CONNS INC
Unless the  context  indicates  otherwise,  references  to "we," "us," and "our" refer to the consolidated  business  operations of Conn's, Inc. and all of its direct and indirect  subsidiaries,  limited liability  companies and limited partnerships.  Overview        We are a specialty  retailer of home appliances and consumer  electronics. We sell major home appliances including refrigerators, freezers, washers, dryers and ranges, and a variety of consumer electronics including  projection,  plasma and LCD televisions,  camcorders, DVD players and home theater products. We also sell home office equipment, lawn and garden equipment,  mattresses and furniture and we continue to introduce  additional product categories for the home and for consumer entertainment,  such as MP3's, to help increase same store sales and to respond to our customers'  product needs.  We offer over 1,100 product items, or SKUs, at  good-better-best  price points  representing  such national  brands as General Electric, Whirlpool,  Frigidaire, Maytag, LG, Mitsubishi, Samsung, Sony, Toshiba,  Serta,  Hewlett Packard and Compaq.  Based on revenue in 2004, we were the 12th largest retailer of home appliances in the United States. Additionally, historically  we are the second or third leading  retailer of home appliances in terms of market share in the majority of our established markets.  Likewise,  in the home entertainment  product categories in which we compete, we rank third or fourth in market share in the majority of our established markets.        We  began as a small  plumbing  and  heating  business  in 1890.  We began selling home  appliances  to the retail market in 1937 through one store located in Beaumont,  Texas.  We opened our second store in 1959 and have since grown to 56 stores.        We have been known for providing  excellent  customer service for over 115 years.  We believe  that our  customer-focused  business  strategies  make us an attractive  alternative  to appliance and  electronics  superstores,  department stores and other national,  regional and local  retailers.  We strive to provide our customers with:        o     a high level of customer service;        o     highly trained and knowledgeable sales personnel;        o     a broad range of competitively priced,  customer-driven,  brand name             products;        o     flexible  financing  alternatives  through  our  proprietary  credit             programs;        o     same day and next day delivery capabilities; and        o     outstanding product repair service.        We believe that these  strategies  drive repeat purchases and enable us to generate substantial brand name recognition and customer loyalty.  During fiscal 2006, approximately 62% of our credit customers, based on the number of invoices written, were repeat customers.        In 1994,  we  realigned  and added to our  management  team,  enhanced our infrastructure  and refined our  operating  strategy to position  ourselves  for future growth.  From fiscal 1994 to fiscal 1999, we  selectively  grew our store base from 21 to 26 stores while improving  operating  margins from 5.2% to 8.7%. Since fiscal 1999, we have generated significant growth in our number of stores, revenue and profitability. Specifically:        o     we have grown from 26 stores to 56 stores, an increase of over 115%,             with several more stores currently under development;        o     total  revenues  have grown by 200% at a  compounded  annual rate of             17.0% from  $234.5  million  in fiscal  1999,  to $702.4  million in             fiscal 2006;                                         1          o     net  income  from  continuing  operations  has  grown  by  360% at a             compounded  annual rate of 24.7% from $8.8 million in fiscal 1999 to             $41.2 million in fiscal 2006; and        o     our same store sales growth from fiscal 1999 through fiscal 2006 has             averaged  9.2%;  it  was  16.9%  for  fiscal  2006.  See  additional             discussion about same store sales under  Managements  Discussion and             Analysis of Financial Condition and Results of Operations.        Our  principal  executives  offices  are located at 3295  College  Street, Beaumont, Texas 77701. Our telephone number is (409) 832-1696, and our corporate website is  www.conns.com.  We do not intend for  information  contained  on our website to be part of this Form 10-K.  Corporate Reorganization        We were formed as a Delaware  corporation  in January 2003 with an initial capitalization of $1,000 to become the holding company of Conn Appliances, Inc., a Texas corporation. Prior to the completion of our initial public offering (the "IPO") in November  2003,  we had no  operations.  As a result of the IPO,  Conn Appliances, Inc. became our wholly-owned subsidiary and the common and preferred stockholders of Conn Appliances, Inc. exchanged their common and preferred stock on a  one-for-one  basis for the common  and  preferred  stock of  Conn's,  Inc. Immediately  after the IPO, all preferred stock and  accumulated  dividends were redeemed,  either  through  the  payment of cash or through  the  conversion  of preferred stock to common stock.  Industry Overview        The home appliance and consumer  electronics  industry includes major home appliances,  small appliances,  home office equipment and software,  projection, plasma and LCD televisions,  and audio, video and portable electronics.  Sellers of  home  appliances  and  consumer  electronics  include  large  appliance  and electronics  superstores,  national chains, small regional chains,  single-store operators, appliance and consumer electronics departments of selected department and discount stores and home improvement centers.        Based on data  published in Twice,  This Week in Consumer  Electronics,  a weekly  magazine  dedicated  to the home  appliances  and  consumer  electronics industry in the United States,  the top 100 major appliance  retailers  reported sales of  approximately  $22.1  billion  in 2004,  up  approximately  10.0% from reported  sales in 2003 of  approximately  $20.1 billion.  The retail  appliance market is large and concentrated  among a few major dealers.  Sears has been the leader  in the  retail  appliance  market,  with a  market  share of the top 100 retailers of  approximately  39% in 2004, down from  approximately  42% in 2003. Lowe's and Home Depot held the second and third place  positions,  respectively, in national market share in 2004.        As measured by Twice,  the top 100 consumer  electronics  retailers in the United States reported  equipment and software sales of $96.7 billion in 2004, a 7.9% increase from the $89.6 billion reported in 2003. According to the Consumer Electronics  Association,  or CEA, total industry manufacturer sales of consumer electronics  products in the United States,  including imports, are projected to exceed  $109  billion  by  2007.  The  consumer  electronics  market  is  highly fragmented.  We estimate,  based on data provided in Twice, that the two largest consumer  electronics  superstore chains together accounted for less than 28% of the total electronics  sales  attributable to the 100 largest retailers in 2004. New entrants in both the home  appliances  and consumer  electronics  industries have been  successful  in  gaining  market  share by  offering  similar  product selections at lower prices.        In the  home  appliance  market,  many  factors  drive  growth,  including consumer confidence, household formations and new product introductions. Product design and innovation is rapidly becoming a key driver of growth in this market. Products  either  recently  introduced  or scheduled to be offered  include high efficiency,  front-loading laundry appliances, three door refrigerators,  double ovens,  free-standing ranges,  cabinet style dishwashers,  and dual fuel cooking appliances.        Technological  advancements  and the  introduction  of new  products  have largely driven growth in the consumer  electronics  market.  Recently,  industry growth  has  been  fueled   primarily  by  the  introduction  of  products  that incorporate  digital  technology,  such as portable and traditional DVD players, digital cameras and camcorders,  digital stereo receivers, satellite technology, MP3 products and high definition flat panel and projection televisions.  Digital products offer significant advantages over their analog counterparts,  including better  clarity  and quality of video and audio,  durability  of  recording  and compatibility with computers.  Due to these advantages,  we believe that digital technology  will continue to drive  industry  growth as consumers  replace their analog  products  with  digital  products.  We  believe  the  following  product advancements will continue to fuel growth in the consumer  electronics  industry and that they offer us the potential for significant sales growth:                                         2          o     Digital  Television  (DTV  and  High  Definition  TV).  The  Federal             Communications  Commission  has set a hard date of February 17, 2009             for  all   commercial   television   stations  to  transition   from             broadcasting analog signals to digital signals.  The Yankee Group, a             communications   and  networking   research  and  consulting   firm,             estimates that by the year 2007, HDTV signals will be in nearly 41.6             million,  or 40%, of homes in the United States.  This  represents a             compounded  annual  growth  rate of 17.1%  from the  estimated  18.9             million homes receiving  digital cable at the end of 2002. To view a             digital   transmission,   consumers   will  need  either  a  digital             television  or a set-top box  converter  capable of  converting  the             digital  broadcast  for viewing on an analog set.  According  to the             CEA, DTV unit sales are expected to grow from 12.0 million  units in             2005 to 15.8 million  units in 2006,  representing  an annual growth             rate of 32.5%.  We  believe  the high  clarity  digital  flat  panel             televisions in both liquid crystal display (LCD), and plasma formats             has increased the quality and sophistication of these  entertainment             products  and will be a key driver of digital  television  growth as             more digital and high  definition  content is made available  either             through traditional distribution methods or through emerging content             delivery systems. As prices continue to drop on such products,  they             become  increasingly  attractive to larger and more diverse group of             consumers.        o     Digital  Versatile Disc (DVD).  According to the CEA, the DVD player             has become  the  fastest  growing  consumer  electronics  product in             history.  First  introduced in March 1997, DVD players are currently             in 80% of U.S. homes. We believe newer  technology  based on the DVD             delivery  system,  such  as  high  definition  DVD,  "blu-ray",  and             portable  players will continue to drive  consumer  interest in this             entertainment category.        o     Portable electronics.  Compressed-music portables,  represented most             notably by the Apple "iPod", enjoy significant growth, and accounted             for 84.5% of total dollar sales in battery-operated  music portables             in 2005  according to the CEA as reported in TWICE  magazine.  Apple             shipped more than 14 million  units of the iPod in the quarter ended             December  31,  2005 as  compared  to 4.6  million  in the prior year             period.  Business Strategy        Our objective is to be the leading  specialty  retailer of home appliances and  consumer  electronics  in each of our  markets.  We strive to achieve  this objective  through a continuing  focus on superior  execution in five key areas: merchandising,  consumer  credit,  distribution,  product  service and training. Successful execution in each area relies on the following strategies:        o     Providing a high level of customer service.  We endeavor to maintain             a very high  level of  customer  service as a key  component  of our             culture,  which has resulted in average customer satisfaction levels             of approximately  91% over the past three years. We measure customer             satisfaction  on the sales floor,  in our delivery  operation and in             our service  department by sending  survey cards to all customers to             whom we have  delivered  or  installed  a product  or made a service             call. Our customer service resolution department attempts to address             all customer complaints within 48 hours of receipt.        o     Developing  and retaining  highly  trained and  knowledgeable  sales             personnel.  We require all sales  personnel  to  specialize  in home             appliances,  consumer  electronics or "track" products.  Some of our             sales associates qualify in more than one specialty.  Track products             include  small  appliances,   computers,  camcorders,  DVD  players,             cameras,  MP3  players  and  telephones  that  are sold  within  the             interior of a large  colorful  track that circles the interior floor             of our stores. This specialized  approach allows the sales person to             focus on specific product categories and become an expert in selling             and using  products in those  categories.  New sales  personnel must             complete an intensive  two-week classroom training program conducted             at  our  corporate  office  and an  additional  week  of  on-the-job             training  riding in a delivery and a service truck to observe how we             serve our customers after the sale is made.        o     Offering a broad range of customer-driven,  brand name products.  We             offer  a  comprehensive   selection  of  high-quality,   brand  name             merchandise  to our customers at guaranteed  low prices.  Consistent             with our good-better-best  merchandising  strategy,  we offer a wide             range of product selections from entry-level models through high-end             models.  We maintain  strong  relationships  with  approximately  50             manufacturers  and  distributors  that enable us to offer over 1,100             SKUs to our  customers.  Our  principal  suppliers  include  General                                          3                Electric, Whirlpool,  Frigidaire,  Maytag, LG, Mitsubishi,  Samsung,             Sony, Toshiba,  Serta,  Poulan,  Weedeater,  American Yard Products,             Hewlett  Packard and Compaq.  To facilitate  our  responsiveness  to             customer  demand,  we use our  prototype  store,  located  near  our             corporate  offices in Beaumont,  Texas, to test the sales process of             all new  products  and obtain  customers'  reactions  to new display             formats before introducing these products and display formats to our             other stores.         o     Offering  flexible  financing  alternatives  through our proprietary             credit programs.  In the last three years, we financed,  on average,             approximately  57% of our retail sales  through our internal  credit             programs.  We believe  our  credit  programs  expand  our  potential             customer  base,  increase  our sales  revenue and  enhance  customer             loyalty by providing  our  customers  immediate  access to financing             alternatives that our competitors typically do not offer. Our credit             department   makes  all  credit   decisions   internally,   entirely             independent of our sales personnel. We provide special consideration             to the customer's  credit history with us. Before extending  credit,             we match our loss experience by product category with the customer's             credit worthiness to determine down payment amounts and other credit             terms. This facilitates  product sales while keeping our credit risk             within an acceptable range.  Approximately 58% of customers who have             active  credit  accounts  with us  take  advantage  of our  in-store             payment  option  and come to our  stores  each  month to make  their             payments,  which we  believe  results in  additional  sales to these             customers.  Through  our  predictive  dialing  program,  we  contact             customers with past due accounts daily and attempt to work with them             to collect  payments in times of financial  difficulty or periods of             economic  downturn.  Our credit  decisions and  collections  process             enabled us to achieve a 2.9% net loss ratio in fiscal  2004,  a 2.4%             net loss  ratio in fiscal  2005 and a 2.5% net loss  ratio in fiscal             2006 on the  credit  portfolio  that  we  service  for a  Qualifying             Special Purpose Entity or QSPE.        o     Maintaining  same  day and next day  distribution  capabilities.  We             maintain four regional  distribution centers and three other related             facilities  that cover all of the major markets in which we operate.             These  facilities are part of a sophisticated  inventory  management             system that also includes a fleet of approximately  130 transfer and             delivery vehicles that service all of our markets.  Our distribution             operations  enable us to deliver  products on the day of, or the day             after, the sale to approximately 95% of our customers.        o     Providing  outstanding  product  repair  service.  We service  every             product that we sell, and we service only the products that we sell.             In this way, we can assure our customers  that they will receive our             service  technicians'  exclusive  attention to their product  repair             needs.  All of our service  centers are authorized  factory  service             facilities  that  provide  trained   technicians  to  offer  in-home             diagnostic and repair service as well as on-site service and repairs             for products that cannot be repaired in the customer's home.  Store Development and Growth Strategy        In addition to executing our business  strategy,  we intend to continue to achieve  profitable,  controlled growth by increasing same store sales,  opening new stores and updating, expanding or relocating our existing stores.        o     Increasing  same store  sales.  We plan to continue to increase  our             same store sales by:              o     continuing to offer quality products at competitive prices;              o     re-merchandising  our product offerings in response to changes                   in consumer demand;              o     adding new merchandise to our existing product lines;              o     training our sales personnel to increase sales closing rates;              o     updating our stores on a three-year rotating basis;              o     continuing   to  promote   sales  of  computers   and  smaller                   electronics  within the  interior  track  area of our  stores,                   including the expansion of high margin accessory items;                                         4                o     continuing  to  provide a high  level of  customer  service in                   sales, delivery and servicing of our products; and              o     increasing sales of our merchandise, finance products, service                   maintenance  agreements  and credit  insurance  through direct                   mail and in-store credit promotion programs.        o     Opening  new stores.  We intend to take  advantage  of our  reliable             infrastructure  and proven  store model to continue  the pace of our             new store  openings  by  opening  six to eight new  stores in fiscal             2007.  This  infrastructure   includes  our  proprietary  management             information  systems,  training  processes,   distribution  network,             merchandising  capabilities,  supplier relationships and centralized             credit  approval and collection  processes.  We intend to expand our             store base in existing, adjacent and new markets, as follows:              o     Existing  and  adjacent  markets.  We intend to  increase  our                   market presence by opening new stores in our existing markets,                   in adjacent markets and in new markets as we identify the need                   and  opportunity.  New store openings in these  locations will                   allow us to maximize opportunity in those markets and leverage                   our existing distribution network, advertising presence, brand                   name recognition and reputation.              o     New markets.  In fiscal 2006,  we opened  another new store in                   South Texas in Harlingen  and  continued to open new stores in                   our  Dallas/Fort  Worth  and  San  Antonio  markets.  We  have                   identified several new markets that meet our criteria for site                   selection,  including East Texas and central  Louisiana around                   Shreveport,  Monroe  and  Alexandria,  southern  Oklahoma  and                   southwest  Arkansas.  We intend to consider these new markets,                   as well as others,  over the next  several  fiscal  years.  We                   intend  to  first  address  markets  in  states  in  which  we                   currently  operate.  We expect that this new store growth will                   include   major   metropolitan   markets  in  both  Texas  and                   Louisiana. We have also identified a number of smaller markets                   within  Texas and  Louisiana in which we expect to explore new                   store  opportunities.   Our  long-term  growth  plans  include                   markets  in other  areas  of  significant  population  density                   within neighboring states.        o     Updating,  expanding or relocating  existing  stores.  Over the last             three years,  we have  updated,  expanded or  relocated  most of our             stores.  We have implemented our larger prototype store model at all             locations at which the market  demands  support such store size, and             where available physical space would accommodate the required design             changes.  As we  continue  to add new  stores  or  replace  existing             stores, we intend to modify our floor plan to include this new model             as we perceive market support. We continuously evaluate our existing             and  potential  sites to ensure our stores are in the best  possible             locations and relocate stores that are not properly  positioned.  We             typically  lease  rather  than  purchase  our  stores to retain  the             flexibility  of  subleasing  a location if we later  decide that the             store is  performing  below our  standards  or the  market  would be             better  served  by  a  relocation.   After  updating,  expanding  or             relocating a store,  we expect to increase same store sales at those             stores.               The addition of new stores has played,  and we believe will continue to play, a significant  role in our continued  growth and success.  We currently operate 56 retail stores located in Texas and Louisiana.  We opened three stores in fiscal 2004; and we opened six stores in each of fiscal 2005 and fiscal 2006. We also closed one clearance store in one of our markets in fiscal 2005. We plan to continue our store development  program by opening an additional six to eight new stores, or an approximately 10% increase,  per year and continue to update a portion of our  existing  stores  each  year.  We believe  that  continuing  our strategies of updating existing stores,  growing our store base and locating our stores in desirable geographic markets are essential for our future success.  Customers              We do  not  have a  significant  concentration  of  sales  with  any individual customer and, therefore,  the loss of any one customer would not have a material impact on our business. No single customer accounts for more than 10% of our total  revenues;  in fact,  no single  customer  accounted  for more than $500,000 (less than 0.1%) of our total revenue of $702.4 million during the year ended January 31, 2006.                                         5    Products and Merchandising        Product  Categories.  Each of our stores  sells five major  categories  of products: major home appliances, consumer electronics,  computers and peripheral equipment,  delivery and  installation  services and other  household  products, including lawn and garden equipment and mattresses.  The following table,  which has been  adjusted  from previous  filings to ensure  comparability,  presents a summary of net sales by major product category,  service  maintenance  agreement commissions and service  revenues,  for the years ended January 31, 2004,  2005, and 2006:                                                                    Years Ended January 31,                               ------------------------------------------------------------------------------                                          2004                      2005                       2006                               ------------------------   ------------------------   ------------------------                                 Amount          %           Amount         %           Amount          %                               -----------   ----------   -----------   ----------   -----------   ----------                                                           (dollars in thousands) Major home appliances ........$  159,401         36.2%   $  168,962         34.2%   $  223,651         36.0% Consumer electronics .........   139,417         31.6       154,880         31.3       186,679         30.1 Track ........................    70,031         15.9        85,644         17.3       100,154         16.1 Delivery .....................     6,726          1.5         7,605          1.5         9,870          1.6 Lawn and garden ..............    11,505          2.6        13,710          2.8        17,083          2.8 Bedding ......................     6,441          1.5        10,262          2.1        13,126          2.1 Furniture ....................     5,712          1.3         7,182          1.5        15,313          2.5 Other ........................     3,346          0.8         3,315          0.7         4,001          0.6                               -----------   ----------   -----------   ----------   -----------   ----------    Total product sales .......   402,579         91.3       451,560         91.4       569,877         91.8 Service maintenance agreement   commissions ................    20,074          4.6        23,950          4.8        30,583          4.9 Service revenues .............    18,265          4.1        18,725          3.8        20,278          3.3                               -----------   ----------   -----------   ----------   -----------   ----------    Total net sales ...........$  440,918        100.0%   $  494,235        100.0%   $  620,738        100.0%                               ===========   ==========   ===========   ==========   ===========   ==========          Within  these major  product  categories  (excluding  service  maintenance agreements,  service  revenues  and  delivery  and  installation),  we offer our customers  over  1,100  SKUs in a wide  range  of  price  points.  Most of these products are manufactured by brand name companies,  including  General Electric, Whirlpool,  Frigidaire, Maytag, LG, Mitsubishi, Samsung, Sony, Hitachi, Toshiba, Serta, Hewlett Packard and Compaq. As part of our good-better-best merchandising strategy, our customers are able to choose from products ranging from low-end to mid- to high-end models in each of our key product categories, as follows:      Category                     Products                   Selected Brands    --------                     --------                   ---------------  Major appliances        Refrigerators, freezers,      General Electric,                         washers, dryers, ranges,      Frigidaire, Whirlpool,                         dishwashers, air              Maytag, LG, KitchenAid,                         conditioners and vacuum       Sharp, Samsung, Friedrich,                         cleaners                      Roper, Hoover and Eureka  Consumer electronics    Projection, plasma, LCD and   Mitsubishi, Sony, Toshiba,                         DLP televisions, and home     Samsung, Sanyo, JVC,                         theater systems               Hitachi, Yamaha, Apple and                                                       Fujifilm  Track                   Computers, computer           Hewlett Packard, Compaq,                         peripherals, VCRs,            Sony                         camcorders, digital                         cameras, DVD players,                         audio components, compact                         disc players, speakers and                         portable electronics (e.g.                         iPods)  Other                   Lawn and garden, furniture    Poulan, Husqvarna, Toro,                         and mattresses                Weedeater, Ashley and                                                       Serta                                         6           Purchasing.   We  purchase   products  from  over  100  manufacturers  and distributors. Our agreements with these manufacturers and distributors typically cover a one or two year time period,  are renewable at the option of the parties and are terminable upon 30 days written notice by either party. Similar to other specialty  retailers,  we purchase a significant  portion of our total inventory from a  limited  number  of  vendors.  During  fiscal  2006,  60.6% of our total inventory  purchases were from six vendors,  including 17.0%, 12.2% and 11.4% of our total inventory from Frigidaire,  Whirlpool and Sony respectively.  The loss of any one or more of these key vendors or our failure to establish and maintain relationships  with these and other vendors could have a material adverse effect on our results of operations and financial condition. We have no indication that any of our  suppliers  will  discontinue  selling  us  merchandise.  We have not experienced   significant   difficulty  in  maintaining   adequate   sources  of merchandise,  and we generally  expect that adequate sources of merchandise will continue to exist for the types of products we sell.        Merchandising Strategy. We focus on providing a comprehensive selection of high-quality  merchandise  to appeal to a broad  range of  potential  customers. Consistent with our  good-better-best  merchandising  strategy,  we offer a wide range of product  selections from entry-level models through high-end models. We primarily sell brand name warranted merchandise.  Our established  relationships with major  appliance and electronic  vendors and our  affiliation  with NATM, a major  buying  group,   give  us  purchasing  power  that  allows  us  to  offer custom-featured appliances and electronics and provides us a competitive selling advantage over other independent retailers.  We use our prototype store, located near our  corporate  offices  in  Beaumont,  Texas,  to test the sale of all new products  and  obtain  customers'   reactions  to  new  display  formats  before introducing  these products and display formats to our other stores.  As part of our merchandising  strategy, we operate clearance centers, either as stand-alone units or  incorporated  within one of our retail  stores,  in our  Houston,  San Antonio  and  Dallas  markets  to  help  sell  damaged,   used  or  discontinued merchandise.  We have recently  redesigned our approach to the  merchandising of our "track"  products to provide  consumer-friendly  point of sale  transactions that take place  within a track area  located in the  interior of our store.  We believe that this focused  approach to creating  consumer  awareness and ease of purchase of our track products will help increase same store sales.        Pricing.  We  emphasize  competitive  pricing on all of our  products  and maintain a low price  guarantee  that is valid in all markets from 10 to 30 days after the sale,  depending  on the product.  At most of our stores,  to print an invoice  that  contains  pricing  other  than the price  maintained  within  our computer  system,  sales personnel must call a special  "hotline"  number at the corporate  office for  approval.  Personnel  staffing  this  hotline  number are familiar with competitor pricing and are authorized to make price adjustments to fulfill our low price guarantee when a customer presents acceptable proof of the competitor's  lower price. This centralized  function also allows us to maintain control of pricing and to store and retrieve pricing data of our competitors.  Customer Service        We focus on  customer  service  as a key  component  of our  strategy.  We believe our same day or next day delivery  option,  which is not offered by most of our competitors, is one of the keys to our success.  Additionally, we attempt to answer and resolve all  customer  complaints  within 48 hours of receipt.  We track customer complaints by individual salesperson, delivery person and service technician.  We send out over 36,000  customer  satisfaction  survey  cards each month covering all deliveries and service calls. Based upon a response rate from our customers of approximately  15%, we consistently  report an average customer satisfaction level of approximately 91%.                                         7    Store Operations        Stores.  At the end of fiscal  2006 we  operated  56 retail and  clearance stores  located in Texas and  Louisiana.  The following  table  illustrates  our markets, the number of freestanding and strip mall stores in each market and the calendar year in which we opened our first store in each market:                                                                        Number of Stores                                                                ------------------   First Market                                                           Stand    Strip     Store                                                                  Alone     Mall     Opened - -------------------------------------------------------------- --------- -------- ---------- Houston ......................................................     8       10          1983 San Antonio/Austin ...........................................     6        7          1994 Golden Triangle (Beaumont, Port Arthur and Orange,     Texas and Lake Charles, Louisiana) .......................     1        4          1937 Baton Rouge/Lafayette ........................................     1        4          1975 Corpus Christi ...............................................     1        0          2002 Dallas/Fort Worth ............................................     1       11          2003 South Texas ..................................................     1        1          2004                                                                --------- -------- Total ........................................................    19       37                                                                ========= ========          Our stores have an average  selling space of  approximately  21,100 square feet,  plus a rear storage area  averaging  approximately  6,000 square feet for fast-moving or smaller  products that customers  prefer to carry out rather than wait  for  in-home  delivery.  Two of  our  stores  are  clearance  centers  for discontinued  product models and damaged  merchandise,  returns and  repossessed product located in our Houston and Dallas markets and contain 28,800 square feet of  combined  selling  space.  All stores are open from 10:00 a.m.  to 9:00 p.m. Monday through Friday,  from 9:00 a.m. to 9:00 p.m. on Saturday,  and from 11:00 a.m.  to 7:00 p.m. on Sunday.  We also offer  extended  store  hours  during the holiday selling season.        Approximately  66% of our stores are located in strip shopping centers and regional malls, with the balance being stand-alone  buildings in "power centers" of big box consumer retail stores.  All of our locations have parking  available immediately  adjacent to the store's  front  entrance.  Our  storefronts  have a distinctive front that guides the customer to the entrance of the store.  Inside the store,  a large colorful tile track circles the interior floor of the store. One side of the track leads the  customer to major  appliances,  while the other side of the track  leads the  customer  to a large  display  of  television  and projection  television  products.  The inside of the track contains various home office  and  consumer  electronic  products  such as  computers,  printers,  DVD players,  camcorders,  digital  cameras  and  MP3  players.  We are  continually refining our approach to merchandising of our track products, and in fiscal 2006 expanded our small kitchen appliance assortment, introduced musical products and expanded our offering of seasonal products.  Mattresses,  furniture and lawn and garden  equipment  displays  occupy  the rear of the sales  floor.  To reach the cashier's desk at the center of the track area, our customers must walk past our products.  We believe  this  increases  sales to  customers  who have  purchased products  from us on  credit in the past and who  return  to our  stores to make their monthly credit payments.        We have updated  most of our stores in the last three years.  We expect to continue to update our stores as needed to address each store's  specific needs. All of our updated  stores,  as well as our new stores,  include modern interior selling  spaces  featuring  attractive  signage and display  areas  specifically designed for each major product type. Our prototype  store for future  expansion has from  25,000  to  30,000  square  feet of  retail  selling  space,  which is approximately  20% more than the average size of our existing  stores and a rear storage area of between 5,000 and 7,000 square feet.  Our investment to update a store has averaged  approximately  $220,000 per store over the past three years, and as a result of the updating, we expect to increase same store sales at those stores.  Over the last three years, we have invested  approximately $7.8 million updating, refurbishing or relocating our existing stores.        Site Selection.  Our stores are typically  located adjacent to freeways or major travel  arteries and in the vicinity of major retail  shopping  areas.  We prefer to locate our stores in areas where our prominent  tower  storefront will be  the  anchor  of  the   shopping   center  or  readily   visible  from  major thoroughfares.  We also  attempt to locate our stores in the  vicinity  of major home appliance and  electronics  superstores.  We have  typically  entered major metropolitan  markets where we can potentially support at least 10 to 12 stores. We  believe  this  number  of  stores  allows  us to  optimize  advertising  and distribution  costs. We have and may continue,  however,  to elect to experiment with opening lower numbers of new stores in smaller  communities  where customer demand for products  and services  outweighs  any extra cost.  Other  factors we consider  when  evaluating  potential  markets  include  the  distance  from our distribution  centers,  our existing store  locations and store locations of our competitors and population, demographics and growth potential of the market.                                         8          Store Economics.  We lease 50 of our 56 current store  locations,  with an average monthly rent of $18,800. Our average per store investment for the 12 new stores we have  opened in the last two years  was  approximately  $1.5  million, including leasehold  improvements,  fixtures and equipment and inventory (net of accounts  payable).  For these new stores, the net sales per store have averaged $0.7 million per month.        Our new stores have typically been profitable on an operating basis within their first three to six months of operation  and, on average have  returned our net  cash  investment  in 20  months  or less.  We  consider  a new  store to be successful  if it achieves $8 million to $9 million in sales volume and 2% to 5% in operating margins before other ancillary revenues and allocations of overhead and advertising in the first full year of operation. We expect successful stores that  have  matured,  which  generally  occurs  after  two  to  three  years  of operations, to generate annual sales of approximately $12 million to $15 million and 5% to 9% in operating  margins before other ancillary  revenues and overhead and allocations.  However,  depending on the credit and insurance penetration of an individual  store, we believe that a store that does not achieve these levels of sales can still contribute significantly to our pretax margin.        Personnel and Compensation. We staff a typical store with a store manager, an assistant  manager,  an average of 23 sales personnel and other support staff including  cashiers  and/or  porters based on store size and location.  Managers have an average tenure with us of  approximately  seven years and typically have prior sales floor  experience.  In  addition  to store  managers,  we have seven district  managers  that  generally  oversee  from six to eight  stores  in each market.  Our district  managers  generally  have five to fifteen  years of sales experience  and report to our vice president of store  operations,  who has over twenty years of sales experience.        We compensate our sales associates on a straight  commission  arrangement, while we generally  compensate  store managers on a salary basis plus incentives and cashiers at an hourly rate. In some instances, store managers receive earned commissions plus base salary. Our clearance center is staffed with a manager and six to eight sales personnel who are paid on a straight commission  arrangement. We believe that  because our store  compensation  plans are tied to sales,  they generally  provide us an advantage in attracting and retaining  highly motivated employees.        Training.  New  sales  personnel  must  complete  an  intensive  two  week classroom  training program  conducted at our corporate  office. We then require them to spend an additional  week riding in a delivery and service truck to gain an  understanding  of how we  serve  our  customers  after  the  sale  is  made. Installation and delivery staff and service  personnel  receive training through an  on-the-job  program in which  individuals  are  assigned  to an  experienced installation and delivery or service employee as helpers prior to working alone. In addition,  our employees  benefit from on-site training  conducted by many of our vendors.        We attempt to identify  store  manager  candidates  early in their careers with us and place them in a defined  program of training.  They generally  first attend our in-house training program,  which provides guidance and direction for the  development  of  managerial  and  supervisory  skills.  They then attend an external Dale Carnegie  certified  management  course that helps  solidify their management  knowledge and builds upon their internal training.  After completion of these training  programs,  manager  candidates work as assistant managers for six to twelve  months and are then allowed to manage one of our smaller  stores, where they are supervised  closely by the store's district manager.  We give new managers an opportunity to operate larger stores as they become more  proficient in their  management  skills.  Each store  manager  attends  mandatory  training sessions on a monthly basis and also attends  bi-weekly sales training  meetings where participants receive and discuss new product information.  Marketing        We design our  marketing  and  advertising  programs to increase our brand name recognition, educate consumers about our products and services and generate customer  traffic in order to increase  sales.  Our  programs  include  periodic promotions  such as three,  six,  twelve,  eighteen,  twenty-four  or thirty-six months of no interest financing.  We conduct our advertising  programs primarily through  local  newspapers,  local  radio and  television  stations  and  direct marketing through direct mail, telephone and our website.                                         9          Direct  marketing  has  become  an  effective  way for us to  present  our products and services to our existing customers and potential new customers.  We use direct mail to target  promotional  mailings to credit  worthy  individuals, including new  residents in our market areas from time to time. In addition,  we use direct  mail to market  increased  credit  lines to existing  customers,  to encourage  customers  using third party credit to convert to our credit programs and for  customer  appreciation  mailings.  We also  conduct a mail  program  to reestablish contact with customers who applied for credit recently at one of our stores but did not  purchase  a product.  We also call  customers  who  recently applied  for  credit  at one of our  retail  locations  but did not  purchase  a product;  this often redirects potential purchasers back into the original store location.        Our website,  www.conns.com,  offers  information  about our  selection of products and provides  useful  information to the consumer on pricing,  features and benefits for each product and required corporate governance information. Our website  also allows the  customers  residing in the markets in which we operate retail  locations  to apply and be  considered  for  credit,  to see our special on-line  promotional  items and to make  purchases  on-line  through  the use of approved credit cards. The website currently averages approximately 5,040 visits per day from  potential and existing  customers and during fiscal 2006,  was the source of approximately 80,400 credit  applications.  The website is linked to a call  center,  allowing  us to better  assist  customers  with their  credit and product needs.  Distribution and Inventory Management        We typically  locate our stores in close  proximity  of our five  regional distribution centers located in Houston, San Antonio, Dallas and Beaumont, Texas and  Lafayette,  Louisiana  and  smaller  cross-dock  facilities  in Austin  and Harlingen,  Texas. This enables us to deliver products to our customers quickly, reduces  inventory   requirements  at  the  individual  stores  and  facilitates regionalized inventory and accounting controls.        In our retail stores,  we maintain an inventory of  fast-moving  items and products  that  the  customer  is  likely  to  carry  out  of  the  store.   Our sophisticated  Distribution  Inventory  Sales  computer  system  and the  recent introduction  of scanning  technology  in our  distribution  centers allow us to determine on a real-time  basis the exact location of any product we sell. If we do not have a product at the desired  retail  store at the time of sale,  we can provide it through our distribution system on a next day basis.        We  maintain  a fleet  of  tractors  and  trailers  that  allow us to move products  from  market to market and from  distribution  centers to stores.  Our fleet  of  home  delivery  vehicles  enables  our  highly-trained  delivery  and installation  specialists  to  quickly  complete  the sales  process,  enhancing customer service. We receive a delivery fee based on their choice of same day or next day  delivery.  Additionally,  we are able to  complete  deliveries  to our customers on the same day as, or the day after the sale for approximately 95% of our customers who have requested delivery.                                         10    Finance Operations        General. We sell our products for cash or for payment through major credit cards,  which  we treat as cash  sales.  We also  offer  our  customers  several financing  alternatives  through our proprietary  credit  programs.  In the last three fiscal years,  we financed,  on average,  approximately  57% of our retail sales through one of our two credit programs. We offer our customers a choice of installment  payment plans and revolving credit plans through our primary credit portfolio.  We also offer an installment  program  through our secondary  credit portfolio to a limited  number of customers  who do not qualify for credit under our primary credit  portfolio.  The following  table shows our product sales and gross service maintenance agreements sales, excluding returns and allowances and service revenues, by method of payment for the periods indicated.                                                                 Years Ended January 31,                               -----------------------------------------------------------------------                                    2004                    2005                    2006                               ----------------------  ----------------------  -----------------------                                 Amount        %         Amount        %         Amount         %                               ----------  ----------  ----------  ----------  ----------  -----------                                                       (dollars in thousands) Cash and other credit cards ..$ 198,765        47.0%  $ 193,753        40.8%  $ 254,047         42.3% Primary credit portfolio:    Installment ...............  182,802        43.3     225,369        47.4     263,667         43.9    Revolving .................   16,627         3.9      20,663         4.3      30,697          5.1 Secondary credit portfolio ...   24,459         5.8      35,725         7.5      52,049          8.7                               ----------  ----------  ----------  ----------  ----------  -----------    Total .....................$ 422,653       100.0%  $ 475,510       100.0%  $ 600,460        100.0%                               ==========  ==========  ==========  ==========  ==========  ===========          Credit  Approval.  Our credit  programs  are  operated by our  centralized credit department staff,  completely independent of sales personnel.  As part of our  centralized  credit  approval  process,  we have  developed  a  proprietary standardized scoring model that provides preliminary credit decisions, including down payment amounts and credit terms,  based on both customer and product risk. We  developed  this model with data  analysis by  Equifax(R)  to  correlate  the product category of a customer purchase with the default  probability.  Although we rely on this program to approve  automatically some credit  applications from customers for whom we have previous credit experience,  over 92.8% of our credit decisions  are  based on  evaluation  of the  customer's  creditworthiness  by a qualified credit grader.  As of January 31, 2006, we employed  approximately 400 full-time and part-time  employees who focus on credit approval and collections. These employees are highly trained to follow our strict methodology in approving credit,  collecting our accounts,  and charging off any  uncollectible  accounts based on pre-determined aging criteria.        A significant  part of our ability to control  delinquency  and charge-off rates is tied to the relatively  high level of down payments that we require and the purchase  money  security  interest that we obtain in the product  financed, which  reduce our credit risk and increase our  customers'  willingness  to meet their future  obligations.  We require the  customer to provide  proof of credit property  insurance  coverage to offset  potential  losses  relating to theft or damage of the product financed.        Installment  accounts  are paid over a  specified  period of time with set monthly payments.  Revolving  accounts provide customers with a specified amount which the customer may borrow,  repay and  re-borrow so long as the credit limit is not exceeded. Most of our installment accounts provide for payment over 12 to 36 months,  and for those  accounts paid in full during fiscal 2006, the average account  was  outstanding  for  approximately  13 to 15  months.  Our  revolving accounts were outstanding  approximately 12 to 17 months for those accounts paid in full during  fiscal  2006.  During  fiscal  2006,  approximately  7.2% of the applications  approved  under the primary  program  were  handled  automatically through  our  computer  system  based on  previous  credit  history  with us. We automatically  send the  application of any new credit  customer or any customer seeking additional credit where there has been a past delinquency or performance problem to an experienced, in-house credit grader.        We created our  secondary  credit  portfolio  program to meet the needs of those customers who do not qualify for credit under our primary  program.  If we cannot approve a customer's  application for credit under our primary portfolio, we  automatically  send the  application  to the credit  staff of our  secondary portfolio for further  consideration.  We offer only the installment  program to these  customers,  and  we  grant  credit  to  these  consumers  under  stricter underwriting criteria, including higher down payments. An experienced,  in-house credit grader  administers the credit approval process.  Most of the installment accounts approved under this program provide for repayment over 12 to 36 months, and for those accounts paid in full during fiscal 2006, the average  account was outstanding for approximately 13 to 15 months.                                         11          The following two tables  present,  for comparison  purposes,  information regarding our two credit portfolios.                                                                 Primary Portfolio (1)                                                  ------------------------------------                                                         Years Ended January 31,                                                  ------------------------------------                                                     2004         2005         2006                                                  ----------   ----------   ----------                                                (total outstanding balance in thousands)       Total outstanding balance (period end) ....$ 293,909    $ 358,252    $ 421,649       Average outstanding customer balance ......$   1,189    $   1,268    $   1,284       Number of active accounts (period end) ....  247,151      282,533      328,402       Total applications processed (2) ..........  499,755      567,352      684,674       Percent of retail sales financed ..........     47.2%        51.7%        49.0%       Total applications approved ...............     59.3%        56.4%        52.8%       Average down payment ......................      8.6%         7.4%         7.6%       Average interest spread (3) ...............     12.2%        12.7%        12.0%                                                             Secondary Portfolio                                                  ------------------------------------                                                        Years Ended January 31,                                                  ------------------------------------                                                     2004         2005         2006                                                  ----------   ----------   ----------                                                (total outstanding balance in thousands)       Total outstanding balance (period end) ....$  55,561    $  70,448    $  98,072       Average outstanding customer balance ......$   1,057    $   1,040    $   1,128       Number of active accounts (period end) ....   52,566       67,718       86,936       Total applications processed (2) ..........  192,228      238,605      314,698       Percent of retail sales financed ..........      5.8%         7.5%         8.7%       Total applications approved ...............     26.9%        33.3%        34.1%       Average down payment ......................     27.7%        27.2%        26.4%       Average interest spread (3) ...............     13.0%        14.0%        14.1%   - ----------------- (1)   The Primary Portfolio consists of owned and sold receivables. (2)   Unapproved credit  applications in the primary portfolio are automatically       referred to the secondary portfolio. (3)   Difference  between the average  interest  rate yield on the portfolio and       the average  cost of funds under the program plus the  allocated  interest       related to funds required to finance the credit enhancement portion of the       portfolio.  Also  reflects  the loss of  interest  income  resulting  from       interest free promotional programs.        Credit  Quality.  We enter into  securitization  transactions  to sell our retail  receivables to a qualifying  special  purpose  entity or QSPE,  which we formed  for  this  purpose.  After  the  sale,  we  continue  to  service  these receivables  under a contract  with the QSPE.  We closely  monitor  these credit portfolios  to identify  delinquent  accounts  early and  dedicate  resources to contacting  customers  concerning  past due accounts.  We believe that our local presence,  ability to work with  customers and flexible  financing  alternatives contribute to the  historically  low charge-off  rates on these  portfolios.  In addition,  our customers have the opportunity to make their monthly  payments in our stores,  and  approximately 58% of our active credit accounts did so at some time during the last 12 months. We believe that these factors help us maintain a relationship  with the customer that keeps losses low while  encouraging  repeat purchases.        Our follow-up  collection  activities involve a combination of centralized efforts that take place in our corporate office and outside  collection  efforts that involve a visit by one of our credit  counselors to the customer's home. We maintain a sophisticated predictive dialer system and letter campaign that helps us contact  between  20,000  and  25,000  delinquent  customers  daily.  We also maintain  a  very  experienced   skip-trace  department  that  utilizes  current technology to locate  customers  who have moved and left no forwarding  address. Our outside collectors provide an on-site contact with the customer to assist in the collection  process or, if needed, to actually  repossess the product in the event of non-payment.  Repossessions are made when it is clear that the customer is unwilling to establish a reasonable  payment  process.  Our legal  department represents  us in  bankruptcy  proceedings  and filing of  delinquency  judgment claims and helps handle any legal issues associated with the collection process.                                         12          Generally, we deem an account to be uncollectible and charge it off if the account is 120 days or more past due and has not had a payment in the last seven months.  Over  the  last 36  months,  we  have  recovered  approximately  19% of charged-off  amounts  through  our  collection  activities.  The income  that we realize  from our  interest in  securitized  receivables  depends on a number of factors,  including expected credit losses. Therefore, it is to our advantage to maintain a low delinquency rate and loss ratio on these credit portfolios.        Our  accounting  and  credit  staff   consistently   monitors   trends  in charge-offs  by  examining  the  various  characteristics  of  the  charge-offs, including store of origination,  product type, customer credit information, down payment amounts and other identifying information. We track our charge-offs both gross,  or before  recoveries,  and net, or after  recoveries.  We  periodically adjust our credit  granting,  collection and  charge-off  policies based on this information.        The following table reflects the performance of our two credit portfolios, net of unearned interest.                                                                            Primary Portfolio (1)            Secondary Portfolio                                                             -------------------------------   ----------------------------                                                                 Years Ended January 31,         Years Ended January 31,                                                             -------------------------------   ----------------------------                                                                2004       2005      2006        2004      2005      2006                                                             ---------  ---------  ---------   --------  --------  --------                                                                 (dollars in thousands)           (dollars in thousands)                                                             $293,909   $358,252   $421,649    $55,561   $70,448   $98,072 Average total outstanding balance ..........................$271,659   $323,108   $387,464    $54,988   $64,484   $86,461 Account balances over 60 days old (period end) .............$ 13,484   $ 17,503   $ 26,029    $ 4,783   $ 5,640   $ 9,508 Percent of balances over 60 days old to total   outstanding (period end) (2) .............................     4.6%       4.9%       6.2%       8.6%      8.0%      9.7% Allowance for doubtful accounts (period end) ...............$  9,534   $ 10,168   $ 11,464    $ 2,224   $ 2,089   $ 2,348 Percent allowance for doubtful accounts to total   outstanding (period end) .................................     3.2%       2.8%       2.7%       4.0%      3.0%      2.4% Bad debt write-offs (net of recoveries) ....................$  7,905   $  7,601   $ 10,225    $ 1,499   $ 1,604   $ 1,915 Percent of write-offs (net) to average outstanding (3) .....     2.9%       2.4%       2.6%       2.7%      2.5%      2.2%   - ------------------------------------------------------ (1)   The Primary Portfolio consists of owned and sold receivables. (2)   At January 31, 2006, the percent of balances over 60 days old was elevated       due  to  the  impact  of  Hurricanes  Katrina  and  Rita.  See  additional       discussion in Management's  Discussion and Analysis of Financial Condition       and Results of Operations. (3)   The fiscal  year ended  January  31,  2005,  includes  the  benefit of new       information  received  during the year,  which impacted the realization of       sales tax credits on prior year write-offs.        The  following  table  presents  information  regarding  the growth of our combined credit portfolios, including unearned interest.                                                                    Years Ended January 31,                                                     ----------------------------------------                                                         2004         2005            2006                                                     -----------   -----------    -----------                                                             (dollars in thousands)       Beginning balance ............................$  362,076    $  418,702     $  514,204       New receivables financed .....................   331,849       423,935        495,553       Revolving finance charges ....................     4,354         3,926          3,858       Returns on account ...........................    (6,860)      (10,670)        (5,397)       Collections on account .......................  (263,313)     (312,484)      (375,342)       Accounts charged off .........................   (11,934)      (11,825)       (14,392)       Recoveries of charge-offs ....................     2,530         2,620          2,252                                                     -----------   -----------    -----------       Ending balance ...............................   418,702       514,204        620,736       Less unearned interest at end of period ......   (69,232)      (85,504)      (101,015)                                                     -----------   -----------    -----------       Total portfolio, net .........................$  349,470    $  428,700     $  519,721                                                     ===========   ===========    ===========    Product Support Services        Credit Insurance.  Acting as agents for unaffiliated  insurance companies, we sell credit life,  credit  disability,  credit  involuntary  unemployment and credit property insurance at all of our stores.  These products cover payment of the customer's credit account in the event of the customer's  death,  disability or involuntary  unemployment or if the financed property is lost or damaged.  We receive sales commissions from the unaffiliated insurance company at the time we sell  the  coverage,  and we  recognize  retrospective  commissions,  which  are additional  commissions  paid by the insurance  carrier if insurance  claims are lower than projected, as such commissions are actually earned.                                         13          We  require  proof  of  property   insurance  on  all  installment  credit purchases,  although we do not require that  customers  purchase this  insurance from  us.  During  fiscal  2006,  approximately  75.2% of our  credit  customers purchased  one  or  more  of  the  credit  insurance   products  we  offer,  and approximately 29.1% purchased all of the insurance products we offer. Commission revenues from the sale of credit insurance contracts  represented  approximately 3.3%,  3.2% and 2.6% of total  revenues  for fiscal  years 2004,  2005 and 2006, respectively.        Warranty  Service.  We provide warranty service for all of the products we sell and only for the products we sell.  Customers purchased service maintenance agreements  on products  representing  approximately  48.8% of our total  retail sales for fiscal 2006. These agreements broaden and extend the period of covered manufacturer  warranty  service for up to five years from the date of  purchase, depending  on the product,  and cover  certain  items during the  manufacturer's warranty period. These agreements are sold at the time the product is purchased. Customers may finance the cost of the  agreements  along with the purchase price of the  associated  product.  We contact the customer prior to the expiration of the service  maintenance  period to provide  them the  opportunity  to renew the period of warranty coverage.        We have  contracts with  unaffiliated  third party insurers that issue the service  maintenance  agreements to cover the costs of repairs  performed by our service  department  under these  agreements.  The initial  service  contract is between the  customer  and the  independent  insurance  company,  but we are the insurance  company's  first  choice to provide  service  when it is  needed.  We receive a  commission  on the sale of the  contract,  and we bill the  insurance company for the cost of the service work that we perform.  Commissions  on these third party  contracts  are  recognized  in revenues,  net of the payment to the third party obligor. Renewal contracts are between the customer and our in-house service department.  Under renewal contracts we recognize revenues received, and direct selling expenses  incurred,  over the life of the contracts,  and expense the cost of the service work performed as products are repaired.        Of the 15,000 to 20,000 repairs that we perform each month,  approximately 35.4% are covered  under these  service  maintenance  agreements,  approximately 50.5% are covered by  manufacturer  warranties  and the  remainder are "walk-in" repairs  from  our  customers.  Revenues  from  the  sale of  service  contracts represented  approximately 4.6%, 4.8%, and 4.9% of net sales during fiscal years 2004, 2005 and 2006, respectively.   Management Information Systems        We have a fully integrated management  information system that tracks on a real-time basis point-of-sale  information,  inventory receipt and distribution, merchandise  movement and  financial  information.  The  management  information system also includes a local area network that  connects all corporate  users to e-mail,  scheduling and various  servers.  All of our facilities are linked by a wide-area network that provides  communication for in-house credit authorization and real time polling of sales and  merchandise  movement at the store level. In our  distribution  centers,  we use  radio  frequency  terminals  to  assist  in receiving,  stock put-away,  stock movement,  order filling,  cycle counting and inventory  management.  At our stores,  we  currently  use desktop  terminals to assist in receiving, transferring and maintaining perpetual inventories.        Our  integrated  management  information  system also  includes  extensive functionality for management of the complete credit portfolio life cycle as well as  functionality  for the  management  of product  service.  The credit  system continues  from our in-house  credit  authorization  through  account set up and tracking, credit portfolio condition,  collections, credit employee productivity metrics,  skip-tracing,  bankruptcy and fraud and legal account management.  The service  system   provides  for  service  order   processing,   warranty  claims processing,  parts  inventory  management,  technician  scheduling and dispatch, technician  performance metrics and customer  satisfaction  measurement.  All of these systems share a common customer and product sold database.        Our point of sale system  uses an IBM Series i5 hardware  system that runs on the i5OS operating system. This system enables us to use a variety of readily available  applications  in conjunction  with software that supports the system. All of our current  business  application  software,  except our  accounting and human  resources  systems,   has  been  developed  in-house  by  our  management information  system  employees.  We believe our management  information  systems efficiently  support our current  operations and provide a foundation for future growth.                                         14          We employ a Nortel  telephone  switch and state of the art Avaya (formerly Mosaix)  predictive dialer, as well as a redundant data network and cable plant, to improve the efficiency of our collection and overall corporate  communication efforts.        As  part  of our  ongoing  system  availability  protection  and  disaster recovery  planning,  we have  implemented a secondary  IBM Series i5 system.  We installed  and  implemented  a back-up  IBM  Series  i5 system in our  corporate offices to provide the ability to switch production  processing from the primary system to the  secondary  system  within  fifteen to thirty  minutes  should the primary  system  become  disabled  or  unreachable.  The two  machines  are kept synchronized  utilizing third party software.  This backup system provides "high availability" of the production processing  environment.  The primary IBM Series i5 system is  geographically  removed from our corporate  office for purposes of disaster  recovery and  security.  These systems  worked as designed  during our recent  evacuation from our corporate  headquarters in Beaumont,  Texas,  due to Hurricane Rita.  While we were displaced,  our store,  distribution  and service operations  that were not  impacted by the  hurricane  continued  to have normal system availability and functionality.  Competition        According to Twice,  total industry  manufacturer sales of home appliances and consumer  electronics  products in the United States,  including imports, to the top 100  dealers  were  estimated  to be $21.3  billion  and $96.4  billion, respectively,   in  2004.  The  retail  home  appliance   market  is  large  and concentrated among a few major suppliers. Sears has historically been the leader in the retail  home  appliance  market,  with a market  share  among the top 100 retailers  of  approximately  39% in 2004,  down from 42% in 2003.  The consumer electronics  market is  highly  fragmented.  We  estimate  that the two  largest consumer electronics  superstore chains accounted for less than 35% of the total electronics sales  attributable to the 100 largest  retailers in 2003.  However, new entrants in both  industries have been successful in gaining market share by offering similar product selections at lower prices.        As reported by Twice, based upon revenue in 2004, we were the 12th largest retailer of home  appliances.  Our competitors  include  national mass merchants such as Sears and Wal-Mart,  specialized national retailers such as Circuit City and Best Buy,  home  improvement  stores  such as  Lowe's  and Home  Depot,  and locally-owned  regional or independent retail specialty stores. The availability and convenience of the Internet and other  direct-to-consumer  alternatives  are increasing as a competitive factor in our industry,  especially for distribution of computer and entertainment software.        We compete primarily based on enhanced customer service through our unique sales  force  training  and  product  knowledge,  same day or next day  delivery capabilities,  proprietary  in-house credit  program,  guaranteed low prices and product repair service.  Regulation        The  extension of credit to consumers  is a highly  regulated  area of our business.   Numerous  federal  and  state  laws  impose   disclosure  and  other requirements on the  origination,  servicing and enforcement of credit accounts. These laws  include,  but are not limited to, the Federal  Truth in Lending Act, Equal Credit Opportunity Act and Federal Trade Commission Act. State laws impose limitations on the maximum amount of finance charges that we can charge and also impose  other  restrictions  on  consumer  creditors,   such  as  us,  including restrictions on collection and  enforcement.  We routinely  review our contracts and  procedures  to ensure  compliance  with  applicable  consumer  credit laws. Failure  on  our  part  to  comply  with  applicable  laws  could  expose  us to substantial penalties and claims for damages and, in certain circumstances,  may require us to refund finance  charges already paid and to forego finance charges not  yet  paid  under  non-complying  contracts.  We  believe  that  we  are  in substantial compliance with all applicable federal and state consumer credit and collection laws.        Our  sale  of  credit  life,   credit   disability,   credit   involuntary unemployment and credit property  insurance  products is also highly  regulated. State laws currently impose disclosure  obligations with respect to our sales of credit and other  insurance  products  similar to those  required by the Federal Truth in Lending Act, impose  restrictions on the amount of premiums that we may charge and require licensing of certain of our employees and operating entities. We  believe  we are in  substantial  compliance  with  all  applicable  laws and regulations relating to our credit insurance business.                                         15    Employees        As of January 31, 2006, we had approximately 2,600 full-time employees and 200 part-time employees,  of which approximately 1,200 were sales personnel.  We provide a  comprehensive  benefits  package  including  health,  life, long term disability,  and dental  insurance  coverage as well as a 401(k) plan,  employee stock  purchase  plan,  paid  vacation,  sick pay and holiday  pay.  None of our employees are covered by  collective  bargaining  agreements  and we believe our employee relations are good.  Tradenames and Trademarks        We have registered the trademarks "Conn's" and our logos.  Available Information        We are subject to reporting requirements of the Securities Exchange Act of 1934,  or the  Exchange  Act,  and its rules and  regulations.  The Exchange Act requires us to file reports,  proxy and other  information  statements and other information with the Securities and Exchange Commission ("SEC"). Copies of these reports,  proxy statements and other  information can be inspected and copied at the SEC Public Reference Room, 450 Fifth Street, N.W.,  Washington,  D.C. 20549. You may obtain  information  on the  operation of the Public  Reference  Room by calling  the  SEC  at  1-800-SEC-0330.  You  may  also  obtain  these  materials electronically by accessing the SEC's home page on the internet at www.sec.gov.        In addition,  we make available,  free of charge on our internet  website, our Annual Report on Form 10-K,  Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and  amendments  to these  reports  filed or furnished  pursuant to Section  13(a) or 15(d) of the  Exchange Act as soon as  reasonably  practicable after we electronically  file this material with, or furnish it to, the SEC. You may review these documents,  under the heading "Conn's  Investor  Relations," by accessing  our website at  www.conns.com.  Also,  reports and other  information concerning  us are  available  for  inspection  and  copying  at NASDAQ  Capital Markets.                                         16
An investment in our common stock involves risks and  uncertainties.  You should  consider  carefully  the  following  information  about  these risks and uncertainties before buying shares of our common stock. The occurrence of any of the risks  described  below  could  adversely  affect  our  business,  financial condition or results of operations. In that case, the trading price of our stock could decline, and you could lose all or part of the value of your investment.  Our success depends  substantially on our ability to open and operate profitably new stores in existing, adjacent and new geographic markets.         We plan to continue our expansion by opening an  additional  six to eight new stores in fiscal 2007. We anticipate these new stores to include  additional stores in the Dallas/Fort Worth Metroplex,  South Texas, where we currently have two stores, and possibly others in areas where we have not operated  previously. We have not yet selected sites for all of the stores that we plan to open within the next fiscal year.  We may not be able to open all of these  stores,  and any new stores that we open may not be  profitable  or meet our goals.  Any of these circumstances could have a material adverse effect on our financial results.         There are a number of factors  that could  affect our ability to open and operate new stores consistent with our business plan, including:         o      competition in existing, adjacent and new markets;         o      competitive conditions, consumer tastes and discretionary spending               patterns in adjacent and new markets that are different from those               in our existing markets;         o      a lack of  consumer  demand for our  products  at levels  that can               support new store growth;         o      limitations  created by covenants and conditions  under our credit               facilities and our asset-backed securitization program;         o      the availability of additional financial resources;         o      the substantial outlay of financial resources required to open new               stores  and the  possibility  that we may  recognize  little or no               related benefit;         o      an inability or  unwillingness  of vendors to supply  product on a               timely basis at competitive prices;         o      the  failure  to open  enough  stores in new  markets to achieve a               sufficient market presence;         o      the  inability  to  identify   suitable  sites  and  to  negotiate               acceptable leases for these sites;         o      unfamiliarity  with local real estate markets and  demographics in               adjacent and new markets;         o      problems in adapting our  distribution  and other  operational and               management systems to an expanded network of stores;         o      difficulties associated with the hiring, training and retention of               additional skilled personnel, including store managers; and         o      higher costs for print, radio and television advertising.          These  factors may also affect the ability of any newly opened  stores to achieve sales and profitability levels comparable with our existing stores or to become profitable at all.                                         17    If we are unable to manage our growing  business,  our revenues may not increase as  anticipated,  our cost of  operations  may rise  and our  profitability  may decline.         We face many business risks associated with growing companies,  including the risk that our management, financial controls and information systems will be inadequate  to support  our planned  expansion.  Our growth  plans will  require management to expend  significant  time and effort and  additional  resources to ensure the continuing adequacy of our financial controls,  operating procedures, information  systems,  product purchasing,  warehousing and distribution systems and employee  training  programs.  We cannot predict  whether we will be able to manage  effectively  these increased demands or respond on a timely basis to the changing  demands  that our planned  expansion  will  impose on our  management, financial controls and information  systems.  If we fail to manage  successfully the  challenges  our growth poses,  do not continue to improve these systems and controls  or  encounter  unexpected  difficulties  during  our  expansion,   our business,  financial  condition,  operating  results  or  cash  flows  could  be materially adversely affected.  The inability to obtain funding for our credit operations through securitization facilities  or other  sources may  adversely  affect our business and  expansion plans.         We  finance  most  of  our  customer   receivables  through  asset-backed securitization  facilities.  The trust  arrangement  governing these  facilities currently  provides for two separate series of asset-backed  notes that allow us to finance up to $450 million in customer  receivables.  Under each note series, we transfer  customer  receivables  to a qualifying  special  purpose  entity we formed for this purpose in exchange for cash,  subordinated  securities  and the right to receive  cash flows  equal to the  interest  rate  spread  between  the transferred  receivables  and the notes issued to third parties  ("interest only strip").  This qualifying special purpose entity, in turn, issues notes that are collateralized  by these  receivables  and  entitle  the holders of the notes to participate in certain cash flows from these  receivables.  The Series A program is  a  $250  million  variable  funding  note  held  by  Three  Pillars  Funding Corporation,  of which  $185.0  million  was drawn as of January 31,  2006.  The Series B program  consists of $200 million in private bond  placements that will require scheduled principal payments beginning in October 2006.         Our ability to raise  additional  capital through further  securitization transactions,  and to do so on economically  favorable  terms,  depends in large part on factors that are beyond our control.         These factors include:         o      conditions in the securities and finance markets generally;         o      conditions in the markets for securitized instruments;         o      the credit quality and performance of our customer receivables;         o      our  ability  to obtain  financial  support  for  required  credit               enhancement;         o      our ability to service adequately our financial instruments;         o      the absence of any material  downgrading  or withdrawal of ratings               given to our securities previously issued in securitizations; and         o      prevailing interest rates.          Our   ability  to  finance   customer   receivables   under  our  current asset-backed  securitization facilities depends on our compliance with covenants relating to our business and our customer  receivables.  If these programs reach their  capacity or otherwise  become  unavailable,  and we are unable to arrange substitute  securitization facilities or other sources of financing, we may have to limit the  amount of  credit  that we make  available  through  our  customer finance programs.  This may adversely affect revenues and results of operations. Further,  our inability to obtain funding through  securitization  facilities or other sources may adversely  affect the  profitability  of outstanding  accounts under our credit programs if existing customers fail to repay outstanding credit due to our refusal to grant additional credit. Since our cost of funds under our bank credit  facility is expected to be greater in future years than our cost of funds under our current securitization facility,  increased reliance on our bank credit facility may adversely affect our net income.                                         18    An increase in interest rates may adversely affect our profitability.         The interest  rates on our bank credit  facility and the Series A program under our asset-backed  securitization  facility fluctuate up or down based upon the LIBO/LIBOR rate, the prime rate of our  administrative  agent or the federal funds rate in the case of the bank credit facility and the commercial paper rate in the case of the Series A program. To the extent that such rates increase, the fair value of the  interest  only strip will  decline and our  interest  expense could increase which may result in a decrease in our profitability.  We have significant  future capital needs which we may be unable to fund, and we may need additional funding sooner than currently anticipated.         We  will  need  substantial  capital  to  finance  our  expansion  plans, including  funds  for  capital  expenditures,   pre-opening  costs  and  initial operating  losses  related to new store  openings.  We may not be able to obtain additional  financing on acceptable  terms. If adequate funds are not available, we will have to curtail  projected  growth,  which  could  materially  adversely affect our business, financial condition, operating results or cash flows.         We  estimate  that  capital  expenditures  during  fiscal  2007  will  be approximately  $25 million to $30 million and that capital  expenditures  during future years may exceed this amount.  We expect that cash  provided by operating activities,  available  borrowings under our credit facility,  and access to the unfunded portion of our asset-backed  securitization  program will be sufficient to fund our  operations,  store  expansion and updating  activities  and capital expenditure programs through at least January 31, 2007. However, this may not be the case. We may be required to seek additional capital earlier than anticipated if future cash flows from operations fail to meet our  expectations and costs or capital expenditures related to new store openings exceed anticipated amounts.  A decrease in our credit sales could lead to a decrease in our product sales and profitability.         In the last three years, we financed,  on average,  approximately  57% of our retail sales through our internal  credit  programs.  Our ability to provide credit as a financing  alternative  for our  customers  depends on many factors, including the quality of our accounts receivable portfolio.  Payments on some of our credit accounts  become  delinquent from time to time, and some accounts end up in default,  due to several  factors,  including  general and local  economic conditions.  As we expand into new markets,  we will obtain new credit  accounts that may  present a higher  risk than our  existing  credit  accounts  since new credit  customers do not have an  established  credit history with us. A general decline in the  quality of our  accounts  receivable  portfolio  could lead to a reduction of available  credit  provided  through our finance  operations.  As a result, we might sell fewer products, which could adversely affect our earnings. Further,  because  approximately  58% of our credit  customers make their credit account  payments  in our stores,  any  decrease  in credit  sales could  reduce traffic in our stores and lower our revenues. A decline in the credit quality of our credit  accounts  could also cause an increase in our credit  losses,  which could  result  in a  decrease  in our  securitization  income  or  increase  the provision for bad debts on our statement of operations  and result in an adverse effect on our earnings.  A decline in credit quality could also lead to stricter underwriting criteria which might have a negative impact on sales.  A downturn in the economy may affect consumer purchases of discretionary  items, which could reduce our net sales.         A large  portion of our sales  represent  discretionary  spending  by our customers.  Many factors affect discretionary spending,  including world events, war,  conditions in financial  markets,  general business  conditions,  interest rates,  inflation,  energy  and  gasoline  prices,  consumer  debt  levels,  the availability of consumer credit, taxation, unemployment trends and other matters that influence  consumer  confidence and spending.  Our customers'  purchases of discretionary items,  including our products,  could decline during periods when disposable  income  is lower or  periods  of  actual  or  perceived  unfavorable economic  conditions.  If this  occurs,  our net sales and  profitability  could decline.                                         19    We face significant  competition from national,  regional and local retailers of major home appliances and consumer electronics.         The retail market for major home  appliances and consumer  electronics is highly  fragmented and intensely  competitive.  We currently  compete  against a diverse group of retailers,  including  national mass  merchants  such as Sears, Wal-Mart,  Target, Sam's Club and Costco, specialized national retailers such as Circuit  City and Best Buy,  home  improvement  stores  such as Lowe's  and Home Depot, and  locally-owned  regional or independent  retail specialty stores that sell  major  home  appliances  and  consumer   electronics  similar,  and  often identical, to those we sell. We also compete with retailers that market products through store catalogs and the Internet. In addition,  there are few barriers to entry into our current and contemplated  markets,  and new competitors may enter our current or future markets at any time.         We may not be able to compete  successfully  against  existing and future competitors.   Some  of  our  competitors  have  financial  resources  that  are substantially  greater than ours and may be able to purchase  inventory at lower costs and better sustain  economic  downturns.  Our competitors may respond more quickly to new or emerging technologies and may have greater resources to devote to  promotion  and sale of products  and  services.  If two or more  competitors consolidate their businesses or enter into strategic  partnerships,  they may be able to compete more effectively against us.         Our  existing  competitors  or new  entrants  into our industry may use a number of different strategies to compete against us, including:         o      expansion by our existing  competitors or entry by new competitors               into markets where we currently operate;         o      lower pricing;         o      aggressive advertising and marketing;         o      extension of credit to customers on terms more  favorable  than we               offer;         o      larger  store  size,  which  may  result  in  greater  operational               efficiencies, or innovative store formats; and         o      adoption of improved retail sales methods.         Competition  from  any of these  sources  could  cause us to lose  market share,  revenues and customers,  increase  expenditures or reduce prices, any of which could have a material adverse effect on our results of operations.  If new products are not introduced or consumers do not accept new products,  our sales may decline.         Our ability to maintain and increase  revenues  depends to a large extent on the periodic  introduction and availability of new products and technologies. We believe that the introduction and continued growth in consumer  acceptance of new  products,  such as digital  video  recorders  and digital,  high-definition televisions, will have a significant impact on our ability to increase revenues. These  products  are subject to  significant  technological  changes and pricing limitations  and are subject to the actions and  cooperation  of third  parties, such as movie distributors and television and radio  broadcasters,  all of which could  affect  the  success  of  these  and  other  new   consumer   electronics technologies.  It is possible that new products  will never  achieve  widespread consumer acceptance.  If we fail to anticipate changes in consumer preferences, our sales may decline.         Our products must appeal to a broad range of consumers whose  preferences cannot be  predicted  with  certainty  and are  subject to change.  Our  success depends upon our ability to anticipate  and respond in a timely manner to trends in consumer  preferences  relating to major  household  appliances  and consumer electronics.  If we fail to identify and respond to these changes,  our sales of these products may decline.  In addition,  we often make commitments to purchase products  from our  vendors up to six months in  advance  of  proposed  delivery dates. Significant deviation from the projected demand for products that we sell may have a material  adverse  effect on our results of operations  and financial condition,  either  from lost sales or lower  margins  due to the need to reduce prices to dispose of excess inventory.                                         20    A disruption in our relationships  with, or in the operations of, any of our key suppliers could cause our sales to decline.         The  success  of  our  business  and  growth  strategies   depends  to  a significant  degree on our  relationships  with our suppliers,  particularly our brand name suppliers such as General Electric,  Whirlpool,  Frigidaire,  Maytag, LG, Mitsubishi,  Sony, Hitachi,  Samsung,  Toshiba,  Serta,  Hewlett Packard and Compaq.  We do not have long term supply  agreements  or exclusive  arrangements with the majority of our vendors.  We typically order our inventory  through the issuance of individual purchase orders to vendors. We also rely on our suppliers for cooperative advertising support. We may be subject to rationing by suppliers with respect to a number of limited  distribution  items.  In addition,  we rely heavily  on a  relatively  small  number  of  suppliers.  Our top six  suppliers represented  60.6% of our purchases  for fiscal 2006,  and the top two suppliers represented  approximately 29.2% of our total purchases.  The loss of any one or more of these key vendors or our failure to establish and maintain relationships with these and other vendors could have a material adverse effect on our results of operations and financial condition.         Our ability to enter new markets  successfully  depends, to a significant extent,  on the willingness and ability of our vendors to supply  merchandise to additional  warehouses  or stores.  If vendors are unwilling or unable to supply some or all of their products to us at acceptable prices in one or more markets, our results of operations and financial condition could be materially  adversely affected.         Furthermore,  we rely on credit from vendors to purchase our products. As of January 31, 2006, we had $40.9 million in accounts  payable and $74.0 million in merchandise inventories. A substantial change in credit terms from vendors or vendors'  willingness  to extend credit to us would reduce our ability to obtain the merchandise  that we sell, which could have a material adverse effect on our sales and results of operations.  You should not rely on our comparable store sales as an indication of our future results of operations because they fluctuate significantly.         Our  historical   same  store  sales  growth   figures  have   fluctuated significantly from quarter to quarter. For example,  same store sales growth for each of the  quarters  of fiscal  2006  were  7.3%,  12.1%,  23.3%,  and  22.6%, respectively.  Even though we  achieved  double-digit  same store  sales  growth during fiscal 2006, we may not be able to increase same store sales at this pace in the future. A number of factors have historically affected, and will continue to affect, our comparable store sales results, including:         o      changes in competition;         o      general economic conditions;         o      new product introductions;         o      consumer trends;         o      changes in our merchandise mix;         o      changes in the relative  sales price  points of our major  product               categories;         o      the impact of our new  stores on our  existing  stores,  including               potential  decreases  in  existing  stores'  sales as a result  of               opening new stores;         o      weather conditions in our markets;         o      timing of promotional events;         o      timing and location of major sporting events; and         o      our ability to execute our business strategy effectively.                                         21           Changes in our quarterly and annual  comparable store sales results could cause the price of our common stock to fluctuate significantly.  Because we experience seasonal  fluctuations in our sales, our quarterly results will fluctuate, which could adversely affect our common stock price.         We  experience  seasonal  fluctuations  in our net  sales  and  operating results.  In fiscal 2006,  we generated  29.4% of our net sales and 31.4% of our net income in the fiscal  quarter ended  January 31 (which  included the holiday selling  season).  We also incur  significant  additional  expenses  during this fiscal  quarter due to higher  purchase  volumes and increased  staffing.  If we miscalculate the demand for our products generally or for our product mix during the fiscal quarter ending January 31, our net sales could decline,  resulting in excess  inventory,  which could harm our financial  performance.  A shortfall in expected net sales,  combined with our  significant  additional  expenses during this fiscal quarter, could cause a significant decline in our operating results. This could adversely affect our common stock price.  Our business could be adversely affected by changes in consumer  protection laws and regulations.         Federal and state consumer  protection laws and regulations,  such as the Fair  Credit  Reporting  Act,  limit the manner in which we may offer and extend credit.  Since we finance a substantial portion of our sales, any adverse change in the regulation of consumer credit could  adversely  affect our total revenues and gross margins.  For example,  new laws or regulations could limit the amount of interest or fees that may be charged on  consumer  loan  accounts or restrict our ability to collect on account balances,  which would have a material adverse effect on our earnings.  Compliance with existing and future laws or regulations could require us to make material expenditures, in particular personnel training costs, or otherwise adversely affect our business or financial results.  Failure to comply with these laws or regulations,  even if inadvertent,  could result in negative publicity,  fines or additional licensing expenses,  any of which could have an adverse effect on our results of operations and stock price.  Pending  litigation  relating  to the sale of credit  insurance  and the sale of service maintenance agreements in the retail industry,  including one lawsuit in which we were the defendant, could adversely affect our business.         We understand that states' attorneys general and private  plaintiffs have filed lawsuits against other retailers relating to improper practices  conducted in connection with the sale of credit insurance in several  jurisdictions around the  country.  We offer  credit  insurance  in all of our stores and require the purchase  of  property  credit  insurance  products  from us or from third party providers  in  connection  with  sales of  merchandise  on  installment  credit; therefore,  similar  litigation  could be brought against us. We were previously named as a defendant in a purported  class  action  lawsuit  alleging  breach of contract and violations of state and federal  consumer  protection  laws arising from the terms of our  service  maintenance  agreements.  A final  judgment  was entered dismissing that lawsuit. While we believe we are in full compliance with applicable  laws and  regulations,  if we are found liable in any future lawsuit regarding  credit  insurance  or  service  maintenance  agreements,  we could be required to pay  substantial  damages or incur  substantial  costs as part of an out-of-court settlement, either of which could have a material adverse effect on our results of operations and stock price.  An adverse  judgment or any negative publicity  associated with our service  maintenance  agreements or any potential credit insurance litigation could also affect our reputation, which could have a negative impact on sales.  If we lose key  management  or are  unable to  attract  and  retain  the  highly qualified sales personnel required for our business, our operating results could suffer.         Our  future  success  depends  to a  significant  degree  on the  skills, experience  and continued  service of Thomas J. Frank,  Sr., our Chairman of the Board and Chief  Executive  Officer,  William C. Nylin,  Jr., our  President and Chief Operating Officer,  David L. Rogers, our Chief Financial Officer, David R. Atnip,  our Senior Vice President and Treasurer,  Sydney K. Boone, our Secretary and General Counsel, and other key personnel.  If we lose the services of any of these  individuals,  or if one or more of them or other key personnel  decide to join a  competitor  or otherwise  compete  directly or  indirectly  with us, our business  and  operations  could be  harmed,  and we could  have  difficulty  in                                         22    implementing  our strategy In addition,  as our business  grows, we will need to locate, hire and retain additional  qualified sales personnel in a timely manner and develop,  train and manage an increasing  number of  management  level sales associates  and other  employees.  Competition  for  qualified  employees  could require us to pay higher wages to attract a sufficient number of employees,  and increases in the federal  minimum wage or other  employee  benefits  costs could increase  our  operating  expenses.  If we are  unable  to  attract  and  retain personnel as needed in the future,  our net sales growth and  operating  results could suffer.  Because  our  stores  are  located  in Texas and  Louisiana,  we are  subject to regional risks.         Our 56  stores  are  located  exclusively  in Texas and  Louisiana.  This subjects  us to  regional  risks,  such  as  the  economy,  weather  conditions, hurricanes  and other  natural  disasters.  If the region  suffered  an economic downturn or other adverse  regional  event,  there could be an adverse impact on our net sales  and  profitability  and our  ability  to  implement  our  planned expansion program.  Several of our competitors  operate stores across the United States and thus are not as vulnerable to the risks of operating in one region.  Our  information  technology  infrastructure  is vulnerable to damage that could harm our business.         Our ability to operate our business  from day to day, in  particular  our ability to manage our credit operations and inventory levels, largely depends on the efficient  operation of our computer hardware and software  systems.  We use management  information  systems  to track  inventory  information  at the store level,  communicate customer information,  aggregate daily sales information and manage our credit portfolio.  These systems and our operations are vulnerable to damage or interruption from:         o      power   loss,    computer    systems    failures   and   Internet,               telecommunications or data network failures;         o      operator  negligence or improper  operation by, or supervision of,               employees;         o      physical  and  electronic  loss  of  data  or  security  breaches,               misappropriation and similar events;         o      computer viruses;         o      intentional acts of vandalism and similar events; and         o      hurricanes, fires, floods and other natural disasters.         The software that we have developed to use in granting credit may contain undetected  errors  that  could  cause our  network to fail or our  expenses  to increase.  Any failure due to any of these causes, if it is not supported by our disaster recovery plan, could cause an interruption in our operations and result in reduced net sales and profitability.  If we are unable to maintain  our  current  insurance  coverage  for our service maintenance  agreements,  our  customers  could incur  additional  costs and our repair  expenses  could  increase,  which could  adversely  affect our financial condition and results of operations.         There are a limited  number of insurance  carriers that provide  coverage for our service  maintenance  agreements.  If insurance becomes unavailable from our current  carriers  for any reason,  we may be unable to provide  replacement coverage on the same terms, if at all. Even if we are able to obtain replacement coverage,  higher premiums could have an adverse impact on our  profitability if we are  unable  to  pass  along  the  increased  cost of  such  coverage  to our customers.  Inability to obtain insurance  coverage for our service  maintenance agreements  could  cause   fluctuations  in  our  repair  expenses  and  greater volatility of earnings.                                         23    If we are unable to maintain  group credit  insurance  policies  from  insurance carriers,  which  allow us to  offer  their  credit  insurance  products  to our customers  purchasing  on credit,  our  revenues  could be reduced and bad debts might increase.         There are a limited  number of insurance  carriers  that  provide  credit insurance  coverage  for sale to our  customers.  If  credit  insurance  becomes unavailable for any reason we may be unable to offer replacement coverage on the same terms, if at all. Even if we are able to obtain  replacement  coverage,  it may be at higher  rates or reduced  coverage,  which could  affect the  customer acceptance of these products, reduce our revenues or increase our credit losses.  Changes in trade regulations, currency fluctuations and other factors beyond our control could affect our business.         A significant  portion of our inventory is  manufactured  overseas and in Mexico.  Changes in trade  regulations,  currency  fluctuations or other factors beyond  our  control  may  increase  the  cost of items we  purchase  or  create shortages of these items,  which in turn could have a material adverse effect on our results of  operations  and  financial  condition.  Conversely,  significant reductions  in the cost of these items in U.S.  dollars may cause a  significant reduction  in the  retail  prices of those  products,  resulting  in a  material adverse  effect on our sales,  margins or  competitive  position.  In  addition, commissions  earned  on  both  our  credit  insurance  and  service  maintenance agreement  products could be adversely  affected by changes in statutory premium rates, commission rates, adverse claims experience and other factors.  We may be unable to protect our intellectual property rights, which could impair our name and reputation.         We believe  that our success  and  ability to compete  depends in part on consumer  identification of the name "Conn's." We have registered the trademarks "Conn's" and our logo. We intend to protect  vigorously  our  trademark  against infringement  or  misappropriation  by others.  A third  party,  however,  could attempt  to  misappropriate  our  intellectual   property  in  the  future.  The enforcement  of our  proprietary  rights  through  litigation  could  result  in substantial  costs  to us that  could  have a  material  adverse  effect  on our financial condition or results of operations.  Any changes in the tax laws of the states of Texas and  Louisiana  could  affect our state tax liabilities.         From  time  to  time,  legislation  has  been  introduced  in  the  Texas legislature that would,  among other things,  remove the current  exemption from franchise tax liability that limited  partnerships enjoy.  Currently,  the Texas Legislature is not in session and its next regular session is scheduled to begin in January  2007;  however,  the Texas  Governor  has  announced  he will call a special  session of the Texas  Legislature  beginning  April 17, 2006 to address school finance reform mandated by the Texas Supreme Court.  Legislation could be introduced  that,  among  other  things,  could  change  the  way  that  limited partnerships  are taxed in the  state of  Texas;  however,  the  outcome  of any particular proposal cannot be predicted with any certainty.  A  further  rise  in  oil  and  gasoline  prices  could  affect  our  customers' determination  to drive to our  stores,  and  cause  us to  raise  our  delivery charges.         A further significant increase in oil and gasoline prices could adversely affect our customers'  shopping  decisions and patterns.  We rely heavily on our internal distribution system and our same or next day delivery policy to satisfy our  customers'  needs and desires,  and any such  significant  increases  could result in increased  distribution  charges. Such increases may not significantly affect our competitors.
None.                                         24
The following summarizes the geographic location of our stores, warehouse and distribution centers and corporate facilities by major market area:                                                                                          Leases                                                                                 With                                                                                Options                                                          Total     Warehouse   Expiring                                No. of       Leased       Square     Square      Beyond     Geographic Location       Locations   Facilities      Feet       Feet      10 Years - ---------------------------- ----------  -----------  ----------- ----------- ---------  Golden Triangle District (1)        5            5       153,568      32,169        5 Louisiana District ..........       5            5       129,890      27,200        5 Houston District ............      18           14       394,240      90,070       13 San Antonio/Austin District .      13           13       379,330      83,982       12 Corpus Christi ..............       1            1        51,670      14,300        1 South Texas .................       2            2        55,660       8,435        2 Dallas District .............      12           10       351,243      79,245       10                              ----------  -----------  ----------  ----------  ---------    Store Totals .............      56           50     1,515,601     335,401       48 Warehouse/Distribution  Centers ....................       6            3       703,453     703,453        1 Service Centers .............       5            3       191,932     133,636        1 Corporate Offices ...........       1            1       106,783      25,000        1                              ----------  -----------  ----------  ----------  ---------    Total ....................      68           57     2,517,769   1,197,490       51                              ==========  ===========  ==========  ==========  =========    - -----------------        (1)    Includes one store in Lake Charles, Louisiana.
We are involved in routine  litigation  incidental  to our business  from time to time. We do not expect the outcome of any of this routine  litigation to have a material  effect on our  financial  condition  or  results of  operation. However,  the results of their  proceedings  cannot be predicted with certainty, and changes in facts and circumstances could impact our estimate of reserves for litigation.
There were no matters  submitted to a vote of security holders during the fourth quarter of fiscal 2006.                                         25                                         PART II
What is the principal market for our common stock?         The principal  market for our common stock is the NASDAQ National Market. Our  common  stock is listed on the  NASDAQ  National  Market  under the  symbol "CONN." Information regarding the high and low sales prices for our common stock for each  quarterly  period  since our  initial  public  offering as reported on NASDAQ is summarized as follows:                                                              High         Low                                                           ---------   ---------          Quarter ended April 30, 2004 .................... $ 18.08     $ 14.50          Quarter ended July 31, 2004 ..................... $ 19.18     $ 15.35          Quarter ended October 31, 2004 .................. $ 16.82     $ 13.79          Quarter ending January 31, 2005 ................. $ 18.33     $ 14.37          Quarter ended April 30, 2005 .................... $ 19.70     $ 15.29          Quarter ended July 31, 2005 ..................... $ 27.51     $ 16.69          Quarter ended October 31, 2005 .................. $ 29.80     $ 23.20          Quarter ended January 31, 2006 .................. $ 44.93     $ 28.68    How many common stockholders do we have?         As of March 27, 2006,  we had  approximately  57 common  stockholders  of record and an estimated 6,400 beneficial owners of our common stock.  Did we declare any cash dividends in fiscal 2005 or fiscal 2006?         No cash  dividends were paid in fiscal 2005 or 2006. We do not anticipate paying dividends in the foreseeable future. Any future payment of dividends will be at the  discretion of the Board of Directors and will depend upon our results of operations,  financial condition,  cash requirements and other factors deemed relevant by the Board of  Directors,  including  the terms of our  indebtedness. Provisions in  agreements  governing  our  long-term  indebtedness  restrict the amount  of  dividends  that  we may  pay  to  our  stockholders.  See  "Item  7. Management's  Discussion  and  Analysis of  Financial  Condition  and Results of Operations - Liquidity and Capital Resources."  Has the Company had any sales of unregistered securities during the last year?         The Company has had no sales of  unregistered  securities  during  fiscal 2006.                                         26
Twelve                                                 Year      Six Months    Months                                                 Ended       Ended        Ended               Years Ended January 31,                                                July 31,   January 31,  January 31, ---------------------------------------------                                                  2001        2002        2002        2003        2004        2005        2006                                                ---------   ---------   ---------   ---------   ---------   ---------   ---------                                                                             (unaudited) Statement of Operations (1):                              (dollars and shares in thousands, except per share amounts)  Total revenues ................................$327,257    $206,896    $378,525    $445,973    $499,310    $567,092    $702,422 Operating expense: Cost of goods sold, including ware- housing and occupancy cost .................... 201,963     127,543     233,226     276,956     317,712     359,710     453,374 Selling, general and administrative expense ........................  92,194      58,630     106,949     125,712     135,174     152,900     181,631    Provision for bad debts ....................   1,734       1,286       2,406       4,125       4,657       5,637       3,769                                                ---------   ---------   ---------   ---------   ---------   ---------   --------- Total operating expense ....................... 295,891     187,459     342,581     406,793     457,543     518,247     638,774                                                ---------   ---------   ---------   ---------   ---------   ---------   --------- Operating income ..............................  31,366      19,437      35,944      39,180      41,767      48,845      63,648 Interest expense, net and minority interest ...   3,754       2,940       4,855       7,237       4,577       2,477         400                                                ---------   ---------   ---------   ---------   ---------   ---------   --------- Earnings before income taxes ..................  27,612      16,497      31,089      31,943      37,190      46,368      63,248 Provision for income taxes ....................   9,879       5,944      11,130      11,342      12,850      16,243      22,067                                                ---------   ---------   ---------   ---------   ---------   ---------   --------- Net income from continuing operations .........  17,733      10,553      19,959      20,601      24,340      30,125      41,181 Discontinued operations, net of tax ...........    (546)           -       (389)           -          -           -           -                                                ---------   ---------   ---------   ---------   ---------   ---------   --------- Net income ....................................  17,187      10,553      19,570      20,601      24,340      30,125      41,181 Less preferred stock dividends (2) ............  (2,173)     (1,025)     (1,939)     (2,133)     (1,954)          -           -                                                ---------   ---------   ---------   ---------   ---------   ---------   --------- Net income available for      common stockholders ......................$ 15,014    $  9,528    $ 17,631    $ 18,468    $ 22,386    $ 30,125    $ 41,181                                                =========   =========   =========   =========   =========   =========   ========= Earnings per common share:        Basic ..................................$   0.87    $   0.56    $   1.03    $   1.10    $   1.26    $   1.30    $   1.76        Diluted ................................$   0.87    $   0.55    $   1.01    $   1.10    $   1.22    $   1.27    $   1.70 Average common shares  outstanding:        Basic ..................................  17,169      17,025      17,060      16,724      17,726      23,192      23,412        Diluted ................................  17,194      17,327      17,383      16,724      18,335      23,754      24,192  Other Financial Data: Stores open at end of period ..................      32          36          36          42          45          50          56 Same store sales growth (3) ...................    10.3%       16.7%       15.6%        1.3%        2.6%        3.6%       16.9% Inventory turns (4) ...........................     5.9         7.5         6.8         6.6         6.5         6.0         6.6 Gross margin percentage (5) ...................    38.3%       38.4%       38.4%       37.9%       36.4%       36.6%       35.5% Operating margin (6) ..........................     9.6%        9.4%        9.5%        8.8%        8.4%        8.6%        9.1% Return on average equity (7) ..................    36.7%       35.9%       34.9%       28.3%       19.5%       16.4%       18.5% Capital expenditures ..........................$ 14,833    $ 10,551    $ 15,547    $ 15,070    $  9,401    $ 19,619    $ 18,490  Balance Sheet Data: Working capital ...............................$ 40,752    $ 45,546    $ 45,546    $ 69,984    $115,366    $148,074    $179,496 Total assets .................................. 134,425     145,644     145,644     181,798     234,760     268,792     341,995 Total debt ....................................  31,445      38,750      38,750      51,992      14,512      10,532         136 Preferred stock ...............................  15,400      15,226      15,226      15,226           -           -           - Total stockholders' equity ....................  54,879      62,860      62,860      82,669     166,590     200,802     245,284   - -------------------------------------------------- (1)    Information  excludes the operations of the rent-to-own division that was        sold in February, 2001. (2)    Dividends  were  not  actually  declared  or  paid  until  2004,  but are        presented for purposes of earnings per share calculations. (3)    Same store sales growth is calculated by comparing the reported  sales by        store for all stores that were open throughout a period to reported sales        by store for all stores that were open throughout the prior period. Sales        from  closed  stores  have been  removed  from each  period.  Sales  from        relocated  stores have been  included in each  period  because  each such        store was relocated within the same general geographic market. Sales from        expanded stores have been included in each period. (4)    Inventory  turns  are  defined  as the  cost  of  goods  sold,  excluding        warehousing and occupancy  cost,  divided by the average of the beginning        and ending product inventory,  excluding consigned goods; information for        the six months ended January 31, 2002 has been  annualized for comparison        purposes. (5)    Gross margin  percentage is defined as total  revenues less cost of goods        and parts sold,  including  warehousing  and occupancy  cost,  divided by        total revenues. (6)    Operating  margin  is  defined  as  operating  income  divided  by  total        revenues. (7)    Return on average  equity is calculated as current period net income from        continuing  operations divided by the average of the beginning and ending        equity;  information  for the six months ended  January 31, 2002 has been        annualized for comparison purposes.                                         27
Forward-Looking Statements         This report contains forward-looking  statements.  We sometimes use words such  as  "believe,"  "may,"  "will,"  "estimate,"   "continue,"   "anticipate," "intend," "expect," "project" and similar expressions, as they relate to us, our management   and  our   industry,   to  identify   forward-looking   statements. Forward-looking   statements  relate  to  our  expectations,   beliefs,   plans, strategies,  prospects, future performance,  anticipated trends and other future events.  We have based our  forward-looking  statements  largely on our  current expectations and projections  about future events and financial trends affecting our  business.  Actual  results  may  differ  materially.  Some  of  the  risks, uncertainties  and assumptions  about us that may cause actual results to differ from these forward-looking statements include, but are not limited to:         o      the success of our growth strategy and plans regarding opening new               stores and entering adjacent and new markets,  including our plans               to continue  expanding into the Dallas/Fort  Worth Metroplex,  and               South Texas;         o      our intention to update or expand existing stores;         o      our ability to obtain  capital for required  capital  expenditures               and costs  related  to the  opening  of new stores or to update or               expand existing stores;         o      our cash flows from operations, borrowings from our revolving line               of  credit  and  proceeds   from   securitizations   to  fund  our               operations, debt repayment and expansion;         o      rising  interest  rates may  increase  our cost of  borrowings  or               reduce securitization income;         o      technological and market developments, growth trends and projected               sales in the home  appliance  and consumer  electronics  industry,               including with respect to digital products like DVD players, HDTV,               digital radio, home networking devices and other new products, and               our ability to capitalize on such growth;         o      the  potential  for price  erosion or lower unit sales points that               could result in declines in revenues;         o      increasing  oil and gas  prices  that could  adversely  affect our               customers' shopping decisions and patterns;         o      both 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;         o      changes  in laws and  regulations  and/or  interest,  premium  and               commission  rates  allowed by  regulators  on our  credit,  credit               insurance and service  maintenance  agreements as allowed by those               laws and regulations;         o      our relationships with key suppliers;         o      the  adequacy  of our  distribution  and  information  systems and               management experience to support our expansion plans;         o      the accuracy of our  expectations  regarding  competition  and our               competitive advantages;         o      the  potential  for market  share  erosion  that  could  result in               reduced revenues;         o      the  accuracy of our  expectations  regarding  the  similarity  or               dissimilarity  of our existing  markets as compared to new markets               we enter; and         o      the outcome of litigation affecting our business.                                         28           Additional  important  factors  that could  cause our  actual  results to differ  materially from our  expectations  are discussed under "Risk Factors" in this Form 10-K.  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 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.         Through our 56 retail  stores,  we provide  products  and services to our customers in six primary market areas,  including Houston,  San  Antonio/Austin, Dallas/Fort  Worth,  southern  Louisiana,  Southeast  Texas,  and  South  Texas. Products and services  offered  through retail sales outlets  include major home appliances,  consumer  electronics,  home  office  equipment,  lawn  and  garden products, mattresses, furniture, service maintenance agreements, customer credit programs,  including  installment  and revolving  credit account  services,  and various credit insurance  products.  These activities are supported  through our extensive  service,  warehouse  and  distribution  system.  Our stores  bear the "Conn's"  name,  after our founder's  family,  and deliver the same products and services to our  customers.  All of our 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.        Presented  below is a diagram  setting forth our five  cornerstones  which represent,  in our  view,  the  five  components  of  our  sales  goal -  strong merchandising  systems,  state of the art credit options for our  customers,  an extensive  warehousing and distribution  system, a service system to support our customers  needs  beyond  the  product  warranty  periods,   and  our  uniquely, well-trained  employees in each area.  Each of these systems combine to create a "nuts and bolts"  support  system for our customers  needs and desires.  Each of these systems is discussed at length in the Business section of this report.   BUSINESS CORNERSTONES: - ---------------  => DRIVE => SALES Merchandising Credit Distribution Service Training   We, of  course,  derive a large  part of our  revenue  from our  product  sales. However, unlike many of our competitors,  we provide in-house credit options for our customers' product purchases.  In the last three years, we have financed, on average,  approximately 57% of our retail sales through these programs. In turn, we finance (convert to cash) substantially all of our customer  receivables from these  credit  options  through an  asset-backed  securitization  facility.  See                                         29    "Business - Finance Operations" for a detailed discussion of our in-house credit programs. As part of our asset-backed securitization facility, we have created a qualifying special purpose entity,  which we refer to as the QSPE or the issuer, to purchase customer  receivables from us and to issue asset-backed and variable funding  notes  to  third  parties  to fund  such  purchases.  We  transfer  our receivables,  consisting of retail installment  contracts and revolving accounts extended to our customers,  to the issuer in exchange for cash and  subordinated securities.         While our warehouse and  distribution  system does not directly  generate revenues,   other  than  the  fees  paid  by  our  customers  for  delivery  and installation  of the  products to their  homes,  it is our extra,  "value-added" program that our existing  customers have come to rely on, and our new customers are hopefully sufficiently impressed with to become repeat customers.  We derive revenues from our repair services on the products we sell. Additionally,  acting as an agent for unaffiliated  companies, we sell credit insurance to protect our customers from credit losses due to death, disability,  involuntary unemployment and  damage to the  products  they have  purchased;  to the  extent  they do not already have it.  Executive Overview         This overview is intended to provide an executive  level  overview of our operations for our fiscal year ended January 31, 2006. A detailed explanation of the  changes in our  operations  for the fiscal  year ended  January 31, 2006 as compared  to the prior year is  included  beginning  on page 36.  Following  are significant financial items in managements view:         o      Our revenues for the fiscal year ended January 31, 2006  increased               by 23.9  percent,  or $135.3  million,  from  fiscal  year 2005 to               $702.4  million  due to  sales  growth,  primarily  from  existing               stores, and increased  securitization income. Our same store sales               product growth rate for the fiscal year ended January 31, 2006 was               16.9%,  versus 3.6% for fiscal 2005. The improvement in same store               sales growth was due primarily to improved  execution at the store               level and  effective  sales  promotions.  (Also  see  "Operational               Changes and Outlook.")         o      During the last half of fiscal year 2006, two hurricanes,  Katrina               and Rita, hit the Gulf Coast. These storms significantly  impacted               our operations by:                o      temporary  closing  of our  Louisiana,  South  East  Texas,                      Corpus Christi and Houston stores and related  distribution                      operations for limited periods of time,               o      positively impacting Net sales as customers in the affected                      areas  replaced  appliances  and other  household  products                      damaged as a result of the storms,               o      disrupting   credit   collection   efforts  while  we  were                      displaced  from our corporate  headquarters  as a result of                      Hurricane Rita, causing a short-term increase in the credit                      portfolio's  delinquency  statistics  and  resulting  in  a                      reduction  of Finance  charges and other and an increase in                      Bad debt expense, and               o      causing us to incur  expenses  related to the relocation of                      our  corporate  office  functions  and  losses  related  to                      damaged  merchandise  and  facilities,   net  of  insurance                      proceeds.         o      Same store sales  benefited  from the  effects of the  hurricanes.               Appliance  sales  accounted  for the  majority of the  increase in               total  same  stores  sales  during  the  period due in part to our               customers' need to replace items damaged by the storms. We believe               same store  sales,  adjusted for our estimate of the impact of the               hurricanes,  grew approximately 12% for the year ended January 31,               2006.         o      Our entry into the  Dallas/Fort  Worth and the South Texas markets               had a positive impact on our revenues. Approximately $75.9 million               of our product  sales for the year ended  January 31,  2006,  came               from the  opening  of twelve new  stores in these  markets,  since               February  2004.  Our plans  provide for the opening of  additional               stores in existing markets during the balance of fiscal 2007 as we               focus on  opportunities  in  markets  in  which  we have  existing               infrastructure.         o      While deferred interest and "same as cash" plans continue to be an               important  part  of  our  sales  promotion   plans,  our  improved               execution  and  effective  use of a variety  of sales  promotions,               enabled us to reduce the level of deferred  interest  and "same as               cash" plans that extend beyond one year, relative to gross product               sales  volume.  For the fiscal  years  ended  January 31, 2005 and               2006,  $29.0  million and $33.9  million,  respectively,  in gross               product  sales were  financed by extended  deferred  interest  and               "same as cash" plans.  These  extended term  promotional  programs               were not offered broadly until April,  2004. We expect to continue               to offer  this type of  extended  term  promotional  credit in the               future.                                         30           o      During the year ended January 31, 2006,  pretax income was reduced               by $1.0 million to reflect our estimate of expected  losses due to               increased  delinquencies  from  Hurricane  Rita  and  a  temporary               increase in bankruptcy filings. The increase in bankruptcy filings               is as a result of the new  bankruptcy law that took effect October               17, 2005,  prompting  consumers to file for bankruptcy  protection               before the new law went into effect.  The $1.0  million  charge to               earnings  reduced  Finance  charges  and  other  by  $895,000  and               increased Bad debt expense by $105,000.         o      Our gross  product  margin  was  35.5% for  fiscal  year  2006,  a               decrease  from 36.6% in fiscal  2005,  primarily  as a result of a               change in our  revenue  mix as  Product  sales  grew  faster  than               Service  revenues  and Finance  charges and other.  Also,  reduced               insurance sales penetration negatively impacted our gross margin.         o      Our operating  margin  increased to 9.1% from 8.6% in fiscal 2005.               In fiscal year 2006,  we  decreased  SG&A  expense as a percent of               revenues  to 25.8%  from 27.0% when  compared  to the prior  year,               primarily from decreases in payroll and payroll  related  expenses               and net  advertising  expense as a percent of revenues.  Partially               offsetting  these  reductions  were  increased  general  liability               insurance  expense and expenses  incurred due to Hurricane Rita of               approximately  $907,000,  net  of  estimated  insurance  proceeds.               Additionally,  our operating  margin  benefited from a decrease in               the  Provision for bad debts as a percent of revenues from 1.0% to               0.5%.         o      Operating  cash flows  were $64.3  million  for fiscal  2006.  Our               operating  cash  flows  increased  as a result  of  increased  net               income, improved funding under our asset-backed securitization and               vendor and federal  employment  and income tax  payment  deferrals               granted because of the hurricanes.  Most of the payments  deferred               will be paid during the three month period ended April 30, 2006.         o      Our  pretax   income  for  fiscal  2006   increased  by  36.4%  or               approximately  $16.8  million,  from fiscal 2005 to $63.2 million.               The  increase  was driven  largely by the  increase  in sales with               additional  benefit from improved  expense  leverage,  as Selling,               general  and  administrative  expenses  did  not  grow  as fast as               revenues.   Operational Changes and Outlook         We have  implemented,  continued  increased focus on or modified  several initiatives  in fiscal 2006 that we believe  will  positively  impact our future operating results, including:         o      A  reorganization  of  our  retail   management  team,   including               strengthening  the  district  management  team in the  Dallas/Fort               Worth market;         o      Successfully  increasing  the sales force by adding  approximately               13% more sales  associates  per store,  resulting  in  incremental               sales volume;         o      Implementation of call centers in the stores, emphasizing regular,               consistent contact with our customers;         o      Increased  emphasis  on the  sales of  furniture,  and  additional               product lines added to this category; and         o      Promoting  flat panel  technology in our stores as the price point               becomes more affordable for our customers.                                         31          Our sales  during the last five months of fiscal 2006  benefited  from the impact of  Hurricanes  Katrina and Rita.  This impact could  affect  future same store sales due to:        o     The acceleration of the sale of essential appliances in the affected             markets  disrupting the normal  replacement o cycle for these items;             and        o     The  same  store  sales  reported  for the  impacted  markets  being             elevated to a level that might not be duplicated. o         While our credit  portfolio  delinquency  statistics were still negatively impacted by the effects of the hurricanes at January 31, 2006, we anticipate the portfolio performance returning to historical levels as we continue to work with the customers impacted by these events.        During  the year,  we opened  four new  stores  in the  Dallas/Fort  Worth market, one in Harlingen, Texas and one in San Antonio, Texas. We continue to be satisfied with the results in the Dallas/Fort  Worth market and will continue to expand the number of stores in that  market.  We added  additional  distribution capability  during the year by opening  our  140,000  square  foot  distribution center in Dallas,  and increased our service  center  capabilities  in Dallas by converting our previous  distribution  center to a full-time service center. Our new  Harlingen  store  now  joins a store in  McAllen,  Texas,  opened  in early September 2004,  forming our South Texas market,  We believe that this market is substantially  underserved and provides great growth  potential for our company. We have  several  other  locations  in Texas and  Louisiana  that we believe are promising and, along with new stores in existing markets,  are in various stages of  development  for  opening in fiscal year 2007.  We also  continue to look at other markets, including neighboring states for opportunities.        The consumer  electronics  industry  depends on new products to drive same store  sales  increases.   Typically,   these  new  products,  such  as  digital televisions,  DVD players,  digital  cameras and MP3 players are  introduced  at relatively  high price  points  that are then  gradually  reduced as the product becomes more mainstream. To sustain positive same store sales growth, unit sales must  increase  at a rate  greater  than the  decline  in  product  prices.  The affordability  of the product helps 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.  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 January 31, 2006.        Transfers of Financial  Assets.  We transfer  customer  receivables to the QSPE that issues  asset-backed  securities  to third party  lenders  using these accounts as  collateral,  and we continue to service  these  accounts  after the transfer.  We recognize the sale of these accounts when we relinquish control of the  transferred  financial  asset in  accordance  with  Statement  of Financial Accounting Standards ("SFAS") No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities. As we transfer the accounts, we record an asset  representing the "interest only strip",  which is cash flows resulting  entirely  from  the  interest  on the  security.  The  gain  or  loss recognized  on  these  transactions  is  based  on  our  best  estimates  of key assumptions,  including  forecasted credit losses,  payment rates, forward yield curves,  costs of servicing the accounts and appropriate discount rates. The use                                         32    of different estimates or assumptions could produce different financial results. For example,  if we had assumed a 10.0%  reduction in net interest spread (which might be caused by rising interest  rates),  our interest in securitized  assets would have been reduced by $4.7  million as of January 31, 2006,  which may have an adverse  effect on earnings.  We recognize  income from our interest in these transferred  accounts  based on the  difference  between the interest  earned on customer  accounts and the costs  associated  with  financing  and servicing the transferred  accounts,  less a  provision  for bad  debts  associated  with  the transferred  assets.  This income is recorded as "Finance  charges and other" in our  consolidated  statement of operations.  If we had assumed a 10% increase in the  assumption  used for  developing  the reserve for doubtful  accounts on the books of the QSPE, the impact to recorded "Finance charges and other" would have been a reduction in revenues and pretax income of $1.2 million.        Deferred  Tax  Assets.   We  have  significant  net  deferred  tax  assets (approximately  $5.5  million  as of January  31,  2006),  which are  subject to periodic recoverability assessments.  Realization of our net deferred tax assets may be dependent upon whether we achieve  projected  future taxable income.  Our estimates  regarding  future  profitability  may  change  due to  future  market conditions,  our  ability to continue  to execute at  historical  levels and our ability to  continue  our growth  plans.  These  changes,  if any,  may  require material  adjustments to these deferred tax asset balances.  For example,  if we had assumed that the future tax rate at which these deferred items would reverse was 34.1%  rather than 35.1%,  we would have  reduced the net deferred tax asset and net income by approximately $94,000.        Intangible Assets. We have significant intangible assets related primarily to goodwill.  The determination of related estimated useful lives and whether or not these assets are impaired involves significant judgments. Effective with the implementation  of SFAS 142, we ceased  amortizing  goodwill  and began  testing potential impairment of this asset annually based on judgments regarding ongoing profitability  and cash flow of the  underlying  assets.  Changes in strategy or market  conditions  could  significantly  impact  these  judgments  and  require adjustments to recorded asset balances. For example, if we had reason to believe that our  recorded  goodwill  had become  impaired  due to decreases in the fair market  value of the  underlying  business,  we would  have to take a charge  to income for that portion of goodwill  that we believe is  impaired.  Our goodwill balance at January 31, 2005 and 2006 was $9.6 million        Property,  Plant and Equipment.  Our accounting  policies  regarding land, buildings,  and equipment include judgments regarding the estimated useful lives of  such  assets,  the  estimated  residual  values  to  which  the  assets  are depreciated, and the determination as to what constitutes increasing the life of existing assets.  These judgments and estimates may produce materially different amounts of  depreciation  and  amortization  expense  than would be  reported if different  assumptions  were used.  These  judgments may also impact the need to recognize an  impairment  charge on the  carrying  amount of these assets if the anticipated cash flows associated with the assets are not realized. In addition, the  actual  life of the asset and  residual  value  may be  different  from the estimates used to prepare financial statements in prior periods.        Revenue  Recognition.  Revenues  from  the  sale of  retail  products  are recognized at the time the product is delivered to the  customer.  Such revenues are  recognized  net of any  adjustments  for  sales  incentive  offers  such as discounts, coupons, rebates, or other free products or services. We sell service maintenance  agreements  and credit  insurance  contracts on behalf of unrelated third  parties.  For  contracts  where the third  parties are the obligor on the contract, commissions are recognized in revenues at the time of sale, and in the case of retrospective commissions,  based on claims experience, at the time that they are earned.  When we sell service  maintenance  agreements  in which we are deemed  to be the  obligor  on the  contract  at the  time of sale,  revenue  is recognized  ratably,  on a  straight-line  basis,  over the term of the  service maintenance  agreement.  These direct obligor service maintenance agreements are renewal contracts that provide our customers  protection  against product repair costs arising after the expiration of the manufacturer's  warranty and the third party obligor  contracts and typically range from 12 months to 36 months.  These agreements are separate units of accounting under Emerging Issues Task Force No. 00-21, Revenue Arrangements with Multiple  Deliverables.  The amounts of service maintenance  agreement  revenue  deferred at January 31, 2005 and 2006 were $3.9 million and $3.6 million,  respectively,  and are included in "Deferred revenue" in the accompanying balance sheets. The amounts of service maintenance agreement revenue  recognized  for the fiscal years ended January 31, 2004,  2005 and 2006 were $4.5 million, $5.0 million and $5.0 million, respectively.                                          33          Vendor  Allowances.  We receive  funds from vendors for price  protection, product  rebates,  marketing  and  training  and  promotion  programs  which are recorded on the  accrual  basis as a reduction  to the related  product  cost or advertising  expense  according to the nature of the program.  We accrue rebates based on the  satisfaction  of  terms of the  program  and  sales of  qualifying products  even though  funds may not be  received  until the end of a quarter or year. If the programs are related to product purchases, the allowances,  credits or payments  are recorded as a reduction  of product  cost;  if the programs are related to promotion or marketing of the product,  the allowances,  credits,  or payments  are recorded as a reduction  of  advertising  expense in the period in which the expense is incurred.        Recent Accounting Pronouncements. In December 2004, Statement of Financial Accounting  Standards No. 123R,  Share-Based Payment, was issued. This statement establishes  standards  for  accounting  for  transactions  in which  an  entity exchanges its equity  instruments for goods or services,  focusing  primarily on accounting for  transactions in which an entity obtains an employee's  services. The statement  requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments, based on the grant-date fair value of the award,  and record that cost over the period  during which the employee is required to provide service in exchange for the award. Additionally, the statement  provides  multiple  options for adopting the  requirements of the standard.  We are  required  to  implement  the  provisions  of  this  statement effective February 1, 2006, and intend to elect to retrospectively  adjust prior year results for comparison purposes.  We are required under existing accounting standards to provide  supplemental  disclosure in the footnotes to our financial statements as if our financial statements had been prepared using the fair value method of accounting for stock based  compensation.  See Note 1 to our financial statements for additional information.        Accounting for Leases.  The accounting for leases is governed primarily by SFAS No. 13, Accounting for Leases. As required by the standard, we analyze each lease, at its inception,  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.  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.                                         34          Results of Operations        The following table sets forth certain statement of operations information as a percentage of total revenues for the periods indicated.                                                     Years ended January 31,                                                 ----------------------------                                                   2004      2005      2006                                                 --------  --------  --------  Revenues: Product sales ..................................   80.6%     79.6%     81.1% Service maintenance agreement   commissions (net) ............................    4.0       4.2       4.4 Service revenues ...............................    3.7       3.3       2.9                                                 --------  --------  -------- Total net sales ................................   88.3      87.1      88.4 Finance charges and other ......................   11.7      12.9      11.6                                                 --------  --------  -------- Total revenues .................................  100.0     100.0     100.0 Cost and expenses: Cost of goods sold, including   warehousing and occupancy costs ..............   62.8      62.6      63.8 Cost of parts sold, including   warehousing and occupancy costs ..............    0.8       0.8       0.8 Selling, general and administrative expense ....   27.1      27.0      25.8 Provision for bad debts ........................    0.9       1.0       0.5                                                 --------  --------  --------     Total costs and expenses ...................   91.6      91.4      90.9                                                 --------  --------  -------- Operating income ...............................    8.4       8.6       9.1 Interest expense (including minority interest) .    0.9       0.4       0.1                                                 --------  --------  -------- Earnings before income taxes ...................    7.5       8.2       9.0 Provision for income taxes     Current ....................................    2.6       2.9       3.3     Deferred ...................................      -         -      (0.2)                                                 --------  --------  -------- Total provision for income taxes ...............    2.6       2.9       3.1                                                 --------  --------  -------- Net income .....................................    4.9%      5.3%      5.9%                                                 ========  ========  ========           In reviewing the  percentages  reflected in the above table, we noted that the following trends in our operations developed within the last twelve months.              o     The  increase in cost of goods sold as a  percentage  of total                   revenues  reflects  the shift in revenue mix as product  sales                   grew  faster than  service  revenues  and finance  charges and                   other. Cost of products sold was 78.7% of net product sales in                   the 2005 period and 78.6% in the 2006 period.              o     The decline in selling,  general and administrative expense as                   a  percentage  of  total  revenues  resulted   primarily  from                   decreased   payroll  and  payroll  related  expenses  and  net                   advertising  expense,  as a  percent  of  revenues,  that were                   partially  offset by  increased  general  liability  insurance                   expense and higher expenses incurred due to Hurricane Rita.              o     The  declining  trend in interest  expense as a percentage  of                   total  revenues  is  a  function  of  continuing  to  generate                   positive cash flow,  the pay-off of debt with our IPO proceeds                   in fiscal year 2004 and the impact of expiring  interest  rate                   swap agreements.        The  presentation  of our gross  margins  may not be  comparable  to other retailers since we include the cost of our in-home  delivery  service as part of selling,  general and administrative expense.  Similarly, we include the cost of merchandising our products,  including amounts related to purchasing the product and a portion of our advertising  cost, in selling,  general and  administrative expense.  It is our understanding that other retailers may include such costs as part of cost of goods sold.                                         35          The following table presents certain operations information in dollars and percentage changes from year to year:            Analysis of Consolidated Statements of Operations (in thousands except percentages)                                    2005 vs. 2004        2006 vs. 2005                                       Years Ended January 31,         Incr/(Decr)          Incr/(Decr)                                   -------------------------------   -----------------  -------------------                                      2004       2005       2006      Amount     Pct     Amount      Pct                                   ---------  ---------  ---------   --------  -------  ---------  -------- Revenues Product sales ....................$402,579   $451,560   $569,877    $48,981     12.2%  $118,317      26.2% Service maintenance agreement commissions (net) ................  20,074     23,950     30,583      3,876     19.3      6,633      27.7 Service revenues .................  18,265     18,725     20,278        460      2.5      1,553       8.3                                   ---------  ---------  ---------   --------  -------  ---------  -------- Total net sales .................. 440,918    494,235    620,738     53,317     12.1    126,503      25.6 Finance charges and other ........  58,392     72,857     81,684     14,465     24.8      8,827      12.1                                   ---------  ---------  ---------   --------  -------  ---------  -------- Total revenues ................... 499,310    567,092    702,422     67,782     13.6    135,330      23.9 Cost of goods and parts sold ..... 317,712    359,710    453,374     41,998     13.2     93,664      26.0                                   ---------  ---------  ---------   --------  -------  ---------  -------- Gross Profit ..................... 181,598    207,382    249,048     25,784     14.2     41,666      20.1 Gross Margin .....................    36.4%      36.6%      35.5% Selling, general and  administrative expense .......... 135,174    152,900    181,631     17,726     13.1     28,731      18.8 Provision for bad debts ..........   4,657      5,637      3,769        980     21.0     (1,868)    (33.1)                                   ---------  ---------  ---------   --------  -------  ---------  -------- Operating income .................  41,767     48,845     63,648      7,078     16.9     14,803      30.3 Operating Margin .................     8.4%       8.6%       9.1% Interest expense .................   4,577      2,359        400     (2,218)   (48.5)    (1,959)    (83.0) Minority interest in limited  partnership .....................       -        118          -        118                (118)                                   ---------  ---------  ---------   --------  -------  ---------  -------- Pretax Income ....................  37,190     46,368     63,248      9,178     24.7     16,880      36.4 Income taxes .....................  12,850     16,243     22,067      3,393     26.4      5,824      35.9                                   ---------  ---------  ---------   --------  -------  ---------  -------- Net Income .......................  24,340     30,125     41,181      5,785     23.8     11,056      36.7 Less preferred dividends .........   1,954          -          -     (1,954)  (100.0)         -         -                                   ---------  ---------  ---------   --------  -------  ---------  -------- Net income available for common stockholders ..........$ 22,386   $ 30,125     41,181    $ 7,739     34.6%  $ 11,056      36.7%                                   =========  =========  =========   ========  =======  =========  ========          Refer to the above  Analysis of  Consolidated  Statements of Operations in condensed form while reading the operations review on a year by year basis.  Year Ended January 31, 2005 Compared to the Year Ended January 31, 2006        Revenues.  Total  revenues  increased by $135.3  million,  or 23.9%,  from $567.1  million for the year ended  January  31, 2005 to $702.4  million for the year ended January 31, 2006. The increase was  attributable  to increases in net sales of $126.5  million,  or 25.6%,  and $8.8  million,  or 12.1%,  in  finance charges and other revenue.        The $126.5 million increase in net sales was made up of the following:        o     a $75.8 million  increase  resulted from a same store sales increase             of 16.9%. Appliance sales accounted for the majority of the increase             and were  significantly  impacted by our customers'  need to replace             items  damaged as a result of  Hurricanes  Katrina  and Rita.  After             adjusting  for our estimate of the impact of the storms,  we believe             same  store  sales  increased  approximately  12%,  with  appliance,             electronics,   track  and   furniture   sales   being  the   biggest             contributors.  As a result of changes in the commission structure on             our  third-party  service  maintenance  agreement  (SMA)  contracts,             beginning  July 2005,  we began  realizing  the benefit of increased             front-end  commissions on SMA sales,  which increased net sales $1.4             million,  (offsetting  this increase is a decrease in  retrospective             commissions which is reflected in Finance charges and other),        o     a $49.8 million  increase  generated by twelve retail locations that             were not open for twelve  consecutive  months in each period, net of             reductions related to the closing of one location,        o     a $644,000  decrease  resulted  from an  increase  in  discounts  on             promotional credit sales, and        o     a $1.6  million  increase  resulted  from  an  increase  in  service             revenues.                                         36         The  components of the $126.5  million  increase in net sales were a $118.3 million  increase in product  sales and an $8.2  million net increase in service maintenance  agreement  commissions  and service  revenues.  The $118.3  million increase in product sales resulted from the following:       o    approximately  $82.6  million was  attributable  to  increases in unit           sales, due to increased  appliances,  track,  furniture,  and consumer           electronics sales, and       o    approximately  $35.7  million was  attributable  to  increases in unit           price points. The price point impact was driven primarily by:            o    consumers selecting higher priced consumer electronics  products,                as the new technology becomes more affordable;           o    consumers selecting higher priced appliance  products,  including                high-efficiency washers and dryers and stainless kitchen           o    appliances, and higher prices on appliances in general.       The following table presents the makeup of net sales by product category in each period,  including service  maintenance  agreement  commissions and service revenues,  expressed both in dollar amounts and as a percent of total net sales. Classification  of sales  has been  adjusted  from  previous  filings  to ensure comparability between the categories.                                                                Years Ended January 31,                                       -----------------------------------------------------                                                 2005                      2006                                       -----------------------   ---------------------------    Percent                  Category               Amount       Percent      Amount         Percent       Increase                                       -----------   ---------   -----------   -------------   -----------                                                     (dollars in thoursands)      Major home appliances ...........$  168,962        34.2%   $  223,651            36.0%         32.4% (1)      Consumer electronics ............   154,880        31.3       186,679            30.1          20.5  (2)      Track ...........................    85,644        17.3       100,154            16.1          16.9  (2)      Delivery ........................     7,605         1.5         9,870             1.6          29.8  (2)      Lawn and garden .................    13,710         2.8        17,083             2.8          24.6  (2)      Bedding .........................    10,262         2.1        13,126             2.1          27.9  (2)      Furniture .......................     7,182         1.5        15,313             2.5         113.2  (3)      Other ...........................     3,315         0.7         4,001             0.6          20.7  (2)                                       -----------   ---------   -----------   -------------           Total product sales ........   451,560        91.4       569,877            91.8          26.2      Service maintenance agreement         commissions ..................    23,950         4.8        30,583             4.9          27.7  (2)      Service revenues ................    18,725         3.8        20,278             3.3           8.3                                       -----------   ---------   -----------   -------------           Total net sales ............$  494,235       100.0%   $  620,738           100.0%         25.6%                                       ===========   =========   ===========   =============        (1)  In addition to strong overall sales growth,  appliance sales benefited           from our customers' needs after the hurricanes.      (2)  These increases are consistent with overall  increase in product sales           and improved unit prices.      (3)  This  increase  is due to  the  increased  emphasis  on the  sales  of           furniture,  primarily sofas,  recliners and entertainment centers, and           new product lines added to this category.       Revenue from Finance  charges and other  increased  by  approximately  $8.8 million,  or 12.1%,  from $72.9  million for the year ended  January 31. 2005 to $81.7  million for the year ended  January 31,  2006.  This  increase in revenue resulted  primarily from increases in securitization  income of $9.6 million,  a $1.0 million decrease in service maintenance agreement retrospective commissions and a net increase in insurance commissions and other revenues of $210,000.  The increase in  securitization  income is  attributable to higher product sales and increases  in our  retained  interest  in assets  transferred  to the QSPE,  due primarily to increases in the  transferred  balances.  Partially  offsetting the securitization income increases was a reduction of $895,000 for estimated losses resulting from increased  bankruptcy  filings by our customers  prior to October 17,  2005,  the  effective  date of the new  bankruptcy  law and our estimate of expected additional loan losses due to the impact of Hurricane Rita.                                         37         Cost of Goods Sold. Cost of goods sold, including warehousing and occupancy cost,  increased by $92.9  million,  or 26.2%,  from $355.2 million for the year ended  January 31, 2005 to $448.1  million for the year ended  January 31, 2006. This increase was consistent with the 26.2% increase in net product sales during the year ended January 31, 2006.  Cost of products sold was 78.7% of net product sales in the 2005 period and 78.6% in the 2006 period.       Cost  of  Service  Parts  Sold.  Cost  of  service  parts  sold,  including warehousing and occupancy cost, increased  approximately $758,000, or 16.7%, for the year ended  January 31, 2006 as compared to the year ended January 31, 2005, due to increases in parts sales.       Selling,  General and Administrative  Expense.  While Selling,  general and administrative expense increased by $28.7 million, or 18.8%, from $152.9 million for the year ended January 31, 2005 to $181.6 million for the year ended January 31, 2006, it decreased as a percentage of total revenue from 27.0% to 25.8%. The decrease in expense as a percentage of total  revenues  resulted  primarily from decreased payroll and payroll related expenses and net advertising expense, as a percent of revenues,  that were partially offset by increased  general liability insurance  expense  and  higher  expenses  incurred  due to  Hurricane  Rita  of approximately $907,000, net of estimated insurance proceeds,  including expenses related to relocation of the corporate  office  functions and losses  related to damaged merchandise and facility damage.       Provision  for Bad  Debts.  The  provision  for bad  debts  on  receivables retained  by the Company and not  transferred  to the QSPE and other  non-credit portfolio receivables decreased by $1.9 million, or 33.1%, during the year ended January 31, 2006 as compared to the year ended January 31, 2005,  primarily as a result  of  changes  in the loss  history  and  provision  adjustments  based on favorable  loss  experience  during the last twelve  months,  and  revised  loss allocations  between  receivables  retained by us and those  transferred  to the QSPE, which were offset in Finance charges and other.  Partially  offsetting the bad debt  expense  decrease  was a  charge  of  $105,000  for  estimated  losses resulting from increased  bankruptcy  filings by our customers  prior to October 17, 2005, the effective  date of the new bankruptcy law and expected  additional loan losses due to the impact of Hurricane Rita on our customers.  See Note 2 to the financial statements for information regarding the performance of the credit portfolio.       Interest Expense,  net. Net interest expense decreased by $2.0 million,  or 83.0%, from $2.4 million for the year ended January 31, 2005 to $400,000 for the year  ended  January  31,  2006.  The  net  decrease  in  interest  expense  was attributable to the following factors:       o    expiration  of $20.0  million  in our  interest  rate  hedges  and the           discontinuation of hedge accounting for derivatives  resulted in a net           decrease in interest expense of approximately $856,000; and       o    the  deconsolidation  of  SRDS  (previously   consolidated  as  a  VIE           according  to FIN 46)  resulted in a decrease  of interest  expense of           $759,000,       The remaining  decrease in interest expense of $385,000 resulted from lower average  outstanding  debt  balances and higher  interest  income from  invested funds.       Minority  Interest.  As a result of FIN 46, for the year ended  January 31, 2005,  we  eliminated  the  pretax   operating   profit   contributed  from  the consolidation   of  SRDS  through  the  minority   interest  line  item  in  our consolidated  statement  of  operations  (see  Note 1 of Notes to the  Financial Statements).       Provision  for Income Taxes.  The  provision for income taxes  increased by $5.9 million,  or 36.0%,  from $16.2 million for the year ended January 31, 2005 to $22.1  million  for the year ended  January  31,  2006,  consistent  with the increase in pretax income of 36.1%.       Net Income.  As a result of the above factors,  Net income  increased $11.1 million,  or 36.7%,  from $30.1  million for the year ended  January 31, 2005 to $41.2 million for the year ended January 31, 2006.  Year Ended January 31, 2004 Compared to the Year Ended January 31, 2005       Revenues.  Total revenues increased by $67.8 million, or 13.6%, from $499.3 million for the year ended January 31, 2004 to $567.1 million for the year ended January 31, 2005.  The increase  was  attributable  to increases in net sales of $53.3 million,  or 12.1%,  and $14.5 million,  or 24.8%,  in finance charges and other revenue.                                         38         The $53.3 million increase in net sales was made up of the following:       o    a $14.8 million increase  resulted from a same store sales increase of           3.6%.       o    a $40.5 million increase  generated by nine retail locations that were           not open for twelve consecutive months in each period.       o    a $2.4  million  decrease  resulted  from an increase in  discounts on           promotional credit sales, and       o    a $460,000 increase resulted from an increase in service revenues.       The  components  of the $53.3  million  increase  in net sales were a $49.0 million  increase in product  sales and a $4.3  million net  increase in service maintenance  agreement  commissions  and  service  revenues.  The $49.0  million increase in product sales resulted from the following:       o    approximately  $18.0  million was  attributable  to  increases in unit           sales, due to increased appliances, mattresses and track sales, and       o    approximately  $31.0  million was  attributable  to  increases in unit           price points. The price point impact was driven primarily by consumers           selecting  higher priced  products as new  technology  prices fall and           become more affordable.       The following table presents the makeup of net sales by product category in each period,  including service  maintenance  agreement  commissions and service revenues,  expressed both in dollar amounts and as a percent of total net sales. Classification  of sales  has been  adjusted  from  previous  filings  to ensure comparability between the categories.                                                               Years Ended January 31,                                       -----------------------------------------------------                                                 2004                      2005                                       -----------------------   ---------------------------    Percent                  Category               Amount       Percent      Amount         Percent       Increase                                       -----------   ---------   -----------   -------------   -----------                                                      (dollars in thousands)      Major home appliances ...........$  159,401        36.1%   $  168,962            34.2%          6.0%      Consumer electronics ............   139,417        31.6       154,880            31.3          11.1      Track ...........................    70,031        15.9        85,644            17.3          22.3  (1)      Delivery ........................     6,726         1.5         7,605             1.5          13.1      Lawn and garden .................    11,505         2.6        13,710             2.8          19.2  (2)      Bedding .........................     6,441         1.5        10,262             2.1          59.3  (2)      Furniture .......................     5,712         1.3         7,182             1.5          25.7  (3)      Other ...........................     3,346         0.8         3,315             0.7          (0.9)                                       -----------   ---------   -----------   -------------           Total product sales ........   402,579        91.3       451,560            91.4          12.2      Service maintenance agreement         commissions ..................    20,074         4.6        23,950             4.8          19.3      Service revenues ................    18,265         4.1        18,725             3.8           2.5                                       -----------   ---------   -----------   -------------           Total net sales ............$  440,918       100.0%   $  494,235           100.0%         12.1%                                       ===========   =========   ===========   =============        (1)  Emphasis  continues  to be given to  promotion of sales in the "track"           area of computers,  computer  peripherals,  portable  electronics  and           small appliances.      (2)  The  increases  in lawn and  garden  and  mattresses  result  from our           increased  emphasis placed on these relatively new product  categories           and the  introduction  of the Serta  brand  mattresses  to our product           line.      (3)  There has been significant growth in the sales of furniture, primarily           recliners and other  seating  products.  More square  footage is being           devoted to  furniture  in certain  store  locations  as we continue to           "test the market" for this product category.       Revenue from Finance  charges and other  increased by  approximately  $14.5 million,  or 24.8%,  from $58.4  million for the year ended  January 31. 2004 to $72.9  million for the year ended  January 31,  2005.  This  increase in revenue resulted primarily from increases in securitization income of $11.7 million, and increases in  insurance  commissions  and other  revenues of $2.8  million.  The increase in  securitization  income is  attributable to higher product sales and increases  in our  retained  interest  in assets  transferred  to the QSPE,  due primarily to increases in the transferred balances.                                         39         Cost of Goods Sold. Cost of goods sold, including warehousing and occupancy cost,  increased by $41.5  million,  or 13.2%,  from $313.6 million for the year ended  January 31, 2004 to $355.1  million for the year ended  January 31, 2005. This increase primarily resulted from the 12.2% increase in net product sales as well as an increase in cost of products sold. Cost of products sold was 77.9% of net product  sales in the 2004 period and 78.7% in the 2005 period.  The overall increase in cost of goods sold as a percentage  of product  sales was  primarily caused by the  continued  deterioration  of  retail  price  points  and sales of relatively  lower  margin  computer  products  growing at a more rapid rate than sales of higher margin products.       Cost  of  Service  Parts  Sold.  Cost  of  service  parts  sold,  including warehousing and occupancy cost, increased  approximately $500,000, or 11.7%, for the year ended  January 31, 2005 as compared to the year ended January 31, 2004, due to increases in parts sales.       Selling,  General and Administrative  Expense.  While Selling,  general and administrative expense increased by $17.7 million, or 13.1%, from $135.2 million for the year ended January 31, 2004 to $152.9 million for the year ended January 31, 2005, it decreased as a percentage of total revenue from 27.1% to 27.0%. The increase in total expense was primarily the result of increased  sales  salaries and commissions (and other  payroll-related  expense),  delivery,  occupancy and depreciation  expense due to the addition of new stores and all in line with the 12.1% increase in net sales.  Professional services was up 41.2% which partially reflects the effect of complying  with  Sarbanes/Oxley  Section 404 by expending approximately  $600,000  on direct  implementation,  including  our  independent accounting firms cost incurred in testing and preparation necessary to issue its initial  report,  but not including our employee man hours.  General  liability, property  and health  insurance  costs were up 24.3% due to  additional  stores, additional  employees  (primarily  sales)  and the  higher  exposure  of being a publicly-traded company. These cost increases were partially offset by decreases in telephone, amortization, advertising and equipment lease expense.       Provision  for Bad  Debts.  The  provision  for bad  debts  on  receivables retained  by the Company and not  transferred  to the QSPE and other  non-credit portfolio receivables increased by $1.0 million, or 21.1%, during the year ended January 31, 2005 as compared to the year ended  January 31, 2004,  primarily due to the  21.2%  increase  in  our  average  outstanding  balance  of  our  credit portfolio.       Interest Expense,  net. Net interest expense decreased by $2.2 million,  or 48.5%, from $4.6 million for the year ended January 31, 2004 to $2.4 million for the year ended  January 31,  2005.  The net  decrease  in  interest  expense was attributable to the following factors:       o    the  expiration  of $30.0 million of our interest rate hedges in April           2003 and the  expiration  of $50.0 million of our interest rate hedges           in  November  2003 and the  discontinuation  of hedge  accounting  for           derivatives  resulted in a net  decrease  of $1.4  million in interest           expense from the prior period; and       o    the  decrease in our average  outstanding  debt from $39.9  million to           $2.6  million  (when  ignoring the impact of FIN 46  consolidation  of           $14.8  million,  see  below) as a result of our  public  offering  and           payoff of substantially  all of our outstanding debt with the proceeds           resulted  in a decrease  in  interest  expense of  approximately  $1.9           million;  these decreases were offset by the following:       o    the  increase  in  interest  rates in our  continuing  revolving  debt           facilities and related commitment fees of $361,000; and       o    the implementation of FIN 46 resulted in  reclassification of $759,000           in expenses previously reflected as occupancy cost in Selling, general           and    administrative    expense   to    Interest    expense;    these           reclassifications  should not be  necessary in the future since we are           no longer subject to the provisions of FIN 46.       Minority  Interest.  As a result of FIN 46, beginning  February 1, 2004, we eliminate the pretax operating profit contributed from the consolidation of SRDS through  the  minority  interest  line  item in our  consolidated  statement  of operations.                                         40          Provision  for Income Taxes.  The provision for income taxes  increased by $3.4 million,  or 26.4%,  from $12.8 million for the year ended January 31, 2004 to $16.2  million for the year ended  January 31, 2005.  The increase in the tax provision  was  directly  related  to the  increase  in pretax  profits  of $9.2 million, or 24.7%. The effective tax rate attributable to continuing  operations for the year ended January 31, 2005 was 35.0%, compared with 34.6% for the prior year.  Taxes were  comprised of federal and state rates  totaling  35.5% in both periods  offset by cash refunds due to return amounts being lower than estimates and adjustments of previous tax provisions in both periods.        Net Income.  As a result of the above factors,  Net income  increased $5.8 million,  or 23.8%,  from $24.3  million for the year ended  January 31, 2004 to $30.1 million for the year ended January 31, 2005.  Impact of Inflation        We do not believe that inflation has a material effect on our net sales or results of operations.  However,  a continuing  significant  increase in oil and gasoline prices could  adversely  affect our customers'  shopping  decisions and patterns.  We rely heavily on our internal  distribution  system and our same or next day delivery  policy to satisfy our customers'  needs and desires,  and any such significant increases could result in increased  distribution charges. Such increases may not affect our competitors in the same manner as it affects us.  Seasonality and Quarterly Results of Operations        Our  business is  somewhat  seasonal,  with a higher  portion of sales and operating  profit  realized  during the quarter that ends January 31. The fiscal quarter  ending  January 31  reflects  the  holiday  selling  season,  the major collegiate  bowl season,  the National  Football  League  playoffs and the Super Bowl.  Over the four quarters of fiscal 2006,  gross margins were 35.4%,  36.2%, 35.7% and 34.6%. During the same period, operating margins were 9.7%, 8.8%, 8.2% and 9.5%. A portion of the fluctuation in gross margins and operating margins is due to planned infrastructure cost additions,  such as increased warehouse space and larger  stores,  additional  personnel  and  systems  required to absorb the significant  increase in revenues that we have experienced over the last several years.        Additionally,  quarterly  results may  fluctuate  materially  depending on factors such as the following:        o     timing of new product  introductions,  new store  openings and store             relocations;        o     sales contributed by new stores;        o     increases or decreases in comparable store sales;        o     adverse weather conditions;        o     shifts in the timing of certain holidays or promotions; and        o     changes in our merchandise mix.        Results for any quarter are not necessarily indicative of the results that may be achieved for a full year.                                         41          The following table sets forth certain  unaudited  quarterly  statement of operations  information  for the eight  quarters  ended  January 31,  2006.  The unaudited  quarterly  information  has been  prepared on a consistent  basis and includes all normal recurring  adjustments that management  considers  necessary for a fair presentation of the information shown.                                                             2005                                            2006                             ---------------------------------------------   ---------------------------------------------                                             Quarter Ended                                   Quarter Ended                             ---------------------------------------------   ---------------------------------------------                              Apr. 30     Jul. 31     Oct. 31     Jan. 31     Apr. 30     Jul. 31     Oct. 31     Jan. 31                             ---------   ---------   ---------   ---------   ---------   ---------   ---------   ---------                                              (dollars and shares in thousands, except per share amounts) Total revenues .............$134,877    $136,601    $132,910    $162,704    $158,163    $164,375    $173,305    $206,579  Percent of total revenues ..    23.8%       24.1%       23.4%       28.7%       22.5%       23.4%       24.7%       29.4%  Gross profit ...............$ 48,999    $ 49,805    $ 49,228    $ 59,350    $ 56,021    $ 59,560    $ 61,947    $ 71,520  Gross profit as a % of total revenues ...    36.3%       36.5%       37.0%       36.5%       35.4%       36.2%       35.7%       34.6%  Operating profit ...........$ 12,715    $ 11,057    $ 10,117    $ 14,956    $ 15,387    $ 14,417    $ 14,137    $ 19,707  Operating profit as a % total revenues ......     9.4%        8.1%        7.6%        9.2%        9.7%        8.8%        8.2%        9.5%  Net income available for common stockholder .....$  7,773    $  6,790    $  6,315    $  9,247    $  9,802    $  9,324    $  9,131    $ 12,924  Net income available for common stockholder as a % of revenue ..........     5.8%        5.0%        4.8%        5.7%        6.2%        5.7%        5.3%        6.3%  Outstanding shares:       Basic ................  23,145      23,179      23,206      23,230      23,307      23,366      23,458      23,523       Diluted ..............  23,749      23,801      23,681      23,764      23,856      24,114      24,286      24,512  Earnings per share:       Basic ................$   0.34    $   0.29    $   0.27    $   0.40    $   0.42    $   0.40    $   0.39    $   0.55       Diluted ..............$   0.32    $   0.29    $   0.27    $   0.39    $   0.41    $   0.39    $   0.38    $   0.53    Liquidity and Capital Resources        We require  capital to finance our growth as we add new stores and markets to our  operations,  which  in turn  requires  additional  working  capital  for increased   receivables  and  inventory.   We  have  historically  financed  our operations  through a combination  of cash flow  generated  from  operations and external  borrowings,  including primarily bank debt, extended terms provided by our vendors for inventory purchases,  acquisition of inventory under consignment arrangements  and transfers of  receivables to our  asset-backed  securitization facilities. At January 31, 2006, we had a revolving line of credit facility with a  group  of  lenders  in the  amount  of $50  million,  under  which  we had no borrowings  outstanding  but  utilized  $3.0  million of  availability  to issue letters of credit.  We expect  that our cash  requirements  for the  foreseeable future,  including those for our capital expenditure  requirements,  will be met with our  available  line of credit and our existing  $45.2  million in cash and cash  equivalents  at  January  31,  2006,  together  with cash  generated  from operations.  Our current plans are to grow our store base by approximately 10% a year.  We expect we will  invest in real  estate  and  customer  receivables  to support the additional  stores and same store sales growth.  Depending on market conditions we may, at times, enter into  sale-leaseback  transactions to finance our real estate or seek alternative  financing  sources for new store expansions and customer receivables growth.        The  following  is a  comparison  of our  statement  of cash flows for our fiscal years 2005 and 2006:        The increase in cash flow from  operating  activities for fiscal year 2006 from fiscal year 2005 of $64.1  million,  resulted  primarily from increased net income,  a  smaller  increase  in the  retained  interest  in the  asset  backed securitization  program  and the timing of  payments  of  accounts  payable  and federal income and employment  taxes.  Operating cash flows have been positively impacted  in the amount of  approximately  $18.9  million by federal  income and employment  tax payment  deadlines  being deferred until February 28, 2006 after Hurricane Rita.        Our promotional  credit programs offered to certain  customers provide for "same as cash" interest free periods of varying  terms,  generally  three,  six, twelve,  eighteen,  twenty-four or thirty-six months. These promotional accounts are eligible for securitization up to 30.0% of eligible securitized receivables. The percentage of eligible  securitized  receivables  represented by promotional receivables  was 15.0%,  23.5% and 19.4% as  January  31,  2004,  2005 and 2006, respectively.  To the extent we exceed the 30.0% limit, or to the extent we have such  promotional  credit  receivables  that do not qualify for inclusion in the                                         42    programs,  we are required to use our other capital resources to fund the unpaid balance of the  receivables  for the promotional  period.  The weighted  average promotional  period  was  12.5  and  11.8  months  for  promotional  receivables outstanding  as of January  31, 2005 and January  31,  2006,  respectively.  The weighted average  remaining term on those same  promotional  receivables was 9.0 and 7.3 months, respectively. While overall these promotional receivables have a much shorter average weighted life than non-promotional  receivables, we receive less income as a result of a reduced net interest margin used in the calculation of the gain on the sale of the  receivables.  As a result,  the existence of the interest free extended payment terms  negatively  impacts the gains or losses as compared to the other  receivables,  and results in a decrease in our  available cash.        Net cash used in investing  activities  was $18.5  million for both fiscal year 2005 and fiscal year 2006. Offsetting the $1.1 million decline in purchases of property and equipment  was a $1.1 million  decline in proceeds from sales of property  and  equipment.  Included  in fiscal 2005  purchase  of  property  and equipment was $1.7 million of purchases by SRDS,  which was  consolidated in our fiscal  2005  Statement  of Cash  Flows.  The cash  expended  for  property  and equipment was used primarily for construction of new stores and the reformatting of existing  stores to better support our current  product mix. We estimate that capital  expenditures  for the 2007 fiscal year will  approximate $25 million to $30 million.        We lease 50 of our 56  stores,  and our plans for future  store  locations include  primarily  leases,  but does not exclude store  ownership.  Our capital expenditures  for  future  store  projects  should  primarily  be for our tenant improvements to the property leased (including any new distribution  centers and warehouses),  the cost of which is approximately $1.5 million per store, and for our  existing  store  remodels,  in the range of  $220,000  per  store  remodel, depending  on store size.  In the event we  purchase  existing  properties,  our capital  expenditures  will depend on the particular  property and whether it is improved when purchased.  We are  continuously  reviewing new  relationship  and funding   sources  and   alternatives   for  new   stores,   which  may  include "sale-leaseback" or direct  "purchase-lease"  programs, as well as other funding sources  for  our  purchase  and  construction  of  those  projects.  If we  are successful  in these  relationship  developments,  our direct cash needs  should include  only  our  capital  expenditures  for  tenant  improvements  to  leased properties and our remodel programs for existing stores,  but could include full ownership if it meets our cash investment strategy.        Net cash from  financing  activities  decreased  $19.6  million from $11.9 million for the year ended  January 31,  2005,  to a use of cash of $7.7 million for the year ended  January  31,  2006.  This  change  resulted  primarily  from increases in payments on various debt  instruments of $10.5 million,  as opposed to borrowings in the prior year of $10.4 million.  Partially  offsetting the use of cash was increased  proceeds from stock issued under employee  benefit plans. We do not expect to incur significant net borrowing or repayments under our bank credit facilities in fiscal 2007.        On October 31, 2005, we entered into a new,  expanded bank credit facility with the same group of banks that had provided the previous credit  arrangement. The new agreement  expands the line of credit to $50 million,  from $35 million, provides an accordion  feature to allow further expansion of the facility to $90 million, under certain conditions,  and extends the maturity date to November 1, 2010.  Additionally,  the  facility  provides  sublimits  of  $8  million  for a swingline  line of credit for faster  advances  on  borrowing  requests,  and $5 million for standby letters of credit. Loans under our revolving credit facility may, at our option,  bear interest at either the alternate  base rate,  which is the greater of the administrative  agent's prime rate or the federal funds rate, or the adjusted LIBO/LIBOR rate for the applicable interest period, in each case plus an applicable  interest  margin.  The interest  margin is between 0.00% and 0.50% for base rate loans and between 0.75% and 1.75% for LIBO/LIBOR alternative rate loans.  The interest margin will vary depending on our debt coverage ratio. We  additionally  pay commitment  fees for the undrawn  portion of our revolving credit facility. At January 31, 2006 the interest rate on the revolving facility was 7.25%.                                         43          A summary of the  significant  financial  covenants  that  govern our bank credit facility compared to our actual compliance status at January 31, 2006, is presented below:                                                                                                       Required                                                                                               Minimum/                                                                               Actual          Maximum                                                                          ---------------- ---------------- Debt service coverage ratio must exceed required minimum ................  4.44 to 1.00     2.00 to 1.00 Total adjusted leverage ratio must be lower than required maximum .......  1.53 to 1.00     3.00 to 1.00 Adjusted consolidated net worth must exceed required minimum ............ $ 237,280,000    $ 143,240,000 Charge-off ratio must be lower than required maximum ....................  0.02 to 1.00     0.06 to 1.00 Extension ratio must be lower than required maximum .....................  0.03 to 1.00     0.05 to 1.00 30-day delinquency ratio must be lower than required maximum ............  0.09 to 1.00     0.13 to 1.00         Note: All terms in the above table are defined by the bank credit facility       and may or may not agree directly to the financial  statement  captions in       this document.         Events of default  under the  credit  facility  include,  subject to grace periods  and  notice  provisions  in  certain   circumstances,   non-payment  of principal,  interest or fees; violation of covenants; material inaccuracy of any representation  or warranty;  default  under or  acceleration  of certain  other indebtedness;  bankruptcy and  insolvency  events;  certain  judgments and other liabilities;  certain environmental claims; and a change of control. If an event of default  occurs,  the lenders under the credit  facility are entitled to take various actions,  including  accelerating  amounts due under the credit facility and requiring that all such amounts be immediately paid in full. Our obligations under  the  credit  facility  are  secured  by all of our and our  subsidiaries' assets,  excluding customer  receivables owned by the QSPE and certain inventory subject to vendor floor plan arrangements.        The following  table reflects  outstanding  commitments for borrowings and letters of credit,  and the  amounts  utilized  under those  commitments,  as of January 31, 2006:                                                                                                            Balance     Available                                      Commitment Expires in Fiscal Year Ending January 31,        at           at                                ------------------------------------------------------------   January 31, January 31,                                   2007     2008  2009     2010     2011  Thereafter   Total      2006        2006                                   ----     ----  ----     ----     ----  ----------   -----      ----        ----                                                      (in thousands)  Revolving Bank Facility (1) ...$      -                $ 50,000                     $ 50,000  $  3,015    $ 46,985 Unsecured Line of Credit ......   8,000                                                8,000         -       8,000 Inventory Financing (2) .......  30,000                                               30,000    12,626      17,374 Letters of Credit .............   1,500                                                1,500         -       1,500                                ------------------------------------------------------------------------------------             Total .............$ 39,500   $  -   $  -  $ 50,000   $  -       $   -  $ 89,500  $ 15,641    $ 73,859                                ====================================================================================    (1)   Includes letter of credit  sublimit.  There was $3.0 million of letters of       credit issued at January 31, 2006. (2)   Included  in  accounts  payable on the  consolidated  balance  sheet as of       January 31, 2006.        Since we extend credit in  connection  with a large portion of our retail, service  maintenance  and credit  insurance  sales, we created a QSPE in 2002 to purchase  customer  receivables  from us and to issue  asset-backed and variable funding notes to third parties to finance its purchase of these receivables.  We transfer  receivables,  consisting of retail installment contracts and revolving accounts  extended  to our  customers,  to the  issuer  in  exchange  for  cash, subordinated securities and the right to receive the interest spread between the assets held by the QSPE and the notes issued to third  parties and our servicing fees. The  subordinated  securities  issued to us accrue interest based on prime rates and are subordinate to these third party notes        Both the bank credit facility and the asset-backed  securitization program are  significant  factors  relative to our ongoing  liquidity and our ability to meet the cash needs associated with the growth of our business. Our inability to use either of these programs because of a failure to comply with their covenants would  adversely  affect our  continued  growth.  Funding of current  and future receivables  under the  asset-backed  securitization  program  can be  adversely affected if we exceed  certain  predetermined  levels of  re-aging  receivables, write-offs,  bankruptcies or other ineligible receivable amounts. If the funding under the  asset-backed  securitization  program were reduced or terminated,  we would  have to draw down our bank  credit  facility  more  quickly  than we have estimated.                                         44          A summary of the total  receivables  managed  under the credit  portfolio, including  quantitative  information about delinquencies,  net credit losses and components of  securitized  assets,  is presented in note 2 to our  consolidated financial statements.        Based on  current  operating  plans,  we  believe  that cash  provided  by operating activities,  available borrowings under our credit facility, access to the  unfunded  portion of the  variable  funding  portion  of our asset-  backed securitization  program  and our  current  cash  and  cash  equivalents  will be sufficient to fund our operations,  store expansion and updating  activities and capital expenditure  programs through at least January 31, 2007. However,  there are several  factors that could decrease cash provided by operating  activities, including:        o     reduced demand for our products;        o     more stringent vendor terms on our inventory purchases;        o     loss of ability to acquire inventory on consignment;        o     increases  in product cost that we may not be able to pass on to our             customers;        o     reductions  in  product   pricing  due  to  competitor   promotional             activities;        o     changes in inventory  requirements based on longer delivery times of             the  manufacturers  or other  requirements  which  would  negatively             impact our delivery and distribution capabilities;        o     increases in the retained portion of our receivables portfolio under             our current QSPE's asset-backed o securitization program as a result             of  changes  in  performance  or  types of  receivables  transferred             (promotional versus non-promotional);        o     inability  to expand our  capacity  for  financing  our  receivables             portfolio   under   new   or   replacement   QSPE   o   asset-backed             securitization  programs  or a  requirement  that we retain a higher             percentage of the credit portfolio under such programs;        o     increases in the program  costs  (interest and  administrative  fees             relative to our receivables  portfolio)  associated with the funding             of our receivables;        o     increases in personnel costs required for us to stay  competitive in             our markets; and        o     our  inability to obtain a  relationship  to provide the purchase of             and financing of our capital expenditures for our new stores.        If cash provided by operating  activities  during this period is less than we expect or if we need additional  financing for future growth,  we may need to increase our revolving  credit facility or undertake  additional  equity or debt offerings. We may not be able to obtain such financing on favorable terms, if at all.         Off-Balance Sheet Financing Arrangements        At January 31, 2006, the issuer has issued two series of notes: a Series A variable  funding  note with a capacity  of $250.0  million  purchased  by Three Pillars Funding Corporation and three classes of Series B notes in the aggregate amount of $200.0 million.  The commercial paper underlying the Series A variable funding  note is rated A1/P1 by Standard  and Poors and  Moody's,  respectively. These ratings  represent the highest rating  ("highest  quality") of each rating agency's three  short-term  investment  grade ratings,  except that Standard and Poors could add a "+" which would  convert the  "highest  quality"  rating to an "extremely  strong" rating.  The Series B notes consist of: Class A notes in the amount $120.0  million,  rated Aaa by Moody's  representing  the highest  rating ("highest  quality") of the four long term investment  grade ratings provided by this  organization;  Class B notes  in the  amount  $57.8  million,  rated A2 by Moody's  representing the middle of the third rating ("upper medium quality") of the four long term investment grade ratings provided by this  organization;  and                                         45    Class C notes in the amount of $22.2  million,  rated  Baa2/BBB  by Moody's  and Fitch,  respectively.  These ratings represent the lowest of the four investment grades ("medium quality") provided by these organizations. The ratings disclosed are not  recommendations  to buy, sell or hold securities.  These ratings may be changed or withdrawn at any time without notice,  and each of the ratings should be evaluated  independently of any other rating. We are not aware of a rating by any other rating organization and are not aware of any changes in these ratings. Private institutional  investors,  primarily insurance companies,  purchased the Series B notes.  The issuer  used the  proceeds of these  issuances,  along with funds  provided  by us in fiscal  2003  from  borrowings  under our bank  credit facility, to initially purchase eligible accounts receivable from us and to fund a required $8.0 million  restricted  cash account for credit  enhancement of the Series B notes.        We are entitled to a monthly servicing fee, so long as we act as servicer, in an amount equal to .25% multiplied by the average aggregate  principal amount of receivables plus the amount of average aggregate defaulted  receivables.  The issuer  records  revenues  equal to the interest  charged to the customer on the receivables less losses, the cost of funds, the program administration fees paid to either Three Pillars  Funding  Corporation or the Series B note holders,  and the servicing fee.  SunTrust Capital Markets,  Inc. serves as an  administrative agent for Three Pillars  Funding  Corporation  in  connection  with the Series A variable funding note.        The Series A variable  funding  note permits the issuer to borrow funds up to $250.0  million to purchase  receivables  from us,  thereby  functioning as a credit facility to accumulate  receivables.  When borrowings  under the Series A variable  funding note approach $250.0 million,  the issuer intends to refinance the  receivables  by issuing a new series of notes and use the  proceeds  to pay down the outstanding  balance of the Series A variable funding note, so that the credit facility will once again become  available to accumulate new receivables. As of January 31, 2006, borrowings under the Series A variable funding note were $185.0 million.        The Series A variable  funding  note  matures on  September  1, 2007.  The issuer will repay the Series A variable  funding note and any  refinancing  note with amounts received from customers pursuant to receivables that we transferred to the  issuer.  Beginning  on October 20,  2006,  the issuer will begin to make scheduled  principal  payments on the Series B notes with amounts  received from customers  pursuant to receivables  that we  transferred  to the issuer.  To the extent that the issuer has not otherwise repaid the Series B notes,  they mature on September 1, 2010.  We are currently in  negotiations  to increase the amount and extend the term of the Series A variable funding note and issue a new series of fixed-rate  notes to provide funding for additional  purchases of receivables and the paydown of the Series B notes.        The Series A variable  funding note bears interest at the commercial paper rate plus an  applicable  margin,  in most  instances of 0.8%,  and the Series B notes  have fixed  rates of  4.469%,  5.769% and 8.180% for the Class A, B and C notes,  respectively.  In addition,  there is an annual administrative fee and a non-use fee associated with the unused portion of the committed facility.        We  are  not  directly  liable  to  the  lenders  under  the  asset-backed securitization  facility.  If the  issuer is  unable  to repay the  Series A and Series  B  notes  due to its  inability  to  collect  the  transferred  customer accounts, the issuer could not pay the subordinated notes it has issued to us in partial  payment for  transferred  customer  accounts,  and the Series B lenders could claim the balance in the restricted cash account. We are also contingently liable under a $10.0 million  letter of credit that secures our  performance  of our  obligations or services under the servicing  agreement as it relates to the transferred assets that are part of the asset-backed securitization facility.        The  issuer is  subject  to certain  affirmative  and  negative  covenants contained in the transaction  documents  governing the Series A variable funding note and the  Series B notes,  including  covenants  that  restrict,  subject to specified  exceptions:  the  incurrence  of  additional  indebtedness  and other obligations  and  the  granting  of  additional  liens;  mergers,  acquisitions, investments and  disposition of assets;  and the use of proceeds of the program. The issuer  also makes  covenants  relating to  compliance  with  certain  laws, payment of taxes, maintenance of its separate legal entity,  preservation of its existence,  protection of collateral and financial reporting.  In addition,  the program requires the issuer to maintain a minimum net worth.        Events of default under the Series A variable  funding note and the Series B notes,  subject to grace periods and notice provisions in some  circumstances, include, among others: failure of the issuer to pay principal, interest or fees; violation by the issuer of any of its covenants or agreements; inaccuracy of any representation  or  warranty  made by the  issuer;  certain  servicer  defaults; failure of the trustee to have a valid and  perfected  first  priority  security interest in the  collateral;  default  under or  acceleration  of certain  other indebtedness; bankruptcy and insolvency events; failure to maintain certain loss ratios and portfolio  yield;  change of control  provisions  and certain  events pertaining to us. The issuer's  obligations under the program are secured by the receivables and proceeds.                                         46                                   [GRAPHIC OMITTED]             [SEE SUPPLEMENTAL PDF OF SECURITIZATION FACILITIES CHART]         Certain Transactions        Since 1996, we have leased a retail store location of approximately 19,150 square feet in Houston,  Texas from Thomas J. Frank,  Sr.,  our  Chairman of the Board and Chief  Executive  Officer.  The lease provides for base monthly rental payments  of  $17,235  plus  escrows  for  taxes,   insurance  and  common  area maintenance  expenses of increasing monthly amounts based on expenditures by the management  company  operating the shopping center of which this store is a part through  January  31,  2011.  We also  have an option to renew the lease for two additional  five-year  terms. Mr. Frank received total payments under this lease of $281,000 in fiscal 2004, 2005 and 2006,  respectively.  Based on market lease rates for comparable retail space in the area, we believe that the terms of this lease are no less favorable to us than we could have obtained in an arms' length transaction at the date of the lease commencement.        We  leased  six  store  locations  from  Specialized   Realty  Development Services,  LP ("SRDS"), a real estate development company that was created prior to our becoming publicly held and was owned by various members of management and individual  investors of Stephens Group, Inc., a significant  shareholder of the company.  Based on  independent  appraisals  that were performed on each project that was  completed,  we  believe  that the  terms of the  leases  were at least comparable  to those that could be obtained in an arms' length  transaction.  As part of the ongoing  operation of SRDS, we received  management  fees associated with the administrative functions that were provided to SRDS of $5,000, $100,000 and $6,500 for the years ended January 31, 2004, 2005 and 2006, respectively. As of January  31,  2005,  we no longer  leased any  properties  from SRDS since it divested  itself of the  leased  properties.  As part of the  divestiture,  SRDS reimbursed us $75,000 for costs related to lease modifications.        We engage the services of Direct Marketing Solutions,  Inc., or DMS, for a substantial portion of its direct mail advertising.  Direct Marketing Solutions, Inc. is partially  owned (less than 50%) by the Stephens Group Inc.,  members of the Stephens family,  Jon Jacoby,  and Doug Martin.  The Stephens Group Inc. and the members of the Stephens family are significant  shareholders of the Company, and Jon Jacoby and Doug Martin are members of our Board of  Directors.  The fees we paid to DMS during fiscal years ended 2005 and 2006 amounted to approximately $1.8  million  and $4.3  million,  respectively.  Thomas  J.  Frank,  the  Chief Executive  Officer  and  Chairman  of the  Board  of  Directors  owned  a  small percentage  (0.7%) at the end of fiscal year 2005,  but  divested  his  interest during the first half of fiscal year 2006.                                         47          Contractual Obligations        The  following   table  presents  a  summary  of  our  known   contractual obligations  as of January 31, 2005,  with respect to the specified  categories, classified by payments due per period.                                                                      Payments due by period                                                    --------------------------------------                                                       Less                         More                                                       Than     1-3       3-5      Than 5                                           Total      1 Year   Years     Years     Years                                         ---------  --------  --------  --------  --------                                                           (in thousands) Long term debt .........................$     136  $    136  $      -  $      -  $      - Operating leases: Real estate ............................  112,262    14,348    27,448    24,933    45,533 Equipment ..............................    3,795     1,217     1,439       831       308 Purchase obligations (1) ...............    2,789     1,664     1,125         -         -                                         ---------  --------  --------  --------  -------- Total contractual cash obligations .....$ 118,982  $ 17,365  $ 30,012  $ 25,764  $ 45,841                                         =========  ========  ========  ========  ========         ---------------------       (1) Includes  contracts for  long-term  communication  services.  Does not       include outstanding purchase orders for merchandise,  services or supplies       which are ordered in the normal course of operations  and which  generally       are received and recorded within 30 days.
Interest  rates  under  our bank  credit  facility  are  variable  and are determined,  at our option, as the base rate, which is the greater of prime rate or federal  funds rate plus 0.50% plus the base rate  margin,  which ranges from 0.00% to 0.50%,  or LIBO/LIBOR  plus the  LIBO/LIBOR  margin,  which ranges from 0.75% to 1.75%.  Accordingly,  changes in the prime rate, the federal funds rate or LIBO/LIBOR,  which are affected by changes in interest rates generally,  will affect the interest  rate on, and  therefore  our costs  under,  our bank credit facility. We are also exposed to interest rate risk associated with our interest only  strip  and the  subordinated  securities  we  receive  from  our  sales of receivables to the QSPE. See footnote 2 to the audited financial  statements for disclosures related to the sensitivity of the current fair value of the interest only strip and the subordinated securities to 10% and 20% adverse changes in the factors that affect these assets, including interest rates.        We held  interest rate swaps and collars with  notional  amounts  totaling $20.0 million as of January 31, 2004, with terms  extending  through April 2005. Those  instruments were held for the purpose of hedging  variable  interest rate risk,  primarily related to cash flows from our  interest-only  strip as well as our variable rate debt. In fiscal 2004,  hedge  accounting was  discontinued for the remaining  $20.0 million.  At the time the cash flow hedge  designation  was discontinued,  we began to  recognize  changes in the fair value of the swaps as interest  expense and to  amortize  the  accumulated  other  comprehensive  loss related  to  those  derivates  as  interest  expense  over the  period  that the forecasted  transactions  effected the  statement of  operations.  During fiscal 2004, we reclassified $0.2 million of losses previously  recorded in accumulated other  comprehensive  losses into the statement of operations  and recorded $1.7 million of income into the statement of operations because of the change in fair value of the swaps.  During fiscal 2005, we reclassified  $1.1 million of losses previously recorded in accumulated other comprehensive losses into the statement of  operations  and  recorded  $1.1  million  of income  into the  statement  of operations because of the change in fair value of the swaps. During fiscal 2006, we reclassified $0.2 million of losses previously  recorded in accumulated other comprehensive  losses into the statement of operations and recorded $0.2 million of income into the statement of  operations  because of the change in fair value of the swaps.        Prior to  discontinuing  these  hedges,  each  period  we  recorded  hedge ineffectiveness,  which arose from differences  between the interest rate stated in the  derivative  instrument  and the interest rate upon which the  underlying hedged transaction is based.  Ineffectiveness totaled $0.4 million, for the year ended  January  31,  2004,  and  is  reflected  in  "Interest  Expense"  in  our consolidated statement of operations.  Since all hedge accounting has ceased, no ineffectiveness was recognized in fiscal 2005 or 2006.                                         48
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS                                                                             Page                                                                             ----  Management's Report on Internal Control Over Financial Reporting..............50  Report of Independent Registered Public Accounting Firm   on Internal Control Over Financial Reporting................................51  Report of Independent Auditors................................................52  Consolidated Balance Sheets...................................................53  Consolidated Statements of Operations.........................................54  Consolidated Statements of Stockholders' Equity...............................55  Consolidated Statements of Cash Flows.........................................56  Notes to Consolidated Financial Statements....................................57                                         49            Management's Report on Internal Control Over Financial Reporting  Our management is responsible for establishing and maintaining adequate internal control  over  financial   reporting  as  defined  in  Rule  13a-15(f)  or  Rule 15(d)-15(f)  under  the  Exchange  Act.  Our  internal  control  over  financial reporting is designed to provide reasonable  assurance regarding the reliability of financial reporting and the preparation of financial  statements for external purposes in accordance with generally accepted accounting principles.  Because of its inherent  limitations,  internal control over financial reporting may  not  prevent  or  detect  misstatements.   Therefore,  even  those  systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.  Our management (with the  participation of our principal  executive  officer and our principal  financial  officer)  assessed the  effectiveness  of our internal control  over  financial  reporting  as of  January  31,  2006.  In making  this assessment,  management  used  the  criteria  set  forth  by  the  Committee  of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated  Framework.  Based on our assessment and those  criteria,  management believes  that,  as of January 31,  2006,  our internal  control over  financial reporting is effective.  Management's  assessment  of the  effectiveness  of our  internal  control  over financial  reporting  as of January 31,  2006 has been  audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is included elsewhere herein.  Conn's, Inc. Beaumont, Texas March 30, 2006            /s/ David L. Rogers       -----------------------           David L. Rogers       Chief Financial Officer            /s/ Thomas J. Frank       -----------------------           Thomas J. Frank       Chief Executive  Officer                                         50                 Report of Independent Registered Public Accounting Firm   The Board of Directors and Shareholders of Conn's, Inc.  We  have  audited   management's   assessment,   included  in  the  accompanying Management's Report on Internal Control Over Financial  Reporting,  that Conn's, Inc.  maintained  effective  internal  control  over  financial  reporting as of January 31, 2006, based on criteria established in Internal  Control--Integrated Framework  issued by the Committee of Sponsoring  Organizations  of the Treadway Commission (the COSO  criteria).  Conn's,  Inc.'s  management is responsible for maintaining  effective  internal  control over  financial  reporting and for its assessment of the  effectiveness of internal  control over financial  reporting. Our  responsibility  is to express an opinion on management's  assessment and an opinion on the  effectiveness  of the company's  internal control over financial reporting based on our audit.  We conducted  our audit in accordance  with the standards of the Public  Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain  reasonable  assurance  about whether  effective internal  control  over  financial  reporting  was  maintained  in all  material respects. Our audit included obtaining an understanding of internal control over financial reporting,  evaluating management's assessment, testing and evaluating the design and operating  effectiveness of internal control, and performing such other  procedures as we considered  necessary in the  circumstances.  We believe that our audit provides a reasonable basis for our opinion.  A company's  internal control over financial  reporting is a process designed to provide reasonable  assurance  regarding the reliability of financial  reporting and the preparation of financial  statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial  reporting  includes those policies and procedures that (1) pertain to the  maintenance  of records that, in reasonable  detail,  accurately and fairly reflect the  transactions  and  dispositions  of the assets of the company;  (2) provide  reasonable  assurance  that  transactions  are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting  principles,  and that receipts and  expenditures  of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of  unauthorized  acquisition,  use, or  disposition  of the company's assets that could have a material effect on the financial statements.  Because of its inherent  limitations,  internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate  because of changes in  conditions,  or that the degree of compliance with the policies or procedures may deteriorate.  In our opinion,  management's  assessment that Conn's, Inc. maintained effective internal  control over  financial  reporting  as of January 31, 2006,  is fairly stated,  in all material  respects,  based on the COSO  criteria.  Also,  in our opinion, Conn's, Inc. maintained,  in all material respects,  effective internal control  over  financial  reporting  as of January 31,  2006,  based on the COSO criteria.  We also have  audited,  in accordance  with the standards of the Public  Company Accounting  Oversight Board (United States),  the consolidated balance sheets of Conn's,  Inc.  as of January 31,  2006 and 2005,  and the  related  consolidated statements of operations,  stockholders'  equity, and cash flows for each of the three years in the period ended January 31, 2006 of Conn's,  Inc. and our report dated March 29, 2006 expressed an unqualified opinion thereon.                                          Ernst & Young LLP  Houston, Texas March 29, 2006                                         51                 Report of Independent Registered Public Accounting Firm  The Board of Directors and Shareholders of Conn's, Inc.  We have audited the accompanying  consolidated balance sheets of Conn's, Inc. as of  January  31,  2006 and 2005,  and the  related  consolidated  statements  of operations,  stockholders' equity, and cash flows for each of the three years in the period  ended  January 31,  2006.  Our audits also  included  the  financial statement schedule listed in the Index at Item 15(a). These financial statements and  schedules  are  the  responsibility  of  the  Company's   management.   Our responsibility  is to  express  an opinion  on these  financial  statements  and schedule based on our audits.  We conducted our audits in accordance  with the standards of the Public  Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis,  evidence  supporting  the amounts and  disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant  estimates  made by  management,  as well as evaluating  the overall financial  statement  presentation.   We  believe  that  our  audits  provide  a reasonable basis for our opinion.  In our opinion,  the financial  statements  referred to above present fairly, in all material respects,  the consolidated  financial position of Conn's,  Inc. at January 31, 2006 and 2005,  and the  consolidated  results of its operations and its cash flows for each of the three years in the period ended January 31, 2006, in conformity with U.S. generally accepted accounting  principles.  Also, in our opinion,  the related financial statement schedule,  when considered in relation to the  basic  financial  statements  taken as a whole,  presents  fairly in all material respects the information set forth therein.  As  discussed  in Note 1 to the  consolidated  financial  statements,  effective January 31, 2005 the Company adopted  Financial  Standards Board  Interpretation No. 46, "Consolidation of Variable Interest Entities".  We also have  audited,  in accordance  with the standards of the Public  Company Accounting  Oversight Board (United States),  the effectiveness of the Company's internal  control over  financial  reporting  as of January 31,  2006,  based on criteria  established  in Internal  Control-Integrated  Framework  issued by the Committee of Sponsoring  Organizations of the Treadway Commission and our report dated March 29, 2006 expressed an unqualified opinion thereon.                                           Ernst & Young LLP  Houston, Texas March 29, 2006                                         52                                      Conn's, Inc.                            CONSOLIDATED BALANCE SHEETS                         (in thousands, except share data)                                                                January 31,                                                          ---------------------                                 Assets                      2005        2006                                                          ---------   --------- Current Assets Cash and cash equivalents ...............................$  7,027    $ 45,176 Accounts receivable, net of allowance for   doubtful accounts of $2,211 and $914, respectively ....  26,728      23,542 Interest in securitized assets .......................... 105,159     123,449 Inventories .............................................  62,346      73,987 Deferred income taxes ...................................   4,901       4,670 Prepaid expenses and other assets .......................   3,552       4,004                                                          ---------   --------- Total current assets .................................... 209,713     274,828 Non-current deferred income tax asset                       1,523       2,464 Property and equipment Land ....................................................   2,919       6,671 Buildings ...............................................   8,068       7,084 Equipment and fixtures ..................................  10,036       9,612 Transportation equipment ................................   4,419       3,284 Leasehold improvements ..................................  56,926      65,507                                                          ---------   --------- Subtotal ................................................  82,368      92,158 Less accumulated depreciation ........................... (34,658)    (37,332)                                                          ---------   --------- Total property and equipment, net .......................  47,710      54,826 Goodwill, net ...........................................   9,617       9,617 Other assets, net .......................................     229         260                                                          ---------   --------- Total assets ............................................$268,792    $341,995                                                          =========   =========                         Liabilities and Stockholders' Equity  Current Liabilities Notes payable ...........................................$  5,500    $      - Current portion of long-term debt .......................      29         136 Accounts payable ........................................  27,108      40,920 Accrued compensation and related expenses ...............   8,548      18,847 Accrued expenses ........................................  11,928      17,380 Income taxes payable ....................................       -       8,794 Deferred income taxes ...................................     966         757 Deferred revenues and allowances ........................   7,383       8,498 Fair value of derivatives ...............................     177           -                                                          ---------   --------- Total current liabilities ...............................  61,639      95,332 Long-term debt ..........................................   5,003           - Non-current deferred tax liability ......................     704         903 Deferred gain on sale of property .......................     644         476 Stockholders' equity Preferred stock ($0.01 par value, 1,000,000   shares authorized; none issued or outstanding) ........       -           - Common stock ($0.01 par value, 40,000,000   shares authorized; 23,267,596 and 23,571,564     shares issued and outstanding       at January 31, 2005 and 2006, respectively) .......     233         236 Accumulated other comprehensive income ..................   7,516       8,004 Additional paid in capital ..............................  84,257      87,067 Retained earnings ....................................... 108,796     149,977                                                          ---------   --------- Total stockholders' equity .............................. 200,802     245,284                                                          ---------   --------- Total liabilities and stockholders' equity ..............$268,792    $341,995                                                          =========   =========  See notes to consolidated financial statements.                                         53                                      Conn's, Inc.                       CONSOLIDATED STATEMENTS OF OPERATIONS                     (in thousands, except earnings per share)                                                                Years Ended January 31,                                                    ---------------------------------                                                      2004        2005        2006                                                    ---------   ---------   --------- Revenues Product sales .....................................$402,579    $451,560    $569,877 Service maintenance agreement   commissions (net) ...............................  20,074      23,950      30,583 Service revenues ..................................  18,265      18,725      20,278                                                    ---------   ---------   ---------   Total net sales ................................. 440,918     494,235     620,738 Finance charges and other .........................  58,392      72,857      81,684                                                    ---------   ---------   --------- Total revenues .................................... 499,310     567,092     702,422 Cost and expenses Cost of goods sold, including   warehousing and occupancy costs ................. 313,637     355,159     448,064 Cost of service parts sold, including   warehousing and occupancy cost ..................   4,075       4,551       5,310 Selling, general and administrative expense ....... 135,174     152,900     181,631 Provision for bad debts ...........................   4,657       5,637       3,769                                                    ---------   ---------   ---------     Total cost and expenses ....................... 457,543     518,247     638,774                                                    ---------   ---------   --------- Operating income ..................................  41,767      48,845      63,648 Interest expense ..................................   4,577       2,359         400                                                    ---------   ---------   --------- Income before minority interest and income taxes ..  37,190      46,486      63,248 Minority interest in limited partnership ..........       -         118           -                                                    ---------   ---------   --------- Income before income taxes ........................  37,190      46,368      63,248 Provision for income taxes   Current .........................................  12,980      16,147      23,048   Deferred ........................................    (130)         96        (981)                                                    ---------   ---------   ---------   Total provision for income taxes ................  12,850      16,243      22,067                                                    ---------   ---------   --------- Net Income ........................................  24,340      30,125      41,181 Less preferred dividends ..........................   1,954           -           -                                                    ---------   ---------   --------- Net income available for common stockholders ......$ 22,386    $ 30,125    $ 41,181                                                    =========   =========   ========= Earnings per share   Basic ...........................................$   1.26    $   1.30    $   1.76   Diluted .........................................$   1.22    $   1.27    $   1.70 Average common shares outstanding   Basic ...........................................  17,726      23,192      23,412   Diluted .........................................  18,335      23,754      24,192   See notes to consolidated financial statements.                                         54                                      Conn's, Inc.                  CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY                     (in thousands, except per share amounts)                                                                                           Accum.                                                                          Other                                       Preferred Stock    Common Stock    Compre-                        Treasury Stock                                       ----------------  ---------------  hensive  Paid in   Retained   ----------------                                       Shares   Amount   Shares   Amount  Income    Capital  Earnings   Shares   Amount     Total                                       ------  --------  -------  ------  -------  --------  ---------  ------  --------  --------- Balance January 31, 2003 .............  175    15,226   17,175   $ 172   $2,751   $     -    $68,131   $ 455   $(3,611)  $ 82,669                                                                                                                                 - Preferred dividends declared .........         10,194                                        (10,194) Preferred stock redeemed:    For cash ..........................  (10)   (1,454)                                                                     (1,454)    For common stock .................. (165)  (23,966)   1,712      17             23,949                                       - Additional common   stock issued at IPO ................                   4,623      46             58,311                                  58,357 Exercise of options ..................                      47       1                396                                     397 Cancellation of treasury stock .......                    (455)     (5)                       (3,606)   (455)    3,611          - Net income                                                                                    24,340                       24,340 Unrealized gain on derivative   instruments (net of tax of $794),   net of reclassification   adjustments of $158   (net of tax of $ 89) ...............                                    1,411                                             1,411 Adjustment of fair value of securitized   assets (net of tax of $489),   net of reclassification adjustments   of $ 239 (net of tax of $ 134) .....                                      870                                               870                                                                                                                          --------- Total comprehensive income ...........                                                                                     26,621                                       ------  --------  -------  ------  -------  --------  ---------  ------  --------  --------- Balance January 31, 2004 .............    -         -   23,102     231    5,032    82,656     78,671       -         -    166,590  Exercise of options,   including tax benefit ..............                     162       2              1,492                                   1,494 Issuance of common stock under   Employee Stock Purchase Plan .......                       9                        109                                     109 Forfeiture of 5,181 restricted shares                       (5)                                                                 - Net income ...........................                                                        30,125                       30,125 Reclassification adjustments    on derivative instruments    (net of tax of $ 399) .............                                      732                                               732 Adjustment of fair value of    securitized assets (net of    tax of $955), net of reclass-    ification adjustments of    $9,643 (net of tax of $5,249) .....                                    1,752                                             1,752                                                                                                                          --------- Total comprehensive income ...........                                                                                     32,609                                       ------  --------  -------  ------  -------  --------  ---------  ------  --------  --------- Balance January 31, 2005 .............    -         -   23,268     233    7,516    84,257    108,796       -         -    200,802  Exercise of options, including tax benefit ................                     293       3              2,618                                   2,621 Issuance of common stock under Employee Stock Purchase Plan .........                      11                        192                                     192 Net income ...........................                                                        41,181                       41,181 Reclassification adjustments    on derivative instruments    (net of tax of $ 86) ..............                                      160                                               160 Adjustment of fair value of    securitized assets (net of    tax of $164), net of reclass-    ification adjustments of    $9,175 (net of tax of $4,963) .....                                      328                                               328                                                                                                                          --------- Total comprehensive income ...........                                                                                     41,669                                       ------  --------  -------  ------  -------  --------  ---------  ------  --------  --------- Balance January 31, 2006 .............    -   $     -   23,572   $ 236   $8,004   $87,067   $149,977       -   $     -   $245,284                                       ======  ========  =======  ======  =======  ========  =========  ======  ========  =========   See notes to consolidated financial statements.                                         55                                      Conn's, Inc.                       CONSOLIDATED STATEMENTS OF CASH FLOWS                                  (in thousands)                                                                                  Years Ended January 31,                                                                      ---------------------------------                                                                         2004        2005        2006                                                                      ---------   ---------   ---------  Cash flows from operating activities Net income ..........................................................$ 24,340    $ 30,125    $ 41,181 Adjustments to reconcile net income to net cash provided by operating activities:   Depreciation ......................................................   6,654       8,777      11,271   Amortization ......................................................     592          18        (318)   Provision for bad debts ...........................................   4,657       5,637       3,769   Accretion from interests in securitized assets .................... (12,529)    (14,892)    (14,138)   Provision for deferred income taxes ...............................    (130)         96        (981)   Loss (gain) from sale of property and equipment....................      64         126          69   Discounts on promotional credit, net ..............................       -       1,571         691   Losses (gains) from derivatives ...................................  (1,010)        (15)         69 Change in operating assets and liabilities:   Accounts receivable ............................................... (11,412)    (29,339)     (4,889)   Inventory .........................................................  (7,624)     (8,604)    (11,641)   Prepaid expenses and other assets .................................     900        (515)       (452)   Accounts payable ..................................................   1,910         696      13,812   Accrued expenses ..................................................   4,200       7,697      15,751   Income taxes payable ..............................................   2,429      (2,430)      8,794   Deferred revenues and allowances ..................................    (648)      1,222       1,330                                                                      ---------   ---------   --------- Net cash provided by operating activities ...........................  12,393         170      64,318                                                                      ---------   ---------   --------- Cash flows from investing activities   Purchase of property and equipment ................................  (9,401)    (19,619)    (18,490)   Proceeds from sales of property ...................................   1,291       1,131          34                                                                      ---------   ---------   --------- Net cash used in investing activities ...............................  (8,110)    (18,488)    (18,456)                                                                      ---------   ---------   --------- Cash flows from financing activities   Net proceeds from the sale of common stock ........................  58,357           -           -   Net proceeds from stock issued under employee benefit plans,       including tax benefit .........................................     397       1,603       2,813   Redemption of preferred stock .....................................  (1,454)          -           -   Net borrowings (payments) under line of credit .................... (31,999)     10,500     (10,500)   Payments on term note ............................................. (15,000)          -           -   Increase in debt issuance costs ...................................    (213)       (118)       (130)   Borrowings on promissory notes ....................................       -           -         136   Payment of promissory notes .......................................  (4,901)        (60)        (32)                                                                      ---------   ---------   --------- Net cash provided by (used in) financing activities .................   5,187      11,925      (7,713)                                                                      ---------   ---------   --------- Impact on cash of consolidation of SRDS .............................   1,024         478           -                                                                      ---------   ---------   --------- Net change in cash ..................................................  10,494      (5,915)     38,149 Cash and cash equivalents   Beginning of the year .............................................   2,448      12,942       7,027                                                                      ---------   ---------   ---------   End of the year ...................................................$ 12,942    $  7,027    $ 45,176                                                                      =========   =========   ========= Supplemental disclosure of cash flow information   Cash interest paid ................................................$  5,718    $  2,387    $    635   Cash income taxes paid, net of refunds ............................  10,162      19,372      13,179   Cash interest received from interests in securitized assets .......  12,801      19,630      26,996   Cash proceeds from new securitizations ............................ 213,741     256,139     285,529   Cash flows from servicing fees ....................................  11,963      14,496      17,542 Supplemental disclosure of non-cash activity   Customer receivables exchanged for interests in securitized assets   41,123      58,342      58,835   Amounts reinvested in interests in securitized assets ............. (56,478)    (81,652)    (76,133)    See notes to consolidated financial statements.                                         56                                      CONN'S , INC.                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                  January 31, 2006  1.    Summary of Significant Accounting Policies        Principles of Consolidation. The consolidated financial statements include the accounts of Conn's,  Inc. and its subsidiaries,  limited liability companies and limited  partnerships,  all of which are wholly-owned  (the "Company").  All material  intercompany   transactions  and  balances  have  been  eliminated  in consolidation.        The Company  enters into  securitization  transactions  to sell its retail installment   and   revolving   customer   receivables.   These   securitization transactions  are  accounted  for as  sales  in  accordance  with  Statement  of Financial  Accounting  Standards ("SFAS") No. 140,  Accounting for Transfers and Servicing of Financial  Assets and  Extinguishment  of  Liabilities  because the Company has relinquished control of the receivables.  Additionally,  the Company has  transferred  such  receivables  to  a  qualifying  special  purpose  entity ("QSPE").  Accordingly,  neither the transferred receivables nor the accounts of the QSPE are included in the consolidated  financial  statements of the Company. See Note 2 for further discussion.        Application of FIN 46. In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, Consolidation of Variable Interest Entities, An  Interpretation  of  Accounting  Research  Bulletin No. 51, or FIN 46. FIN 46 requires  entities,  generally,  to be  consolidated  by a company when it has a controlling  financial  interest  through  ownership,  direct or indirect,  of a majority  voting  interest  in an entity with which it  conducts  business.  The Company  evaluated the effects of the issuance of FIN 46 on the  accounting  for its leases  with  Specialized  Realty  Development  Services,  LP  ("SRDS")  and determined that it was appropriate to consolidate the balance sheet of SRDS with the  Company as of January 31,  2004.  As of January  31,  2005,  the Company no longer  leased any of its  facilities  from SRDS and  therefore FIN 46 no longer applies and the Company no longer consolidates SRDS's balance sheet or statement of operations.  However,  the operations of SRDS are consolidated  with those of the Company  commencing on February 1, 2004 through the last  effective  date of the  Company's  leases  with  SRDS of  January  30,  2005.  The  effect  of such consolidation  on the  Company's  Statement  of  Operations  for the year  ended January 31, 2005 was to reduce "Selling,  general and administrative expense" by $0.9 million,  increase  "Interest  expense" by $0.8 million and reduce  "Income before  income  taxes"  by  $0.1  million  for  "Minority  interest  in  limited partnership". The Company had no exposure to losses incurred by SRDS.        Business  Activities.  The Company,  through its retail  stores,  provides products  and  services  to its  customer  base  in six  primary  market  areas, including  southern  Louisiana,  southeast  Texas,  Houston,  South  Texas,  San Antonio/Austin,  and Dallas, Texas. Products and services offered through retail sales outlets include major home appliances,  consumer electronics,  home office equipment, lawn and garden products, mattresses,  furniture, service maintenance agreements,  installment  and revolving  credit  account  services,  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  companies  represent one reportable segment under SFAS No. 131,  Disclosures  About Segments of an Enterprise and Related  Information. 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.        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.                                         57          Vendor  Programs.  The  Company  receives  funds  from  vendors  for price protection,  product and volume  rebates,  marketing,  training and  promotional programs  which are  recorded on as the amounts are earned as a reduction to the related  product  cost or  advertising  expense,  according to the nature of the program.  The Company accrues 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, which would include price protection, product and volume rebates, the allowances, credits, or payments are recorded as a reduction of product cost and are  reflected  in cost of goods sold when the related  product is sold.  If the programs  relate  to  marketing,  training  and  promotions  that  are  not  for reimbursement of specific incremental costs, the allowances, credits or payments are  reflected as a reduction of cost of goods sold. If the programs are related to promotion or marketing of the product,  the allowances,  credits, or payments for reimbursement of specific,  incremental,  identifiable,  advertising-related costs  incurred in selling the vendors'  products are recorded as a reduction of advertising  expense and are  reflected in selling,  general and  administrative expenses in the period in which the expense is  incurred.  The  credits/payments received from vendors that were netted against advertising expense for the years ended January 31, 2004,  2005 and 2006 were $2.8 million,  $4.8 million and $5.8 million, respectively.        Earnings Per Share. In accordance  with SFAS No. 128,  Earnings per Share, the Company  calculates  basic  earnings per share by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share include the dilutive  effects of any stock options granted  calculated under the treasury method.  The following table sets forth the shares  outstanding for the earnings per share calculations (shares in thousands):                                                                          Year Ended January 31,                                                              ----------------------------                                                                2004      2005      2006                                                              --------  --------  -------- Common stock outstanding, beginning of period ..............  17,175    23,102    23,268 Weighted average common stock issued in initial   public offering ..........................................     719                   - Weighted average common stock issued in preferred   stock redemption .........................................     285                   - Weighted average common stock issued in stock   option exercises .........................................       2        89       142 Weighted average common stock issued to employee   stock purchase plan ......................................       -         3         2 Weighted average number of restricted shares forfeited .....       -        (2) Less: Weighted average treasury shares purchased and   weighted average shares purchased and cancelled ..........    (455)                  -                                                              --------  --------  -------- Shares used in computing basic earnings per share ..........  17,726    23,192    23,412 Dilutive effect of stock options, net of assumed repurchase   of treasury stock ........................................     609       562       780                                                              --------  --------  -------- Shares used in computing diluted earnings per share ........  18,335    23,754    24,192                                                              ========  ========  ========            During the periods presented,  options with an exercise price in excess of the average  market price of the  Company's  common stock are excluded  from the calculation  of the dilutive  effect of stock  options for diluted  earnings per share  calculations.  The weighted average number of options not included in the calculation of the dilutive  effect of stock options was 0.1 million for each of the years ended  January 31, 2005 and 2006,  and none for the year ended January 31, 2004.        Cash and Cash  Equivalents.  The Company  considers all highly liquid debt instruments  purchased  with a  maturity  of  three  months  or  less to be cash equivalents.        Inventories. Inventories consist of finished goods or parts and are valued at the lower of cost (moving weighted average method) or market.                                         58          Property and Equipment. Property and equipment are recorded at cost. Costs associated  with major  additions  and  betterments  that  increase the value or extend the lives of assets are capitalized and  depreciated.  Normal repairs and maintenance that do not materially improve or extend the lives of the respective assets are charged to operating  expenses as incurred.  Depreciation is computed on the straight-line method over the estimated useful lives of the assets, or in the case or leasehold  improvements,  over the shorter of the  estimated  useful lives or the remaining terms of the respective  leases. The estimated lives used to compute depreciation expense are summarized as follows:            Buildings .............................     30 years           Equipment and fixtures ................  3 - 5 years           Transportation equipment ..............      3 years           Leasehold improvements ................ 5 - 10 years        Property and equipment  are  evaluated for  impairment at the retail store level.  The Company  performs a periodic  assessment of assets for impairment in the absence of such  information  or  indicators.  Additionally,  an  impairment evaluation is performed  whenever  events or changes in  circumstances  indicate that the carrying amount of the assets might not be recoverable. The most likely condition  that would  necessitate  an assessment  would be an adverse change in historical and estimated  future results of a retail  store's  performance.  For property and equipment to be held and used, the Company recognizes an impairment loss if its carrying amount is not  recoverable  through its  undiscounted  cash flows and  measures  the  impairment  loss based on the  difference  between the carrying amount and fair value.        All gains and losses on sale of assets are included in  "Selling,  general and administrative expense" in the consolidated statements of operations.                                             Years Ended January 31,                                         ------------------------------ (in thousands of dollars)                   2004      2005       2006 - ----------------------------------      --------- --------- ---------- Gain (loss) on sale of assets ..........     (64)     (126)       (69)        Receivable  Sales and Interests in  Securitized  Receivables.  The Company enters into securitization  transactions to sell customer retail installment and revolving  receivable  accounts.  In these  transactions,  the  Company  retains interest-only  strips and  subordinated  securities,  all of which are  retained interests  in the  securitized  receivables.  Gain or loss on the  sales  of the receivables  depends in part on the previous  carrying  amount of the  financial assets  involved  in the  transfer,  allocated  between  the assets sold and the retained interests,  based on their relative fair value at the date of transfer. Retained  interests are carried at fair value on the Company's  balance sheet as available-for-sale  securities in accordance  with SFAS No. 115,  Accounting for Certain  Investments  in Debt and Equity  Securities.  Impairment  and  interest income are recognized in accordance with Emerging Issues Task Force ("EITF") No. 99-20,  Recognition of Interest  Income and Impairment on Purchased and Retained Beneficial  Interests  in  Securitized  Financial  Assets.  Servicing  fees  are recognized monthly as they are earned. Gains on sales of receivables, impairment on retained  interests,  interest  income from retained  interests and servicing fees are included in "Finance charges and other" in the  consolidated  statement of operations.        The  Company  estimates  fair value of its  retained  interest in both the initial  securitization  and  thereafter  based on the  present  value of future expected   cash   flows   using   management's   best   estimates   of  the  key assumptions--credit losses, prepayment rates, forward yield curves, and discount rates  commensurate with the risks involved.  The Company's retained interest in the transferred receivables are valued on a revolving pool basis.        Receivables Not Sold.  Certain  receivables are not eligible for inclusion in the  securitization  transactions and are therefore  carried on the Company's balance sheet in "Accounts receivable".  Such receivables are recorded net of an allowance for doubtful accounts, which is calculated based on historical losses. Generally,  a  receivable  is  considered  delinquent  if a payment has not been received on the  scheduled  due date.  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 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 value. (See also Note 2.)                                         59          Goodwill.  Goodwill  represents the excess of purchase price over the fair market value of net assets  acquired.  The Company assesses the potential future impairment of goodwill on an annual basis,  or at any other time when impairment indicators  exist.  In fiscal 2004,  2005 and 2006,  the Company  concluded that goodwill was not impaired based on its annual impairment testing.        Income Taxes.  The Company follows the liability  method of accounting for income  taxes.  Under this  method,  deferred  tax assets  and  liabilities  are determined  based on differences  between  financial  reporting and tax bases of assets and  liabilities  and are measured  using the tax rates and laws that are expected be in effect when the differences are expected to reverse.        Revenue  Recognition.  Revenues  from  the  sale of  retail  products  are recognized at the time the product is delivered to the  customer.  Such revenues are  recognized  net of any  adjustments  for  sales  incentive  offers  such as discounts,  coupons,  rebates or other free  products or  services.  The Company sells service maintenance agreements and credit insurance contracts on behalf of unrelated  third parties.  For contracts where the third parties are the obligor 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. The Company records a receivable for earned but unremitted retrospective commissions and reserves for future  cancellations  of service  maintenance  agreements  and credit insurance contracts estimated based on historical  experience.  Where the Company  sells  service  maintenance  agreements in which it is deemed to be the obligor on the contract at the time of sale, revenue is recognized ratably, on a straight-line basis, over the term of the service maintenance  agreement.  These Company-obligor  service  maintenance  agreements  are renewal  contracts  which provide our customers  protection against product repair costs arising after the expiration of the manufacturer's warranty and the third-party obligor contracts. These agreements  typically range from 12 months to 36 months.  These agreements are separate units of accounting under EITF No. 00-21, Revenue Arrangements with Multiple  Deliverables  and are valued  based on the agreed upon retail  selling price. The amounts of service maintenance  agreement revenue deferred at January 31, 2005 and 2006 were $3.9  million  and $3.6  million,  respectively,  and are included  in  "Deferred  revenue and  allowances"  in the  accompanying  balance sheets. Under the renewal contracts, the Company defers and amortizes its direct selling expenses over the contract term and records the cost of the service work performed as products are repaired.        The  classification of the amounts included as "Finance charges and other" is summarized as follows (in thousands):                                                                         Years Ended January 31,                                                            -----------------------------------                                                              2004        2005        2006                                                            ---------   ---------   ---------            Securitization income:             Servicing fees received ....................... $11,963     $14,496     $17,542             Accretion of gains on sale of receivables .....  12,529      14,892      14,138             Interest earned on retained interests .........  12,801      19,630      26,996                                                            ---------   ---------   ---------               Total securitization income .................  37,293      49,018      58,676           Interest Income from receivables not sold .......     888       1,224       1,181           Insurance commissions ...........................  16,498      17,992      18,305           Other ...........................................   3,713       4,623       3,522                                                            ---------   ---------   ---------               Finance charges and other ................... $58,392     $72,857     $81,684                                                            =========   =========   =========            Gains on sale of receivables .................... $13,510     $17,604     $14,692                                                            =========   =========   =========                                           60          Securitization income includes accretion of gains on sales of receivables, impairment of retained  interests,  interest income from retained  interests and servicing fees. No significant impairments related to the interest only strip of retained interests have been recorded in the years ended January 31, 2004, 2005, or 2006.  Gains on sale of  receivables  will be  recognized  as  securitization income as accretion over the lives of the related  receivables.  See "Receivable Sales and Interest in Securitized  Receivables" for revenue recognition policies related to these components.        The  Company  offers  interest  free  promotional  programs  for three- to 24-month contracts and has recorded interest income only on those contracts that are not expected to make  payments  within the time period  specified to satisfy the  promotional  requirements.   The  Company  also  offers  24-  and  36-month no-interest contracts on which no interest is owed for the term of the contract, unless the terms of the  contract  related to periodic  payments are not met, in which case interest accrues at the normal contract rate from that point forward. Other than these  promotional  programs,  the Company does not extend  credit at interest rates other than market rates.        The  following  table sets forth the sales  made under the  interest  free programs (in thousands):                                                     Years Ended January 31,                                               ----------------------------------                                                  2004       2005         2006                                               ---------- ---------- ------------           Sales under interest-free programs ..  $66,986   $126,575     $159,767         These sales are  recognized  at the time the product is  delivered  to the customer,  which is consistent  with the above stated  policy.  Considering  the short-term  nature of interest free programs for terms less than one year, sales are recorded at full value and are not discounted. Sales financed by longer-term (18-, 24- and 36-month) interest free programs are recorded at their net present value (see  "Application  of APB 21 to Cash Option Programs that Exceed One Year in Duration"  below).  Receivables  arising out of the  Company's  interest-free programs are securitized with other qualifying customer receivables.        The Company  classifies  amounts billed to customers  relating to shipping and  handling  as  revenues.  Costs of $15.1  million,  $16.7  million and $21.0 million associated with shipping and handling revenues are included in "Selling, general and  administrative  expense" for the years ended January 31, 2004, 2005 and 2006, respectively.        Fair  Value of  Financial  Instruments.  The  fair  value of cash and cash equivalents,  receivables,  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,  prepayment rates,  forward  yield curves and  discount  rates  commensurate  with the risks involved.  See  Note 2.  The  carrying  value of the  Company's  long-term  debt approximates  fair value due to either the time to maturity or the  existence of variable interest rates that approximate current market rate.        The fair value of interest  rate swap  agreements  are recorded in current liabilities based on the settlement value obtained from the counter-party in the transaction.  The Company  does not use  derivative  financial  instruments  for trading  purposes.  The  Company  uses  derivatives  to hedge a  portion  of the variable  interest  rate risk related to the cash flows from its  interest  only strip and its variable rate debt.         We held interest rate swaps and collars with  notional  amounts  totaling $20  million at both  January 31, 2004 and 2005,  with terms  extending  through April 2005. Those  instruments were held for the purpose of hedging a portion of the  variable  interest  rate  risk,  primarily  related  to cash flows from our interest-only  strip as well as our variable  rate debt.  Hedge  accounting  was discontinued  for the rate swaps in fiscal 2004. At the time the cash flow hedge designation was discontinued, we began to recognize changes in the fair value of the swaps as interest expense and amortize the accumulated  other  comprehensive loss  related to those  derivates  as interest  expense over the period that the forecasted  transactions  effected the  statement of  operations.  During fiscal 2004, we reclassified $0.2 million of losses previously  recorded in accumulated other  comprehensive  losses into the statement of operations  and recorded $1.7 million of income into the statement of operations because of the change in fair value of the swaps.  During fiscal 2005, we reclassified  $1.1 million of losses previously recorded in accumulated other comprehensive losses into the statement of  operations  and  recorded  $1.1  million  of income  into the  statement  of operations because of the change in fair value of the swaps. During fiscal 2006, we reclassified $0.2 million of losses previously  recorded in accumulated other comprehensive  losses into the statement of operations and recorded $0.2 million of income into the statement of  operations  because of the change in fair value of the swaps.                                         61          Prior to  discontinuing  these  hedges,  each  period  we  recorded  hedge ineffectiveness,  which arose from differences  between the interest rate stated in the  derivative  instrument  and the interest rate upon which the  underlying hedged transaction is based.  Ineffectiveness  totaled $0.4 million for the year ended  January  31,  2004,  and  is  reflected  in  "Interest  Expense"  in  our consolidated statement of operations.  Since all hedge accounting has ceased, no ineffectiveness was recognized in fiscal 2005 or 2006.        Stock-Based  Compensation.  As permitted by SFAS No. 123,  Accounting  for Stock-Based  Compensation,  the Company  follows the  intrinsic  value method of accounting for stock-based  compensation  issued to employees,  as prescribed by Accounting  Principles  Board  Opinion No. 25,  Accounting  for Stock  Issued to Employees, and related interpretations. Since all options have been issued at or above  fair  value,  no  compensation  expense  has been  recognized  under  the Company's stock option plan for any of the periods presented.  Additionally,  no compensation  expense is recorded  for shares  issued  pursuant to the  employee stock purchase plan as it is a qualified plan.        If  compensation  expense for the Company's stock option plan and employee stock  purchase  plan  had  been  recognized  using  the fair  value  method  of accounting  under  SFAS 123,  net  income  and  earnings  per share  would  have decreased by the percentages  reflected in the tables below.  The  straight-line attribution  method was used to allocate  compensation  expense over the vesting period  for the stock  option  plan.  The fair value of the  options  issued was estimated on the date of grant,  with the weighted average  assumptions used for grants as reflected in the table.  For post-IPO  grants the Company has used the Black-Scholes model to determine fair value. Prior to the IPO, the fair value of the options  issued was  estimated  using the minimum  valuation  option-pricing model. Fair value compensation  expense for the employee stock purchase plan was computed as the 15% discount  from fair market value the employee  receives when purchasing the shares.  The following  presents the impact to earnings per share if the Company had adopted  the fair value  recognition  provisions  of SFAS 123 (dollars in thousands except per share data):                                                                           Years Ended January 31,                                                               ----------------------------------                                                                  2004        2005         2006                                                               ----------  ----------  ----------        Net income available for common stockholders as        reported ..............................................$  22,386   $  30,125   $  41,181       Stock-based compensation, net of tax, that would have         been reported under SFAS 123 .........................     (530)     (1,017)     (1,313)                                                               ----------  ----------  ----------       Pro forma net income ...................................$  21,856   $  29,108   $  39,868                                                               ==========  ==========  ==========        Earnings per share-as reported:         Basic ................................................$    1.26   $    1.30   $    1.76         Diluted ..............................................$    1.22   $    1.27   $    1.70       Pro forma earnings per share:         Basic ................................................$    1.23   $    1.26   $    1.70         Diluted ..............................................$    1.20   $    1.23   $    1.66       Percent change:         Net income ...........................................     (2.4)%      (3.4)%      (3.2)%       Assumptions used in pricing model:         Weighted average risk free interest rates ............      0.9%        1.8%        3.9%         Weighted average expected lives in years .............      4.3         4.4         4.6         Weighted average volatility ..........................     37.5%       30.0%       32.0%         Expected dividends ...................................        -           -           -                                           62          Self insurance. The Company is self-insured for certain losses relating to group health, workers' compensation,  automobile,  general and product liability claims.  The Company has stop loss  coverage to limit the exposure  arising from these claims.  Self-insurance  losses for claims filed and claims incurred,  but not reported,  are accrued  based upon the Company's  estimates of the aggregate liability for  uninsured  claims  incurred  using  development  factors based on historical experience.        Expense  Classifications.  The Company records "Cost of goods sold" as the direct cost of products sold, any related  in-bound freight costs, and receiving costs,  inspection  costs,  internal  transfer costs, and other costs associated with the operations of its distribution  system. Also included in "Cost of goods sold" is an allocation of advertising  expense  computed at  approximately 6% of the product direct cost. The offset for this allocation is in "Selling,  general and  administrative  expense"  and is netted with  advertising  costs along with vendor rebates (see "Vendor  Programs" above).  Advertising  expense included in Selling,  general and  administrative  expense  for the years ended  January 31, 2004, 2005 and 2006, was:                                                                           Years Ended January 31,                                                             ------------------------------------                                                                2004         2005         2006                                                             ----------   ----------  -----------                                                                         (in thousands)       Gross advertising expense ............................$  24,686    $  28,564    $  32,107       Less:       Vendor rebates .......................................   (2,812)      (4,752)      (5,793)       Allocation to Cost of goods sold .....................  (17,517)     (20,635)     (26,621)                                                             ----------   ----------   ----------       Net advertising expense in           Selling, general and adminstrative expense .......$   4,357    $   3,177     $   (307)                                                             ==========   ==========   ==========          In  addition,  the  Company  records as "Cost of service  parts  sold" the direct  cost of parts used in its  service  operation  and the  related  inbound freight  costs,  purchasing  and receiving  costs,  inspection  costs,  internal transfer  costs,  and other  costs  associated  with the  warranty  and  service distribution operation.        The costs associated with the Company's merchandising function,  including product  purchasing,  advertising,  sales  commissions,  and all store occupancy costs are included in "Selling, general and administrative expense."        Application  of APB 21 to Cash  Option  Programs  that  Exceed One Year in Duration.  In February  2004,  the Company  began  offering  promotional  credit payment  plans on certain  products  that extend  beyond one year. In accordance with APB 21, Interest on Receivables and Payables,  such sales are discounted to their fair value  resulting  in a  reduction  in sales and  receivables  and the amortization  of the  discount  amount  over the term of the  deferred  interest payment plan. The difference between the gross sale and the discounted amount is reflected  as a reduction of Product  sales in the  consolidated  statements  of operations and the amount of the discount being  amortized in the current period is recorded in Finance  charges and other.  For the years ended January 31, 2005 and 2006,  "Product  sales"  were  reduced  by $2.4  million  and $3.1  million, respectively,  and "Finance charges and other" was increased by $0.9 million and $2.4  million,  respectively,  to effect  the  adjustment  to fair  value and to reflect the appropriate amortization of the discount.        Reclassifications.  Certain  reclassifications have been made in the prior years' financial statements to conform to the current year's presentation.        Accumulated Other  Comprehensive  Income. The balance of accumulated other comprehensive  income  (net of tax) at January 31,  2005 was  comprised  of $7.7 million of unrealized gains on interests in securitized assets less $0.2 million of  unrealized   losses  on  derivatives.   The  balance  of  accumulated  other comprehensive  income  (net of tax) at January 31,  2006 was  comprised  of $8.0 million of unrealized gains on interests in securitized assets.                                         63          Recent  Accounting  Pronouncements.  In  December  2004,  SFAS  No.  123R, Share-Based Payment, was issued. The statement is a revision of SFAS No. 123 and supersedes APB Opinion No. 25,  Accounting  for Stock Issued to Employees.  This statement  establishes  standards for  accounting for  transactions  in which an entity exchanges its equity instruments for goods or services. It also addresses transactions  in which an entity  incurs  liabilities  in exchange  for goods or services that are based on the fair value of the entity's equity  instruments or that may be settled by the issuance of those equity  instruments.  The statement focuses  primarily on accounting  for  transactions  in which an entity  obtains employee services in share-based payment  transactions,  and does not change the previous accounting  guidance for share-based payment  transactions with parties other than  employees.  This  statement  requires a public entity to measure the cost  of  employee  services  received  in  exchange  for  an  award  of  equity instruments based on the grant-date fair value of the award and record that cost over the period  during  which the  employee is  required to provide  service in exchange for the award. Additionally, employee services received in exchange for liability  awards  will  be  measured  at fair  value  and  re-measured  at each reporting  date,  with changes in the fair value recorded as  compensation  cost over that period.        This statement applies to all awards granted after the required  effective date and to awards  modified,  repurchased  or  cancelled  after that date.  The cumulative effect of initially applying this statement, if any, is recognized as of the required  effective  date. As of the required  effective date, all public entities  will apply this  statement  using a  modified  version of  prospective application,  which requires  recognition of  compensation  cost on or after the required  effective  date for the  portion of  outstanding  awards for which the requisite  service has not yet been  rendered.  For periods  before the required effective date,  entities may elect to apply a modified version of retrospective application under which financial statements for prior periods are adjusted on a basis  consistent with the pro forma  disclosures  required for those periods by SFAS No. 123.  The Company is  required to adopt this  statement  on February 1, 2006,  and  intends to elect the  modified  retrospective  application  and will adjust  the  financial  statements  for  prior  periods  to give  effect  to the fair-value-based  method of accounting for  share-based  payments.  See Note 1 - Stock-Based Compensation for the expected impact on prior year "Net income".        In February 2006,  SFAS No. 155,  Accounting for Certain Hybrid  Financial Instruments,  was  issued.  This  statements  is an  amendment  of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,  and SFAS No. 140, Accounting for Transfers and Servicing of Financial  Assets and  Extinguishments of Liabilities-a  replacement of FASB Statement No. 125. This statement  permits fair value  remeasurement  for any hybrid financial  instrument that contains an embedded  derivative that would otherwise require  bifurcation,  clarifies which interest-only   strips  and  principal-only   strips  are  not  subject  to  the requirements of SFAS No. 133, establishes a requirement to evaluate interests in securitized  financial  assets  to  identify  interests  that  are  freestanding derivatives or that are hybrid  financial  instruments  that contain an embedded derivative requiring  bifurcation,  clarifies that concentrations of credit risk in the form of  subordination  are not embedded  derivatives and amends SFAS No. 140 to eliminate the  prohibition  on a qualifying  special-purpose  entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument.  This statement is effective for all  financial  instruments  acquired or issued  after the  beginning  of an entity's first fiscal year that begins after  September 15, 2006. The Company is currently  analyzing  the impact this  statement  will have on its  consolidated results of operations and its financial position.        In March 2006, SFAS No. 156,  Accounting for Servicing of Financial Assets an amendment of FASB Statement No. 140, was issued.  This statement  requires an entity to recognize a servicing  asset or liability  each time it  undertakes an obligation to service a financial  asset by entering into a servicing  contract, requires all separately recognized servicing assets and servicing liabilities to be  initially  measured  at fair value,  permits an entity to choose  either the amortization method or fair value measurement method for subsequent  measurement of each class of separately recognized servicing assets, permits, at its initial adoption,  a  one-time  reclassification  of  available-for-sale  securities  to trading  securities by entities with recognized  servicing rights and,  requires separate  presentation of and additional  disclosures  for servicing  assets and servicing  liabilities  subsequently  measured at fair value.  This statement is effective for all financial  instruments  acquired or issued after the beginning of an entity's  first fiscal year that begins  after  September  15,  2006.  The Company is  currently  analyzing  the  impact  this  statement  will have on its consolidated results of operations and its financial position.                                         64    2.    Interests in Securitized Receivables           The Company has an agreement to sell customer  receivables.  As part of this  agreement,  the Company sells eligible  retail  installment  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 January  31,  2006 (in thousands):                                    Capacity     Utilized    Available                                  ----------   ----------   ---------- Series A ........................$ 250,000    $ 185,000     $ 65,000 Series B - Class A ..............  120,000      120,000           -- Series B - Class B ..............   57,778       57,778           -- Series B - Class C ..............   22,222       22,222           --                                  ----------   ----------    ---------   Total .........................$ 450,000    $ 385,000     $ 65,000                                  ==========   ==========    =========         The Series A program  functions  as a credit  facility to fund the initial transfer of eligible  receivables.  When the facility approaches  capacity,  the QSPE ("Issuer") intends to seek financing to pay down the outstanding balance in the Series A variable  funding note; at that point, the facility will once again become  available  to  accumulate  the  transfer of new  receivables  or to meet required  principal  payments  on other  series  as they  become  due.  This new financing could be in the form of additional  notes,  bonds or other instruments as the market might allow.  The Series A program matures  September 1, 2007. The Series B program  (which is  non-amortizing  for the first four  years)  matures officially  on September  1, 2010,  although it is expected  that the  principal payments,  which are  required to begin in October  2006,  will retire the bonds prior to that date.        The agreement  contains  certain  covenants  requiring the  maintenance of various financial ratios and receivables performance standards.  The Company was in compliance with the  requirements of the agreement as of January 31, 2006. As part of the new securitization  program, the Company and Issuer arranged for the issuance  of a  stand-by  letter  of credit in the  amount of $10.0  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 has a term of one year,  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 trustee,  if the  Company,  as  servicer,  fails to make the  required monthly payments of the cash collected to the trustee.        Through its retail sales activities, the Company generates customer retail installment  and  revolving  receivable   accounts.   The  Company  enters  into securitization  transactions  to sell  these  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  3.9% 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  does not  record an asset or  liability  related  to any servicing  obligations because the servicing benefits received are determined to be just adequate to compensate  the Company for its servicing  responsibilities. 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. Their value is subject to credit, prepayment, and interest rate risks on the transferred financial assets.                                         65          The fair values of the Company's  interest in  securitized  assets were as follows (in thousands):                                                           January 31,                                                 -----------------------------                                                      2005            2006                                                 -------------   ------------- Interest-only strip ............................$     16,365    $     18,853 Subordinated securities ........................      88,794         104,596                                                 -------------   ------------- Total fair value of interests in securitized  assets ........................................$    105,159    $    123,449                                                 =============   =============         The table  below  summarizes  valuation  assumptions  used for each period presented:                                                    Years Ended January 31,                                             --------------------------------                                                 2004      2005         2006                                             ------------------- ------------       Prepayment rates         Primary installment ................     1.5%      1.5%         1.5%         Primary revolving ..................     3.0%      3.0%         3.0%         Secondary installment ..............     1.5%      1.5%         1.5%       Net interest spread         Primary installment ................    12.2%     12.0%        11.1%         Primary revolving ..................    12.2%     12.0%        11.1%         Secondary installment ..............    13.0%     13.6%        13.5%       Expected losses         Primary installment ................     3.5%      3.4%         3.0%         Primary revolving ..................     3.5%      3.4%         3.0%         Secondary installment ..............     3.5%      3.4%         3.0%       Projected expense         Primary installment ................     3.9%      3.9%         3.9%         Primary revolving ..................     3.9%      3.9%         3.9%         Secondary installment ..............     3.9%      3.8%         3.9%       Discount rates         Primary installment ................    10.0%     10.0%        13.0%         Primary revolving ..................    10.0%     10.0%        13.0%         Secondary installment ..............    14.0%     14.0%        17.0%       Delinquency and deferral rates         Primary installment ................     9.4%     10.1%         9.3%         Primary revolving ..................    11.3%      8.9%         7.3%         Secondary installment ..............    16.5%     15.3%        14.0%                                         66          At January 31, 2006, 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 .........    $87,491         $9,691       $26,267  Expected weighted average life .......................  1.2 years     1.4 years      1.6 years  Annual prepayment rate assumption ....................        1.5%           3.0%          1.5%   Impact on fair value of 10% adverse change .........    $   122         $   14       $   108   Impact on fair value of 20% adverse change .........    $   240         $   27       $   210 Net interest spread assumption .......................       11.1%          11.1%         13.5%   Impact on fair value of 10% adverse change .........    $ 2,845         $  315       $ 1,545   Impact on fair value of 20% adverse change .........    $ 5,630         $  624       $ 3,019 Expected losses assumptions ..........................        3.0%           3.0%          3.0%   Impact on fair value of 10% adverse change .........    $   775         $   86       $   349   Impact on fair value of 20% adverse change .........    $ 1,546         $  171       $   695 Projected expense assumption .........................        3.9%           3.9%          3.9%   Impact on fair value of 10% adverse change .........    $   983         $  109       $   421   Impact on fair value of 20% adverse change .........    $ 1,966         $  217       $   841 Discount rate assumption .............................       13.0%          13.0%         17.0%   Impact on fair value of 10% adverse change .........    $   821         $   91       $   482   Impact on fair value of 20% adverse change .........    $ 1,630         $  181       $   951 Delinquency and deferral .............................        9.3%           7.3%         14.0%   Impact on fair value of 10% adverse change (1) .....    $    73         $    8       $    96   Impact on fair value of 20% adverse change (1) .....    $   146         $   16       $   186 - ---------------------------------------------------------------  (1) For purposes of this analysis, an adverse change is assumed to be a decrease in the delinquency and deferral rate. A decrease  results in a faster  repayment of the loans, which reduces the fair value of the interest-only  strip a greater amount  than  the  resulting  increase  in the fair  value  of the  subordinated securities. Since it is assumed that none of the other assumptions would change, an increase in the  delinquency  and deferral rate results in an increase in the fair value, (i.e. losses are not assumed to increase as a result).        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.                                         67          The following  illustration  presents  quantitative  information about the receivables portfolios managed by the Company (in thousands):                                             Total Principal Amount                                                of             Principal Amount Over                                           Receivables          60 Days Past Due (1)                                           January 31,              January 31,                                     -----------------------  -----------------------                                          2005         2006        2005         2006                                     ----------  -----------  ----------  -----------       Primary portfolio:                  Installment .......$ 328,042   $  380,603   $  16,636   $   24,934                  Revolving .........   30,210       41,046         867        1,095                                     ----------  -----------  ----------  -----------       Subtotal .....................  358,252      421,649      17,503       26,029       Secondary portfolio:                  Installment .......   70,448       98,072       5,640        9,508                                     ----------  -----------  ----------  -----------       Total receivables managed ....  428,700      519,721      23,143       35,537       Less receivables sold ........  419,172      509,681      21,540       33,483                                     ----------  -----------  ----------  -----------       Receivables not sold .........    9,528       10,040   $   1,603   $    2,054                                                              ==========  ===========       Non-customer receivables .....   17,200       13,502                                     ----------  -----------                 Total accounts                  receivable, net ...$  26,728   $   23,542                                     ==========  ===========                                                Average Balances         Net Credit Losses                                         January 31, (1)          January 31, (2)                                     -----------------------  -----------------------                                          2005         2006       2005          2006                                     ----------  -----------  ---------  ------------       Primary portfolio:                  Installment .......$ 297,187   $  352,315                  Revolving .........   25,921       35,149                                     ----------  -----------       Subtotal .....................  323,108      387,464   $  8,829   $    11,303       Secondary portfolio:                  Installment .......   64,484       83,461      2,394         2,421                                     ----------  -----------  ---------  ------------       Total receivables managed ....  387,592      470,925     11,223        13,724       Less receivables sold ........  378,178      461,215      9,760        13,165                                     ----------  -----------  ---------  ------------       Receivables not sold .........$   9,414   $    9,710   $  1,463   $       559                                     ==========  ===========  =========  ============          --------------       (1)   Amounts are based on end of period balances.        (2)   Amounts represent total loan loss provision,  net of recoveries,  on             total receivables.  3.    Notes Payable and Long-Term Debt        At January 31,  2006,  the  Company  had $47.0  million of its $50 million revolving credit facility  available for borrowings.  The amounts utilized under the  revolving  credit  facility  reflected  $3.0 million  related to letters of credit issued.  The letters of credit were issued under a $5.0 million  sublimit provided under the facility for standby letters of credit.  Additionally,  there were no amounts  outstanding  under a short-term  revolving  bank agreement that provides  up to  $8.0  million  of  availability  on an  unsecured  basis.  This unsecured  facility  matures  in May 2006 and has a floating  rate of  interest, based on Prime, which equaled 7.00% at January 31, 2006.                                         68          Long-term debt consists of the following (in thousands,  except  repayment explanations):                                                                January 31,                                                           --------------------                                                              2005      2006                                                           --------- ---------- Revolving credit facility with interest at variable   rates (7.25% at January 31, 2006) ......................$  5,000  $       - Promissory notes, due in monthly installments ............      32        136                                                           --------- ---------- Total long-term debt .....................................   5,032        136 Less amounts due within one year .........................     (29)      (136)                                                           --------- ---------- Amounts classified as long-term ..........................$  5,003  $       -                                                           ========= ==========        The  revolving  facility  is subject to the  Company  maintaining  various financial and non-financial  covenants.  In addition, the provisions of the bank credit facility limit the payment of dividends on the Company's common stock. As of January 31, 2005 and January 31, 2006, the Company was in compliance with all financial and non-financial covenants.        The current  agreement  provides for a revolving  facility capacity of $50 million,  with a $5  million  letter  of  credit  sublimit  and an $8.0  million sublimit  for a  swingline  of  credit.  Interest  rates  are  variable  and are determined,  at the  option of the  Company,  at the Base Rate (the  greater  of Agent's  prime rate or federal  funds rate plus 0.50%) plus the Base Rate Margin (which ranges from 0.00% to 0.50%) or LIBO/LIBOR Rate plus the LIBO/LIBOR Margin (which ranges from 0.75% to 1.75%). Both the Base Rate Margin and the LIBO/LIBOR Margin are  determined  quarterly  based on a debt  coverage  ratio equal to the rolling four-quarter relationship of total debt (including lease obligations) to earnings  before  interest,  taxes,  depreciation,  amortization  and rent.  The Company  is  obligated  to  pay a  non-use  fee  on a  quarterly  basis  on  the non-utilized  portion of the  revolving  facility at rates  ranging from .20% to ..375%.  The  revolving  facility  is secured by the  assets of the  Company  not otherwise  encumbered  and a pledge  of  substantially  all of the  stock of the Company's present and future subsidiaries and matures in November 2010.        Interest  expense  incurred on notes  payable and  long-term  debt totaled $2.2, $1.1 and $0.2 million for the years ended January 31, 2004, 2005 and 2006, respectively.  Interest  expense  included  interest related to SRDS debt, which totaled $0.8 million for the year ended January 31, 2005.  Aggregate  maturities of  long-term  debt as of January 31 in the year  indicated  are as follows  (in thousands):                 2007 .................................  $     136                2008 .................................          -                2009 .................................          -                                                       -----------                Total ................................  $     136                                                       ===========   4.    Letters of Credit        The Company  utilizes  unsecured  letters of credit to secure a portion of the QSPE's asset-backed securitization program,  deductibles under the Company's insurance programs and international product purchases.  At January 31, 2005 and January 31, 2006,  the Company had  outstanding  unsecured  letters of credit of $12.1  million and $13.0  million,  respectively.  These  letters of credit were issued under the three following facilities:        o     The Company has a $5.0 million sublimit provided under its revolving             line of credit for stand-by and import letters of credit. At January             31,  2006,  $3.0 million of letters of credit were  outstanding  and             callable  at the option of the  Company's  insurance  carrier if the             Company does not honor its requirement to fund deductible amounts as             billed under its insurance program.        o     The Company has  arranged  for a $10.0  million  stand-by  letter of             credit to  provide  assurance  to the  trustee  of the  asset-backed             securitization  program that funds collected by the Company,  as the             servicer, would be remitted as required under the base indenture and             other related documents. The letter of credit has a term of one year             and expires in August 2006.        o     The Company obtained a $1.5 million  commitment for trade letters of             credit  to  secure   product   purchases   under  an   international             arrangement.  At January 31,  2006,  there were no letters of credit             outstanding  under this commitment.  The letter of credit commitment             has a term of one year and expires in May 2006.                                         69          The maximum  potential  amount of future  payments  under these  letter of credit  facilities is considered to be the aggregate  face amount of each letter of credit commitment, which total $16.5 million as of January 31, 2006.  5.    Income Taxes        Deferred  income  taxes  reflect  the  net  effects  of  temporary  timing differences between the carrying amounts of assets and liabilities for financial reporting  purposes  and the amounts used for income tax  purposes.  Significant components  of the  Company's  net deferred  tax assets  result  primarily  from differences   between  financial  and  tax  methods  of  accounting  for  income recognition on service contracts and residual interests, capitalization of costs in inventory,  and deductions for  depreciation and doubtful  accounts,  and the fair  value  of  derivatives.  The  deferred  tax  assets  and  liabilities  are summarized as follows (in thousands):                                                                January 31,                                                           --------------------                                                             2005         2006                                                           -------      -------       Deferred Tax Assets       Allowance for doubtful accounts         and warranty and insurance cancellations ........$   763      $ 1,844       Deferred revenue ..................................  2,204          597       Fair value of derivatives .........................     62            -       Interest in securitized assets ....................    479          982       Property and equipment ............................  1,297        2,297       Inventories .......................................    952          772       Accrued vacation and other ........................    667        1,268                                                          --------    --------       Total deferred tax assets .........................  6,424        7,760       Deferred Tax Liabilities       Sales tax receivable ..............................   (919)        (768)       Goodwill ..........................................   (672)        (903)       Other .............................................    (79)        (615)                                                          --------    --------       Total deferred tax liabilities .................... (1,670)      (2,286)                                                          --------    --------       Net Deferred Tax Asset ............................$ 4,754      $ 5,474                                                          ========     ========        Significant components of income taxes were as follows (in thousands):                                        Years Ended January 31,                                 ------------------------------------                                    2004        2005         2006                                 ----------  ----------  ------------  Current:    Federal .....................$  13,095   $  16,100   $    23,023    State .......................     (115)         47            25                                 ----------  ----------  ------------      Total current .............   12,980      16,147        23,048 Deferred:    Federal .....................     (339)         96          (975)    State .......................      209           -            (6)                                 ----------  ----------  ------------      Total deferred ............     (130)         96          (981)                                 ----------  ----------  ------------ Total tax provision ............$  12,850   $  16,243   $    22,067                                 ==========  ==========  ============                                         70          A reconciliation  of the statutory tax rate and the effective tax rate for each of the periods presented in the statements of operations is as follows:                                                                    Years Ended January 31,                                                       -----------------------------------                                                          2004        2005        2006                                                       ----------  ---------  ------------        U.S. Federal statutory rate ...................      35.0%      35.0%         35.0%       State and local income taxes ..................       0.3        0.1           0.1       Non-deductible entertainment,         tax-free interest income and other ..........       0.2        0.4          (0.1)                                                       ----------  ---------  ------------       Effective tax rate attributable        to continuing operations .....................      35.5%      35.5%         35.0%       Other .........................................      (0.9)      (0.5)         (0.1)                                                       ----------  ---------  ------------       Effective tax rate ............................      34.6%      35.0%         34.9%                                                       ==========  =========  ============     6.    Leases        The Company leases certain of its facilities and operating  equipment from outside parties and from a stockholder/officer. The real estate leases generally have initial  lease  periods of from 5 to 15 years with  renewal  options at the discretion of the Company;  the equipment leases  generally  provide for initial lease  terms of three to seven  years and  provide  for a purchase  right by the Company at the end of the lease term at the fair market value of the equipment.        The  following  is a  schedule  of future  minimum  base  rental  payments required under the operating leases that have initial non-cancelable lease terms in excess of one year (in thousands):                                            Third      Related          Years Ended January 31,          Party       Party       Total          ---------------------------- ------------- ---------- -----------          2007 ........................ $    15,358   $    207   $  15,565          2008 ........................      14,764        207      14,971          2009 ........................      13,709        207      13,916          2010 ........................      13,077        207      13,284          2011 ........................      12,273        207      12,480          Thereafter ..................      45,841          -      45,841                                       ------------- ---------- -----------          Total ....................... $   115,022   $  1,035   $ 116,057                                       ============= ========== ===========          Total lease expense was  approximately  $14.0  million,  $15.0 million and $15.7 million for the years ended January 31, 2004, 2005 and 2006, respectively, including  approximately  $1.6  million,  $0.2  million and $0.2 million paid to related  parties,  respectively.  During the year ended  January 31,  2005,  the Company paid $1.4 million  under leases with SRDS. As SRDS was  consolidated  in the statement of operations for the year ended January 31, 2005,  these payments were characterized as selling, general and administrative expenses, depreciation expense, interest expense and minority interest in limited partnership. See Note 1.        Certain of our leases are subject to scheduled  minimum rent  increases or escalation provisions,  the cost of which is recognized on a straight-line basis over the minimum  lease term.  Tenant  improvement  allowances,  when granted by lessor, are deferred and amortized as contra-lease  expense over the term of the lease.  7.    Stock-Based Compensation        The Company  approved an Incentive  Stock Option Plan that  provides for a pool of up to 3.5 million  options to purchase  shares of the  Company's  common stock.  Such  options are to be granted to various  officers  and  employees  at prices equal to the market value on the date of the grant. The options vest over three or five year periods  (depending  on the grant) and expire ten years after the date of grant. As part of the completion of the IPO, the Company amended the Incentive  Stock Option Plan to provide for a total  available pool of 2,559,767 options, adopted a Non-Employee Director Stock Option Plan that included 300,000 options,  and  adopted an  Employee  Stock  Purchase  Plan that  reserved  up to 1,267,085  shares of the  Company's  common stock to be issued.  On November 24, 2003, the Company  issued six  non-employee  directors  240,000 total options to acquire the Company's  stock at $14.00 per share.  On June 3, 2004,  the Company issued 40,000  options to acquire the  Company's  stock at $17.34 per share to a seventh  non-employee  director.  At January  31,  2006,  the Company had 20,000 options remaining in the Non-Employee Director Stock Option Plan.                                         71         The  Employee  Stock  Purchase  Plan is  available  to a  majority  of the employees  of the Company and its  subsidiaries,  subject to minimum  employment conditions  and maximum  compensation  limitations.  At the end of each calendar quarter,  employee  contributions  are used to acquire shares of common stock at 85% of the lower of the fair  market  value of the common  stock on the first or last day of the  calendar  quarter.  During the year ended  January 31, 2005 and 2006, the Company issued 8,664 and 10,496 shares of common stock,  respectively, to employees  participating  in the plan,  leaving  1,247,925  shares  remaining reserved for future issuance under the plan as of January 31, 2006.        A summary of the status of the Company's  Incentive  Stock Option Plan and the activity during the years ended January 31, 2004, 2005 and 2006 is presented below (shares in thousands):                                                             Years Ended January 31,                                 -------------------------------------------------------------                                        2004                2005                2006                                 --------------------- ------------------ --------------------                                             Weighted           Weighted            Weighted                                             Average             Average             Average                                             Exercise           Exercise            Exercise                                   Shares     Price     Shares    Price    Shares     Price                                 ---------- ---------- -------- --------- -------- ----------- Outstanding, beginning of year      1,241      $8.34    1,531     $9.68    1,666      $11.50 Granted                               369      14.00      387     17.43      343       33.88 Exercised                             (47)     (8.36)    (162)    (8.72)    (271)      (8.34) Canceled                              (32)     (9.15)     (90)   (11.07)    (112)     (17.78)                                 ---------- ---------- -------- --------- -------- ----------- Outstanding, end of year            1,531      $9.68    1,666    $11.50    1,626      $16.31                                 ========== ========== ======== ========= ======== =========== Weighted average grant date  fair value of options granted  during period                                 $4.77              $4.97               $11.09                                            ==========          =========          =========== Options exercisable at end of  year                                 551                 712                743 Options available for grant           981                 684                453                                         Options Outstanding        Options Exercisable                                 -------------------------------- --------------------                                              Weighted                                   Shares      Average   Weighted   Shares    Weighted                                 Outstanding  Remaining   Average Exercisable Average                                  January    Contractual Exercise January 31, Exercise                                  31, 2006    Life in      Price    2006       Price     Range of Exercise Prices                  Years - ------------------------------------------- ----------- -------- ----------- -------- $4.29-$4.29                              9         3.9    $4.29           9    $4.29 $8.21-$10.83                           696         5.3     8.51         569     8.38 $14.00 -$16.49                         306         7.9    14.33         108    14.17 $17.73-$17.73                          288         8.9    17.73          57    17.73 $33.88-$33.88                          327         9.8    33.88           -        -                                 ----------- ----------- -------- ----------- --------    Total                             1,626         7.3   $16.31         743    $9.88                                 =========== =========== ======== =========== ========                                            72   8.    Significant Vendors           As shown in the table below, a significant portion of the Company's merchandise  purchases for years ended January 31, 2004, 2005 and 2006 were made from six vendors:                                  Years Ended January 31,                             --------------------------------          Vendor                2004       2005       2006          ---------------    ---------- ---------- ----------          A                      15.5 %     14.2 %     17.0 %          B                      11.2       13.8       12.2          C                      12.5       13.2       11.4          D                       5.7        8.0        7.8          E                       4.0        6.7        6.8          F                       4.7        5.8        5.4                             ---------- ---------- ----------          Totals                 53.6 %     61.7 %     60.6 %                             ========== ========== ==========            As part  of a  program  to  purchase  product  inventory  from  vendors overseas,  the  Company  was not  obligated  at January  31,  2006 for under any stand-by letters of credit.  9.    Related Party Transactions           The Company leases one of its stores from its Chief  Executive  Officer and Chairman of Board, under the terms of a lease it entered prior to becoming a publicly  held  company.  It also leased six store  locations  from  Specialized Realty Development Services, LP ("SRDS"), a real estate development company that was  created  prior to the  Company's  becoming  publicly  held and was owned by various members of management and individual  investors of Stephens Group,  Inc. The Stephens Group, Inc. is a significant  shareholder of the Company.  Based on independent  appraisals  that were performed on each project that was completed, the Company  believes  that the terms of the leases were at least  comparable to those that could be  obtained  in an arms'  length  transaction.  As part of the ongoing operation of SRDS, the Company received a management fee associated with the administrative  functions that were provided to SRDS of $5,000, $100,000 and $6,500 for the years ended January 31, 2004, 2005 and 2006, respectively.  As of January 31, 2005, the Company no longer leased any properties from SRDS since it divested  itself of the  leased  properties.  As part of the  divestiture,  SRDS reimbursed the Company  $75,000 for costs related to lease  modifications.  As a result of the divestiture,  the Company's  consolidated balance sheet at January 31, 2005 does not include  accounts  of SRDS that were  previously  consolidated with our financial  statements at January 31, 2004.  However,  the  consolidated statements of operations  and cash flows for fiscal 2005 include the  operations and cash flows of SRDS through the dates the sales were completed.         The Company engaged the services of Direct Marketing Solutions,  Inc., or DMS, for a substantial portion of its direct mail advertising.  Direct Marketing Solutions,  Inc. is partially  owned (less than 50%) by the Stephens Group Inc., members of the Stephens family,  Jon Jacoby, and Doug Martin. The Stephens Group Inc. and the members of the Stephens family are significant  shareholders of the Company,  and Jon Jacoby and Doug Martin are members of the  Company's  Board of Directors.  The fees the Company paid to DMS during  fiscal years ended 2005 and 2006  amounted to  approximately  $1.8 million and $4.3  million,  respectively. Thomas J.  Frank,  the Chief  Executive  Officer  and  Chairman  of the Board of Directors  owned a small  percentage  (0.7%) at the end of fiscal year 2005, but divested his interest during the first half of fiscal year 2006.   10.    Benefit Plans           The  Company has  established  a defined  contribution  401(k) plan for eligible  employees  who are at least 21 years old and have  completed  at least one-year of service. Employees may contribute up to 20% of their eligible pretax compensation  to the plan.  The  Company  will match 100% of the first 3% of the employees' contributions and 50% of the next 2% of the employees' contributions. Employees at least 50 years of age may make  supplemental  contributions  to the Plan as defined by current regulations. At its option, the Company may also make supplemental  contributions to the Plan, but has not made such  contributions in the past three years.  The matching  contributions  made by the company  totaled $1.2,  $1.4 and $1.6 million  during the years ended January 31, 2004,  2005 and 2006, respectively.                                         73   11.    Common and Preferred Stock            The  Company  has  outstanding  23,571,564  shares of common  stock at January 31, 2006,  of which 7,000 shares are  restricted  as to various  vesting rights until July 2006.        As part of the Company's  recapitalization  and  reorganization  that took place in 1998,  a total of 213,720  shares of  preferred  stock  were  issued in exchange for existing common stock of the Company; such shares were valued as of the date of the  transaction at $87.18 per share and bore a cumulative  dividend of 10% that was not payable until declared by the Company's  board of directors. Such cumulative  dividends must be paid before dividends on the common stock can be distributed. On January 24, 2003, the board of directors declared a preferred stock  dividend as of April 30, 2003 in the amount of $8.8  million  ($50.53 per share) contingent upon the completion of a proposed initial public offering.  On December  1, 2003 when the  initial  public  offering  was  closed,  the Company redeemed all preferred stock and accumulated  dividends for 1,711,832  shares of common stock and $1.5 million in cash.        The table  below  reflects  the number of  preferred  shares  the  Company redeemed  during the  periods  covered  and the total  costs of the  redemptions including accumulated dividends (dollars in thousands):           Year ended January 31,          Redeemed     Costs      Dividends          ----------------------         ----------- ---------- -------------          2004                             174,648    $25,420       $10,194          2005                                   -          -             -          2006                                   -          -             -   12.    Contingencies        Legal   Proceedings.   The  Company  is  involved  in  routine  litigation incidental  to our business from time to time.  Currently,  the Company does not expect the outcome of any of this routine  litigation to have a material  effect on its financial  condition or results of  operations.  However,  the results of these proceedings  cannot be predicted with certainty,  and changes in facts and circumstances could impact the Company's estimate of reserves for litigation.        Insurance. Because of its inventory, vehicle fleet and general operations, the Company has purchased insurance covering a broad variety of potential risks. The Company  purchases  insurance  polices covering general  liability,  workers compensation, real property, inventory and employment practices liability, among others. Additionally,  the Company has umbrella policies with an aggregate limit of $50.0  million.  The Company  has  retained a portion of the risk under these policies and its group health insurance program. See additional discussion under Note 1. The Company has a $3.0 million letter of credit  outstanding  supporting its  obligations  under the  property  and  casualty  portion  of its  insurance program.        Service  Maintenance  Agreement  Obligations.  The Company  sells  service maintenance  agreements  under which it is the obligor for payment of qualifying claims.  The Company is responsible  for  administering  the program,  including setting the pricing of the agreements sold and paying the claims. The pricing is set based on historical claims experience and expectations  about future claims. While the Company is unable to estimate maximum potential claim exposure, it has a history of overall  profitability  upon the ultimate  resolution of agreements sold. The revenues  related to the  agreements  sold are deferred at the time of sales and recorded in revenues in the statement of  operations  over the life of the  agreements.  The amounts  deferred are reflected on the face of the balance sheet in "Deferred  revenues  and  allowances,"  see also Note 1 for  additional discussion.                                          74
None
Evaluation of Disclosure Controls and Procedures       In accordance  with Rules 13a-15 and 15d-15 under the  Securities  Exchange Act of 1934, we have evaluated, under the supervision and with the participation of management,  including our Chief  Executive  Officer and our Chief  Financial Officer,  the  effectiveness  of the  design  and  operation  of our  disclosure controls and procedures (as defined in Rules  13a-15(e) and 15d-15(e)  under the Exchange Act) as of the end of the period covered by this annual  report.  Based on that evaluation,  our Chief Executive Officer and our Chief Financial Officer concluded  that, as of the end of the period covered by this annual report,  our disclosure  controls and procedures  were  effective in timely  alerting them to material  information  relating  to our  business  (including  our  consolidated subsidiaries) required to be included in our Exchange Act filings.       Management's Report on Internal Control over Financial Reporting       Please refer to  Management's  Report on Internal  Control  over  Financial Reporting on page 49 of this report.       Changes in Internal Controls Over Financial Reporting       There  have  been  no  changes  in our  internal  controls  over  financial reporting  that  occurred in the quarter  ended  January  31,  2006,  which have materially affected,  or are reasonably likely to materially affect our internal controls over financial reporting.
None                                          75                                       PART III           The  information  required  by Items 10 through 14 is  included  in our definitive Proxy Statement  relating to our 2006 Annual Meeting of Stockholders, and is incorporated herein by reference.  CROSS REFERENCE TO ITEMS 10-14 LOCATED IN THE PROXY STATEMENT                                                                               Caption in the Conn's, Inc.                         Item                                                 2006 Proxy Statement                ------------------------------------------    -------------------------------------------------------
76                                        PART IV
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................76
PART IV                                      -------
(a)   The following documents are filed as a part of this report:              (1)   The financial  statements listed in response to Item 8 of this                   report are as follows:                    Consolidated Balance Sheets as of January 31, 2005 and 2006                    Consolidated  Statements  of  Operations  for the Years  Ended                   January 31, 2004, 2005 and 2006                    Consolidated  Statements of Stockholders' Equity for the Years                   Ended January 31, 2004, 2005 and 2006                    Consolidated  Statements  of Cash  Flows for the  Years  Ended                   January 31, 2005 and 2006              (2)   Financial Statement Schedule:  Report of Independent  Auditors                   on  Financial  Statement  Schedule  for the three years in the                   period ended  January 31, 2006;  Schedule II -- Valuation  and                   Qualifying  Accounts.  The financial statement schedule should                   be  read  in  conjunction  with  the  consolidated   financial                   statements  in  our  2006  Annual   Report  to   Stockholders.                   Financial statement schedules not included in this report have                   been omitted  because they are not  applicable or the required                   information is shown in the consolidated  financial statements                   or notes thereto.              (3)   Exhibits:  A list of the exhibits filed as part of this report                   is set  forth in the  Index  to  Exhibits,  which  immediately                   precedes   such  exhibits  and  is   incorporated   herein  by                   reference.                                          77                                      SIGNATURES           Pursuant to the  requirements  of Section 13 or 15(d) of the Securities Exchange Act of l934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.                                    CONN'S, INC.                                   (Registrant)                                    /s/ Thomas J. Frank, Sr.                                   ---------------------------------------------- Date:  March 30, 2006             Thomas J. Frank, Sr.                                   Chairman of the Board and Chief Executive                                   Officer            Pursuant to the  requirements  of the Securities  Exchange Act of 934, this  report has been  signed  below by the  following  persons on behalf of the registrant and in the capacities and on the dates indicated.                                Signature                                          Title                         Date                         ---------                                          -----                          ----                   /s/ Thomas J. Frank. Sr.                    Chairman of the Board and             March 30, 2006 - ------------------------------------------------------------ Chief Executive Officer                  Thomas J. Frank, Sr.                        (Principal Executive Officer)                    /s/ David L. Rogers                         Chief Financial Officer               March 30, 2006 - ------------------------------------------------------------ (Principal Financial and Accounting                  David L. Rogers                             Officer)                    /s/ Marvin D. Brailsford - ------------------------------------------------------------ Director                              March 30, 2006                  Marvin D. Brailsford                     /s/ Jon E.M.Jacoby - ------------------------------------------------------------ Director                              March 30, 2006                  Jon E.M. Jacoby                    /s/ Bob L. Martin - ------------------------------------------------------------ Director                              March 30, 2006                  Bob L. Martin                    /s/ Douglas H. Martin - ------------------------------------------------------------ Director                              March 30, 2006                  Douglas H. Martin                    /s/ Scott L. Thompson                       Director                              March 30, 2006 - ------------------------------------------------------------                  Scott L. Thompson                    /s/ William T. Trawick - ------------------------------------------------------------ Director                              March 30, 2006                  William T. Trawick                    /s/ Theodore M. Wright - ------------------------------------------------------------ Director                              March 30, 2006                  Theodore M. Wright                                           78                                     EXHIBIT INDEX  Exhibit Number                                    Description - -------                                   -----------  2         Agreement  and Plan of Merger  dated  January 15,  2003,  by and among           Conn's,  Inc.,  Conn  Appliances,  Inc.  and Conn's  Merger Sub,  Inc.           (incorporated  herein  by  reference  to  Exhibit  2 to  Conn's,  Inc.           registration statement on Form S-1 (file no. 333-109046) as filed with           the Securities and Exchange Commission on September 23, 2003).  3.1       Certificate of Incorporation of Conn's, Inc.  (incorporated  herein by           reference  to Exhibit 3.1 to Conn's,  Inc.  registration  statement on           Form S-1  (file  no.  333-109046)  as filed  with the  Securities  and           Exchange Commission on September 23, 2003).  3.1.1     Certificate  of  Amendment  to the  Certificate  of  Incorporation  of           Conn's,  Inc. dated June 3, 2004 (incorporated  herein by reference to           Exhibit 3.1.1 to Conn's, Inc. Form 10-Q for the quarterly period ended           April 30, 2004 (File No.  000-50421)  as filed with the  Commission on           June 7, 2004).  3.2       Bylaws of Conn's,  Inc.  (incorporated  herein by reference to Exhibit           3.2 to  Conn's,  Inc.  registration  statement  on Form S-1  (file no.           333-109046) as filed with the  Securities  and Exchange  Commission on           September 23, 2003).  3.2.1     Amendment  to the  Bylaws  of  Conn's,  Inc.  (incorporated  herein by           reference  to  Exhibit  3.2.1 to Conn's  Form  10-Q for the  quarterly           period  ended  April 30, 2004 (File No.  000-50421)  as filed with the           Commission on June 7, 2004).  4.1       Specimen of  certificate  for shares of Conn's,  Inc.'s  common  stock           (incorporated  herein by  reference  to Exhibit  4.1 to  Conn's,  Inc.           registration statement on Form S-1 (file no. 333-109046) as filed with           the Securities and Exchange Commission on October 29, 2003).  10.1      Amended and Restated 2003  Incentive  Stock Option Plan  (incorporated           herein by  reference  to  Exhibit  10.1 to Conn's,  Inc.  registration           statement  on Form  S-1  (file  no.  333-109046)  as  filed  with  the           Securities and Exchange Commission on September 23, 2003).t  10.1.1    Amendment  to the Conn's,  Inc.  Amended and Restated  2003  Incentive           Stock Option Plan (incorporated  herein by reference to Exhibit 10.1.1           to Conn's  Form 10-Q for the  quarterly  period  ended  April 30, 2004           (File No. 000-50421) as filed with the Commission on June 7, 2004).t  10.1.2    Form of Stock Option  Agreement  (incorporated  herein by reference to           Exhibit  10.1.2 to Conn's,  Inc. Form 10-K for the annual period ended           January 31, 2005 (File No. 000-50421) as filed with the Securities and           Exchange Commission on April 5, 2005).t  10.2      2003 Non-Employee  Director Stock Option Plan (incorporated  herein by           reference to Exhibit 10.2 to Conn's,  Inc.  registration  statement on           Form  S-1  (file  no.  333-109046)as  filed  with the  Securities  and           Exchange Commission on September 23, 2003).t  10.2.1    Form of Stock Option  Agreement  (incorporated  herein by reference to           Exhibit  10.2.1 to Conn's,  Inc. Form 10-K for the annual period ended           January 31, 2005 (File No. 000-50421) as filed with the Securities and           Exchange Commission on April 5, 2005).t  10.3      Employee  Stock  Purchase  Plan  (incorporated  herein by reference to           Exhibit 10.3 to Conn's, Inc. registration  statement on Form S-1 (file           no.  333-109046) as filed with the Securities and Exchange  Commission           on September 23, 2003).t  10.4      Conn's  401(k)  Retirement  Savings  Plan   (incorporated   herein  by           reference to Exhibit 10.4 to Conn's,  Inc.  registration  statement on           Form S-1  (file  no.  333-109046)  as filed  with the  Securities  and           Exchange Commission on September 23, 2003).t                                          79   10.5      Shopping  Center  Lease  Agreement  dated May 3, 2000,  by and between           Beaumont  Development Group, L.P., f/k/a Fiesta Mart, Inc., as Lessor,           and CAI,  L.P.,  as Lessee,  for the property  located at 3295 College           Street, Suite A, Beaumont,  Texas (incorporated herein by reference to           Exhibit 10.5 to Conn's, Inc. registration  statement on Form S-1 (file           no.  333-109046) as filed with the Securities and Exchange  Commission           on September 23, 2003).  10.5.1    First Amendment to Shopping Center Lease Agreement dated September 11,           2001, by and among  Beaumont  Development  Group,  L.P.,  f/k/a Fiesta           Mart,  Inc., as Lessor,  and CAI,  L.P.,  as Lessee,  for the property           located at 3295 College Street, Suite A, Beaumont, Texas (incorporated           herein by reference  to Exhibit  10.5.1 to Conn's,  Inc.  registration           statement  on Form  S-1  (file  no.  333-109046)  as  filed  with  the           Securities and Exchange Commission on September 23, 2003).  10.6      Industrial  Real  Estate  Lease  dated June 16,  2000,  by and between           American  National  Insurance  Company,  as Lessor,  and CAI, L.P., as           Lessee,  for the property  located at 8550-A Market  Street,  Houston,           Texas  (incorporated  herein by  reference  to Exhibit 10.6 to Conn's,           Inc. registration statement on Form S-1 (file no. 333-109046) as filed           with the Securities and Exchange Commission on September 23, 2003).  10.6.1    First  Renewal  of Lease  dated  November  24,  2004,  by and  between           American  National  Insurance  Company,  as Lessor,  and CAI, L.P., as           Lessee,  for the property  located at 8550-A Market  Street,  Houston,           Texas  (incorporated  herein by reference to Exhibit 10.6.1 to Conn's,           Inc.  Form 10-K for the annual period ended January 31, 2005 (File No.           000-50421)  as filed with the  Securities  and Exchange  Commission on           April 5, 2005).  10.7      Lease  Agreement  dated  December  5, 2000,  by and  between  Prologis           Development  Services,   Inc.,  f/k/a  The  Northwestern  Mutual  Life           Insurance  Company,  as Lessor,  and CAI,  L.P.,  as  Lessee,  for the           property  located at 4810  Eisenhauer  Road,  Suite 240,  San Antonio,           Texas  (incorporated  herein by  reference  to Exhibit 10.7 to Conn's,           Inc. registration statement on Form S-1 (file no. 333-109046) as filed           with the Securities and Exchange Commission on September 23, 2003).  10.7.1    Lease Amendment No. 1 dated November 2, 2001, by and between  Prologis           Development  Services,   Inc.,  f/k/a  The  Northwestern  Mutual  Life           Insurance  Company,  as Lessor,  and CAI,  L.P.,  as  Lessee,  for the           property  located at 4810  Eisenhauer  Road,  Suite 240,  San Antonio,           Texas  (incorporated  herein by reference to Exhibit 10.7.1 to Conn's,           Inc. registration statement on Form S-1 (file no. 333-109046) as filed           with the Securities and Exchange Commission on September 23, 2003).  10.8      Lease Agreement dated June 24, 2005, by and between Cabot  Properties,           Inc. as Lessor,  and CAI, L.P., as Lessee, for the property located at           1132  Valwood  Parkway,  Carrollton,  Texas  (incorporated  herein  by           reference to Exhibit 99.1 to Conn's,  Inc.  Current Report on Form 8-K           (file  no.  000-50421)  as filed  with  the  Securities  and  Exchange           Commission on June 29, 2005).  10.9      Credit Agreement dated October 31, 2005, by and among Conn Appliances,           Inc. and the Borrowers thereunder, the Lenders party thereto, JPMorgan           Chase Bank,  National  Association,  as Administrative  Agent, Bank of           America,   N.A.,  as   Syndication   Agent,   and  SunTrust  Bank,  as           Documentation Agent (incorporated  herein by reference to Exhibit 10.9           to Conn's,  Inc. Quarterly Report on Form 10-Q (file no. 000-50421) as           filed with the  Securities  and  Exchange  Commission  on  December 1,           2005).  10.9.1    Letter of Credit Agreement dated November 12, 2004 by and between Conn           Appliances,  Inc. and CAI Credit 10.9.1  Insurance  Agency,  Inc., the           financial  institutions  listed on the signature  pages  thereto,  and           JPMorgan Chase Bank, as Administrative  Agent (incorporated  herein by           reference  to Exhibit 99.2 to Conn's Inc.  Current  Report on Form 8-K           (File No.  000-50421)  as filed with the  Commission  on November  17,           2004).                                          80   10.10     Receivables  Purchase  Agreement dated September 1, 2002, by and among           Conn Funding II, L.P., as Purchaser,  Conn  Appliances,  Inc. and CAI,           L.P., collectively as Originator and Seller, and Conn Funding I, L.P.,           as Initial Seller  (incorporated  herein by reference to Exhibit 10.10           to  Conn's,  Inc.  registration   statement  on  Form  S-1  (file  no.           333-109046) as filed with the  Securities  and Exchange  Commission on           September 23, 2003).  10.11     Base  Indenture  dated  September 1, 2002, by and between Conn Funding           II,  L.P.,  as  Issuer,  and  Wells  Fargo  Bank  Minnesota,  National           Association,  as Trustee  (incorporated herein by reference to Exhibit           10.11 to Conn's,  Inc.  registration  statement  on Form S-1 (file no.           333-109046) as filed with the  Securities  and Exchange  Commission on           September 23, 2003).  10.11.1   First  Supplemental  Indenture  dated  October 29, 2004 by and between           Conn  Funding II,  L.P.,  as Issuer,  and Wells  Fargo Bank,  National           Association,  as Trustee  (incorporated herein by reference to Exhibit           99.1 to Conn's,  Inc. Current Report on Form 8-K (File No.  000-50421)           as filed with the Commission on November 4, 2004).  10.12     Series 2002-A Supplement to Base Indenture dated September 1, 2002, by           and between  Conn Funding II,  L.P.,  as Issuer,  and Wells Fargo Bank           Minnesota,  National  Association,  as Trustee (incorporated herein by           reference to Exhibit 10.12 to Conn's, Inc.  registration  statement on           Form S-1  (file  no.  333-109046)  as filed  with the  Securities  and           Exchange Commission on September 23, 2003).  10.12.1   Amendment to Series  2002-A  Supplement  dated March 28, 2003,  by and           between  Conn  Funding  II,  L.P.  as  Issuer,  and Wells  Fargo  Bank           Minnesota,  National  Association,  as Trustee (incorporated herein by           reference to Exhibit 10.12.1 to Conn's,  Inc. Form 10-K for the annual           period ended  January 31, 2005 (File No.  000-50421) as filed with the           Securities and Exchange Commission on April 5, 2005).  10.12.2   Amendment No. 2 to Series 2002-A Supplement dated July 1, 2004, by and           between  Conn  Funding  II,  L.P.,  as  Issuer,  and Wells  Fargo Bank           Minnesota,  National  Association,  as Trustee (incorporated herein by           reference to Exhibit 10.12.2 to Conn's,  Inc. Form 10-K for the annual           period ended  January 31, 2005 (File No.  000-50421) as filed with the           Securities and Exchange Commission on April 5, 2005).  10.13     Series 2002-B Supplement to Base Indenture dated September 1, 2002, by           and between  Conn Funding II,  L.P.,  as Issuer,  and Wells Fargo Bank           Minnesota,  National  Association,  as Trustee (incorporated herein by           reference to Exhibit 10.13 to Conn's, Inc.  registration  statement on           Form S-1  (file  no.  333-109046)  as filed  with the  Securities  and           Exchange Commission on September 23, 2003).  10.13.1   Amendment to Series  2002-B  Supplement  dated March 28, 2003,  by and           between  Conn  Funding  II,  L.P.,  as  Issuer,  and Wells  Fargo Bank           Minnesota,  National  Association,  as Trustee (incorporated herein by           reference to Exhibit 10.13.1 to Conn's,  Inc. Form 10-K for the annual           period ended  January 31, 2005 (File No.  000-50421) as filed with the           Securities and Exchange Commission on April 5, 2005).  10.14     Servicing Agreement dated September 1, 2002, by and among Conn Funding           II, L.P.,  as Issuer,  CAI,  L.P.,  as Servicer,  and Wells Fargo Bank           Minnesota,  National  Association,  as Trustee (incorporated herein by           reference to Exhibit 10.14 to Conn's, Inc.  registration  statement on           Form S-1  (file  no.  333-109046)  as filed  with the  Securities  and           Exchange Commission on September 23, 2003).  10.14.1   First  Amendment to Servicing  Agreement  dated June 24, 2005,  by and           among Conn Funding II, L.P., as Issuer,  CAI,  L.P., as Servicer,  and           Wells  Fargo  Bank,  National  Association,  as Trustee  (incorporated           herein by reference to Exhibit  10.14.1 to Conn's,  Inc. Form 10-Q for           the quarterly period ended July 31, 2005 (File No. 000-50421) as filed           with the Securities and Exchange Commission on August 30, 2005).                                          81   10.14.2   Second  Amendment to Servicing  Agreement  dated November 28, 2005, by           and among Conn Funding II, L.P.,  as 10.14.2  Issuer,  CAI,  L.P.,  as           Servicer,  and Wells  Fargo  Bank,  National  Association,  as Trustee           (incorporated  herein by reference to Exhibit 10.14.2 to Conn's,  Inc.           Form 10-Q for the  quarterly  period  ended  July 31,  2005  (File No.           000-50421)  as filed with the  Securities  and Exchange  Commission on           August 30, 2005).  10.15     Form  of  Executive  Employment  Agreement   (incorporated  herein  by           reference to Exhibit 10.15 to Conn's, Inc.  registration  statement on           Form S-1  (file  no.  333-109046)  as filed  with the  Securities  and           Exchange Commission on October 29, 2003).t  10.15.1   First Amendment to Executive Employment Agreement between Conn's, Inc.           and Thomas J. Frank,  Sr.,  Approved by the  stockholders May 26, 2005           (incorporated  herein by reference to Exhibit 10.15.1 to Conn's,  Inc.           Form 10-Q for the  quarterly  period  ended  July 31,  2005  (file No.           000-50421)  as filed with the  Securities  and Exchange  Commission on           August 30, 2005).t  10.16     Form of Indemnification Agreement (incorporated herein by reference to           Exhibit 10.16 to Conn's, Inc. registration statement on Form S-1 (file           no.  333-109046) as filed with the Securities and Exchange  Commission           on September 23, 2003).t  10.17     2007 Bonus Program (incorporated herein by reference to Form 8-K (file           no.  000-50421)  filed with the Securities and Exchange  Commission on           March 30, 2006).t  10.18     Description  of  Compensation   Payable  to   Non-Employee   Directors           (incorporated  herein by  reference  to Form 8-K (file no.  000-50421)           filed with the Securities and Exchange Commission on June 2, 2005).t  10.19     Dealer  Agreement  between Conn  Appliances,  Inc. and Voyager Service           Programs, Inc. effective as of January 1, 1998 (filed herewith).  10.19.1   Amendment #1 to Dealer Agreement by and among Conn  Appliances,  Inc.,           CAI, L.P.,  Federal Warranty  Service  Corporation and Voyager Service           Programs, Inc. effective as of July 1, 2005 (filed herewith).  10.19.2   Amendment #2 to Dealer Agreement by and among Conn  Appliances,  Inc.,           CAI, L.P.,  Federal Warranty  Service  Corporation and Voyager Service           Programs, Inc. effective as of July 1, 2005 (filed herewith).  10.19.3   Amendment #3 to Dealer Agreement by and among Conn  Appliances,  Inc.,           CAI, L.P.,  Federal Warranty  Service  Corporation and Voyager Service           Programs, Inc. effective as of July 1, 2005 (filed herewith).  10.19.4   Amendment #4 to Dealer Agreement by and among Conn  Appliances,  Inc.,           CAI, L.P.,  Federal Warranty  Service  Corporation and Voyager Service           Programs, Inc. effective as of July 1, 2005 (filed herewith).  10.20     Service Expense  Reimbursement  Agreement between Affiliates Insurance           Agency,  Inc. and American Bankers Life Assurance  Company of Florida,           American  Bankers  Insurance  Company Ranchers & Farmers County Mutual           Insurance Company, Voyager Life Insurance Company and Voyager Property           and  Casualty   Insurance   Company  effective  July  1,  1998  (filed           herewith).  10.20.1   First  Amendment  to Service  Expense  Reimbursement  Agreement by and           among CAI, L.P.,  Affiliates  Insurance Agency, Inc., American Bankers           Life  Assurance  Company  of  Florida,  Voyager  Property  &  Casualty           Insurance Company, American Bankers Life Assurance Company of Florida,           American  Bankers  Insurance  Company of Florida and American  Bankers           General Agency, Inc. effective July 1, 2005 (filed herewith).                                          82   10.21     Service Expense  Reimbursement  Agreement between CAI Credit Insurance           Agency,  Inc. and American Bankers Life Assurance  Company of Florida,           American  Bankers  Insurance  Company Ranchers & Farmers County Mutual           Insurance Company, Voyager Life Insurance Company and Voyager Property           and  Casualty   Insurance   Company  effective  July  1,  1998  (filed           herewith).  10.21.1   First  Amendment  to Service  Expense  Reimbursement  Agreement by and           among  CAI  Credit  Insurance  Agency,  Inc.,  American  Bankers  Life           Assurance  Company of Florida,  Voyager Property & Casualty  Insurance           Company,  American Bankers Life Assurance Company of Florida, American           Bankers  Insurance  Company of Florida,  American  Reliable  Insurance           Company,  and American Bankers General Agency,  Inc. effective July 1,           2005 (filed herewith).  10.22     Consolidated  Addendum and Amendment to Service Expense  Reimbursement           Agreements  by  and  among  Certain   Member   Companies  of  Assurant           Solutions,  CAI Credit Insurance Agency, Inc. and Affiliates Insurance           Agency, Inc. effective April 1, 2004 (filed herewith).  11.1      Statement re: computation of earnings per share is included under Note           1 to the financial statements.  21        Subsidiaries  of Conn's,  Inc.  (incorporated  herein by  reference to           Exhibit 21 to Conn's,  Inc.  registration  statement on Form S-1 (file           no.  333-109046) as filed with the Securities and Exchange  Commission           on September 23, 2003).  23.1      Consent of Ernst & Young LLP (filed herewith).  31.1      Rule  13a-14(a)/15d-14(a)   Certification  (Chief  Executive  Officer)           (filed herewith).  31.2      Rule  13a-14(a)/15d-14(a)   Certification  (Chief  Financial  Officer)           (filed herewith).  32.1      Section  1350   Certification   (Chief  Executive  Officer  and  Chief           Financial Officer) (furnished herewith).  99.1      Subcertification  by  Chief  Operating  Officer  in  support  of  Rule           13a-14(a)/15d-14(a)  Certification  (Chief  Executive  Officer) (filed           herewith).  99.2      Subcertification  by Treasurer in support of Rule  13a-14(a)/15d-14(a)           Certification (Chief Financial Officer) (filed herewith).  99.3      Subcertification  by Secretary in support of Rule  13a-14(a)/15d-14(a)           Certification (Chief Financial Officer) (filed herewith).  99.4      Subcertification  of Chief Operating Officer,  Treasurer and Secretary           in support of Section 1350 Certifications (Chief Executive Officer and           Chief Financial Officer) (furnished herewith).  t     Management contract or compensatory plan or arrangement.                                          83                                                 Schedule II-Valuation and Qualifying Accounts                                                         Conn's, Inc. - -----------------------------------------------------------------------------------------------------------------------------                       Col A                              Col B                  Col C                Col D         Col E - -----------------------------------------------------------------------------------------------------------------------------                                                                               Additions - -----------------------------------------------------------------------------------------------------------------------------                                                   Balance at            Charged to   Charged to                                                   Beginning of          Costs and   Other Accounts  Deductions    Balance at                    Description                    Period                Expenses     Describe        Describe(1)  End of Period - -----------------------------------------------------------------------------------------------------------------------------  Year ended January 31, 2004 Reserves and allowances from asset accounts: Allowance for doubtful accounts                           117            4,657          -              (2,855)        1,919  Year ended January 31, 2005 Reserves and allowances from asset accounts: Allowance for doubtful accounts                         1,919            5,637          -              (5,345)        2,211  Year ended January 31, 2006 Reserves and allowances from asset accounts: Allowance for doubtful accounts                         2,211            3,769          -              (5,066)          914    (1) Uncollectible accounts written off, net of recoveries      EX-10.19 2 a5112243ex10-19.txt EXHIBIT 10.19                                                                      Exhibit 10.19                                  DEALER AGREEMENT                                       between                                CONN APPLIANCES, INC.                                         and                           VOYAGER SERVICE PROGRAMS, INC.   This Dealer  Agreement  is entered  into  effective as of January 1, 1998 by and between  Conn   Appliances,   Inc.,   Beaumont,   Texas,  a  Texas   corporation (hereinafter,   "Dealer"),   and  Voyager  Service  Programs,  Inc.,  a  Florida corporation (hereinafter "Voyager").  WHEREAS,  Dealer is engaged in the sale of certain merchandise  (hereafter,  the "Covered  Merchandise")  to the general  public in the States of  Louisiana  and Texas; and  WHEREAS,  Dealer  desires to offer,  sell,  and  administer  Voyager's  extended service  agreements in the States of Texas and Louisiana in the form(s) attached hereto as Exhibit A (such  agreements  as amended from time to time by agreement of the parties being  referred to hereinafter  as the "Service  Contract(s)"  to provide  repairs for the  protection of certain of Dealer's  merchandise,  which repairs will be in addition to the warranty protection offered by or enforceable against the manufacturer of such merchandise; and  WHEREAS, Voyager desires to make its Service Contracts available to customers of Dealer and to  delegate  to Dealer  certain  administrative  and claims  service responsibilities.  In consideration of the foregoing premises and the mutual promises and covenants contained herein, the parties agree as follows:  1.   Scope of Agreement.      -------------------      1.1  Applicability.  This Agreement  shall cover all new Service  Contracts sold by Dealer issued in connection with the sale of Covered  Merchandise  since January 1, 1998 and during the term of this Agreement in the States of Louisiana and Texas and those service  contracts  covered under the Release,  Transfer and Indemnification  Agreement attached hereto as Exhibit "B."  Contemporaneous with the  execution  hereof,  the parties  shall  execute the  Release,  Transfer and Indemnification  Agreement or substantially similar agreement as attached hereto as Exhibit B.      1.2 Voyager Exclusive.  The parties agree that, effective as of the date of this  Agreement,  Voyager  shall be Dealer's  exclusive  provider of the Service Contracts  and  related  services  performed  by  Voyager  hereunder.  With  the exception of renewal Service Contracts,  the parties acknowledge that Dealer has marketed and administered  its own extended  service  agreements and which shall hereafter  be  governed  by  this  Agreement  and  the  Release,   Transfer  and Indemnification  Agreement.  Any renewals under any Service  Contract before the effective date of this Agreement shall not be covered by this Agreement.  2.   Sale of Service Contracts.      --------------------------      2.1 Eligible  Merchandise.  Dealer and Voyager  shall  agree,  from time to time, as to which types of merchandise sold by Dealer are eligible to be Covered Merchandise of the type described in the Service Contract.      2.2 Contract Prices.  Voyager shall provide Service  Contracts to Dealer at the prices contained in Schedule A attached hereto ("Contract  Prices").  Dealer shall,  from time to time,  establish the Contract  Prices to be charged for the Service  Contracts  subject to Voyager's  approval  and shall advise  Voyager in writing of such Contract  Prices.  Approval of the Contract  Prices shall not be unreasonably withheld. Dealer shall comply with all Federal, Texas and Louisiana laws and regulations applicable to the pricing of the Service Contracts.                                          1     3.   Duties of Dealer.      -----------------      3.1  General.  Dealer  shall (i) sell and issue the  Service  Contracts  to purchasers;  (ii) handle all  inquiries  from  purchasers  of Service  Contracts pertaining to the Service Contracts (each such original purchaser is a "Contract Holder");  (iii)  discuss  all  requests  for  repairs  with  Contract  Holders, determine to what extent repairs are necessary,  and advise Contract  Holders as to the  procedure for obtaining  repairs or, if  necessary,  replacement  of the Covered  Merchandise  (such  repair  or  replacement  is  hereinafter   "Covered Repair/Replacement");  (iv)  arrange  for the  provision  of service to Contract Holders  with  repair  facilities  (a  "Repair  Facility");  (v)  authorize  the appropriate Repair Facility to perform the Covered Repair/Replacement;  (vi) pay the Repair  Facility  (or Contract  Holder,  if  circumstances  warrant) for the reasonable   cost   ("Service   Contract   Losses")  of  effecting  the  Covered Repair/Replacement;  (vii) provide to Voyager monthly Service  Contract sale and repair cost  summaries,  including  such data and  information  as is reasonably necessary  for the parties to carry out the  transactions  contemplated  by this Agreement;  and, (viii) perform such other services and duties as may reasonably be required to offer,  sell,  and  administer  the  Service  Contracts  that are subject to this Agreement.      3.2  Materials.  Dealer shall submit all printed  contracts,  any marketing materials  which  contain a reference  to Voyager or the Service  Contracts,  or forms pertaining to the  transactions  contemplated by this Agreement to Voyager for its approval prior to use. Such approval shall not be unreasonably withheld.      3.3 Books: Accounts:  Records.  Dealer shall keep accurate books, accounts, and  records  relating  to the  Service  Contracts  that  are  subject  to  this Agreement,  including  but not  limited to,  names and address of each  Contract Holder, and the dates,  amounts and description and model numbers of all Covered Merchandise,  and  Service  Contract  Losses  which are  submitted.  Such books, accounts,  and records  shall be  maintained  in  accordance  with  commercially reasonable  standards  for a period  of at least  five  years  after the date of termination  of this  Agreement.  Dealer  agrees that its books,  accounts,  and records  pertaining to the Service  Contracts  may be audited twice  annually by Voyager or an authorized  regulatory agency. Such audits shall be conducted upon reasonable  notice to Dealer during  regular  business  hours.  All  information obtained  by Voyager or its  affiliates  shall be subject to the  provisions  of Paragraph 12.      3.4 Compliance  with Laws.  Dealer  understands  that the offer,  sale, and administration  of the Service  Contracts may require  Dealer to obtain  certain governmental licenses, and Dealer represents and warrants that in the event such material  licenses,  permits and governmental  approvals and  authorizations are necessary to lawfully offer, sell, and administer the Service Contracts.  Dealer shall comply with such regulations.  Dealer further  understands that applicable laws impose  certain  limitations  on the Dealer's  ability to restrict  implied warranties on  merchandise  covered by a Service  Contract.  Dealer shall comply with all applicable Federal,  Texas and Louisiana laws and regulations  relating to the offer,  sale, and  administration  of the Service  Contracts  which shall include  without  limitation the Texas and Louisiana  Deceptive  Trade Practices Acts and the Magnuson-Moss  Warranty Act and any applicable  Retail  Installment Sales Act as well as other Federal,  Texas and Louisiana laws Dealer and Voyager may advise the other party may be  applicable to the Service  Contracts  written hereunder.      3.5 Sales  Taxes.  In  connection  with the sale of the Service  Contracts, Dealer  agrees  to  account,  remit,  process,  file and pay to the  appropriate governmental  authorities,  pursuant to  applicable  law,  any  Federal,  Texas, Louisiana or local sales tax assessable  with respect to the sale of the Service Contracts.      3.6  Representations.  In  connection  with offers and sales of the Service Contracts, Dealer shall make no oral or written representation (i) pertaining to the coverage  provided under a Service Contract that  misrepresents the scope of the coverage  actually  provided  under the terms  thereof or (ii) to the effect that the  decision of Dealer or the Repair  Facility is binding on the  Contract Holder in any dispute concerning the Service Contract.      3.7 Voyager  Funds.  Those  portions of Contract  Prices  received  for the benefit of Voyager  shall be held by Dealer in a  fiduciary  capacity.  All such Voyager  funds  shall be  promptly  remitted or credited to Voyager on a monthly basis in the manner described in paragraph 5.5 below.      3.8  Relationship.  Dealer's  relationship with Voyager shall be that of an independent   contractor  authorized  to  sell  and  service  Voyager's  Service Contracts and nothing herein shall be construed as creating an employer-employee relationship between Voyager and officers, employees or agents of Dealer, or the relationship of a partnership or joint venture.                                          2          3.9 Complaints.  Dealer shall immediately  refer all lawsuits,  demands for arbitration  and  regulatory  complaints to Voyager for handling,  together with copies of all information in Dealer's files and a summary of the Dealer activity regarding the litigated or disputed  matter.  Voyager agrees to promptly  notify Dealer of all consumer and insurance  department  complaints  received regarding the Service Contracts subject to this Agreement.  Dealer shall maintain a log of all written  complaints,  which shall be available  for  inspection  by Voyager. Dealer and Voyager  shall  cooperate in such  matters so as to allow  resolution thereof to the benefit of both parties.      3.10 Liability Insurance. At the option of Voyager, Dealer agrees to obtain and maintain,  at its sole expense,  blanket fidelity,  and errors and omissions insurance,  insuring Dealer's responsibilities hereunder. Voyager shall be named an additional insured on such insurance  coverages and evidence thereof shall be furnished to Voyager and in the event the addition of Voyager as a named insured to any such  insurance  policy  increases  the  cost or fee for such  insurance, Voyager shall bear the increased  cost  attributable  to its addition as a named insured.      3.11 Dealer  Administrative  Compensation.  Dealer's  compensation  for the administrative  services  performed by it under this Agreement shall be included in the cost of the Service  Contracts  issued to  Contract  Holders and shall be five percent (5%) of the Contract Prices as defined herein. Dealer is authorized to deduct said fee  reimbursements as stated in Paragraph 5.4. Voyager shall pay Dealer  interest on any  reserves  held for the Service  Contracts at the annual statement interest rate for Voyager Property & Casualty Insurance Company,  on a quarterly  basis,  at the time an Experience  Refund is paid or would be payable pursuant to Paragraph  5.5.  Except as provided in paragraph 5.5 below,  Voyager shall not be responsible for any other remuneration to Dealer. Any liability for any Service Contracts  transferred pursuant to Exhibit B shall not be subject to this paragraph.  4.   Duties of Voyager.      ------------------      4.1 Dealer Assistance.  Upon Dealer's reasonable request from time to time, Voyager agrees to consult with Dealer and provide advice relating to procedural, legal  and other  matters  relevant  to the  conduct  of the  offer,  sale,  and administration of the Service Contracts. Except as provided in this Paragraph 4, Voyager shall have no duties with respect to the Service Contracts.      4.2 Forms.  Voyager  shall  furnish to Dealer  sample copies of all Service Contracts  which are authorized for sale by the Dealer,  together with necessary procedure manuals,  reporting forms and claim forms. Upon ninety days (90) prior written notice to Dealer, Voyager may, at its sole discretion, amend any Service Contract or withdraw any Service  Contract  from the market,  but Voyager  shall provide a replacement  Service Contract acceptable to Dealer in the event of any withdrawal at or before the date of its written notice to Dealer.      4.3 Contract Liability Policy. Voyager shall secure a Contractual Liability Insurance  Policy  covering the resulting  liability from the Service  Contracts issued  hereunder from Voyager Property & Casualty  Insurance  Company (VP&C), a company authorized to issue such coverage,  which, as of the effective date, has an A.M. Best rating of A-. In the event VP&C's A.M. Best rating falls below a B+ rating,  Voyager  shall  immediately  replace  the  VP&C  Contractual  Liability Insurance Policy with such a policy issued by another  insurance company with an A.M. Best rating of B+ or higher. Both the VP&C Contractual  Liability Insurance Policy and any required replacement policy shall be substantially similar to the policy  attached  hereto as Exhibit  "C." Such  policy  shall  cover all Service Contracts described in Paragraph 1.1 of this Agreement.  The termination of this agreement  shall not terminate  the coverage  under the policy,  which  coverage shall continue until the Service Contract's expiration.  5.   Fees: Reimbursement; Refunds.      -----------------------------      5.1 Voyager Fees. "Voyager Fee," as that phrase is used herein,  shall mean that amount equal to forty  percent  (40%) of the Contract  Prices (net of sales tax collected) of the Service Contracts sold by Dealer or delivered by Dealer in connection with the sale of Covered Merchandise any renewals thereof.      5.2 Claims  Reimbursement.  Dealer  shall  prepare  and submit to Voyager a monthly  invoice  summarizing all claims and  claims-related  expenses under the Service Contracts  adjusted and paid during the previous month.  "Claims-related expenses" are defined as direct costs incurred in  investigating  and paying the Service  Contract  Losses.  Within  twenty  (20) days of the end of the month in which any invoice is submitted,  Voyager shall reimburse  Dealer for any Service Contract Losses incurred by Dealer during the relevant  period,  upon submission to Voyager of Dealer's summary of Service Contract Losses.                                          3          5.3 Contract Holder Refunds.  If any Service Contract is cancelled,  Dealer shall pay the  Contract  Holder  the  appropriate  refund  owed to such  Holder. Voyager shall credit to Dealer the unearned  pro-rata portion of the Voyager Fee paid by Dealer to Voyager  with  respect  to each  Service  Contract  cancelled. Dealer shall be authorized to deduct the amounts  credited due to  cancellations from the amount due under  Paragraph  5.1 hereof,  in order to determine the net Voyager Fee due for the relevant month.      5.4  Payments  to  Voyager.  Within  twenty (20) days after the end of each month while this  Agreement  is in effect,  Dealer shall send to Voyager the net amount due (Voyager Fees described in Paragraph 5.1 less Dealer  compensation as provided in Paragraph  3.11,  less the credit for  cancellations  referenced  in Paragraph  5.3)  attributable  to all  Service  Contracts  sold  or  renewed  in connection with the sale of Covered Merchandise during the preceding month.      5.5 Experience  Refund.  Voyager shall prepare an Experience Refund (herein so called)  computation for each relevant  Calculation Period in accordance with the steps set forth on Exhibit D attached hereto. For purposes of the Experience Refund  Computation  under  Exhibit B, the  amount  transferred  to Voyager  for Service Contracts pursuant to Exhibit B shall be considered  "Voyager Fees," but in the  computation to be made under Exhibit D, no subtraction for premium taxes nor Dealer  Administrative  Compensation  shall be made,  charged or paid on the transferred  amounts. The first "Calculation Period" hereunder shall end on June 30, 1998,  and  subsequent  Calculation  Periods  shall consist of each calendar quarter following the initial Calculation Period. If such calculations result in a negative  amount (i.e., a deficit),  then no Experience  Refund shall be paid. The amount of such deficit shall be carried  forward to  subsequent  Calculation Periods and offset  against  the  Experience  Refunds  that would  otherwise  be payable for such  Periods,  until such negative  amount is completely  offset or paid.  If such  calculations  result in a positive  amount,  then Voyager  shall within thirty (30) days after the end of a Calculation  Period remit such amount to Dealer as an Experience Refund.      5.6 Following termination of this Agreement in accordance with Paragraph 7, other than as provided under Paragraph  7.2(a),  (b), (c), (d), or (e),  Voyager shall  continue to calculate an Experience  Refund at the end of each  quarterly period. If such calculations  result in a positive amount,  Voyager shall within 30 days after the end of the Calculation  Period remit such amount to Dealer. If such calculations result in a deficit,  such deficit shall be carried forward to subsequent  Calculation  Periods and offset in the same manner as  described  in Paragraph 5.5, except that if positive amounts have been paid after termination, Dealer shall be required to repay Voyager such  positive  amount(s) to reimburse Voyager for such deficit.      5.7  Within  60 days  after  Dealer  has  certified  to  Voyager  that  all liabilities  under all Service Contracts covered by this Agreement have expired, Voyager shall  calculate a final  Experience  Refund,  using the same  procedure described in Paragraph 5.5, 5.6 and Exhibit D.      5.8 In the event this Agreement is terminated pursuant to Paragraph 7.2(a), (b), (c), or (d), or (e), no further Experience Refund will be payable hereunder until all liability for the Service  Contracts  written under this Agreement has expired.  Without  waiving  the  foregoing,  in the event  Voyager,  at its sole discretion,  subject to Paragraph 11 herein, determines that its actual damages, costs,  expenses and  attorney's  fees resulting from such events of termination are satisfied and  reimbursed  in their  entirety,  such amounts that would have been  payable as an  Experience  Refund shall be  calculated  and paid to Dealer pursuant to Paragraph  5.6  contained  herein and Voyager shall pay any positive amounts under such calculation in excess of any amounts necessary to satisfy and reimburse such actual damages, costs, expenses and attorney's fees.  6.   Term.  The  term of this  Agreement  shall  continue  until  terminated  as permitted in Paragraph 7.  7.   Termination.      ------------      7.1  Termination  Without Cause.  Either party may terminate this Agreement upon one hundred  twenty  (120) days prior  written  notice to the other  party; provided, that such party is not then in material breach of this Agreement. This Agreement  shall also  terminate  on any date that is  mutually  agreed  upon in writing by the parties.      7.2  Termination  With Cause by  Voyager.  Subject  to the cure  provisions contained  herein,  Voyager may immediately  terminate this agreement by written notice to Dealer in the event of (a) Dealer's  violation of any  applicable  law relating to the offer,  sale, or administration of the Service Contracts and the violation  continues  for fifteen (15) days after Dealer has received  notice of the violation;  (b) material breach of this Agreement by Voyager, which material breach  continues for 30 days after  Voyager has received  notice of the breach; (c) gross neglect of duty, fraud, misappropriation, or embezzlement by Dealer or its  affiliates  of funds owed to Voyager  or any of its  affiliates  under this                                          4     Agreement  or any other  agreement  with  Dealer or any of its  affiliates;  (d) Dealer  or any of its  affiliates  shall  become  the  subject  of any  order or injunction of any court or  governmental  body  relating to the offer,  sale, or administration  of the Service  Contracts  and such order or  injunction  is not dismissed  within  thirty  (30)  days;  or (e)  Dealer's  voluntary  bankruptcy, insolvency  or  assignment  for the benefit of  creditors.  For purposes of this Agreement, an "affiliate" of Voyager is defined as any company or entity that is a member  company of American  Bankers  Insurance  Group and an "affiliate" of a Dealer shall mean any subsidiary, parent or successor corporation of the Dealer.      7.3  Termination  With  Cause by  Dealer.  Subject  to the cure  provisions contained  herein,  Dealer may  immediately  terminate this agreement by written notice to  Voyager  in the event of (a)  material  breach of this  Agreement  by Voyager,  which material breach continues for 30 days after Voyager has received notice of the breach;  (b) gross neglect of duty,  fraud,  misappropriation,  or embezzlement by Voyager of funds owed Dealer under this  Agreement;  (c) Voyager or its  Affiliates  becoming the subject of any order or injunction of any court or  governmental  body  relating  to the sale or  administration  of the Service Contracts and such order or injunction is not dismissed within thirty (30) days; or (d) Voyager's insolvency.      7.4 Right to Cure. Both parties shall have the right to cure any event that would  provide  either party the right to  terminate  this  Agreement  for cause within  thirty (30) days after written  notice is received of the  occurrence of such event unless a shorter  period of time to cure such  occurrence is provided by this  Agreement.  Such  notice  shall  include a  specific  reference  to the provision  or  provisions  of this  Agreement  which  are  alleged  to have been breached,  a description of the event giving rise to the alleged violation,  and the action to be taken by the party  alleged  to have  violated  the  Agreement. During the cure period,  neither party shall terminate the Agreement.  Paragraph 7.2(c) and  Paragraph  7.3(b) are hereby  expressly  excluded from this right to cure.  8.   Offset. The parties hereto agree that either party may offset, at any time, any amounts  alleged to be due from the other  party  against any amounts due to the other.  Written  notice of the offset and the basis for the offset  shall be given to the other party by the party  claiming  the right of offset.  If either party is determined to have  wrongfully  asserted a right of offset,  that party shall be liable to the other party for the other party's  reasonable  attorney's fees,  costs,  expenses  incurred in challenging  the offset and interest on the offset  funds at a rate of six  percent  (6%) per annum  from the date the funds were initially due.  9.   Indemnity.      ----------       9.1 By Dealer. Dealer hereby agrees to indemnify, defend, and hold harmless Voyager,  any affiliate of Voyager,  and their respective  directors,  officers, employees,  agents,  successors,  and assigns  (collectively,  the  "indemnified parties" and  individually an "indemnified  party") from and against (i) any and all  losses,  liabilities,  costs,  and damages (or actions or claims in respect thereof) that any indemnified  party may suffer or incur insofar as such losses, liabilities,  costs, or damages (or actions or claims in respect  thereof) arise out of or are based  upon any claim  arising  out of or  relating  in any manner whatsoever to (a) the transactions of Dealer contemplated by this Agreement (but specifically  excluding  items  for  which  Dealer  is being  indemnified  under Subparagraph  9.2 and the  contractual  liabilities  payable under the terms and conditions of the Service Contracts)  including without  limitation,  the offer, sale,  or  administration  of the Service  Contracts by Dealer or its agents and employees, claims based upon misrepresentations or fraud by Dealer or its agents and employees in connection with the offer or sale of the Service Contracts, the violation  of  any  law,  statute,   regulation,  or  order  applicable  to  the transactions  contemplated  by  this  Agreement  by  Dealer  or its  agents  and employees, or claims of Contract Holders relating to repairs performed by Dealer or its agents  and  employees  pursuant  to  Service  Contracts,  (b) any act or omission of Dealer or the breach by Dealer of any covenant,  representation,  or warranty of Dealer in this Agreement,  or (c) claims of any taxing authority for taxes  owing or  alleged to be owing  with  respect  to the sale of the  Service Contracts by Dealer,  including  income taxes payable  thereon,  by Dealer other than  premium  taxes  that are the  responsibility  of and  customarily  paid by insurance  companies,  and (ii) any and all reasonable  legal and other expenses incurred by any indemnified party in connection with  investigating,  defending, or prosecuting any of the matters referred to in clause (i) above (or actions or claims in respect thereof) that result in any loss,  liability,  cost, or damage to the indemnified party.      9.2 By  Voyager.  Voyager  hereby  agrees to  indemnify,  defend,  and hold harmless  Dealer,  any  affiliate  of Dealer,  and their  respective  directors, officers,   employees,  agents,  successors,  and  assigns  (collectively,   the "indemnified  parties" and individually an "indemnified party") from and against (i) any and all losses, liabilities, costs, and damages (or actions or claims in respect thereof) that any indemnified party may suffer or incur, insofar as such losses, liabilities, costs, or damages (or actions or claims in respect thereof) arise  out of or are based  upon any claim  arising  out of or  relating  in any                                          5     manner whatsoever to the breach by Voyager of any covenant,  representation,  or warranty  of Voyager in this  Agreement;  the  obligation  of Voyager  under the Service  Contracts;  claims of any taxing authority for taxes owed or alleged to be owed by Voyager with respect to the sale of Service Contracts or the purchase of the contractual  liability policy;  and (ii) any and all reasonable legal and other  expenses   incurred  by  any   indemnified   party  in  connection   with investigating,  defending,  or  prosecuting  any of the  matters  referred to in clause (i) above (or  actions or claims in respect  thereof)  that result in any loss,  liability,  cost,  or  damage to the  indemnified  party. 10.  Effect of Termination.  If this Agreement is terminated by Voyager pursuant to Paragraph 7.2, then Voyager, in its sole discretion,  may elect to either (a) permit  Dealer  to  continue  to  perform  the  administrative  duties of Dealer specified in Paragraph 3 during the run-off of the Service  Contracts  that have not yet expired (the "Unexpired Service Contracts"), or (b) have Voyager, one of its  affiliates,  or a third party  assume the  administrative  duties of Dealer under Paragraph 3 with respect to the Unexpired Service Contracts.  If Dealer is removed  as the  administrator,  then  Dealer  agrees  to  pay to the  successor administrator,  whether it be  Voyager,  an  affiliate,  or a third  party,  the unearned  Dealer  Administrative  Compensation  computed by the pro-rata  method based on the terms of the actual unexpired Service  Contracts.  Dealer agrees to provide to Voyager or its designee such data  regarding  the Service  Contracts, and such other  information  as  Voyager  may  reasonably  require to enable the successor  administrator to service the business hereunder. If this Agreement is terminated  by Dealer  pursuant  to  Paragraph  7.1 or 7.3,  then Dealer may, in Dealer's sole discretion,  continue to perform the duties specified in Paragraph 3 during  run-off.  Whether this  Agreement is  terminated by Dealer or Voyager, Dealer may, at Dealer's sole  discretion,  continue to act as a Repair  Facility under any  applicable  Repair  Facility  Agreement  until the  expiration of the Service Contracts written hereunder unless Dealer materially breaches the Repair Facilities  Agreement or unless this Agreement has been  terminated  pursuant to Paragraph 7.2(c).       If this Agreement is terminated pursuant to Paragraph 7.1 or 7.3 by Dealer, Voyager agrees,  upon termination of this Agreement and upon Dealer's  election, to transfer the unearned Voyager Fee less the Dealer Administrative Compensation to any administrator authorized by Dealer and, if applicable,  by law to receive such fee in the state in which the administrator is domiciled.  In the event the Agreement is terminated  pursuant to Paragraph 7.1 and Dealer elects to transfer the unearned Voyager Fee to a substitute  administrator,  such transfer shall be of the unearned Voyager Fee less the Dealer Administrative Compensation and less Voyager's  retention  as defined in Exhibit D  attached  hereto.  Upon  Dealer's election,  all liability for subsequent claims, refunds or any other obligations regardless of effective or incurred date,  shall be transferred  from Voyager to an approved  assuming insurer on the effective date of such assumption.  In such event,  Voyager and its affiliates  shall be indemnified  and held harmless from any  further  liability  under  this  Agreement  or  the  Contractual  Liability Insurance Policy. 11.  Arbitration.  Unless  otherwise  agreed  to  by  Dealer  and  Voyager,  any controversy  or claim  arising out of or relating to this  Agreement,  or breach hereof, shall be submitted to arbitration in Beaumont,  Texas in accordance with the  Commercial  Arbitration  Rules  of the  American  Arbitration  Association. Voyager and Dealer shall each appoint one arbitrator within fifteen (15) days of the other party's request,  and the two arbitrators so appointed shall appoint a third  arbitrator.  If either party refuses or neglects to appoint an arbitrator within  thirty (30) days after the other  party's  request in writing,  then the other party may appoint two  arbitrators who shall appoint the third. If the two arbitrators fail to agree upon the selection of a third arbitrator within thirty (30) days of their appointment,  the third arbitrator shall be selected pursuant to the American Arbitration  Association rules. None of the arbitrators shall be an employee,  officer,  or director of either  Voyager or Dealer or any of their affiliates.  The  decision  rendered  by the  arbitrator(s)  shall  be  binding. Judgment upon the decision of the arbitrators may be entered in any court having jurisdiction  thereof.  Each party shall pay the expenses incurred by it and the one arbitrator selected by or for it, and shall equally bear the expenses of the American Arbitration Association and the third arbitrator. 12.  Confidentiality.   All  communications   from  Voyager  to  Dealer  or  any affiliate,  or  from  Dealer  to  Voyager  or any  affiliate,  pursuant  to this Agreement and all information and other material  supplied to or obtained by the other party or affiliate under this Agreement (the "Protected  Information") is, by its nature, confidential,  proprietary, material, or important information of the  applicable  party  or  affiliate  and is  intended  to be  exclusively  the knowledge of Voyager,  Dealer,  or their respective  affiliates,  as applicable, alone.  From and after the date hereof,  Voyager,  Dealer,  and their respective affiliates, as applicable,  shall not, directly or indirectly, in any individual or representative  capacity,  reveal,  divulge,  disclose, or communicate in any manner  whatsoever  to any  individual  or entity  (other than their  respective                                          6     officers,  directors,  employees,  or  consultants  who have a need to know) any Protected  Information  of the other  party or any  affiliate,  except as may be required  by  law  or  in  response  to a  subpoena  issued  by a  court  having jurisdiction in the matter, or use any Protected  Information of the other party or any affiliate  for its benefit or the benefit of any third  person.  The term "Protected  Information"  includes  any  information  of any  kind,  nature,  or description  concerning  any matter  affecting or relating to the  businesses of Voyager  or  any of its  affiliates  or  Dealer  or  any of its  affiliates,  as applicable,  including without limitation, (i) names of any customers,  clients, accounts,  agents,  or  personnel,  (ii)  financial  affairs,  (iii)  manner  of operation, (iv) strategies, advertising or marketing plans or plans of any other nature,  (v) information  contained in any data bases,  (vi) software  programs, (vii)  trade  secrets,  (viii)  confidential  information,  or (ix)  methods  of distribution.  Without regard to whether any of the foregoing would be deemed to be material or important  under  applicable  law, Dealer and Voyager each agrees that the same are material and  important  and  materially  affect the effective conduct  of the  business  of  Voyager  and its  affiliates  and  Dealer and its affiliates, as applicable. 13.  Notices.  Any notice or communication  pertaining to this Agreement must be in writing and given by depositing the same in the United States mail, addressed to the party to be notified,  postage  prepaid and  registered or certified with return receipt  requested,  by prepaid overnight  courier,  or by delivering the same in person.  Such notice shall be deemed received on the date on which it is hand-delivered  or, if mailed,  on the earlier of the date actually  received or (whether or not received) on the fifth  business day following the date on which it is so mailed. For purposes of notice, the addresses of the parties shall be:        If to Voyager:    Voyager Service Programs, Inc.                         110 W. 7th Street                         Fort Worth, Texas 76102                         Attn: Tom McCraw, First Senior Vice President       If to Dealer:     Conn Appliances, Inc.                         2755 Liberty                         Beaumont, Texas 77704                         Attn: Thomas Frank, Chairman and Chief Executive Officer  Any party may change its address for notice by written notice given to the other parties in the manner prescribed in this Paragraph.  14.  Survival.  The  provisions of this Agreement  shall survive  termination of this Agreement for a period of four (4) years after all liabilities expire under all Service Contracts covered by this Agreement.  15.  General.      --------      15.1 Entire  Contract.  This  Agreement  and the Exhibits  attached  hereto supersede all prior agreements and understandings relating to the subject matter hereof.  This  Agreement  (including  the Exhibits  attached  hereto) may not be amended other than by written agreement of the parties.      15.2 Choice of Laws.  This Agreement and the rights and  obligations of the parties hereto shall be governed, construed, and enforced in accordance with the laws of the State of Texas (excluding its conflict of laws rules).      15.3  Non-Assignment.  This  Agreement  may not be  assigned  by  Dealer or Voyager.  Any  attempted  assignment  in  violation of this  provision  shall be ineffective for all purposes.      15.4  Severability.  If any  provision  of  this  Agreement  is  held to be illegal, invalid, or unenforceable under present or future laws effective during the term hereof,  such provision shall be fully severable;  this Agreement shall be  construed  and  enforced  as if  such  illegal,  invalid,  or  unenforceable provision  had never  comprised a part  hereof;  and, the  remaining  provisions hereof  shall  remain in full force and effect and shall not be  affected by the illegal,  invalid, or unenforceable  provision or by its severance herefrom.  In lieu of such illegal, invalid, or unenforceable provision,  there shall be added automatically  as a part hereof a provision as similar in terms to such illegal, invalid, or unenforceable  provision as may be possible and be legal, valid, and enforceable.      15.5 Captions. The titles appearing before each provision of this Agreement are for  informational  purposes  only and  shall not be  construed  to limit or modify such provisions.                                          7          EXECUTED by the  respective  officers of the parties by  authority of their respective Boards of Directors, on the dates set forth below, to be effective as of the date first set forth above.                                    VOYAGER SERVICE PROGRAMS, INC.                                    By:   /s/ Mark Cooper                                       ------------------------------------------                                   Its:  Authorized Representative                                       ------------------------------------------                                   Date: 7-16-1998                                       ------------------------------------------                                    CONN APPLIANCES, INC.                                    By:   /s/ Thomas J. Frank                                       ------------------------------------------                                   Its:  Chief Executive Officer                                       ------------------------------------------                                   Date: 7-16-1998                                       ------------------------------------------  In  consideration  of the mutual promises and covenants  contained in the Dealer Agreement,   American  Bankers  Insurance  Company  hereby  guarantees  to  Conn Appliances,  Inc.,  jointly and severally  with its affiliate,  Voyager  Service Programs,  Inc.  ("Voyager"),  the  performance  by Voyager of all of  Voyager's obligations  contained in the Dealer Agreement and any and all future amendments thereto.                                     AMERICAN BANKERS INSURANCE COMPANY                                    By:   /s/ Mark Cooper                                       ------------------------------------------                                   Its:  Authorized Representative                                       ------------------------------------------                                   Date: 7-16-1998                                       ------------------------------------------                                          8                                         EXHIBIT A    Issued By:     Voyager  Service  Programs,  Inc.  ("Voyager"),  a subsidiary  of                American Bankers Insurance Group                                   SERVICE AGREEMENT       In  consideration  of the  amount  paid on this  invoice  for this  Service Agreement ("Agreement"),  and except as hereinafter provided,  Voyager will make all  necessary  repairs and  replacement  of parts for the  appliance or product identified on this invoice at the owner's address as identified on the invoice.                                TERMS AND CONDITIONS       (1)  Service shall be rendered  during normal  working hours and within the           territory  normally serviced by Voyager retained and qualified service           administrators.       (2)  This  Agreement  excludes  (a) damages  caused by spillage of liquids,           insect  infestations  or by other  improper  or  negligent  use of the           products; (b) damages caused by corrosion or rust; (c) theft or damage           caused by flood, fire,  hurricane,  tornado, or all other acts of God;           (d)  consumable  items  such  as  knobs,  cabinetry,  trim,  antennas,           software, disks, needles,  cartridges,  glass, bulbs, batteries, etc.;           (e) commercial use of the product; (f) routine cleaning of appliances,           such as air  conditioners;  (g)  Special,  consequential  or  indirect           damages,  whether by  contract,  tort,  or  negligence;  (h) repair or           replacement covered by the manufacturer's  warranty; (i) verified food           loss damages in excess of $150 on refrigerators  and $250 on freezers;           or (j) damages/repairs covered by owner's other insurance coverages.       (3)  This  Agreement  may  be  canceled  by  Voyager  for  fraud,  material           misrepresentation,  or if any  payment  is not made when due.  Voyager           shall calculate a prorata  refund,  less amounts paid for repairs made           on owner's behalf.       (4)  Owner has the right to  request in writing  the  cancellation  of this           Agreement.  Upon  cancellation,  owner  will  receive  a refund of the           unearned  prorata portion of eighty percent (80%) of the price of this           Service Agreement, less amounts paid for repairs.       (5)  This Agreement is subject to review by seller before being  considered           for renewal.       (6)  Voyager's limit of liability is the replacement value of the product.            a.   Should  Voyager  be  unable  to  repair  a  product  due to  part                unavailability,  or other  circumstances,  Voyager may choose, at                its option,  to either replace it with a product of like value, a                refurbished  product,  or credit monies towards the purchase of a                new product.            b.   If a product is replaced under the terms of this  Agreement,  the                customer may purchase a new Agreement at new product pricing.       (7)  This   Agreement   is   transferable   upon  Voyager  or  its  service           administrator receiving a written request from the original owner.            This  instrument sets forth the entire  agreement  between the parties      and no  representation,  promise or condition  not  contained  herein shall      modify its terms.  If services are  required  that are not included in this      Service Agreement, they will be provided at regular repair rates.            Voyager has retained Conn Appliances,  Inc.  ("Conn's") as its service      administrator.  Conn's provides customer  assistance at these locations and      telephone number:          Area                               Service Center Address                    Telephone           Orange-Port Arthur-Bridge City     2686 Laurel              Beaumont TX      409.735.7166      Beaumont                           2686 Laurel              Beaumont TX      409.832.9938      Lake Charles                       2678 Laurel              Beaumont TX      800.634.7118      Houston Area                       635 Blue Bell            Houston TX       281.591.6611      Houston                            635 Blue Bell            Houston TX       713.xxx.xxxx      San Antonio                        1974 S. Alamo            San Antonio TX   210.354.1000      Lafayette                          2910 Johnston St.        Lafayette LA     318.233.8427                                          EXHIBIT B                   RELEASE, TRANSFER AND INDEMNIFICATION AGREEMENT        This Release,  Transfer and Indemnification Agreement is effective this 1st day of  January,  1998 by  Conn  Appliances,  Inc.,  ("Conn"),  Voyager  Service Programs,  Inc., ("Voyager") and Voyager Property and Casualty Insurance Company ("VPC").                                     WITNESSETH:       WHEREAS,  Voyager Property and Casualty Insurance Company issued to Conn, a Service  Contract   Reimbursement  Policy  ("Policy"),   indemnifying  Conn  for contractual  liabilities  incurred  under  Conn's  Service  Contracts  with  its customers  administered by Conn (collectively referred to with Voyager's service agreements as the "Service Contacts"): and       WHEREAS,  the  parties  have  previously  entered  into  a  certain  Dealer Agreement  for the sale of Voyager  Service  Contracts  and a Deposit  Agreement dated  October  19,  1992,  and  all  amendments   and   modifications   thereto (collectively  Agreement #1), by and among Conn, Voyager,  VPC, American Bankers Insurance Company and Chase Bank of Texas National  Association  (formerly known as Texas  Commerce Bank - Beaumont  National  Association)  which  established a certain related trust account, (hereinafter, the "Trust Account").       WHEREAS, effective January 1, 1998, Conn and Voyager entered into a certain new Dealer Agreement  (Agremeent #2),  whereby Voyager issues Voyager's  Service Contracts to customers of Conn; and       WHEREAS,  pursuant to the terms and  conditions  of  Agreement  #2 and this Agreement,  Voyager  agrees  to assume  liability  for and  administer  existing Service Contracts and to issue new Service Contracts, and to release,  indemnify and hold Conn and VPC  harmless  from any further  obligations  and  liabilities under the  Deposit  Agreement,  the Policy  and the  previously  issued  Service Contracts; and       WHEREAS  Conn  desires  to  release,  indemnify  and hold  Voyager  and VPC harmless from any obligation under Agreement #1 and Policy.       NOW,  THEREFORE,  in  consideration of the mutual  consideration  contained herein, the receipt and sufficiency thereof being duly acknowledged, the parties agree as follows:       (1)  Voyager hereby assumes the  liabilities  under the Service  Contracts, except for any renewals  thereof  issued by Conn prior to the effective  date of Agreement #2. The duties and  obligations of the parties  regarding such Service Contracts  are  hereby and  hereinafter  subject  to the terms of  Agreement  #2 between Conn and Voyager dated January 1, 1998.       (2)  In  consideration  of the  assumption  of such  liability  and duty of administration,  the parties to this  Agreement do hereby agree to terminate the Deposit  Agreement  and  disburse  the Trust  Account  balance  in the amount of $4,900,000 to Conn and the remainder to Voyager. The balance remitted to Voyager shall be consider Voyager Fees and included in the calculation of the Experience Refund under Agreement #2.       (3)  Each party shall  indemnify and hold the other party harmless from any and all loss,  penalties or costs  incurred by it when it is made a party to any regulatory action, lawsuit or threat of either because of any act or omission of the other  party  resulting  from or  growing  out of  unauthorized,  negligent, fraudulent,  or  unfaithful  acts or omissions by the other party in  connection with  Agreement  #1 or Policy.  Costs  shall  include,  but are not  limited to, attorney's fees, court costs,  expenses,  settlement costs, fines, judgments and all damage awards whether actual, compensatory, punitive or otherwise.       (4)  The  parties  further  warranty  that,  by  virtue of  payment  of the foregoing  consideration,  neither party nor any of their successors and assigns shall have any claim or right  against  the other or under or  pursuant  to said Policy and Agreement #1 after the  effective  date of agreement #2 and expressly agrees  that the said  Deposit  Agreement  and  Policy is  terminated  as of the effective  date of this agreement and there is no liability for any claims on or after the date of this  agreement  other  than  those as  specified  herein  and occurring after the effective date of Agreement #2.       (5)  The  parties  acknowledge  that  they have  read and  understand  this Release,  Transfer  and  Indemnification  Agreement;  that  they  have  received independent  legal  advise  from  their  attorney  in regard to its  rights  and obligations  regarding the matters released and parties indemnified herein; that this Release, Transfer and Indemnification Agreement shall not be subject to any claim of mistake of fact and that the  consideration  received  with  respect to this  Release,   Transfer  and   Indemnification   Agreement   constitutes  full satisfaction of all obligations and liabilities.       (6)  The Parties understand that this Release, Transfer and Indemnification Agreement  shall be interpreted  and governed by the laws of the State of Texas, that it shall  inure to the benefit of and be binding  upon Conn,  VPC and their successors and assigns.           (7)  The parties represent that this Release,  Transfer and Indemnification Agreement  does  not  violate  articles  of  incorporation,   by-laws  or  other applicable regulations or resolutions,  and that it has taken any and all action as may be required to have the officers executing this instrument  authorized to execute it on behalf of the corporation.       IN WITNESS WHEREOF,  the Parties have executed duplicate  originals of this Release,  Transfer  and  Indemnification  Agreement  and affixed its  respective corporate seal as of the date stated below.                          VOYAGER PROPERTY AND CASUALTY INSURANCE COMPANY                          By:                         -------------------------------------------------------                         Its:                         -------------------------------------------------------                         -------------------------------------------------------                         Date:                         -------------------------------------------------------                           VOYAGER SERVICE PROGRAMS, INC.                         By:                         -------------------------------------------------------                         Its:                         -------------------------------------------------------                         -------------------------------------------------------                         Date:                         -------------------------------------------------------                           CONN APPLIANCES, INC.                          By:                         -------------------------------------------------------                         Its:                         -------------------------------------------------------                         -------------------------------------------------------                         Date:                         -------------------------------------------------------                                          EXHIBIT C   Service  Contract  Reimbursement  Insurance  Policy  issued to  Voyager  Service Programs, Inc. by Voyager Property & Casualty Insurance Company effective April, 1, 1995 and Service Contract Reimbursement  Insurance Policy issued from Voyager Guaranty  Insurance Company to Voyager Service Programs,  Inc. effective January 1, 1991  until  April 1, 1995 and  reinsured  from  Voyager  Guaranty  Insurance Company  to  Voyager  Property  &  Casualty  Insurance  Company  by  Reinsurance Agreement  effective January 1, 1993, Conn Appliances,  Inc. being an additional named  insured  under both policies and the agreement by signature of authorized representative  below. Both policies are further amended and endorsed to provide coverage  for  verified  food loss  damages  in excess of $150 on  refrigerators and$250 on freezers.     /s/ Mark Cooper - ------------------------------------- Authorized Representative                                          EXHIBIT D  This Exhibit D attached to that certain Dealer  Agreement by and between Voyager Service Programs, Inc. and Conn Appliances, Inc., effective January 1, 1998.                             EXPERIENCE REFUND COMPUTATION  Step 1. In accordance with Paragraph 5.5,  Voyager shall calculate an Experience Refund which shall be on a cumulative inception to date basis as follows:       (a)  From the net written Voyager Fees, the unearned Voyager Fees as of the end of the applicable Calculation Period shall be subtracted.  The amount of the "unearned Voyager Fees" shall be calculated using the pro rata method,  over the term of the individual  Service  Contracts  beginning from the date of sale. The resulting number is the earned Voyager Fees.       (b)  From the earned Voyager Fees, the premium taxes,  Voyager's  retention of 10% and the Dealer  Administrative  Compensation  associated  with the earned Voyager Fees shall be subtracted.  Provided, however, no premium taxes or Dealer Administrative  Compensation  on the funds  transferred to Voyager  pursuant tot Exhibit B shall be subtracted  from the earned  Voyager Fees for the purposes of computing the Experience Refund.       (c)  From the amount  calculated in (b), the paid Service  Contract Losses, claims-related expenses and ending claims reserves shall be subtracted.  Step. 2. From the sum determined  under Step 1, subtract any Experience  Refunds previously paid for prior Calculation Periods.  The positive or negative amount calculated in accordance with these steps is the "Experience  Refund" for the applicable  Calculation  Period to in  Subparagraph 5.5.    EX-10.19.1 3 a5112243ex10-191.txt EXHIBIT 10.19.1                                                                    Exhibit 10.19.1                          AMENDMENT #1 TO DEALER AGREEMENT                        ASSIGNMENTS, CONFIDENTIALITY, T&Cs       THIS   AMENDMENT   #1  (herein   "Amendment")   to  the  Dealer   Agreement ("Agreement")  is made this ___ day of July, 2005 with an effective date of July 1, 2005  ("Effective  Date") by and among Conn Appliances,  a Texas  corporation ("Conn"), CAI, L.P., a Texas limited partnership ("CAILP"),  Conn and CAI having their principal places of business at 3295 College Street, Beaumont, Texas 77701 (except where otherwise noted,  Conn and CAI collectively  herein referred to as "Dealer"),  Federal Warranty Service Corporation, an Illinois corporation having its principal place of business at 260 Interstate North Circle, SE, Atlanta,  GA 30339  ("Federal"),  and Voyager Service Programs,  Inc., a Florida  corporation having its  principal  place of  business at 11222  Quail  Roost  Drive,  Miami, Florida 33157 ("Voyager").  WHEREAS,  Dealer  and  Voyager  entered  into a  "Dealer  Agreement"  stated  as effective  January 1, 1998 (the  "Agreement")  concerning  the sale by Dealer of Service Contracts covering certain specified  merchandise sold by Dealer,  under which Service  Contracts  Voyager was the obligor,  and which Service  Contracts were administered by Dealer; and  WHEREAS,  The  parties  desire  for  Federal  to assume the rights and duties of Voyager  under  the  Agreement,  and  to  provide  for  the  replacement  of the contractual  liability  insurance  policy by a different  insurer  affiliate  of Federal; and  WHEREAS,  The  parties  desire for CAILP to assume the rights and duties of Conn under the Agreement.  NOW THEREFORE,  in  consideration of the mutual covenants and promises set forth herein and in the Agreement, the parties do hereby agree as follows:  1.   Voyager  hereby  assigns,  and Federal hereby  assumes,  all of the rights,      duties and obligations of Voyager under the Agreement.  2.   Conn hereby assigns,  and CAILP hereby assumes,  all of the rights,  duties      and obligations of Dealer under the Agreement.  3.   Exhibit A of the Agreement is hereby replaced by the attached  Amendment #1      Exhibit A. Dealer shall implement the new Service  Contract forms set forth      in Exhibit A, and shall cease  printing,  offering,  selling or issuing any      other Service  Contract  forms, no later than the date selected by Federal,      which shall not be sooner than ninety (90) days after the effective date of      this Amendment #2, and shall  reasonably  reflect the time needed by Dealer      to complete  such  implementation.  Dealer shall  provide  Federal at least      thirty (30) days' notice prior to the actual  implementation  date selected      by Dealer.  Dealer shall  destroy all Service  Contract  forms which do not      comply  with the  attached  Exhibit  A not  later  than  thirty  (30)  days      following the actual implementation date herein referenced.  4.   All references within the Agreement to "Voyager,"  excluding  references to      "Voyager Property & Casualty  Insurance  Company" but including  references      within  other  terms  such as  "Voyager  Fee"  which  incorporate  the name      "Voyager," are hereby changed to "Federal."  5.   Paragraph  13  Notices of the  Agreement,  is hereby  amended  to  indicate      Federal's and Dealer's addresses for notices as:       If to Federal:    Federal Warranty Service Corporation                        260 Interstate North Circle, SE,                        Atlanta, Georgia 30339-2110                        Attn: President                         With copy to:                        American Bankers Insurance Company of Florida                        11222 Quail Roost Drive                        Miami, Florida 33157-6596                        Attn: PPP Channel Attorney                                                                                  1          If to Dealer:     CAI, L.P.                        3295 College Street                        Beaumont, Texas 77701                        Attn: Mr. Thomas Franks  6.   All  references  within  the  Agreement  to  "Voyager  Property  & Casualty      Insurance  Company"  and  "VP&C" are hereby  changed to  "American  Bankers      Insurance Company" and "ABIC" respectively.  7.   Not later than the  implementation  date  referenced in Paragraph 2 of this      Amendment  #1,  Federal shall obtain a  replacement  contractual  liability      insurance policy from American Bankers Insurance  Company of Florida.  Upon      issuance  of the new  American  Bankers  policy,  Dealer  agrees  that  the      previous  policy issued by Voyager  Property & Casualty  Insurance  Company      shall be  cancelled,  however the previous  policy will continue to provide      coverage  for  Voyager-obligor  Service  Contracts  issued  prior  to  such      cancellation.  8.   The  "Confidentiality  and  Non-Disclosure  Agreement"  attached  hereto as      Amendment  #1 Exhibit B, shall be executed  by the parties and  attached to      and made part of the Agreement as Exhibit E.   IN WITNESS HEREOF, the parties have signed this Amendment effective as of the date first above written.  Voyager Service Programs, Inc.            Conn Appliances, Inc.  By:  /s/ Joe Erderman                     By:   /s/ David Atnip 7/21/05    ----------------------------------         ----------------------------------  Title:  Vice President                    Title: Treasurer       -------------------------------           --------------------------------  Federal Warranty Service Corporation                     CAI, L.P.  By:  /s/ Joe Erderman                     By:  /s/ David Atnip 7/21/05    ----------------------------------        -----------------------------------  Title:  Vice President                    Title: Treasurer       -------------------------------           -------------------------------                                                                                  2                       AMENDMENT #1 EXHIBIT A (Agreement Exhibit A)                           SAMPLE SERVICE CONTRACT FORM                                  SERVICE AGREEMENT       In  consideration  of the  amount  paid on the  invoice  for  this  Service Agreement  ("Agreement"),  and except as hereinafter provided,  Federal Warranty Service Corporation will make all necessary repairs and replacement of parts for the appliance or product  identified  on this invoice at the owner's  address as identified  on  the  invoice.  Pre-existing  conditions  are  included  in  this Agreement. This Agreement is not a contract of Insurance.                                TERMS AND CONDITIONS       (1)  Service shall be rendered  during normal  working hours and within the           territory  normally  serviced by Federal Warranty Service  Corporation           retained and qualified service administrators.       (2)  This  Agreement  excludes  (a) damages  caused by spillage of liquids,           failure to maintain proper operating fluid levels, insect infestations           or by other  improper or negligent  use of the  products;  (b) damages           caused by  corrosion  or rust;  (c)  theft or damage  caused by flood,           fire,  hurricane,  tornado,  or all other acts of God; (d)  consumable           items  such as knobs,  cabinetry,  trim,  antennas,  software,  disks,           needles, cartridges, glass, bulbs, belts, blades, tires, oil, filters,           spark plugs,  batteries,  etc.; (e) commercial use of the product; (f)           routine  cleaning and  maintenance of products,  as detailed in owners           manual,  such as air conditioners  and lawn and garden  products;  (g)           Special, consequential or indirect damages, whether by contract, tort,           or negligence; (h) repair or replacement covered by the manufacturer's           warranty;  (i)  verified  food  loss  damages  in  excess  of $ 150 on           refrigerators and $ 250 on freezers;  (j)  damages/repairs  covered by           owner's  other  insurance  coverages;  or (k) use of the  product in a           manner which would void the  manufacturer's  warranty  before or after           the warranty period.       (3)  Owner has the  right at any time to  request  in  writing  to  Federal           Warranty Service  Corporation or its designated service  administrator           the  cancellation of this  Agreement.  Owner may return this Agreement           within  twenty (20) days of the date this  Agreement  was  provided to           them,  or within ten (10) days if the  Agreement  was delivered at the           time of sale. If no claim was made, the Agreement is void and the full           purchase price will be refunded.  A penalty fee of ten (10) percent of           the amount  outstanding  per month on a refund that is not made within           forty-five (45) days will be paid.  These provisions apply only to the           original  purchaser of the  Agreement  and will not be extended to any           additional owners for the product. In the event the seller cancels the           Agreement,  a written  notice will be mailed to the last known address           at least five (5) days prior to  cancellation,  which  shall state the           effective  date of  cancellation  and  the  reason  for  cancellation.           However,  prior notice is not required if the reason for  cancellation           is  nonpayment  of the  provider  fee,  a  material  misrepresentation           relating to the covered  property or its use, or a substantial  breach           of duties  relating  to the  covered  product  or its use.  Seller may           cancel this  Agreement  at any time and a refund of 100% of the amount           paid will be made to the owner.  Any  refunds  made by Seller  will be           less the amounts paid on the owner's behalf for repairs.       (4)  Our  obligations  under this  Agreement are guaranteed by an insurance           policy issued by American Bankers Insurance  Company of Florida.  If a           covered  claim is not paid within  sixty (60) days after proof of loss           has been  filed,  you may  file a claim  directly  with the  Insurance           Company. Please call 1-800-842-2244.       (5)  This Agreement is subject to review by seller before being  considered           for renewal.       (6)  Federal  Warranty Service Corp's limit of liability is the replacement           value of the product.            a.   Should Federal Warranty Service Corporation be unable to repair a                product  due to  part  unavailability,  or  other  circumstances,                Federal Warranty Service  Corporation may choose,  at its option,                to either  replace it with a product of like value, a refurbished                product, or credit monies towards the purchase of a new product.            b.   If a product is replaced under the terms of this Agreement, the               customer may purchase a new Agreement at new product pricing.                                                                                  3          (7)  This  Agreement  is  transferable   upon  Federal   Warranty   Service           Corporation or its service  administrator  receiving a written request           from the original owner.                 This  instrument  sets forth the  entire  agreement  between  the           parties and no  representation,  promise or  condition  not  contained           herein shall modify its terms.  If services are required  that are not           included in this Service  Agreement,  they will by provided at regular           repair rates.                 Federal  Warranty  Service   Corporation  has  retained  CAI,  LP      ("Conn's"),   as  its  service  administrator.   Conn's  provides  customer      assistance at these locations and telephone numbers:          Area                             Service Center Address                      Telephone          Dallas      Corpus Christi      Orange-Port Arthur-Bridge City   2686 Laurel,             Beaumont ,TX       409 735 7166      Beaumont                         2686 Laurel,             Beaumont ,TX       409 832 9938      Lake Charles                     2678 Laurel,             Beaumont, TX       800 634 7118      Houston Area                     635 Blue Bell,           Houston, TX        281 591 6611      San Antonio                      1974 S. Alamo,           San Antonio, TX    210 354 1000      Lafayette                        2910 JohnstonSt,         Lafayette, LA      318 233 8427                                  ARBITRATION PROVISION                               ---------------------       READ THE FOLLOWING ARBITRATION PROVISION ("PROVISION") CAREFULLY. IT LIMITS      CERTAIN OF YOUR RIGHTS,  INCLUDING  YOUR RIGHT TO OBTAIN  RELIEF OR DAMAGES      THROUGH COURT ACTION.       As used in this  Provision,  "You" and  "Your"  mean the  person or persons      named in this [Service  Agreement],  and all of his/her  heirs,  survivors,      assigns  and  representatives.  And,  "We" and "Us" shall mean the  Obligor      identified  above  and  shall  be  deemed  to  include  all of its  agents,      affiliates,  successors and assigns, and any retailer or distributor of its      products,  and all of the dealers,  licensees,  and employees of any of the      foregoing entities       Any and all claims,  disputes,  or controversies  of any nature  whatsoever      (whether in contract, tort or otherwise,  including statutory,  common law,      fraud (whether by  misrepresentation  or by omission) or other  intentional      tort,  property,  or equitable  claims)  arising out of, relating to, or in      connection  with  (1)  this  [Service  Agreement]  or  any  prior  [Service      Agreement],  and  the  purchase  thereof;  and  (2)  the  validity,  scope,      interpretation,  or  enforceability  of  this  Provision  or of the  entire      Agreement  ("Claim"),  shall be  resolved by binding  arbitration  before a      single  arbitrator.  All arbitrations shall be administered by the American      Arbitration Association ("AAA") in accordance with its Expedited Procedures      of the  Commercial  Arbitration  Rules of the AAA in effect at the time the      Claim is filed. The terms of this Provision shall control any inconsistency      between  the AAA's Rules and this  Provision.  You may obtain a copy of the      AAA's Rules by calling (800) 778-7879. Upon written request We will advance      to You either all or part of the fees of the AAA and of the arbitrator. The      arbitrator  will  decide  whether You or We will be  responsible  for these      fees. The arbitrator  shall apply relevant  substantive  law and applicable      statute of limitations and shall provide written, reasoned findings of fact      and  conclusions of law. This Provision is part of a transaction  involving      interstate commerce and shall be governed by the Federal Arbitration Act, 9      U.S.C. ss. 1 et seq. If any portion of this Arbitration Provision is deemed      invalid or unenforceable, it shall not invalidate the remaining portions of      the Arbitration  Provision.  This Arbitration  Provision shall inure to the      benefit of and be binding on You and Us and its Provision shall continue in      full force and effect subsequent to and  notwithstanding  the expiration of      termination of this [Service Agreement].       You agree that any  arbitration  proceeding will only consider Your Claims.      Claims by, or on behalf of, other individuals will not be arbitrated in any      proceeding that is considering Your Claims.       You and We Understand and agree that because of this arbitration  PROVISION      neither  you nor us will have the right to go to court  except as  provided      above or to have a jury trial or to participate as any member of a class of      claimants pertaining to any claim.                                                                                  4          THIS CONTRACT PROVIDES LIMITED SERVICE FOR REASONABLE REPAIR OR REPLACEMENT      TO SPECIFICALLY DESCRIBED ITEMS.       THIS SERVICE CONTRACT IS INCLUSIVE OF THE MANUFACTURER'S  WARRANTY; IT DOES      NOT  REPLACE  THE  MANUFACTURER'S   WARRANTY,   BUT  DOES  PROVIDE  CERTAIN      ADDITIONAL BENEFITS DURING THE TERM OF THE MANUFACTURER'S WARRANTY.       Notice for Texas residents:  If YOU have complaints or questions  regarding      this  AGREEMENT,  YOU may contact the Texas  Department  of  Licensing  and      Regulation at the following address and telephone number:  Texas Department      of Licensing and Regulation,  Post Office Box 12157,  Austin,  Texas 78711;      512-463-6599 or 800-803-9202.             To learn more  about how  Federal  Warranty  Service  Corporation,  an      Assurant Solutions company, uses your information, please visit our website      at www.assurantsolutions.com                                                                                  5                       AMENDMENT #1 EXHIBIT B (Agreement Exhibit E)                   CONFIDENTIALITY AND NON-DISCLOSURE AGREEMENT       THIS  CONFIDENTIALITY  AND NON-DISCLOSURE  [AND JOINT MARKETING]  AGREEMENT ("Agreement") is effective  ______,  200__ between Conn Appliances and CAI, L.P. (Conn and CAI collectively the "Producer"), having a principal place of business at 3295 College Street,  Beaumont,  Texas 77701,  and Federal  Warranty  Service Corporation  ("FWSC"),  having a principal  place of business at 260  Interstate North Circle, Atlanta, Georgia 30339.       A.   FWSC and  Producer  engage in a  business  relationship  that has been           memorialized in certain contract(s) (the "Contract")  executed by both           parties.  The Contract may involve the exchange of confidential and/or           proprietary information.       B.   The  Gramm-Leach-Bliley  Act of 1999  (Public Law  106-102,  113 Stat.           1138),  as it may be amended from time to time (the "GLB Act") and the           regulations  promulgated  thereunder  impose  certain  obligations  on           financial   institutions  with  respect  to  the  confidentiality  and           security of the customer data of such financial institutions.       C.   Without  admitting  any  applicability  of the GLB Act to the business           conducted by and between the  parties,  the parties wish to enter into           this Agreement to supplement the  obligations of the parties set forth           in the  Contract  in  order  to  comply  with  the  GLB  Act  and  the           regulations promulgated thereunder.       NOW,  THEREFORE,  in consideration of the covenants and promises  contained herein, Producer and FWSC agree as follows:  1.   Confidential Information.  "Confidential Information" of a party shall mean      and include information about hardware, software, screens,  specifications,      designs,  plans,  drawings,   data,  prototypes,   discoveries,   research,      developments,  methods, processes,  procedures,  improvements,  `Know-how',      compilations,  market research,  marketing  techniques and plans,  business      plans and strategies,  customer names and all other information  related to      customers,   including   without   limitation   any   "nonpublic   personal      information"  as  defined  under  the GLB Act and  regulations  promulgated      thereunder,  price lists,  pricing  policies and financial  information  or      other  business  and/or  technical  information  and  materials,  in  oral,      demonstrative,   written,   graphic  or  machine-readable  form,  which  is      unpublished,  not  available to the general  public or trade,  and which is      maintained as confidential  and  proprietary  information by the disclosing      party for  regulatory,  customer  relations,  and/or  competitive  reasons.      Confidential   Information   shall  also  include  such   confidential  and      proprietary  information or material  belonging to a disclosing party of or      to which the other  party may obtain  knowledge  or access  through or as a      result  of  the  performance  of  its   obligations   under  the  Contract.      Confidential  Information  also includes any  information  described  above      which the  disclosing  party has obtained in confidence  from another party      who treats it as proprietary or designates it as Confidential  Information,      whether or not owned or developed by the disclosing party.  Notwithstanding      the foregoing,  Confidential  Information does not include aggregate claims      experience data and other actuarial  calculations resulting from Producer's      service  contract  program,  provided  such  data and  calculations  do not      include and cannot in any manner be matched to individual customer-specific      data  including  but not limited to names,  addresses,  telephone  numbers,      contract  numbers,   individual  claim  records,  or  individual  complaint      records.  2.   Exceptions.      -----------       (a)  Notwithstanding  anything to the contrary herein,  neither party shall           have any obligation  with respect to any  Confidential  Information of           other party,  or any portion  thereof,  which the receiving  party can           establish by competent  proof  (including,  but not limited to, ideas,           concepts, `Know-how' techniques, and methodologies); (i) is or becomes           generally known to companies engaged in the same or similar businesses           as the parties hereto on a non-confidential basis, through no wrongful           act of the receiving party; (ii) is lawfully obtained by the receiving                                                                                  6               party from a third  party  which has no  obligation  to  maintain  the           information  as  confidential  and which  provides it to the receiving           party  without  any   obligation  to  maintain  the   information   as           proprietary or  confidential;  (iii) was known prior to its disclosure           to the receiving  party without any obligation to keep it confidential           as evidence by tangible  records  kept by the  receiving  party in the           ordinary course of its business;  (iv) is  independently  developed by           the  receiving  party  without  reference  to the  disclosing  party's           Confidential  Information;  or (v) is the subject of written agreement           whereby the disclosing party consents to the use or disclosure of such           Confidential Information.       (b)  If a  receiving  party or any of its  representative  shall be under a           legal  obligation in any  administrative  or judicial  circumstance to           disclose any Confidential Information,  the receiving party shall give           the  disclosing  party prompt  notice  thereof so that the  disclosing           party may seek a protective  order  and/or  waiver,  if the  receiving           party or any such representative shall, in the opinion of its counsel,           stand  liable for  contempt  or suffer  other  censure or penalty  for           failure to disclose, disclosure pursuant to the order of such tribunal           may be made  by the  receiving  party  or its  representative  without           liability hereunder.  3.   Disclosure and Protection of Confidential Information.      ------------------------------------------------------       (a)  Each party warrants the disclosure of Confidential  Information to the           other party is in accordance with applicable state and federal law and           the party's own stated privacy policies.  Each party agrees not to use           Confidential Information of the other party for any purpose other than           the  fulfillment of such party's  obligations to the other party under           the Contract.  All Confidential  Information relating to a party shall           be held in  confidence by the other party to the same extent and in at           least the same  manner such party  protects  its own  confidential  or           proprietary  information.   Neither  party  shall  disclose,  publish,           release, transfer or otherwise make available Confidential Information           of the other  party in any form to, or for the use or benefit  of, any           person or entity without the other party's consent.  Each party shall,           however,  be  permitted  to disclose  relevant  aspects of the party's           Confidential Information to its officers, agents, subcontractors,  and           employees to the extent that such  disclosure is reasonably  necessary           for the performance of its duties and  obligations  under the Contract           and this Agreement  provided such  disclosure is not prohibited by the           "GLB Act," the regulations  promulgated thereunder or other applicable           law;  provided,  however,  that such party  shall take all  reasonable           measure to ensure that Confidential  Information of the other party is           not disclosed or duplicated in  contravention of the provisions of the           Contract and this Agreement by such officers,  agents,  subcontractors           and employees.  Each party further agrees promptly to advise the other           party in writing of any misappropriation,  or unauthorized  disclosure           or use by any person of Confidential Information which may come to its           attention  and to take all  steps  reasonably  requested  by the other           party to limit,  stop or otherwise  remedy such  misappropriation,  or           unauthorized  disclosure  or use.  If the  GLB  Act,  the  regulations           promulgated  thereunder  or other  applicable  law now or hereafter in           effect   imposes  a  higher   standard  of   confidentiality   to  the           Confidential  Information,   such  standard  shall  prevail  over  the           provisions of this Section 3.       (b)  Neither party will make any more copies of the other  party's  written           or  graphic  materials  containing  Confidential  Information  than is           necessary for its use under the terms of the  Contract,  and each such           copy shall be marked  with the same  proprietary  notices as appear on           the originals.       (c)  Each party shall, at a minimum,  protect the Confidential  Information           of  the  other  party  in the  same  manner  as it  protects  its  own           Confidential Information.       (d)  Each party  shall  develop,  implement  and  maintain a  comprehensive           written   information   security   program  to  protect   Confidential           Information   ("Security   Program")  that  includes   administrative,           technical  and  physical  safeguards   appropriate  to  its  size  and           complexity and nature and scope of its  activities in compliance  with           the GLB Act,  Section 501(b) and regulations  promulgated  thereunder.           The  objective of each such  Security  Program  shall be to insure the           security and  confidentiality  of  Confidential  Information,  protect           against  any  anticipated  threats  or  hazards  to  the  security  or           integrity  of   Confidential   Information  and  protect  against  the           unauthorized  access to or use of Confidential  Information that could                                                                                  7               result in substantial harm or inconvenience to any customer.            Each  party  will  ensure  that any third  party to whom it  transfers           Confidential  Information  enters  into an  agreement  to protect  the           confidentiality  and security of Confidential  Information in the same           manner as required by this  Agreement and in  compliance  with the GLB           Act and regulations promulgated thereunder.            Upon  written  request,  a party  shall  provide  to the  other  party           information,   such  as  audits   or   summaries   of  test   results,           demonstrating the effectiveness of its Security Program.  4.   Term; Return of Materials. The term of this Agreement shall commence on the      effective  date first written  above.  For as long as a party  continues to      possess or control  the  Confidential  Information  furnished  by the other      party, and for so long as the Confidential Information remains unpublished,      confidential and legally  protectable as the  intellectual  property of the      disclosing party, except as otherwise specified herein, the receiving party      shall   make  no  use  of   such   Confidential   Information   whatsoever,      notwithstanding  the expiration of the Agreement.  The parties  acknowledge      their  understanding  that the  expiration of this  Agreement  shall not be      deemed to give  either  party a right or  license  to use or  disclose  the      Confidential  Information  of the other party.  Any materials or documents,      including copies thereof, which contain Confidential Information of a party      shall be  promptly  returned  to such party upon the  request of such party      except that copies may be  retained,  if  required,  for legal or financial      compliance  purposes.  Upon termination or expiration of the Contract,  all      materials  or   documents,   including   copies   thereof,   which  contain      Confidential  Information  of a party  shall be  promptly  returned to such      party or  destroyed  except that copies may be retained,  if required,  for      legal or financial compliance purposes.  5.   Injunctive Relief. It is agreed that the unauthorized  disclosure or use of      any Confidential  Information may cause immediate or irreparable  injury to      the party providing the Confidential  Information,  and that such party may      not be adequately  compensated  for such injury in monetary  damages.  Each      party  therefore  acknowledges  and agrees that,  in such event,  the other      party shall be  entitled  to seek any  temporary  or  permanent  injunctive      relief necessary to prevent such unauthorized  disclosure or use, or threat      of  disclosure or use, and consents to the  jurisdiction  of any federal or      state  court of  competent  jurisdiction  sitting in  Atlanta,  Georgia for      purposes  of any suit  hereunder  and to  service  of  process  therein  by      certified or registered mail, return receipt requested.  6.   Amendments.  This  Agreement  shall  not be  amended,  modified,  released,      discharged,  abandoned or otherwise terminated prior to the expiration,  in      whole or in part, except by written agreement signed by the parties hereto.  7.   Severability.  In the event that any provisions, or any portion thereof, of      this  Agreement  is  determined  by  competent  judicial,   legislative  or      administrative  authority to be prohibited by law, then such  provisions or      part thereof shall be ineffective  only to the extent of such  prohibition,      without invalidating the remaining provisions of the Agreement.  8.   Full Force and Effect.  This  Agreement is only intended to supplement  any      existing  obligation  of the  parties  as set  forth in the  Contract  with      respect to Confidential  Information.  To the extent that the provisions of      the Contract  impose a higher standard of  confidentiality  with respect to      the  Confidential  Information,   such  standard  shall  prevail  over  the      provisions of this Agreement.  Except as supplemented  herein, the Contract      remains in full force and effect.                              [SIGNATURE PAGE FOLLOWS]                                                                                  8     IN WITNESS WHEREOF,  the parties have executed this Agreement,  and intend it to be effective as of the Effective Date, if set forth herein, or upon execution by both parties.  Agreed:                                   Agreed:  Federal Warranty Service Corp               Conn Appliances, Inc.      /s/ Joe Erdeman - ------------------------------------        ------------------------------------  By:                                         By: /s/ David R. Atnip 7/21/2005    ----------------------------------          ---------------------------------      (Signature)                (Date)        (Signature)               (Date)  Name: /s/ Joe Erdeman                       Name: David R. Atnip (Print) (Print)      --------------------------------            -------------------------------  Title: President                            Title: Treasurer       -------------------------------            -------------------------------                                              CAI, L.P.                                               ------------------------------------                                               By: /s/ David R. Atnip 7/21/2005                                                ---------------------------------                                             (Signature)             (Date)                                              Name: David R. Atnip         (Print)                                                  -------------------------------                                              Title: Treasurer                                                   ------------------------------                                                                                  9    EX-10.19.2 4 a5112243ex10-192.txt EXHIBIT 10.19.2                                                                    Exhibit 10.19.2                          AMENDMENT #2 TO DEALER AGREEMENT                          TERM AND TERRITORY OF AGREEMENT       THIS AMENDMENT #2 (herein "Amendment") to the Dealer Agreement ("Agreement") is made this ___ day of July, 2005 with an effective date of July 1, 2005 ("Effective Date") by and among Conn Appliances, Inc., a Texas corporation ("Conn"), CAI, L.P., a Texas limited partnership ("CAILP"), having their principal places of business at 3295 College Street, Beaumont, Texas 77701 (except where otherwise noted, Conn and CAILP collectively herein referred to as "Dealer"), Federal Warranty Service Corporation, an Illinois corporation having its principal place of business at 260 Interstate North Circle, SE, Atlanta, GA 30339 ("Federal"), and Voyager Service Programs, Inc., a Florida corporation having its principal place of business at 11222 Quail Roost Drive, Miami, Florida 33157 ("Voyager").  WHEREAS, Dealer and Voyager entered into a "Dealer Agreement" stated as effective January 1, 1998 (the "Agreement") concerning the sale by Dealer of Service Contracts covering certain specified merchandise sold by Dealer, under which Service Contracts Voyager was the obligor, and which Service Contracts were administered by Dealer; and  WHEREAS, "Amendment #1" to the Agreement substituted Federal in place of Voyager as a party to the Agreement, for purposes of prospective business under the Agreement, and CAILP in place of Conn for purposes of the Agreement, amended Exhibit A and added Exhibit E; and  WHEREAS, The parties desire to provide for additional amendments to the Agreement.   NOW THEREFORE, in consideration of the mutual covenants and promises set forth herein and in the Agreement, the parties do hereby agree as follows:  1.   Paragraph 6 Term of the Agreement is hereby deleted in its entirety and      replaced with the following:       "6. Term. The term of this Agreement shall be four (4) years commencing on      July 1, 2005 unless terminated as provided in Paragraph 7. Notwithstanding      the foregoing and in the absence of any other mutual agreement by the      parties, this Agreement shall be extended automatically for two (2) years      or such other period as agreed by the parties if, at the end of the term,      the Experience Refund, as described in Section 5.5 and calculated in      accordance with Exhibit D, is not projected to be a positive or zero amount      over the remaining term of all unexpired Service Contracts then in-force.      An automatic extension required by this Paragraph 6 shall end upon      restoration of a positive or zero projected Experience Refund over the      remaining term of all unexpired Service Contracts then in-force. Any such      automatic extension shall not affect the parties' rights to terminate for      cause as set forth in Paragraph 7. Notwithstanding the foregoing, in lieu      of or to reduce the duration of any automatic extension required by this      part, Dealer shall be afforded the opportunity to cure any projected      negative amounts by methods other than by the automatic extension of the      term.."  2.   Paragraph 7.1 Termination Without Cause of the Agreement is hereby deleted      in its entirety, and the remaining portions of Paragraph 7, and any      references to Paragraph 7 within the Agreement shall be renumbered      accordingly.  3.   Paragraph 7.1 Termination With Cause by Federal of the Agreement, as      renumbered by Paragraph 2 of this Amendment, is hereby deleted in its      entirety and replaced with the following:       "7.1. Termination With Cause by Federal. Subject to the cure provisions      contained herein, Federal may immediately terminate this agreement by      written notice to Dealer in the event of (a) Dealer's violation of any      applicable law relating to the offer, sale, or administration of the      Service Contracts and such violation continues for fifteen (15) days after      Dealer has received notice of the violation; (b) material breach of this      Agreement by Dealer, which material breach continues for thirty (30) days      after Dealer has received notice of the breach; (c) gross neglect of duty,      fraud, misappropriation, or embezzlement by Dealer or its affiliates of      funds owed to Federal or any of its affiliates under this Agreement or any      other agreement with Dealer or any of its affiliates; (d) Dealer or its      affiliates becoming the subject of any order or injunction of any court or                                                                                  1          governmental body relating to the offer, sale or administration of the      Service Contracts and such order or injunction is not dismissed within      thirty (30) days; (e) Dealer's voluntary bankruptcy, insolvency or      assignment for the benefit of creditors. For purposes of this Paragraph, an      "affiliate" of a party shall mean any subsidiary, parent or successor      corporation or partnership of the party."  4.   Paragraph 7.2 Termination With Cause by Dealer of the Agreement, as      renumbered by Paragraph 2 of this Amendment, is hereby deleted in its      entirety and replaced with the following:       "7.2. Termination With Cause by Dealer. Subject to the cure provisions      contained herein, Dealer may immediately terminate this agreement by      written notice to Federal in the event of (a) Federal's violation of any      applicable law relating to the offer, sale, or administration of the      Service Contracts and such violation continues for fifteen (15) days after      Federal has received notice of the violation; (b) material breach of this      Agreement by Federal, which material breach continues for thirty (30) days      after Federal has received notice of the breach; (c) gross neglect of duty,      fraud, misappropriation, or embezzlement by Federal or its affiliates of      funds owed to Dealer or any of its affiliates under this Agreement or any      other agreement with Federal or any of its affiliates; (d) Federal or its      affiliates becoming the subject of any order or injunction of any court or      governmental body relating to the offer, sale or administration of the      Service Contracts and such order or injunction is not dismissed within      thirty (30) days; (e) Federal's voluntary bankruptcy, insolvency or      assignment for the benefit of creditors. For purposes of this Paragraph, an      "affiliate" of a party shall mean any subsidiary, parent or successor      corporation or partnership of the party."  5.   Paragraph 7.3 Right to Cure of the Agreement, as renumbered by Paragraph 2      of this Amendment, is hereby amended to replace the reference to "Paragraph      7.2(c) and Paragraph 7.3(b)" to "Paragraphs 7.1(c) or 7.2(c)."  6.   A new Paragraph 7.4 is hereby added to the Agreement, to read as follows:       "7.4. Termination of Repair Center Agreement by Federal. In the event      Federal terminates the Repair Center Agreement under which Dealer acts as a      repair center for Service Contract claims, the parties agree that such      termination shall constitute and have the same effect as a Termination With      Cause by Federal pursuant to Paragraph 7.1 of this Agreement."  7.   Wherever in the Agreement the applicable territory is described as "the      States of Louisiana and Texas," such reference is hereby replaced with the      term "the Territory States." The attached Amendment #2 Exhibit A shall      define the Territory States, which may be amended from time to time by      written agreement of the parties.  IN WITNESS HEREOF, the parties have signed this Amendment effective as of the date first above written.  Voyager Service Programs, Inc.             Conn Appliances, Inc.  By:   /s/ Joe Erderman                     By: /s/ David Atnip 7/21/05    --------------------------------           ----------------------------------  Title:    Vice President                   Title:  Treasurer       -----------------------------              -------------------------------  Federal Warranty Service Corporation                  CAI, L.P.  By:  /s/ Joe Erderman                      By: /s/ David Atnip 7/21/05    --------------------------------           ----------------------------------  Title:   Vice President                    Title:  Treasurer       -----------------------------              -------------------------------                                                                                  2                                  AMENDMENT #2 EXHIBIT A                                 TERRITORY STATES   Louisiana and Texas   *    Territory states may be amended by written agreement of the parties without the need for a subsequent amendment to the Agreement.                                                                                  3    EX-10.19.3 5 a5112243ex10-193.txt EXHIBIT 10.19.3                                                                    Exhibit 10.19.3                          AMENDMENT #3 TO DEALER AGREEMENT                         PRICING AND TRANSFER OF RESERVES       THIS AMENDMENT #3 (herein "Amendment") to the Dealer Agreement ("Agreement") is made this ___ day of July, 2005 with an effective date of July 1, 2005 ("Effective Date") by and among Conn Appliances, Inc., a Texas corporation ("Conn"), CAI, L.P., a Texas limited partnership ("CAILP"), having their principal places of business at 3295 College Street, Beaumont, Texas 77701 (except as otherwise noted, Conn and CAILP collectively herein referred to as "Dealer"), Federal Warranty Service Corporation, an Illinois corporation having its principal place of business at 260 Interstate North Circle, SE, Atlanta, GA 30339 ("Federal"), and Voyager Service Programs, Inc., a Florida corporation having its principal place of business at 11222 Quail Roost Drive, Miami, Florida 33157 ("Voyager").  WHEREAS, Dealer and Voyager entered into a "Dealer Agreement" stated as effective January 1, 1998 (the "Agreement") concerning the sale by Dealer of Service Contracts covering certain specified merchandise sold by Dealer, under which Service Contracts Voyager was the obligor, and which Service Contracts were administered by Dealer; and  WHEREAS, "Amendment #1" to the Agreement substituted Federal in place of Voyager and CAILP in place of Conn as parties to the Agreement, amended Exhibit A and added Exhibit E, and "Amendment #2" amended the term and termination provisions of the Agreement; and  WHEREAS, The parties desire to provide for additional amendments to the Agreement.   NOW THEREFORE, in consideration of the mutual covenants and promises set forth herein and in the Agreement, the parties do hereby agree as follows:   1.   Schedule A of the Agreement is hereby replaced with attached Amendment #3      Exhibit A.   2.   Paragraph 5.1 of the Agreement is hereby deleted in its entirety and      replaced with the following:       "5.1 Federal Fees. "Federal Fee," as that phrase is used herein, shall at      inception of this Agreement mean that amount equal to forty percent (40%)      of the Contract Prices (net of sales tax collected) of the Service      Contracts sold by Dealer or delivered by Dealer in connection with the sale      of Covered Merchandise and any renewals thereof. Notwithstanding the      foregoing Federal shall have the right to amend the amount of the Federal      Fee for prospective sales of Service Contracts, as necessary based on loss      experience and actuarial principles, to and only to ensure that the      Experience Refund, as described in Paragraph 5.5 and calculated in      accordance with Exhibit D, shall be not less than a zero amount for the      period from inception of this Agreement to the expiration of all Service      Contracts sold pursuant to this Agreement. Federal shall provide Dealer      with not less than sixty (60) days notice prior to the effective date of      any Federal Fee change, during which Dealer may obtain an independent      opinion from an accredited nationwide actuarial firm. If the independent      actuarial firm recommends a Federal Fee that is two (2) percentage points      or more less than Federal's recommendation, then Federal and Dealer shall      instead implement the recommendation of the independent actuarial firm. In      addition, prior to the effective date of any Federal Fee increase requested      by Federal under this Paragraph, Dealer and Federal shall discuss and may      mutually agree to alternative measures intended to create a zero or      positive Experience Refund from inception-to-expiration. In any event      Dealer shall implement updated Federal Fees within sixty (60) days of      notice from Federal."  3.   Within ten (10) days following the execution date of this Amendment #3,      Voyager and/or Federal shall pay to Dealer the amount of three million,      three hundred seven thousand, nine hundred eighteen dollars ($3,307,918).      This payment shall fully discharge Voyager and Federal and their affiliates      from any obligation to reimburse Dealer or any other party in connection      with Service Contract refunds paid by Dealer prior to the Effective Date.      Federal shall continue to pay Voyager's share of refunds paid after the      Effective Date by Dealer in connection with the cancellation of      Voyager-obligor Service Contracts.                                                                                  1     4.   Within ten (10) days following the execution date of this Amendment #3      Voyager shall transfer all reserves held with respect to the      Voyager-obligor Service Contracts to Federal, less the payment to Dealer as      indicated in this Paragraph 3 of this Amendment. Of those reserves, two      million dollars ($2,000,000) shall become property of Federal and shall be      removed from the reserves held for Service Contracts and shall not be      considered in any calculation of Experience Refunds.  5.   Of the reserves to be transferred by Voyager to Federal, the parties      estimate that after the immediate payment described in Paragraph 3 of this      Amendment and the one-time payment of $2,000,000 to Federal as set forth in      Paragraph 4 of this Amendment, the remaining reserves will include a      surplus in the amount of approximately one million, six hundred ninety-two      thousand, eighty two dollars ($1,692,082) over and above the amount      projected to reimburse Dealer for future Service Contract Losses under the      Voyager-obligor Service Contracts. This surplus amount will be added to the      Federal Fees collected under the Agreement, and shall be earned on a basis      appropriate to the remaining term of the Voyager-obligor Service Contracts,      and shall be included in future calculations of the Experience Refund.  6.   Except for the amounts specially-designated in Paragraphs 3, 4 and 5 above,      all reserves transferred by Voyager to Federal shall be held by Federal as      reserves for future claims under the Voyager-obligor Service Contracts      issued under the Prior Agreements, and shall be included in future      Experience Refund calculations.  7.   Exhibit D of the Agreement is hereby amended to reflect that the amount of      "unearned Federal Fees" shall be calculated using the pro rata method, over      the term of individual Service Contracts beginning on the first day of the      tenth (10th) month following the date of sale.  8.   Paragraph 5.3 of the Agreement is hereby deleted in its entirety and      replaced with the following:       "5.3 Contract Holder Refunds. If any Service Contract is cancelled prior to      its expiration, Dealer shall pay the Contract Holder the appropriate refund      owed to such Contract Holder, in accordance with the terms and conditions      of the Service Contract. After paying such a refund, Dealer shall deduct      from the next payment due to Federal (under Paragraph 5.1 above), Federal's      proportionate share of the refund, which shall be thirty-five percent of      the refund paid by Dealer (the percentage of the Federal Fee, less the      percentage of Dealer Administrative Compensation retained by Dealer)."   IN WITNESS HEREOF, the parties have signed this Amendment effective as of the date first above written.  Voyager Service Programs, Inc.             Conn Appliances, Inc.  By:   /s/ Joe Erderman                     By: /s/ David Atnip 7/21/05    --------------------------------           ----------------------------------  Title:    Vice President                   Title:  Treasurer       -----------------------------              -------------------------------  Federal Warranty Service Corporation                  CAI, L.P.  By:  /s/ Joe Erderman                      By: /s/ David Atnip 7/21/05    --------------------------------           ----------------------------------  Title:   Vice President                    Title:  Treasurer       -----------------------------              -------------------------------                                                                                  2    EX-10.19.4 6 a5112243ex10-194.txt EXHIBIT 10.19.4                                                                    Exhibit 10.19.4                          AMENDMENT #4 TO DEALER AGREEMENT       REPLACEMENT PROGRAM, SALES MANAGER, POTENTIAL FEDERAL FEE REDUCTIONS       THIS AMENDMENT #4 (herein "Amendment") to the Dealer Agreement ("Agreement") is made this ___ day of July, 2005 with an effective date of July 1, 2005 ("Effective Date") by and among Conn Appliances, Inc., a Texas corporation ("Conn"), CAI, L.P., a Texas limited partnership ("CAILP") having their principal places of business at 3295 College Street, Beaumont, Texas 77701 (except as otherwise noted, Conn and CAILP collectively herein referred to as "Dealer"), Federal Warranty Service Corporation, an Illinois corporation having its principal place of business at 260 Interstate North Circle, SE, Atlanta, GA 30339 ("Federal"), and Voyager Service Programs, Inc., a Florida corporation having its principal place of business at 11222 Quail Roost Drive, Miami, Florida 33157 ("Voyager").  WHEREAS, Dealer and Voyager entered into a "Dealer Agreement" stated as effective January 1, 1998 (the "Agreement") concerning the sale by Dealer of Service Contracts covering certain specified merchandise sold by Dealer, under which Service Contracts Voyager was the obligor, and which Service Contracts were administered by Dealer; and  WHEREAS, "Amendment #1" to the Agreement substituted Federal in place of Voyager and CAILP in place of Conn as parties to the Agreement, "Amendment #2" amended the term and termination provisions of the Agreement and Amendment #3 amended the Agreement's pricing provisions and provided for the transfer and release of specified reserves held by Voyager under the Agreement; and  WHEREAS, The parties desire to provide for additional amendments to the Agreement.   NOW THEREFORE, in consideration of the mutual covenants and promises set forth herein and in the Agreement, the parties do hereby agree as follows:   1.   The parties agree to add to the Agreement a new category of Service      Contract which shall provide as its primary benefit the replacement of the      Covered Merchandise to which such Service Contracts pertain (the      "Replacement Program"). The Replacement Program shall be implemented in      accordance with Paragraphs 2 and 3 below.  2.   The parties recognize that Dealer is currently under contractual obligation      to offer a third party's equivalent of the Replacement Program. Dealer      agrees to nonrenew its contractual agreement with such third party and      implement Federal's Replacement Program on a going forward basis at the      later of the following: a) one hundred ----- twenty (120) days after the      effective date of this Amendment #4, or b) the earliest time at which      Dealer may lawfully non-renew its contractual agreement under the terms of      its contract. Dealer shall not notify the third party sooner than necessary      to legally effect the termination or nonrenewal. Dealer shall advise      Federal within thirty (30) days after the effective date of this Amendment      #4 when it will notify the third party and when the termination of its      contract will be effective and when intends to begin selling Federal's      Replacement Program.  3.   Concurrent with Dealer's nonrenewal of the third party agreement as set      forth in paragraph 2 of this Amendment, Dealer and Federal shall enter into      an additional amendment to the Agreement to provide for special aspects of      the Replacement Program. At a minimum, the special aspects of the      Replacement Program will include an income or retention for Federal equal      to: a) 8% of the Contract Price of Replacement Program Service Contracts,      applicable to the first $3,750,000 of such retail sales during any contract      year; and b) 4% of the Contract Price of Replacement Service Contracts,      applicable to retail sales in excess of $3,750,000 during any contract      year. The parties shall agree on Contract Prices, Federal Fees and Dealer      Administrative Compensation for the Service Contracts that incorporate the      retention for Federal described in this paragraph.  4.   Federal shall, within ninety days after the effective date of this      Amendment #4, assign a full time employee or independent contractor of      Federal or any of Federal's affiliates (herein the "Sales Manager"), whose      primary responsibility shall be the training of Dealer's managers and      employees, the monitoring of business results, and the coordination of      marketing efforts to maximize Dealer's sales of Service Contracts and other                                                                                  1          products and services pursuant to the Agreement and other agreements      between Dealer and Federal or Federal's affiliates. The Sales Manager shall      live within the State Territory of Dealer, unless otherwise agreed by the      parties. Federal shall be responsible for day-to-day expenses related to      the assignment of the Sales Manager, including but not limited to salary,      statutorily-required insurance, payroll taxes, office space or office      allowances, training and travel expenses.  5.   Dealer shall cooperate with the Sales Manager to maximize his or her effect      on Service Contract sales. Such cooperation shall include, but not be      limited to, making available officers, managers and employees of Dealer for      training and consultation with the Sales Manager, providing information      related to the performance of Dealer's Service Contract program as      reasonably requested by the Sales Manager, and permitting the Sales Manager      appropriate access to Dealer's facilities in furtherance of the objectives      of this Amendment #4.  6.   Federal agrees to work with Dealer to reduce the current amount of the      Federal Fee, with a mutual goal of reducing the Federal Fee for Service      Contracts, other than Replacement Program Service Contracts, by eight (8)      percentage points through a combination of measures, which may include but      not be limited to: a) reducing the amount of future Claim Related Expenses,      b) reducing Dealer's costs of administering the Service Contract program,      c) improved actuarial forecasting, and/or d) changes to benefits provided      under future Service Contracts. The parties agree that any future reduction      of the Federal Fee shall not reduce Federal's current retention of four      percent (4%) of the Contract Prices (10% of current 40% Federal Fee = 4%).  IN WITNESS HEREOF, the parties have signed this Amendment effective as of the date first above written.  Voyager Service Programs, Inc.             Conn Appliances, Inc.  By:   /s/ Joe Erderman                     By: /s/ David Atnip 7/21/05    --------------------------------           ----------------------------------  Title:    Vice President                   Title:  Treasurer       -----------------------------              -------------------------------  Federal Warranty Service Corporation                  CAI, L.P.  By:  /s/ Joe Erderman                      By: /s/ David Atnip 7/21/05    --------------------------------           ----------------------------------  Title:   Vice President                    Title:  Treasurer       -----------------------------              -------------------------------                                                                                  2    EX-10.20 7 a5112243ex10-20.txt EXHIBIT 10.20                         SERVICE EXPENSE REIMBURSEMENT AGREEMENT       BY THIS AGREEMENT, the insurance companies,  managers and agencies named in the Schedule A(s) attached to and forming a part of this Agreement,  hereinafter referred  to  as  "Company,"  and  Affiliates   Insurance   Agency,   Inc.,  its subsidiaries  and affiliates  hereinafter  referred to as  "Customer,"  agree as follows effective July 1, 1998.  1.   Company has offered to provide insurance  coverage,  service and facilities      through its agents for  insurance  programs,  as  described in the Schedule      A(s) attached,  for insuring Credit Life, Credit Accident & Health,  Credit      Property,  Leased Property,  and Involuntary  Unemployment  Insurance.  The      borrowers,  members,  customers,  lessees  or any  other  person  having an      interest  in a policy of  certificate  subject to this  Agreement  shall be      referred to as "Participant(s)."  2.   The development and implementation of such insurance program will result in      additional administrative costs and expenses for Customer.  3.   Customer  and  Company  have  agreed  upon  their  respective   duties  and      responsibilities  in  the  matter  of  providing  services,  coverages  and      facilities in connection with such insurance program and upon a formula for      reimbursement to Customer of sums necessary to compensate  Customer for its      costs and expense therein incurred.  4.   Because it is impossible to determine  precisely the cost and expense which      will  be   incurred   by   Customer   in   carrying   out  its  duties  and      responsibilities as herein specified,  Company agrees to reimburse Customer      for its costs and expenses in the service and  administration  of insurance      furnished under said programs as follows:       Company shall pay to Customer an Expense Reimbursement:            equal to the percentage of net premiums written or the fixed fee shown           in the column headed Reimbursement Rate in the Schedule A(s) attached           hereto.       It is a condition of this Agreement that Customer refund ratably to Company      on canceled  coverages  and on  reductions  in premiums at the same rate at      which such Expense Reimbursement was originally paid.  5.   Customer  agrees to cooperate  with Company in all  reasonable  particulars      contemplated  by  this  Agreement  and  understands  that  its  duties  and      responsibilities  in  the  matter  of  providing  services,  coverages  and      facilities and for which it is to be reimbursed hereunder are:       (A)  Distribute to Participants, Company's forms, supplies and instructions           for  use  as  well  as  material  covering  the   administration   and           distribution of policies or certificates of insurance;                                          1         (B)  Permit  the  use of its  credit  card,  or  such  other  method  as it           authorized  by law, for the  collection  of premium  contributions  by           Participants.  Maintain an  insurance  escrow  account,  receive,  and           account for all  premiums  and remit to Company  premiums on insurance           written less cancellation  refunds with respect to insurance  programs           contemplated by this Agreement;       (C)  Perform clerical  functions,  typing and mailing of insurance policies           or certificates,  endorsements,  cancellations and periodic statements           covering premium due, net of refunds and other allowances;       (D)  Furnish  Company  with  reports of all  transactions  of  Participants           pursuant to  insurance  programs of Company,  contemplated  under this           Agreement;       (E)  Perform such other similar  administrative  actions as may be required           by Company.       All  premiums  held by  Customer  pursuant  to (B)  above  shall be held as      trustee for Company until  delivered to it.  Company  reserves the right to      require  Customer  to  deposit  all  premiums,   less  Customer's   Expense      Reimbursement  as set forth in  Paragraph 4 hereof,  in a premium  trust or      escrow account.       The reports and  remittances  provided for in (B) and (D) above shall be on      forms  provided by or acceptable to Company,  and shall be  transmitted  in      time to be  received  by Company  not later than twenty (20) days after the      end of each calendar month. Premium payments not made by the due date above      shall bear  interest  from the due date at the rate of one percent (1%) per      month, or the applicable legal maximum rate, whichever is less.  6.   Periodically,  Company  may  require  evidence  that  expense  incurred  by      Customer was approximately equal to reimbursement calculated hereunder.       Customer shall upon request by Company's authorized representative,  during      normal business hours,  make available for inspection all books and records      pertaining  to business  covered by this  Agreement  and the  Schedules and      Addenda attached hereto.  7.   Company  reserves  the right to offset any amounts due to or from  Customer      under this  Agreement  and its  Schedules and Addenda (if any) Credit Life,      Credit Accident & Health, Credit Property,  Involuntary  Unemployment,  and      Leased  Property  Insurance,  against any  amounts due to or from  Customer      under  this or any  agreements  Customer  may have  from  time to time with      Company  and/or any other  subsidiaries  or affiliates of American  Bankers      Insurance Group,  Inc. Customer will have thirty (30) days to challenge any      amounts due Company prior to such offset being made and, if challenged,  no      offsets  will be made.  The issue will be  referred to  arbitration,  as in      Paragraph 10.  8.   Company may  authorize  Customer to offer new  products  and may  establish      rates of Expense Reimbursement on such new products.  Company also reserves      the right to cease  offering any product  listed on Schedule A at any time.      Company may also  prospectively  change the rates of Expense  Reimbursement      for products on Schedule A upon thirty (30) days advance notice if required      by state regulatory  authority,  or with the written consent of Customer if      one or more product lines is in deficit.  This written consent shall not be      made unreasonably  withheld.  In all other respects,  this Agreement may be      altered or amended only in writing signed by both of the parties.                                         2    9.   This Agreement may be terminated by Company at any time by giving  Customer      thirty (30) days notice, in writing, of its intention to terminate.       This  Agreement may be terminated at any time by the mutual consent of both      Customer and Company.       This  Agreement may be terminated by Customer with cause at any time,  upon      thirty (30) days written notice provided to Company. Cause shall be defined      as a material  breach of the Agreement which is not cured by Company within      thirty (30) days of written notice thereof.  10. (A)   Any and all  disputed  or  disagreements  arising  between the parties           pertaining to or relating in any manner to this  Agreement,  including           but not limited to any disputes or  disagreements as to the meaning or           interpretation  of this  Agreement,  or any  portion  thereof,  or the           relationship of the parties  created under this Agreement,  upon which           an amicable  understanding cannot be reached,  including any breach of           this  Agreement,  are to be decided by arbitration in accordance  with           the rules of the  American  Arbitration  Association,  and  subject to           applicable  provisions  of the  statutes  of the state of  Texas.  The           parties agree to be bound by the majority decision of the arbitrators.           The  arbitration  proceeding  shall take place in Fort  Worth,  Texas,           unless  another  location is mutually  agreed to by the parties.  Each           party  shall  be  responsible  for  its  own  costs  and  expenses  in           arbitrating the dispute.       (B)  The  arbitrators  shall state in their  decision  the basis upon which           their   decision  may  be  made.  An  appeal  may  be  made  from  the           arbitrators'  decision  to a court  of  general  jurisdiction  in Fort           Worth,  Texas, on the grounds set forth in the Texas code. All parties           to this Agreement, by signing this Agreement,  consent to the personal           jurisdiction of the Texas courts.       (C)  Three  arbitrators  shall be selected for the arbitration  panel.  One           arbitrator shall be selected by each party. The third arbitrator shall           be selected by the  arbitrators  names by each party.  In the event an           agreement cannot be reached as to the third  arbitrator,  either party           may  petition a court of competent  jurisdiction  to appoint a neutral           arbitrator  as the  third  arbitrator.  The  Federal  Rules  of  Civil           Procedure  and  the  Federal  Rules  of  Evidence   shall  govern  all           procedural  issues;  however,  upon  order  of the  arbitrators  or by           agreement  of  the  parties,  time  limits  contained  therein  may be           shortened or lengthened.  The provision  shall survive the termination           of this Agreement.                                         3    11. (A)   Upon termination of this Agreement, Customer shall promptly account or           and pay over to Company all premiums  due Company upon risk(s)  placed           by Customer.       (B)  Customer further agrees, upon termination of this Agreement, to render           the  normal  and  usual  customer  services  for  Company  during  the           remaining unexpired term of all policies placed by Customer.       (C)  Company agrees, upon termination of this Agreement, to transfer 90% of           the net cumulative premiums  collected,  less (1) the cumulative total           losses  paid  by the  Company,  and (2) the  cumulative  total  of all           payments including,  but not limited to: advance commissions,  expense           reimbursements,  and group experience  rating/contingent  compensation           previously  paid  to the  Agent,  to any  insurer  selected  by  Agent           provided  such  insurer  is  approved  by the  appropriate  regulatory           authorities  to write  insurance  in the State of Texas of the type(s)           for which the net  cumulative  premiums  have been  collected  and for           which group experience ratings/contingent compensation payments may be           or become due Customer.  All liability for subsequent claims,  refunds           or any other policy/certificate obligations regardless of effective or           incurred  date,  shall be  transferred  from  Company to the  approved           assuming insurer on the effective date of such assumption.  12.  In performing its obligations pursuant to this Agreement,  Company may have      access to and receive disclosure of certain confidential  information about      or  belonging  to  Customer,  including  but  not  limited  to:  Customer's      marketing   philosophy,   techniques,   and  objectives,   advertising  and      promotional  copy,  competitive  advantages  and  disadvantages,  financial      results, technological developments, Participant and cardholder lists and a      variety  of  other  information  and  materials  which  Customer  considers      confidential or proprietary (hereinafter "Confidential Information").       Company  agrees  that  during the term of this  Agreement  and  thereafter,      Confidential Information is to be used solely in connection with satisfying      its  obligations  pursuant  to this  Agreement,  and that it shall  neither      disclose  Confidential  Information to any third party nor use Confidential      Information for its own benefit,  except as may be necessary to perform its      obligations pursuant to this Agreement.       All Confidential  Information  furnished to Company in connection with this      Agreement  is the  exclusive  property of  Customer  and, at the request of      Customer or upon  termination  of this  Agreement,  Company shall  promptly      return to  Customer  all  Confidential  Information  without  copying  such      information.       Company  shall  take   measures  to  prevent  its  agents,   employees  and      subcontractors  from  using or  disclosing  any  Confidential  Information,      except as may be necessary for Company to perform its obligations  pursuant      to this  Agreement.  Company  agrees  that it may not  use,  rent,  sell or      authorize the use of the names and addresses supplied by Customer.                                         4         This provision shall survive the termination of this Agreement.  13.  Company  hereby  agrees to indemnify  Customer,  its  directors,  officers,      employees,  and corporate affiliates (the "indemnified parties"),  and hold      them  harmless  against and pay on their  behalf any sums which any of them      shall become  legally  obligated to pay as damages,  fines,  interest,  and      judgments  which  directly  or  indirectly  arise from or are caused by the      wrongful  or  negligent  acts or  omissions  of Company  or its  directors,      officers,  employees and corporate  affiliates,  as well as any  reasonable      attorney's fees, costs and expenses incurred.  It is a condition  precedent      to the  obligations of Company under this  Paragraph  that any  indemnified      party who is being  indemnified  hereunder shall cooperate in such defense.      Notwithstanding  the  indemnification  provided herein,  it is specifically      agreed that Customer  shall  participate on a pro rata basis with regard to      any premium  refunds or rebates made by Company  which may be occasioned by      any claim, controversy, dispute, lawsuit, or administrative proceeding.  14.  It is a condition  precedent to payment of any amounts under this Agreement      by Company that Customer shall certify in writing to Company that all known      claims have been reported to Company. It is understood and agreed, however,      that no waiver of this condition precedent shall result should Company fail      to require such certification of claims.  15.  This  Agreement  together  with any  insurance  programs  designated by the      parties shall  constitute the entire contract between the parties and there      are no other agreements,  oral or written, prior to or contemporaneous with      this Agreement, other than that stated herein.  16.  This Agreement has been executed in a number of Counterparts,  any of which      may be taken as an original.  17.  This  Agreement  is  executed  on behalf of  Company  and  Customer  by the      authorized signatures on the Schedule A(s) attached hereto.  18.  Customer  may assign  its right to receive  any monies due or to become due      from Company under this Agreement or any of its addenda,  including but not      limited to Expense Reimbursement,  to any affiliate of Customer,  including      any affiliated insurance agent or agency, or any other individual or entity      authorized  to  sell or  receive  compensation  for the  sale of any of the      insurance products covered by this Service Expense Reimbursement Agreement.      An affiliate shall be a parent, a wholly owned or controlled  subsidiary of      Customer  or any  affiliate  which is  under  the same  common  control  or      ownership as Customer.  Notice of assignment shall be given to Company,  in      writing. Such assignment shall not be binding on Company and shall be of no      effect until and unless Company acknowledges,  in writing, such assignment.      Payment by Company of any amount due by Company under this Agreement or any      of its addenda to the assignee  shall release  Company of any obligation to      Customer for the amount paid.  No  subsequent  revocation  of an assignment      shall be binding on Company  until and  unless  Company  acknowledges  such      revocation in writing.                                         5         In addition,  simultaneous  with such assignment,  Customer may delegate to      any such  affiliate  any  administrative  duties  of  Customer  that can be      performed  under this Agreement by such  affiliate.  Written notice of such      delegation shall be given to Company.  Neither the giving of such notice or      Company's  acknowledgment  or  consent  to such  delegation  shall  release      Customer  from  any   responsibility  for  performance  of  any  duties  or      obligations under this Agreement or any of its addenda.  19.  In  consideration  of the mutual  promises and covenants  contained in this      Service Expense Reimbursement Agreement, American Bankers Insurance Company      hereby  guarantees  to  Customer,   its  affiliates  and  subsidiaries  the      performance  by Company of all of  Company's  obligations  contained in the      Service Expense  Reimbursement  Agreement and any and all future amendments      or schedules thereto.  20.  The following  Schedules and/or Addendas are attached to and made a part of      this Agreement at its inception:   - --------------------------------------------------------------------------------      Name of Schedule or Addenda:                          Form Number - --------------------------------------------------------------------------------  Service Expense Reimbursement Agreement-              SERA/SCH.A/9-10-94              Schedule A - -------------------------------------------------------------------------------- Service Expense Reimbursement Agreement-         S:\ASSIST\MICHELLE\AFFCONT.SAM    Group Experience Rating/Contingent          Compensation Addendum - --------------------------------------------------------------------------------       VLIC  Voyager Life Insurance Company       VPCIC Voyager Property & Casualty Insurance Company       ABLAC American Bankers Life Assurance Company of Florida       R&F   Ranchers & Farmers County Mutual Insurance Company   s:\assist\michelle\affsera.sam                                         6                         SERVICE EXPENSE REIMBURSEMENT AGREEMENT                                    SCHEDULE A       This Schedule is attached to and by  `reference  made a part of the Service Expense Reimbursement Agreement indicated above between the insurance companies, managers and agencies  named below,  hereinafter  referred to as "Company",  and Affiliates Insurance Agency, Inc., hereinafter referred to as "customer",  dated July 1, 1998. This Schedule is effective July 1, 1998.  NOW THEREFORE, IT IS MUTUALLY UNDERSTOOD AND AGREED AS FOLLOWS:       1.   Customer has agreed to offer, on Company's behalf,  types of insurance           as shown in Paragraph 2 to Participants, borrowers, members, customers           or lessees of:                          AFFILIATES INSURANCE AGENCY, INC.       2.   Customer has agreed to provide  services in connection  with the types           of insurance shown in the states listed with maximums as shown and for           the  Expense  Reimbursement  rate  shown,  which may be either a fixed           amount or a percent of net  premiums  written.  (gross  premiums  less           cancellations):          - --------------------------------------------------------------------------------------------                                                     Expense               Monthly  Company*        Insurance Type           State  Reimbursement  Coverage  Benefits   Term                                                      Rate - --------------------------------------------------------------------------------------------    VLIC         Credit Life-SP             TX         35%        $20,000     N/A    60 Mos. - --------------------------------------------------------------------------------------------   ABLAC         Credit Life - MOB          TX         35%        $20,000     N/A     1 Mo. - --------------------------------------------------------------------------------------------    VLIC    Credit Accident & Health - SP   TX         35%         N/A       $800    60 Mos. - --------------------------------------------------------------------------------------------   ABLAC    Credit Accident & Health -MOB   TX         35%         N/A       $800     1 Mo. - --------------------------------------------------------------------------------------------    R&F         Credit Property - SP        TX         35%        $20,000     N/A    60 Mos. - --------------------------------------------------------------------------------------------    R&F        Credit Property - MOB        TX         35%        $20,000     N/A     1 Mo. - --------------------------------------------------------------------------------------------    R&F           Lease Property            TX         35%        $10,000     N/A     1 Mo. - --------------------------------------------------------------------------------------------    R&F       Involuntary Unemployment      TX         35%         N/A       $500     1 Mo. - --------------------------------------------------------------------------------------------   Execution of this Schedule A also constitutes execution of all of the schedules and/or addendas listed in Paragraph 19 of this Agreement of which this Schedule A becomes a part.    s:\assist\rnichelle\caiscala.S8ITI                                         7    Executed on behalf of the Company          Executed by or on behalf of the Agent at Fort Worth, Texas, this 21st day        at Beaumont, Texas, this 21st day of July ____, 1998.                        of July ____, 1998.   AMERICAN BANKERS LIFE ASSURANCE COMPANY OF FLORIDA RANCHERS & FARMERS COUNTY                  AFFILIATES INSURANCE AGENCY INC. MUTUAL INSURANCE COMPANY VOYAGER LIFE INSURANCE COMPANY VOYAGER PROPERTY AND CASUALTY INSURANCE COMPANY   By:      /s/ Mark Cooper                   By:    /s/ Thomas J. Frank          ---------------------------              ------------------------------ Title:   Authorized Representative         Title: Chief Executive Officer          ---------------------------              ------------------------------ Witness:     AMERICAN BANKERS INSURANCE COMPANY  By:      /s/ Mark Cooper          --------------------------- Title:   Authorized Representative          --------------------------- Witness:  *Initials designate the following companies:  ABLAC  American Bankers Life Assurance Company of Florida R&F    Ranchers & Farmers County Mutual Insurance Company VLIC   Voyager Life Insurance Company VPCIC  Voyager Property & Casualty Insurance Company                                         8                         SERVICE EXPENSE REIMBURSEMENT AGREEMENT             GROUP EXPERIENCE RATING/CONTINGENT COMPENSATION ADDENDUM  THIS ADDENDUM is attached to and by reference made a part of the Service Expense Reimbursement   Agreement  indicated  above  between  the  insurance  companies, managers and agencies  named below,  hereinafter  referred to as "Company",  and Affiliates Insurance Agency, Inc., hereinafter referred to as "Customer",  dated July 1, 1998. This Addendum is effective July 1, 1998.  NOW THEREFORE, IT IS MUTUALLY UNDERSTOOD AND AGREED AS FOLLOWS:  A.   Within 10 days  after  August 1, 1998  (such  date  hereinafter  deemed the      "accounting  date"),  and within 10 days after each month  thereafter while      said Service Expense Reimbursement Agreement is in force, Company agrees to      return a Group  Experience  Rating/Contingent  Compensation  Credit  on the      coverages written under said Agreement as follows:       (1)  The cumulative  earned premiums written in the State of Texas for each           type of  insurance  shown  in  Paragraph  H of this  Addendum  will be           multiplied  by the  percent  shown in  Paragraph  H for  each  type of           insurance and from the product of this  multiplication  there shall be           deducted the sum of the following items for each type of insurance:            a)   The cumulative  total of all losses and loss expenses,  including                all allocated loss adjustment expenses incurred, and            b)   All reserves, and            c)   The cumulative total of all earned expense  reimbursements,  paid                or allowed Customer by Company, and            d)   The cumulative  total of all amounts  previously paid to Customer                in accordance with this Addendum.       (2)  "Losses" include,  but are not limited to, any amounts Company becomes           obligated  to pay to any third  party  arising  out of or  related  to           claims made under coverages under this Agreement,  including,  but not           limited to,  damages,  court awards or judgments or any kind or nature           assessed against Company.       For purposes of this Addendum,  any amounts  accumulated under that certain      Group  Experience  Rating/Contingent  Compensation  Credit  Addendum,  made      effective December 30, 1994, from the sale of the above described insurance      in Texas  shall be  included in the  calculations  of the Group  Experience      Rating/Contingent Compensation Credit in this Paragraph A.  B.   If the  combined  remainder  computed  in  Paragraph  A for  all  types  of      insurance shown in Paragraph H is a positive  figure,  Company shall pay to      Customer the amount of such  remainder  provided that all premiums then due      Company  shall have been  received by Company.  If the  combined  remainder      computed in Paragraph A for all types of insurance  shown in Paragraph H is      a negative figure,  the negative figure shall be carried over to subsequent      accountings  against any amounts that otherwise  become payable to Customer      under aforesaid formula.  Company reserves the right to require Customer to      repay any Group Experience  Rating/Contingent  Compensation Credit received      because of errors in calculations or in the event of retroactive reductions      in premium rates mandated by state regulatory authorities.                                         9    C.   The Group Experience Rating/Contingent Compensation Credit to be paid under      this  Addendum  shall not  exceed the  maximum  amount  promulgated  by the      insurance  statutes and  regulations  of the state  wherein the business is      written.  D.   Payments made under the  provisions of this Addendum by Company to Customer      shall discharge Company's obligation hereunder for the amounts so paid.  E.   Company  reserves  the right to offset any amounts due to or from  Customer      under this  Agreement  and its  Schedules  and  Addenda (if any) for Credit      Life,  Credit  Accident & Health,  Credit  Property,  and  Leased  Property      insurance  against any amounts  due to or from  Customer  under this or any      agreements  Customer  may have from time to time with  Company  and/or  any      other  subsidiaries or affiliates of American Bankers Insurance Group, Inc.      The  Customer  will have  thirty (30 days) to  challenge  any  amounts  due      Company prior to such offset being made and, if challenged, no offsets will      be made.  The issue will be referred to  arbitration  as in Paragraph 10 of      the S.E.R.A. agreement.  F.   It is a condition  precedent to payment of any amounts  under this Addendum      by Company that Customer shall certify in writing to Company that all known      claims have been reported to Company. It is understood and agreed, however,      that no waiver of this condition precedent shall result should Company fail      to require such certification of claims.  G.   In the event of termination of the Service Expense Reimbursement Agreement,      Company shall continue to pay expense reimbursement payments as outlined in      Section A of this Addendum.  However, in the event of a "deficit", which is      deemed to exist any time the result of the calculation  under the provision      of paragraph A of this Addendum is a negative  number,  Customer  shall pay      the amount of said deficit to the Company  within 10 days of receiving  the      respective monthly statement.       When all policy and/or certificate  liabilities,  including losses and loss      adjustment  expenses have been  terminated by expiration,  cancellation  or      prepayment,  Company shall render a final  accounting to Customer,  Company      may withhold payment for this final accounting until customer has certified      in writing to Company that all known claims against company shall have been      duly reported to Company.  H.   It is hereby  understood  that  Paragraph A pertains to only the  following      types of insurance,  at the indicated  percent rates as shown for each type      of insurance.                                         10    - --------------------------------------------------------------------------------           Type of Insurance                              Percent Rate  - --------------------------------------------------------------------------------             Credit Life                                     90% - --------------------------------------------------------------------------------       Credit Accident & Health                              90% - --------------------------------------------------------------------------------           Credit Property                                   90% - --------------------------------------------------------------------------------     Involuntary Unemployment Ins.                           90% - --------------------------------------------------------------------------------           Leased Property                                   90% - --------------------------------------------------------------------------------  I.   Until such time as this  Agreement  is  terminated,  Company  agrees to pay      Customer investment income on the cash held by the Company, at the interest      rate of a one year CD, at Chase Bank Texas National Association's main Fort      Worth,  Texas  branch.  The cash held by the  Company  shall be  calculated      according to the following formula:                      90% of the cumulative net written premium           Less:     the cumulative losses and loss expenses paid;                     the cumulative advance commissions paid or retained; and                     the cumulative contingent commissions paid or due.           Equals    cash held by Company.       Such  investment  income will be paid within thirty (30) days of the end of      each  calendar  quarter based on the average of the cash held by Company at      the beginning and end of the prior quarter.                                         11    Executed on behalf of the Company          Executed by or on behalf of the Agent at Fort Worth, Texas, this 21st day        at Beaumont, Texas, this 21st day of July ____, 1998.                        of July ____, 1998.   AMERICAN BANKERS LIFE ASSURANCE COMPANY OF FLORIDA RANCHERS & FARMERS COUNTY                  AFFILIATES INSURANCE AGENCY INC. MUTUAL INSURANCE COMPANY VOYAGER LIFE INSURANCE COMPANY VOYAGER PROPERTY AND CASUALTY INSURANCE COMPANY   By:      /s/ Mark Cooper                   By:    /s/ Thomas J. Frank          --------------------------               ------------------------------ Title:   Authorized Representative         Title: Chief Executive Officer          --------------------------               ------------------------------ Witness:     *Initials designate the following companies:  ABLAC  American Bankers Life Assurance Company of Florida R&F    Ranchers & Farmers County Mutual Insurance Company VLIC   Voyager Life Insurance Company VPCIC  Voyager Property & Casualty Insurance Company                                         12    EX-10.20.1 8 a5112243ex10-201.txt EXHIBIT 10.20.1                                   FIRST AMENDMENT TO                      SERVICE EXPENSE REIMBURSEMENT AGREEMENT                                      (Texas)       This Amendment is entered into as of July 1, 2005 (the "First Amendment Effective Date") by and among American Bankers Life Assurance Company of Florida, as successor in interest to Voyager Life Insurance Company, Voyager Property & Casualty Insurance Company, American Bankers Life Assurance Company of Florida, American Bankers Insurance Company of Florida and American Bankers General Agency, Inc. on behalf of Ranchers & Farmers Mutual Insurance Company (collectively "Company") and CAI, L.P., successor in interest to Affiliates Insurance Agency, Inc. ("Customer") and amends that certain Service Expense Reimbursement Agreement entered into between Company and Customer effective July 1, 1998 (the "Agreement").  In consideration of the mutual promises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:  1.   The Agreement shall be amended so as to delete Voyager Life Insurance      Company and Voyager Property & Casualty Insurance Company as signatories,      and to add American Bankers Insurance Company of Florida as a signatory.  2.   Section 8 of the Agreement shall be amended to read as follows:       8.   Company may prospectively change the rates of Expense Reimbursement           for products on Schedule A upon thirty (30) days advance notice if           required by state regulatory authority, or in the event of a premium           rate decrease. Company may decrease the rates of Expense Reimbursement           upon thirty (30) days advance notice in the event of a projected           deficit under the Group Experience Rating/ Contingent Compensation           Addendum, in which event such decrease shall be only in an amount           which Company deems necessary to prevent or cure such deficit, and           such decreased rates shall continue in effect only for the period of           time necessary to prevent or cure such deficit. In all other respects,           this Agreement may be altered or amended only in writing signed by           both of the parties.  3.   Section 9 of the Agreement shall be amended to read as follows:       9.   (a) Term.           This Agreement shall be for a term of four years from the First           Amendment Effective Date, and shall automatically renew for successive           one (1) year terms (each a "Renewal Term") unless written notice is           given at least ninety (90) days prior to the effective date of any           term. In the event, as of any renewal date, any deficit exists under           the                                         1              Contingent Compensation Addendum, then Customer shall not have the           right to terminate this Agreement or any group master policy until           such time as the deficit is cured.            (b) Termination by mutual consent. This Agreement may be terminated at           any time by the mutual consent of both Customer and Company.            (c)  Termination with cause by Company.           Subject to the cure provisions contained herein, Company may           immediately terminate this agreement by written notice to Customer in           the event of (i) Customer's violation of any applicable law relating           to the offer, sale or administration of the insurance or debt           protection programs and the violation continues for fifteen (15) days           after Customer has received notice of the violation; (ii) material           breach of this Agreement by Customer, which material breach continues           for thirty (30) days after Customer has received notice of the breach;           (iii) gross neglect of duty, fraud, misappropriation, or embezzlement           by Customer or its affiliates of funds owed to Company or any of its           affiliates under this Agreement or any other agreement with Customer           or any of its affiliates; (iv) Customer or any of its affiliates shall           become the subject of any order or injunction of any court or           governmental body relating to the offer, sale or administration of the           insurance or debt protection programs and such order or injunction is           not dismissed within thirty (30) days; or (v) Customer's voluntary           bankruptcy, insolvency or assignment for the benefit of creditors. For           purposes of this Agreement, an "affiliate" of Company is defined as           any entity that is a member company of Assurant Solutions/Assurant           Specialty Property or any entity under common ownership with such           entity, and an "affiliate" of Customer shall mean any subsidiary,           parent or successor corporation of Customer.            (d)  Termination with cause by Customer.           Subject to the cure provisions contained herein, Customer may           immediately terminate this Agreement by written notice to Company in           the event of (i) Company's violation of any applicable law relating to           the offer, sale or administration of the insurance or debt protection           programs and the violation continues for fifteen (15) days after           Company has received notice of the violation; (ii) material breach of           this Agreement by Company, which material breach continues for thirty           (30) days after Company has received notice of the breach; (iii) gross           neglect of duty, fraud, misappropriation, or embezzlement by Company           of funds owed Customer under this Agreement or any other agreement           with Company or any of its affiliates; (iv) Company or its affiliates           shall become the subject of any order or injunction of any court or           governmental body relating to the offer, sale or administration of the           insurance or debt protection programs and such order or injunction is           not dismissed within thirty (30) days; or (v) Company's voluntary           bankruptcy, insolvency or assignment for the benefit of creditors.                                         2              (e)  Right to cure.           Both parties shall have the right to cure any event that would provide           either party the right to terminate this Agreement for cause within           thirty (30) days after written notice is received of the occurrence of           such event unless a shorter period of time to cure such occurrence is           provided by this Agreement. Such notice shall include a specific           reference to the provision or provisions of this Agreement which are           alleged to have been breached, a description of the event giving rise           to the alleged violation, and the action to be taken by the party           alleged to have violated the Agreement. During the cure period,           neither party shall terminate the Agreement. Paragraphs 9(c)(iii) and           9(d)(iii) are hereby expressly excluded from this right to cure.  4.   Section 21. shall be added to the Agreement as follows:       21.  As soon as practicable, Company agrees to retain a program           management/training resource who will reside in Texas and who will           have daily interaction with Customer's representatives in an effort to           increase sales volume. One resource shall be hired with respect to all           products underwritten or issued by Company and its affiliates under           this and any other agreement between Company and Customer.  5.   Section 22 shall be added to the Agreement as follows:       22.  Exclusivity.           During the term of this Agreement, as extended from time to time,           Customer shall utilize Company exclusively for the insurance written           hereunder, or any product which provides similar coverage.            Notwithstanding the foregoing, in the event a product offered by           Company hereunder is discontinued in any state and Company is unable           to offer a substantially similar replacement product immediately,           Customer may obtain such discontinued product for its customers in the           affected state from another carrier. Company will provide Customer           notice of plans to discontinue a product ninety (90) days prior to           discontinuation, unless a regulatory mandate does not allow for as           much as ninety (90) days advance notice.                                         3              Further, in the event of a proposed rate decrease in any state which           results in a rate for any product or group of products which would           produce a decrease in annual premium production or debt protection           fees greater than $100,000, then Company shall have sixty (60) days           from and after the scheduled implementation date of the rate decrease           to attempt to obtain approval of a different rate. If Company is           unable within said sixty (60) days to obtain approval of a rate which           is within one percent (1%) of the rate for a similar product available           through another carrier in said state, then at the end of said sixty           (60) day period Customer may offer such product through another           carrier in the affected state until such time as Company can offer a           rate for a substantially similar product that is within one percent           (1%) of the alternative carriers' rate.            Customer shall not terminate or aid, directly or indirectly, in the           termination of any insurance written hereunder unless such termination           is initiated by an insured, without encouragement by Customer. Nothing           herein shall prohibit individual customer cancellations handled in the           normal course of business.            Further, in the event Customer implements a debt protection program,           Company shall administer said debt protection program at a fee equal           to 9.25% of net fees charged to participants under such program, which           shall decrease to 9% at such time as the cumulative total of (i) net           fees for the debt protection program and (ii) net premiums written           since the First Amendment Effective Date for the business written           under this Agreement and the Louisiana SERA (as defined in Section           A.(1)(b)(ii) of the Group Experience Rating/Contingent Compensation           Addendum), reaches $125,000,000.  6.   The amounts to be used for future inception-to-date calculations under the      Group Experience Rating/Contingent Compensation Addendum as of the First      Amendment Effective Date are set forth on Schedule C attached hereto and      made a part hereof.  7.   The first paragraph of Section A and paragraph (1) of Section A of the      Group Experience Rating/Contingent Compensation Addendum shall be amended      to read as follows:       A.   Within 10 days after each calendar quarter commencing with the First           Amendment Effective Date and continuing while said Service Expense           Reimbursement Agreement is in force, Company agrees to return Group           Experience Rating/Contingent Compensation Credit on the coverages           written under said Agreement as follows:                                         4         (1)  Premium amounts will be calculated as follows and added together.            (a)  The cumulative net earned premiums written in the State of Texas                prior to the First Amendment Effective Date, which shall be based                upon the agreed-upon cumulative figures set forth in paragraph 5                of the First Amendment, for each type of insurance shown in                Paragraph H of this Addendum, multiplied by 90%.            (b)  The cumulative net earned premiums in the State of Texas                commencing with the First Amendment Effective Date and continuing                for all months (each month being considered as a full month                rather than day-by-day) in which some time during such month the                total combined net fees and insurance premiums written since the                First Amendment Effective Date under the following agreements                amount to $125,000,000 or less:                (i)  this Agreement, and                (ii) the Service Expense Reimbursement Agreement effective July                     1, 1998 covering Louisiana business entered into between                     Voyager Life Insurance Company, Voyager Property & Casualty                     Insurance Company, American Bankers Life Assurance Company                     of Florida, Ranchers & Farmers Mutual Insurance Company and                     CAI, L.P., successor in interest to Affiliates Insurance                     Agency, Inc., as amended from time to time (in which                     American Bankers Insurance Company of Florida and American                     Reliable Insurance Company were subsequently added and                     Voyager Life Insurance Company and Ranchers & Farmers Mutual                     Insurance Company were subsequently deleted as signatories)                     (the "Louisiana SERA"), and                (iii) net fees for the debt protection program                 multiplied by 89.75%; and            (c)  The cumulative net earned premiums in the State of Texas                commencing with the first full month (each month being considered                as a full month rather than day-by-day) written since the First                Amendment Effective Date, in which the total combined net fees                and insurance premiums under the agreements set forth in                paragraphs (i) through (iii) immediately above, exceed                $125,000,000, multiplied by 90%            and from the total there shall be deducted the sum of the following           items for each type of insurance:                                         5              (d)  The cumulative total of all losses and loss expenses, including                all allocated loss adjustment expenses incurred, and           (e)  All reserves, and           (f)  The cumulative total of all earned expense reimbursements, paid                or allowed Customer by Company, and           (g)  The cumulative total of all amounts previously paid to Customer                in accordance with this Addendum.  8.   The last paragraph of Section A of the Group Experience Rating/Contingent      Compensation Addendum, which is set forth below, shall be deleted in its      entirety:            For purposes of this Addendum, any amounts accumulated under that           certain Group Experience Rating/Contingent Compensation Credit           Addendum, made effective December 30, 1994, from the sale of the above           described Insurance in Texas shall be included in the calculations of           the Group Experience Rating/Contingent Compensation Credit under this           Paragraph A.  9.   Section G of the Group Experience Rating/Contingent Compensation Addendum      shall be amended to read as follows:       G.   In the event of termination of the Service Expense Reimbursement           Agreement, Company shall continue to pay expense reimbursement           payments as outlined in Section A of this Addendum. However, in the           event a "deficit" exists or is projected at any time as a result of           the calculation under Section A of this Addendum, Company may decrease           the rate of Expense Reimbursement as provided in Section 8 of the           Agreement.  10.  Section H of the Group Experience Rating/Contingent Compensation Addendum      shall be amended to read as follows:       H.   It is hereby understood that Paragraph A pertains to only the           following types of insurance, at the indicated percent rates as shown           for each type of insurance:                 Type of Insurance                  Percent Rate                -----------------                  ------------                Credit Life                             (*)                Credit Accident & Health                (*)                Credit Property                         (*)                Involuntary Unemployment Ins.           (*)                Leased Property                         (*)       --------      (*)                                         6        (i)   The Percent Rate shall be 90% prior to the First Amendment Effective           Date.      (ii)  After the First Amendment Effective Date, the portion of insurance           under this Agreement to which the Percent Rate applies shall be 89.75%           as to any month (each month being considered as a full month rather           than day-by-day) in which the total combined net fees and insurance           premiums written since the First Amendment Effective Date under the           following agreements amount to $125,000,000 or less: (a) this           Agreement, and (b) the Louisiana SERA, and (c) net fees for the debt           protection program.      (iii) After the First Amendment Effective Date, the portion of insurance           under this Agreement to which the Percent Rate applies shall be 90%           commencing with any month (each month being considered as a full month           rather than day-by-day) in which the total combined net fees and           insurance premiums written since the First Amendment Effective Date           under the agreements listed in paragraphs (a) through (c) immediately           preceding exceed $125,000,000.       The attached Schedule B sets forth an illustration of the calculation of      the Group Experience Rating/Contingent Compensation Credit using the above      rates.  11.  Section I of the Group Experience Rating/Contingent Compensation Addendum      shall be amended to read as follows:       Until such time as this Agreement is terminated, Company agrees to pay      Customer investment income on the cash held by the Company, at the interest      rate of an 18 month CD, as posted on the Bank One/Chase website. The cash      held by the Company shall be calculated according to the following formula:                      [*]% of the cumulative net written premium           Less:      the cumulative losses and loss expenses paid;                      the cumulative advance commissions paid or retained; and                      the cumulative contingent commissions paid or due.           Equals:    cash held by Company.       Each month the average cash held for the month will be calculated based on      current and prior month balances of total cash held. The average cash held      for the month shall be multiplied by the 18 month CD rate posted in the      Bank One/Chase website at the end of the month divided by 12, to determine      the interest accrued for the month. The product of this                                         7         calculation for each of the three months in a quarter shall be added to      determine the investment income to be paid on cash withheld for the      quarter.      ----------      [*] This percentage rate shall be the same as that applied under Section H      of this Addendum, as amended by the First Amendment, based on the blended      rate that results from the sliding scale contained therein.  12.  Schedule A of the Agreement shall be deleted in its entirety and restated      as attached to this First Amendment.  13.  Section J. shall be added to the Group Experience Rating/Contingent      Compensation Addendum and shall read as follows:       J.   In the event Company has exercised its right to change the rate of           Expense Reimbursement as provided in Section 8 of the Service Expense           Reimbursement Agreement, as amended, Company and Customer shall           thereafter conduct a review of the Group Experience Rating/Contingent           Compensation Addendum to determine whether any adjustments under said           Addendum are appropriate in order to avoid a future deficit or to           maintain equity as to the Company and/or Customer in the calculation           under the Group Experience Rating/Contingent Compensation Addendum.           Any adjustment to the Group Experience Rating/Contingent Compensation           Addendum shall be made only upon mutual written agreement, and any           dispute relating thereto shall be resolved in accordance with the           arbitration provisions of Section 10 of this Agreement.  14.  All other provisions of the Agreement shall remain in full force and      effect, unaffected hereby.   IN WITNESS WHEREOF, this Amendment is executed as of the date set forth above by the duly authorized representative of each party.                                                CAI, L.P., by its General Partner                                                      Conn Appliances, Inc.                                              By:           /s/ David R. Atnip                                                ---------------------------------                                              Print Name:   David R. Atnip                                                       --------------------------                                              Title:        Treasurer                                                  -------------------------------                                              Date:         7/21/2005                                                 --------------------------------                                          8                                                  AMERICAN BANKERS LIFE ASSURANCE                                               COMPANY OF FLORIDA as successor in                                               Interest to VOYAGER LIFE INSURANCE                                               COMPANY                                                By:          /s/ Valerie Seasholtz                                                  -------------------------------                                               Print Name:  Valerie Seasholtz                                                         ------------------------                                               Title:       Senior Vice President                                                    -----------------------------                                               Date:        7/21/2005                                                   ------------------------------                                                 VOYAGER PROPERTY & CASUALTY                                               INSURANCE COMPANY                                                By:          /s/ Valerie Seasholtz                                                  -------------------------------                                               Print Name:  Valerie Seasholtz                                                         ------------------------                                               Title:       Senior Vice President                                                    -----------------------------                                               Date:        7/21/2005                                                   ------------------------------                                                 AMERICAN BANKERS LIFE ASSURANCE                                               COMPANY OF FLORIDA                                                By:          /s/ Valerie Seasholtz                                                  -------------------------------                                               Print Name:  Valerie Seasholtz                                                         ------------------------                                               Title:       Senior Vice President                                                    -----------------------------                                               Date:        7/21/2005                                                   ------------------------------                                                 AMERICAN BANKERS INSURANCE                                               COMPANY OF FLORIDA                                                By:          /s/ Valerie Seasholtz                                                  -------------------------------                                               Print Name:  Valerie Seasholtz                                                          -----------------------                                               Title:       Senior Vice President                                                    -----------------------------                                               Date:        7/21/2005                                                   ------------------------------                                         9                                                  AMERICAN BANKERS GENERAL                                               AGENCY, INC. on behalf of                                               RANCHERS & FARMERS MUTUAL                                               INSURANCE COMPANY                                                By:          /s/ Charles D Helton                                                  -------------------------------                                               Print Name:  Charles D Helton                                                          -----------------------                                               Title:       President                                                    -----------------------------                                               Date:        7/21/2005                                                   ------------------------------                                            10                                       SCHEDULE A  This Schedule A is attached to and by reference made a part of the Service Expense Reimbursement Agreement indicated above (the "Agreement") between the insurance companies named below ("Company") and CAI, L.P. ("Customer"). This Schedule A is effective June 30, 2005.                                                                             Maximums Allowed - ------------------------------------------------------------------------------------                                             Expense                                          Reimbursement  Company*     Insurance Type      State      Rate       Coverage  Benefits   Term - ----------   ---------------      -----      ----       --------  --------   ---- - ------------------------------------------------------------------------------------   ABLAC      Credit Life - SP      TX         35%        $20,000     N/A    60 mos. - ------------------------------------------------------------------------------------   ABLAC      Credit Life - MOB     TX         35%        $20,000     N/A     1 mo. - ------------------------------------------------------------------------------------   ABLAC      Credit Accident &     TX         35%          N/A      $800    60 mos.                 Health - SP - ------------------------------------------------------------------------------------   ABLAC      Credit Accident &     TX         35%          N/A      $800     1 mo.                Health - MOB - ------------------------------------------------------------------------------------    R&F      Credit Property - SP   TX         35%        $20,000     N/A    60 mos. - ------------------------------------------------------------------------------------    R&F     Credit Property - MOB   TX         35%        $20,000     N/A     1 mo. - ------------------------------------------------------------------------------------    R&F        Leased Property      TX         35%        $10,000     N/A     1 mo. - ------------------------------------------------------------------------------------   ABIC          Involuntary        TX         35%          N/A      $500    60 mos.              Unemployment - SP - ------------------------------------------------------------------------------------   ABIC          Involuntary        TX         35%          N/A      $500    60 mos.             Unemployment - MOB - ------------------------------------------------------------------------------------   *Initials designate the following companies: ABIC - American Bankers Insurance Company of Florida ABLAC - American Bankers Life Assurance Company of Florida R&F - Ranchers & Farmers Mutual Insurance Company                                          11                                       SCHEDULE B   If, as of the end of any month, total combined net fees and insurance premiums written since the First Amendment Effective Date under the specified agreements total $125,000,000 or less, the Percent Rate under Section H of the Group Experience Rating/Contingent Compensation Addendum, based upon which a payment shall be made at the end of the respective quarter, shall be 89.75% as to each such month (each month being considered as a full month rather than day-by-day).  If, as of the end of any month, total combined net fees and insurance premiums written since the First Amendment Effective Date under the specified agreements exceed $125,000,000, the Percent Rate under Section H of the Group Experience Rating/Contingent Compensation Addendum, based upon which a payment shall be made at the end of the respective quarter, shall be 90% for that month (each month being considered as a full month rather than day-by-day) and thereafter.                                         12    EX-10.21 9 a5112243ex10-21.txt EXHIBIT 10.21                         SERVICE EXPENSE REIMBURSEMENT AGREEMENT       BY THIS AGREEMENT, the insurance companies,  managers and agencies named in the Schedule A(s) attached to and forming a part of this Agreement,  hereinafter referred  to  as  "Company,"  and  CAI  Credit  Insurance   Agency,   Inc.,  its subsidiaries  and affiliates  hereinafter  referred to as  "Customer,"  agree as follows effective July 1, 1998.  1.    Company has offered to provide insurance coverage,  service and facilities       through its agents for  insurance  programs,  as described in the Schedule       A(s) attached,  for insuring Credit Life, Credit Accident & Health, Credit       Property,  Leased Property, and Involuntary  Unemployment  Insurance.  The       borrowers,  members,  customers,  lessees  or any other  person  having an       interest in a policy of  certificate  subject to this  Agreement  shall be       referred to as "Participant(s)."  2.    The development and  implementation  of such insurance program will result       in additional administrative costs and expenses for Customer.  3.    Customer  and  Company  have  agreed  upon  their  respective  duties  and       responsibilities  in the  matter  of  providing  services,  coverages  and       facilities in connection  with such  insurance  program and upon a formula       for reimbursement to Customer of sums necessary to compensate Customer for       its costs and expense therein incurred.  4.    Because it is impossible to determine precisely the cost and expense which       will  be  incurred   by   Customer   in   carrying   out  its  duties  and       responsibilities as herein specified, Company agrees to reimburse Customer       for its costs and expenses in the service and  administration of insurance       furnished under said programs as follows:        Company shall pay to Customer an Expense Reimbursement:              equal to the percentage of net premiums written or the fixed fee             shown in the column headed Reimbursement Rate in the Schedule A(s)             attached hereto.        It is a  condition  of this  Agreement  that  Customer  refund  ratably to       Company on canceled  coverages  and on  reductions in premiums at the same       rate at which such Expense Reimbursement was originally paid.  5.    Customer  agrees to cooperate with Company in all  reasonable  particulars       contemplated  by this  Agreement  and  understands  that  its  duties  and       responsibilities  in the  matter  of  providing  services,  coverages  and       facilities and for which it is to be reimbursed hereunder are:        (A)   Distribute   to   Participants,   Company's   forms,   supplies  and             instructions for use as well as material covering the administration             and distribution of policies or certificates of insurance;                                         1          (B)   Permit  the use of its  credit  card,  or such  other  method  as it             authorized by law, for the  collection of premium  contributions  by             Participants.  Maintain an insurance  escrow account,  receive,  and             account for all premiums and remit to Company  premiums on insurance             written less cancellation refunds with respect to insurance programs             contemplated by this Agreement;        (C)   Perform clerical functions, typing and mailing of insurance policies             or certificates, endorsements, cancellations and periodic statements             covering premium due, net of refunds and other allowances;        (D)   Furnish  Company with reports of all  transactions  of  Participants             pursuant to insurance  programs of Company,  contemplated under this             Agreement;        (E)   Perform such other similar administrative actions as may be required             by Company.        All  premiums  held by  Customer  pursuant  to (B) above  shall be held as       trustee for Company until  delivered to it. Company  reserves the right to       require  Customer  to  deposit  all  premiums,   less  Customer's  Expense       Reimbursement  as set forth in Paragraph 4 hereof,  in a premium  trust or       escrow account.        The reports and remittances  provided for in (B) and (D) above shall be on       forms  provided by or acceptable to Company,  and shall be  transmitted in       time to be  received  by Company not later than twenty (20) days after the       end of each  calendar  month.  Premium  payments  not made by the due date       above  shall bear  interest  from the due date at the rate of one  percent       (1%) per month, or the applicable legal maximum rate, whichever is less.  6.    Periodically,  Company  may  require  evidence  that  expense  incurred by       Customer was approximately equal to reimbursement calculated hereunder.        Customer shall upon request by Company's authorized representative, during       normal business hours, make available for inspection all books and records       pertaining  to business  covered by this  Agreement  and the Schedules and       Addenda attached hereto.  7.    Company  reserves the right to offset any amounts due to or from  Customer       under this  Agreement  and its Schedules and Addenda (if any) Credit Life,       Credit Accident & Health, Credit Property,  Involuntary Unemployment,  and       Leased  Property  Insurance,  against any amounts due to or from  Customer       under  this or any  agreements  Customer  may have  from time to time with       Company and/or any other  subsidiaries  or affiliates of American  Bankers       Insurance Group, Inc. Customer will have thirty (30) days to challenge any       amounts due Company prior to such offset being made and, if challenged, no       offsets  will be made.  The issue will be referred to  arbitration,  as in       Paragraph 10.  8.    Company may  authorize  Customer to offer new products  and may  establish       rates of Expense Reimbursement on such new products. Company also reserves       the right to cease  offering any product listed on Schedule A at any time.       Company may also prospectively  change the rates of Expense  Reimbursement       for  products  on  Schedule  A upon  thirty  (30) days  advance  notice if       required by state  regulatory  authority,  or with the written  consent of       Customer if one or more product lines is in deficit.  This written consent       shall  not be made  unreasonably  withheld.  In all other  respects,  this       Agreement may be altered or amended only in writing  signed by both of the       parties.                                         2    9.    This Agreement may be terminated by Company at any time by giving Customer       thirty (30) days notice, in writing, of its intention to terminate.        This Agreement may be terminated at any time by the mutual consent of both       Customer and Company.        This Agreement may be terminated by Customer with cause at any time,  upon       thirty  (30) days  written  notice  provided  to  Company.  Cause shall be       defined  as a  material  breach  of the  Agreement  which is not  cured by       Company within thirty (30) days of written notice thereof.  10.  (A)    Any and all disputed or  disagreements  arising  between the parties             pertaining to or relating in any manner to this Agreement, including             but not limited to any disputes or  disagreements  as to the meaning             or interpretation of this Agreement,  or any portion thereof, or the             relationship of the parties created under this Agreement, upon which             an amicable understanding cannot be reached, including any breach of             this Agreement,  are to be decided by arbitration in accordance with             the rules of the American  Arbitration  Association,  and subject to             applicable  provisions  of the  statutes of the state of Texas.  The             parties  agree  to  be  bound  by  the  majority   decision  of  the             arbitrators.  The  arbitration  proceeding  shall take place in Fort             Worth,  Texas,  unless another location is mutually agreed to by the             parties.  Each  party  shall be  responsible  for its own  costs and             expenses in arbitrating the dispute.        (B)   The  arbitrators  shall state in their decision the basis upon which             their  decision  may be  made.  An  appeal  may  be  made  from  the             arbitrators'  decision  to a court of general  jurisdiction  in Fort             Worth,  Texas,  on the  grounds  set  forth in the Texas  code.  All             parties to this Agreement, by signing this Agreement, consent to the             personal jurisdiction of the Texas courts.        (C)   Three arbitrators  shall be selected for the arbitration  panel. One             arbitrator  shall be selected by each  party.  The third  arbitrator             shall be selected  by the  arbitrators  names by each party.  In the             event an  agreement  cannot be reached  as to the third  arbitrator,             either  party may  petition  a court of  competent  jurisdiction  to             appoint a neutral  arbitrator as the third  arbitrator.  The Federal             Rules of Civil  Procedure  and the Federal  Rules of Evidence  shall             govern all procedural issues; however, upon order of the arbitrators             or by agreement of the parties, time limits contained therein may be             shortened or lengthened. The provision shall survive the termination             of this Agreement.                                         3    11.  (A)   Upon termination of this Agreement,  Customer shall promptly account             or and pay over to Company all  premiums  due Company  upon  risk(s)             placed by Customer.        (B)   Customer  further agrees,  upon  termination of this  Agreement,  to             render the normal and usual customer services for Company during the             remaining unexpired term of all policies placed by Customer.        (C)   Company agrees, upon termination of this Agreement,  to transfer 90%             of the net cumulative  premiums  collected,  less (1) the cumulative             total losses paid by the Company,  and (2) the  cumulative  total of             all payments  including,  but not limited to:  advance  commissions,             expense  reimbursements,   and  group  experience  rating/contingent             compensation  previously paid to the Agent, to any insurer  selected             by Agent  provided  such  insurer  is  approved  by the  appropriate             regulatory  authorities to write  insurance in the State of Texas of             the  type(s)  for  which  the  net  cumulative  premiums  have  been             collected   and  for  which  group   experience   ratings/contingent             compensation  payments may be or become due Customer.  All liability             for  subsequent  claims,  refunds  or any  other  policy/certificate             obligations  regardless  of  effective  or incurred  date,  shall be             transferred  from  Company to the approved  assuming  insurer on the             effective date of such assumption.  12.   In performing its obligations pursuant to this Agreement, Company may have       access to and receive disclosure of certain confidential information about       or  belonging  to  Customer,  including  but not  limited  to:  Customer's       marketing  philosophy,   techniques,   and  objectives,   advertising  and       promotional  copy,  competitive  advantages and  disadvantages,  financial       results, technological developments,  Participant and cardholder lists and       a variety of other  information  and materials  which  Customer  considers       confidential or proprietary (hereinafter "Confidential Information").        Company  agrees that  during the term of this  Agreement  and  thereafter,       Confidential   Information  is  to  be  used  solely  in  connection  with       satisfying its obligations  pursuant to this Agreement,  and that it shall       neither  disclose  Confidential  Information  to any  third  party nor use       Confidential  Information for its own benefit,  except as may be necessary       to perform its obligations pursuant to this Agreement.        All Confidential  Information furnished to Company in connection with this       Agreement  is the  exclusive  property of Customer  and, at the request of       Customer or upon  termination  of this  Agreement,  Company shall promptly       return to Customer  all  Confidential  Information  without  copying  such       information.        Company  shall  take  measures  to  prevent  its  agents,   employees  and       subcontractors  from using or  disclosing  any  Confidential  Information,       except as may be necessary for Company to perform its obligations pursuant       to this  Agreement.  Company  agrees  that it may not use,  rent,  sell or       authorize the use of the names and addresses supplied by Customer.                                         4          This provision shall survive the termination of this Agreement.  13.   Company  hereby agrees to indemnify  Customer,  its  directors,  officers,       employees,  and corporate affiliates (the "indemnified parties"), and hold       them  harmless  against and pay on their behalf any sums which any of them       shall become legally  obligated to pay as damages,  fines,  interest,  and       judgments  which  directly or  indirectly  arise from or are caused by the       wrongful  or  negligent  acts or  omissions  of Company or its  directors,       officers,  employees and corporate  affiliates,  as well as any reasonable       attorney's fees, costs and expenses incurred.  It is a condition precedent       to the  obligations of Company under this  Paragraph that any  indemnified       party who is being indemnified  hereunder shall cooperate in such defense.       Notwithstanding  the  indemnification  provided herein, it is specifically       agreed that Customer shall  participate on a pro rata basis with regard to       any premium  refunds or rebates made by Company which may be occasioned by       any claim, controversy, dispute, lawsuit, or administrative proceeding.  14.   It is a condition precedent to payment of any amounts under this Agreement       by Company  that  Customer  shall  certify in writing to Company  that all       known claims have been reported to Company.  It is understood  and agreed,       however,  that no waiver of this condition  precedent  shall result should       Company fail to require such certification of claims.  15.   This  Agreement  together  with any insurance  programs  designated by the       parties shall constitute the entire contract between the parties and there       are no other agreements, oral or written, prior to or contemporaneous with       this Agreement, other than that stated herein.  16.   This Agreement has been executed in a number of Counterparts, any of which       may be taken as an original.  17.   This  Agreement  is  executed  on behalf of Company  and  Customer  by the       authorized signatures on the Schedule A(s) attached hereto.  18.   Customer  may assign its right to receive  any monies due or to become due       from Company under this Agreement or any of its addenda, including but not       limited to Expense Reimbursement,  to any affiliate of Customer, including       any  affiliated  insurance  agent or agency,  or any other  individual  or       entity  authorized to sell or receive  compensation for the sale of any of       the  insurance  products  covered by this  Service  Expense  Reimbursement       Agreement.  An affiliate  shall be a parent,  a wholly owned or controlled       subsidiary  of  Customer or any  affiliate  which is under the same common       control or ownership as Customer.  Notice of assignment  shall be given to       Company,  in writing.  Such assignment shall not be binding on Company and       shall be of no effect until and unless Company  acknowledges,  in writing,       such  assignment.  Payment by  Company of any amount due by Company  under       this Agreement or any of its addenda to the assignee shall release Company       of  any  obligation  to  Customer  for  the  amount  paid.  No  subsequent       revocation of an  assignment  shall be binding on Company until and unless       Company acknowledges such revocation in writing.                                         5          In addition,  simultaneous with such assignment,  Customer may delegate to       any such  affiliate  any  administrative  duties of  Customer  that can be       performed under this Agreement by such  affiliate.  Written notice of such       delegation shall be given to Company. Neither the giving of such notice or       Company's  acknowledgment  or consent  to such  delegation  shall  release       Customer  from  any  responsibility  for  performance  of  any  duties  or       obligations under this Agreement or any of its addenda.  19.   In  consideration  of the mutual promises and covenants  contained in this       Service  Expense  Reimbursement  Agreement,   American  Bankers  Insurance       Company hereby guarantees to Customer, its affiliates and subsidiaries the       performance  by Company of all of Company's  obligations  contained in the       Service Expense Reimbursement  Agreement and any and all future amendments       or schedules thereto.  20.   The following Schedules and/or Addendas are attached to and made a part of       this Agreement at its inception:   - --------------------------------------------------------------------------------       Name of Schedule or Addenda:                          Form Number - -------------------------------------------------------------------------------- Service Expense Reimbursement Agreement-                SERA/SCH.A/9-10-94               Schedule A - -------------------------------------------------------------------------------- Service Expense Reimbursement Agreement-          S:\ASSIST\MICHELLE\CAICONT.SAM    Group Experience Rating/Contingent          Compensation Addendum - --------------------------------------------------------------------------------   VLIC  Voyager Life Insurance Company  VPCIC Voyager Property & Casualty Insurance Company  ABLAC American Bankers Life Assurance Company of Florida  R&F   Ranchers & Farmers County Mutual Insurance Company  s:\assist\michelle\caisera.sam                                         6                         SERVICE EXPENSE REIMBURSEMENT AGREEMENT                                    SCHEDULE A  This  Schedule  is  attached  to and by  `reference  made a part of the  Service Expense Reimbursement Agreement indicated above between the insurance companies, managers and agencies named below, hereinafter referred to as "Company", and CAl Credit Insurance Agency, Inc., hereinafter referred to as "customer", dated July 1, 1998. This Schedule is effective July 1, 1998.  NOW THEREFORE, IT IS MUTUALLY UNDERSTOOD AND AGREED AS FOLLOWS:        1.    Customer  has  agreed  to  offer,  on  Company's  behalf,  types  of             insurance  as  shown  in  Paragraph  2 to  Participants,  borrowers,             members, customers or lessees of:                          CAI CREDIT INSURANCE AGENCY, INC.        2.    Customer has agreed to provide services in connection with the types             of insurance  shown in the states  listed with maximums as shown and             for the  Expense  Reimbursement  rate  shown,  which may be either a             fixed amount or a percent of net premiums  written.  (gross premiums             less cancellations):          - -----------------------------------------------------------------------------------------                                                  Expense               Monthly Company*        Insurance Type         State  Reimbursement  Coverage  Benefits   Term                                                   Rate - -----------------------------------------------------------------------------------------    VLIC         Credit Life-SP          LA         35%        $20,000     N/A    60 Mos. - -----------------------------------------------------------------------------------------    VLIC        Credit Life - MOB        LA         35%        $20,000     N/A     1 Mo. - -----------------------------------------------------------------------------------------    VLIC    Credit Accident & Health -   LA         35%          N/A      $800    60 Mos.                      SP - -----------------------------------------------------------------------------------------    VLIC    Credit Accident & Health -   LA         35%          N/A      $800     1 Mo.                      MOB - -----------------------------------------------------------------------------------------   VPCIC       Credit Property - SP      LA         35%        $20,000     N/A    60 Mos. - -----------------------------------------------------------------------------------------   VPCIC      Credit Property - MOB      LA         35%        $20,000     N/A     1 Mo. - -----------------------------------------------------------------------------------------   VPCIC          Lease Property         LA         35%        $10,000     N/A     1 Mo. - -----------------------------------------------------------------------------------------   VPCIC     Involuntary Unemployment    LA         35%          N/A      $500     1 Mo. - -----------------------------------------------------------------------------------------   Execution of this Schedule A also constitutes  execution of all of the schedules and/or  addendas listed in Paragraph 19 of this Agreement of which this Schedule A becomes a part.    s:\assist\rnichelle\caiscala.S8ITI                                          7    Executed on behalf of the Company          Executed by or on behalf of the Agent at Fort Worth, Texas, this 21st            at Beaumont, Texas, this 21st day of  July ____, 1998.                   day of July ____, 1998.   AMERICAN BANKERS LIFE ASSURANCE COMPANY OF FLORIDA RANCHERS & FARMERS COUNTY                  CAI CREDIT INSURANCE AGENCY INC. MUTUAL INSURANCE COMPANY VOYAGER LIFE INSURANCE COMPANY VOYAGER PROPERTY AND CASUALTY INSURANCE COMPANY   By:      /s/ Mark Cooper                   By:      /s/ Thomas J. Frank          --------------------------                 ---------------------------- Title:   Authorized Representative         Title:   President          --------------------------                 ---------------------------- Witness:    AMERICAN BANKERS INSURANCE COMPANY  By:      /s/ Mark Cooper          -------------------------- Title:   Authorized Representative          -------------------------- Witness:  *Initials designate the following companies:  ABLAC  American Bankers Life Assurance Company of Florida R&F    Ranchers & Farmers County Mutual Insurance Company VLIC   Voyager Life Insurance Company VPCIC  Voyager Property & Casualty Insurance Company                                         8                        SERVICE EXPENSE REIMBURSEMENT A GREEMENT             GROUP EXPERIENCE RATING/CONTINGENT COMPENSATION ADDENDUM  THIS ADDENDUM is attached to and by reference made a part of the Service Expense Reimbursement   Agreement  indicated  above  between  the  insurance  companies, managers and agencies named below, hereinafter referred to as "Company", and CAI Credit Insurance Agency, Inc., hereinafter referred to as "Customer", dated July 1, 1998. This Addendum is effective July 1, 1998.  NOW THEREFORE, IT IS MUTUALLY UNDERSTOOD AND AGREED AS FOLLOWS:  A.    Within 10 days  after  August 1, 1998 (such  date  hereinafter  deemed the       "accounting  date"),  and within 10 days after each month thereafter while       said Service Expense  Reimbursement  Agreement is in force, Company agrees       to return a Group Experience Rating/Contingent  Compensation Credit on the       coverages written under said Agreement as follows:        (1)   The cumulative earned premiums written in the State of Louisiana for             each type of insurance shown in Paragraph H of this Addendum will be             multiplied  by the  percent  shown in  Paragraph  H for each type of             insurance and from the product of this multiplication there shall be             deducted the sum of the following items for each type of insurance:              a)    The  cumulative   total  of  all  losses  and  loss  expenses,                   including all allocated loss adjustment expenses incurred, and              b)    All reserves, and              c)    The  cumulative  total of all earned  expense  reimbursements,                   paid or allowed Customer by Company, and              d)    The  cumulative  total  of  all  amounts  previously  paid  to                   Customer in accordance with this Addendum.        (2)   "Losses"  include,  but are not  limited  to,  any  amounts  Company             becomes  obligated  to pay  to any  third  party  arising  out of or             related  to  claims  made  under  coverages  under  this  Agreement,             including, but not limited to, damages, court awards or judgments or             any kind or nature assessed against Company.        For purposes of this Addendum,  any amounts accumulated under that certain       Group Experience  Rating/Contingent  Compensation  Credit  Addendum,  made       effective  December  30,  1994,  from  the  sale  of the  above  described       insurance in Louisiana shall be included in the  calculations of the Group       Experience Rating/Contingent Compensation Credit in this Paragraph A.  B.    If the  combined  remainder  computed  in  Paragraph  A for all  types  of       insurance shown in Paragraph H is a positive figure,  Company shall pay to       Customer the amount of such remainder  provided that all premiums then due       Company  shall have been  received by Company.  If the combined  remainder       computed in Paragraph A for all types of insurance shown in Paragraph H is       a negative figure, the negative figure shall be carried over to subsequent       accountings  against any amounts that otherwise become payable to Customer       under aforesaid formula. Company reserves the right to require Customer to       repay any Group Experience Rating/Contingent  Compensation Credit received       because  of  errors  in  calculations  or  in  the  event  of  retroactive       reductions in premium rates mandated by state regulatory authorities.                                         9    C.    The  Group  Experience  Rating/Contingent  Compensation  Credit to be paid       under this Addendum shall not exceed the maximum amount promulgated by the       insurance  statutes and  regulations  of the state wherein the business is       written.  D.    Payments made under the provisions of this Addendum by Company to Customer       shall discharge Company's obligation hereunder for the amounts so paid.  E.    Company  reserves the right to offset any amounts due to or from  Customer       under this  Agreement  and its  Schedules  and Addenda (if any) for Credit       Life,  Credit  Accident & Health,  Credit  Property,  and Leased  Property       insurance  against any amounts due to or from  Customer  under this or any       agreements  Customer  may have from time to time with  Company  and/or any       other subsidiaries or affiliates of American Bankers Insurance Group, Inc.       The  Customer  will have  thirty (30 days) to  challenge  any  amounts due       Company  prior to such offset  being made and, if  challenged,  no offsets       will be made. The issue will be referred to arbitration as in Paragraph 10       of the S.E.R.A. agreement.  F.    It is a condition  precedent to payment of any amounts under this Addendum       by Company  that  Customer  shall  certify in writing to Company  that all       known claims have been reported to Company.  It is understood  and agreed,       however,  that no waiver of this condition  precedent  shall result should       Company fail to require such certification of claims.  G.    In  the  event  of  termination  of  the  Service  Expense   Reimbursement       Agreement, Company shall continue to pay expense reimbursement payments as       outlined  in  Section  A of this  Addendum.  However,  in the  event  of a       "deficit", which is deemed to exist any time the result of the calculation       under the provision of paragraph A of this Addendum is a negative  number,       Customer  shall pay the amount of said  deficit to the  Company  within 10       days of receiving the respective monthly statement.        When all policy and/or certificate liabilities,  including losses and loss       adjustment  expenses have been  terminated by expiration,  cancellation or       prepayment,  Company shall render a final accounting to Customer,  Company       may  withhold  payment  for  this  final  accounting  until  customer  has       certified  in writing to Company  that all known  claims  against  company       shall have been duly reported to Company.  H.    It is hereby  understood  that  Paragraph A pertains to only the following       types of insurance,  at the indicated percent rates as shown for each type       of insurance.                                          10    - --------------------------------------------------------------------------------         Type of Insurance                             Percent Rate  - --------------------------------------------------------------------------------          Credit Life                                      90% - --------------------------------------------------------------------------------      Credit Accident & Health                             90% - --------------------------------------------------------------------------------         Credit Property                                   90% - --------------------------------------------------------------------------------   Involuntary Unemployment Ins.                           90% - --------------------------------------------------------------------------------         Leased Property                                   90% - --------------------------------------------------------------------------------  I.    Until such time as this  Agreement is  terminated,  Company  agrees to pay       Customer  investment  income  on the  cash  held  by the  Company,  at the       interest rate of a one year CD, at Chase Bank Texas National Association's       main Fort  Worth,  Texas  branch.  The cash held by the  Company  shall be       calculated according to the following formula:                          90% of the cumulative net written premium             Less:       the cumulative losses and loss expenses paid;                         the cumulative advance commissions paid or retained;                         and the cumulative contingent commissions paid or due.             Equals      cash held by Company.        Such investment  income will be paid within thirty (30) days of the end of       each calendar  quarter based on the average of the cash held by Company at       the beginning and end of the prior quarter.                                         11    s:\assist\rnichelle\caiscala.S8ITI  Executed on behalf of the Company          Executed by or on behalf of the Agent at Fort Worth, Texas, this 21st            at Beaumont, Texas, this 21st day of July ____, 1998.                    day of July ____, 1998.   AMERICAN BANKERS LIFE ASSURANCE COMPANY OF FLORIDA RANCHERS & FARMERS COUNTY                  CAI CREDIT INSURANCE AGENCY INC. MUTUAL INSURANCE COMPANY VOYAGER LIFE INSURANCE COMPANY VOYAGER PROPERTY AND CASUALTY INSURANCE COMPANY   By:      /s/ Mark Cooper                   By:     /s/ Thomas J. Frank          -------------------------                 ----------------------------- Title:   Authorized Representative         Title:  President          -------------------------                 ----------------------------- Witness:    *Initials designate the following companies:  ABLAC  American Bankers Life Assurance Company of Florida R&F    Ranchers & Farmers County Mutual Insurance Company VLIC   Voyager Life Insurance Company VPCIC  Voyager Property & Casualty Insurance Company                                         12    EX-10.21.1 10 a5112243ex10-211.txt EXHIBIT 10.21.1                                   FIRST AMENDMENT TO                      SERVICE EXPENSE REIMBURSEMENT AGREEMENT                                    (Louisiana)  This Amendment is entered into as of July 1, 2005 (the "First Amendment Effective Date") by and among American Bankers Life Assurance Company of Florida, as successor in interest to Voyager Life Insurance Company, Voyager Property & Casualty Insurance Company, American Bankers Life Assurance Company of Florida, American Bankers Insurance Company of Florida, American Reliable Insurance Company and American Bankers General Agency, Inc. on behalf of Ranchers & Farmers Mutual Insurance Company (collectively "Company") and CAI Credit Insurance Agency, Inc. ("Customer") and amends that certain Service Expense Reimbursement Agreement entered into between Company and Customer effective July 1, 1998 (the "Agreement").  In consideration of the mutual promises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:  1.    The Agreement shall be amended so as to delete Ranchers & Farmers Mutual       Insurance Company and Voyager Life Insurance Company as signatories, and       to add American Bankers Insurance Company of Florida and American Reliable       Insurance Company as signatories.  2.    Section 8 of the Agreement shall be amended to read as follows:        8.    Company may prospectively change the rates of Expense Reimbursement             for products on Schedule A upon thirty (30) days advance notice if             required by state regulatory authority, or in the event of a premium             rate decrease. Company may decrease the rates of Expense             Reimbursement upon thirty (30) days advance notice in the event of a             projected deficit under the Group Experience Rating/ Contingent             Compensation Addendum, in which event such decrease shall be only in             an amount which Company deems necessary to prevent or cure such             deficit, and such decreased rates shall continue in effect only for             the period of time necessary to prevent or cure such deficit. In all             other respects, this Agreement may be altered or amended only in             writing signed by both of the parties.  3.    Section 9 of the Agreement shall be amended to read as follows:        9.    (a) Term.             This Agreement shall be for a term of four years from the First             Amendment Effective Date, and shall automatically renew for             successive one (1) year terms (each a "Renewal Term") unless written             notice is given at least ninety (90) days prior to the effective             date of any term. In the event, as of any renewal date, any deficit             exists under the Contingent Compensation Addendum, then Customer             shall not have the right to terminate this Agreement or any group             master policy until such time as the deficit is cured.                                         1                (b) Termination by mutual consent.             This Agreement may be terminated at any time by the mutual consent             of both Customer and Company.              (c) Termination with cause by Company.             Subject to the cure provisions contained herein, Company may             immediately terminate this agreement by written notice to Customer             in the event of (i) Customer's violation of any applicable law             relating to the offer, sale or administration of the insurance or             debt protection programs and the violation continues for fifteen             (15) days after Customer has received notice of the violation; (ii)             material breach of this Agreement by Customer, which material breach             continues for thirty (30) days after Customer has received notice of             the breach; (iii) gross neglect of duty, fraud, misappropriation, or             embezzlement by Customer or its affiliates of funds owed to Company             or any of its affiliates under this Agreement or any other agreement             with Customer or any of its affiliates; (iv) Customer or any of its             affiliates shall become the subject of any order or injunction of             any court or governmental body relating to the offer, sale or             administration of the insurance or debt protection programs and such             order or injunction is not dismissed within thirty (30) days; or (v)             Customer's voluntary bankruptcy, insolvency or assignment for the             benefit of creditors. For purposes of this Agreement, an "affiliate"             of Company is defined as any entity that is a member company of             Assurant Solutions/Assurant Specialty Property or any entity under             common ownership with such entity, and an "affiliate" of Customer             shall mean any subsidiary, parent or successor corporation of             Customer.              (d) Termination with cause by Customer.             Subject to the cure provisions contained herein, Customer may             immediately terminate this Agreement by written notice to Company in             the event of (i) Company's violation of any applicable law relating             to the offer, sale or administration of the insurance or debt             protection programs and the violation continues for fifteen (15)             days after Company has received notice of the violation; (ii)             material breach of this Agreement by Company, which material breach             continues for thirty (30) days after Company has received notice of             the breach; (iii) gross neglect of duty, fraud, misappropriation, or             embezzlement by Company of funds owed Customer under this Agreement             or any other agreement with Company or any of its affiliates; (iv)             Company or its affiliates shall become the subject of any order or             injunction of any court or governmental body relating to the offer,             sale or administration of the insurance or debt protection programs             and such order or injunction is not dismissed within thirty (30)             days; or (v) Company's voluntary bankruptcy, insolvency or             assignment for the benefit of creditors.                                         2                (e) Right to cure.             Both parties shall have the right to cure any event that would             provide either party the right to terminate this Agreement for cause             within thirty (30) days after written notice is received of the             occurrence of such event unless a shorter period of time to cure             such occurrence is provided by this Agreement. Such notice shall             include a specific reference to the provision or provisions of this             Agreement which are alleged to have been breached, a description of             the event giving rise to the alleged violation, and the action to be             taken by the party alleged to have violated the Agreement. During             the cure period, neither party shall terminate the Agreement.             Paragraphs 9(c)(iii) and 9(d)(iii) are hereby expressly excluded             from this right to cure.  4. Section 21 shall be added to the Agreement as follows:        21.   As soon as practicable, Company agrees to retain a program             management/training resource who will reside in Texas and who will             have daily interaction with Customer's representatives in an effort             to increase sales volume. One resource shall be hired with respect             to all products underwritten or issued by Company and its affiliates             under this and any other agreement between Company and Customer.  5. Section 22 shall be added to the Agreement as follows:        22.   Exclusivity.             During the term of this Agreement, as extended from time to time,             Customer shall utilize Company exclusively for the insurance written             hereunder, or any product which provides similar coverage.              Notwithstanding the foregoing, in the event a product offered by             Company hereunder is discontinued in any state and Company is unable             to offer a substantially similar replacement product immediately,             Customer may obtain such discontinued product for its customers in             the affected state from another carrier. Company will provide             Customer notice of plans to discontinue a product ninety (90) days             prior to discontinuation, unless a regulatory mandate does not allow             for as much as ninety (90) days advance notice.              Further, in the event of a proposed rate decrease in any state which             results in a rate for any product or group of products which would             produce a decrease in annual premium production or debt protection             fees greater than $100,000, then Company shall have sixty (60) days             from and after the scheduled implementation date of the rate             decrease to attempt to obtain approval of a different rate. If             Company is unable within said sixty (60) days to obtain approval of             a rate which is within one percent (1%) of the rate for a similar             product available through another carrier in said state, then at the             end of said sixty (60) day period Customer may offer such product             through another carrier in the affected state until such time as             Company can offer a rate for a substantially similar product that is             within one percent (1%) of the alternative carriers' rate.                                         3                Customer shall not terminate or aid, directly or indirectly, in the             termination of any insurance written hereunder unless such             termination is initiated by an insured, without encouragement by             Customer. Nothing herein shall prohibit individual customer             cancellations handled in the normal course of business.              Further, in the event Customer implements a debt protection program,             Company shall administer said debt protection program at a fee equal             to 9.25% of net fees charged to participants under such program,             which shall decrease to 9% at such time as the cumulative total of             (i) net fees for the debt protection program and (ii) net premiums             written since the First Amendment Effective Date for the business             written under this Agreement and the Texas SERA (as defined in             Section A.(1)(b)(ii) of the Group Experience Rating/Contingent             Compensation Addendum), reaches $125,000,000.  6.    The amounts to be used for future inception-to-date calculations under the       Group Experience Rating/Contingent Compensation Addendum as of the First       Amendment Effective Date are set forth on Schedule C attached hereto and       made a part hereof.  7.    The first paragraph of Section A and paragraph (1) of Section A of the       Group Experience Rating/Contingent Compensation Addendum shall be amended       to read as follows:        A.    Within 10 days after each calendar quarter commencing with the First             Amendment Effective Date and continuing while said Service Expense             Reimbursement Agreement is in force, Company agrees to return Group             Experience Rating/Contingent Compensation Credit on the coverages             written under said Agreement as follows:              (1)   Premium amounts will be calculated as follows and added                   together.                    (a)   The cumulative net earned premiums written in the State                         of Louisiana prior to the First Amendment Effective                         Date, which shall be based upon the agreed-upon                         cumulative figures set forth in paragraph 5 of the First                         Amendment, for each type of insurance shown in Paragraph                         H of this Addendum, multiplied by 90%.                    (b)   The cumulative net earned premiums in the State of                         Louisiana commencing with the First Amendment Effective                         Date and continuing for all months (each month being                         considered as a full month rather than day-by-day) in                         which some time during such month the total combined net                         fees and insurance premiums written since the First                         Amendment Effective Date under the following agreements                         amount to $125,000,000 or less:                                         4                            (i)   this Agreement, and                          (ii)  the Service Expense Reimbursement Agreement                               effective July 1, 1998 covering Texas business                               entered into between Voyager Life Insurance                               Company, Voyager Property & Casualty Insurance                               Company, American Bankers Life Assurance Company                               of Florida, Ranchers & Farmers Mutual Insurance                               Company and CAI, L.P., successor in interest to                               Affiliates Insurance Agency, Inc., as amended from                               time to time (in which American Bankers Insurance                               Company of Florida was subsequently added and                               Voyager Life Insurance Company and Voyager                               Property and Casualty Insurance Company were                               subsequently deleted as signatories) (the "Texas                               SERA"), and                          (iii) net fees for the debt protection program                          multiplied by 89.75%; and                    (c)   The cumulative net earned premiums in the State of                         Louisiana commencing with the first full month (each                         month being considered as a full month rather than                         day-by-day) written since the First Amendment Effective                         Date, in which the total combined net fees and insurance                         premiums under the agreements set forth in paragraphs                         (i) through (iii) immediately above, exceed                         $125,000,000, multiplied by 90%                    and from the total there shall be deducted the sum of the                   following items for each type of insurance:                    (d)   The cumulative total of all losses and loss expenses,                         including all allocated loss adjustment expenses                         incurred, and                   (e)   All reserves, and                   (f)   The cumulative total of all earned expense                         reimbursements, paid or allowed Customer by Company, and                   (g)   The cumulative total of all amounts previously paid to                         Customer in accordance with this Addendum.  8.    The last paragraph of Section A of the Group Experience Rating/Contingent       Compensation Addendum, which is set forth below, shall be deleted in its       entirety:              For purposes of this Addendum, any amounts accumulated under that             certain Group Experience Rating/Contingent Compensation Credit             Addendum, made effective December 30, 1994, from the sale of the             above described Insurance in Louisiana shall be included in the             calculations of the Group Experience Rating/Contingent Compensation             Credit under this Paragraph A.                                         5    9.    Section G of the Group Experience Rating/Contingent Compensation Addendum       shall be amended to read as follows:        G.    In the event of termination of the Service Expense Reimbursement             Agreement, Company shall continue to pay expense reimbursement             payments as outlined in Section A of this Addendum. However, in the             event a "deficit" exists or is projected at any time as a result of             the calculation under Section A of this Addendum, Company may             decrease the rate of Expense Reimbursement as provided in Section 8             of the Agreement.  10.   Section H of the Group Experience Rating/Contingent Compensation Addendum       shall be amended to read as follows:        H.    It is hereby understood that Paragraph A pertains to only the             following types of insurance, at the indicated percent rates as             shown for each type of insurance:                    Type of Insurance                       Percent Rate                   -----------------                       ------------                   Credit Life                                  (*)                   Credit Accident & Health                     (*)                   Credit Property                              (*)                   Involuntary Unemployment Ins.                (*)                   Leased Property                              (*)       --------       (*)       (i)   The Percent Rate shall be 90% prior to the First Amendment Effective             Date.       (ii)  After the First Amendment Effective Date, the portion of insurance             under this Agreement to which the Percent Rate applies shall be             89.75% as to any month (each month being considered as a full month             rather than day-by-day) in which the total combined net fees and             insurance premiums written since the First Amendment Effective Date             under the following agreements amount to $125,000,000 or less:             (a)   this Agreement, and             (b)   the Texas SERA, and             (c)   net fees for the debt protection program.        (iii) After the First Amendment Effective Date, the portion of insurance             under this Agreement to which the Percent Rate applies shall be 90%             commencing with any month (each month being considered as a full             month rather than day-by-day) in which the total combined net fees             and insurance premiums written since the First Amendment Effective             Date under the agreements listed in paragraphs (a) through (c)             immediately preceding exceed $125,000,000.                                         6          The attached Schedule B sets forth an illustration of the calculation of       the Group Experience Rating/Contingent Compensation Credit using the above       rates.  11.   Section I of the Group Experience Rating/Contingent Compensation Addendum       shall be amended to read as follows:        Until such time as this Agreement is terminated, Company agrees to pay       Customer investment income on the cash held by the Company, at the       interest rate of an 18 month CD, as posted on the Bank One/Chase website.       The cash held by the Company shall be calculated according to the       following formula:                          [*]%  of the cumulative net written premium               Less:     the cumulative losses and loss expenses paid;                         the cumulative advance commissions paid or retained; and                         the cumulative contingent commissions paid or due.               Equals:   cash held by Company.        Each month the average cash held for the month will be calculated based on       current and prior month balances of total cash held. The average cash held       for the month shall be multiplied by the 18 month CD rate posted in the       Bank One/Chase website at the end of the month divided by 12, to determine       the interest accrued for the month. The product of this calculation for       each of the three months in a quarter shall be added to determine the       investment income to be paid on cash withheld for the quarter.        ----------       [*] This percentage rate shall be the same as that applied under Section H       of this Addendum, as amended by the First Amendment, based on the blended       rate that results from the sliding scale contained therein.  12.   Schedule A of the Agreement shall be deleted in its entirety and restated       as attached to this First Amendment.  13.   Section J. shall be added to the Group Experience Rating/Contingent       Compensation Addendum and shall read as follows:        J.    In the event Company has exercised its right to change the rate of             Expense Reimbursement as provided in Section 8 of the Service             Expense Reimbursement Agreement, as amended, Company and Customer             shall thereafter conduct a review of the Group Experience             Rating/Contingent Compensation Addendum to determine whether any             adjustments under said Addendum are appropriate in order to avoid a             future deficit or to maintain equity as to the Company and/or             Customer in the calculation under the Group Experience             Rating/Contingent Compensation Addendum. Any adjustment to the Group             Experience Rating/Contingent Compensation Addendum shall be made             only upon mutual written agreement, and any dispute relating thereto             shall be resolved in accordance with the arbitration provisions of             Section 10 of this Agreement.                                         7    14.   All other provisions of the Agreement shall remain in full force and       effect, unaffected hereby.   IN WITNESS WHEREOF, this Amendment is executed as of the date set forth above by the duly authorized representative of each party.                                       CAI CREDIT INSURANCE AGENCY, INC.                                      By:           /s/ David Atnip                                        -----------------------------------------                                     Print Name:   David Atnip                                                ---------------------------------                                     Title:        President                                          ---------------------------------------                                     Date:         7/21/2005                                          ---------------------------------------                                       AMERICAN BANKERS LIFE ASSURANCE                                     COMPANY OF FLORIDA, as successor in interest                                     to VOYAGER LIFE INSURANCE COMPANY                                      By:           /s/ Valerie Seasholtz                                        -----------------------------------------                                     Print Name:   Valerie Seasholtz                                                ---------------------------------                                     Title:        Senior Vice President                                          ---------------------------------------                                     Date:             7/21/2005                                          ---------------------------------------                                       VOYAGER PROPERTY & CASUALTY                                     INSURANCE COMPANY                                      By:           /s/ Valerie Seasholtz                                        -----------------------------------------                                     Print Name:   Valerie Seasholtz                                                ---------------------------------                                     Title:        Senior Vice President                                          ---------------------------------------                                     Date:         7/21/2005                                           --------------------------------------                                         8                                        AMERICAN BANKERS LIFE ASSURANCE                                     COMPANY OF FLORIDA                                      By:           /s/ Valerie Seasholtz                                        -----------------------------------------                                     Print Name:   Valerie Seasholtz                                                ---------------------------------                                     Title:        Senior Vice President                                          ---------------------------------------                                     Date:         7/21/2005                                           --------------------------------------                                       AMERICAN BANKERS INSURANCE COMPANY                                     OF FLORIDA                                      By:           /s/ Valerie Seasholtz                                        -----------------------------------------                                     Print Name:   Valerie Seasholtz                                                ---------------------------------                                     Title:        Senior Vice President                                          ---------------------------------------                                     Date:         7/21/2005                                           --------------------------------------                                       AMERICAN RELIABLE INSURANCE COMPANY                                      By:           /s/ Authur W. Heggen                                        -----------------------------------------                                     Print Name:   Authur W. Heggen                                                ---------------------------------                                     Title:        Assistant Secretary                                          ---------------------------------------                                     Date:         7/21/2005                                           --------------------------------------                                      AMERICAN BANKERS GENERAL AGENCY, INC.                                     On behalf of                                     RANCHERS & FARMERS MUTUAL INSURANCE                                     COMPANY                                      By:           /s/ Charles D Helton                                        -----------------------------------------                                     Print Name:   Charles D Helton                                                ---------------------------------                                     Title:        President                                          ---------------------------------------                                     Date:         7/21/2005                                           --------------------------------------                                          9                                       SCHEDULE A  This  Schedule A is  attached  to and by  reference  made a part of the  Service Expense  Reimbursement  Agreement indicated above (the "Agreement")  between the insurance  companies named below  ("Company") and CAI Credit  Insurance  Agency, Inc. ("Customer"). This Schedule A is effective June 30, 2005.                                                                             Maximums Allowed - ------------------------------------------------------------------------------------                                            Expense                                          Reimbursement  Company*     Insurance Type      State      Rate       Coverage  Benefits   Term  ---------    --------------      -----      ----       --------  --------   ---- - ------------------------------------------------------------------------------------    ABLAC     Credit Life - SP      LA         35%        $20,000     N/A    60 mos. - ------------------------------------------------------------------------------------    ABLAC     Credit Life - MOB     LA         35%        $20,000     N/A     1 mo. - ------------------------------------------------------------------------------------    ABLAC    Credit Accident &      LA         35%          N/A      $800    60 mos.                Health - SP - ------------------------------------------------------------------------------------    ABLAC     Credit Accident &     LA         35%          N/A      $800     1 mo.                Health - MOB - ------------------------------------------------------------------------------------    ARIC     Credit Property - SP   LA         35%        $20,000     N/A    60 mos. - ------------------------------------------------------------------------------------    VPCIC   Credit Property - MOB   LA         35%        $20,000     N/A     1 mo. - ------------------------------------------------------------------------------------    VPCIC      Leased Property      LA         35%        $10,000     N/A     1 mo. - ------------------------------------------------------------------------------------    ABIC         Involuntary        LA         35%          N/A      $500    60 mos.             Unemployment - SP - ------------------------------------------------------------------------------------    VPCIC        Involuntary        LA         35%          N/A      $500    60 mos.             Unemployment - MOB - ------------------------------------------------------------------------------------   *Initials designate the following companies: ABIC - American Bankers Insurance Company of Florida ABLAC - American Bankers Life Assurance Company of Florida ARIC - American Reliable Insurance Company VPCIC - Voyager Property and Casualty Insurance Company                                          10                                       SCHEDULE B   If, as of the end of any month,  total combined net fees and insurance  premiums written since the First Amendment Effective Date under the specified  agreements total  $125,000,000  or less,  the  Percent  Rate  under  Section H of the Group Experience  Rating/Contingent  Compensation Addendum, based upon which a payment shall be made at the end of the respective  quarter,  shall be 89.75% as to each such month (each month being considered as a full month rather than day-by-day).  If, as of the end of any month,  total combined net fees and insurance  premiums written since the First Amendment Effective Date under the specified  agreements exceed  $125,000,000,  the Percent Rate under Section H of the Group  Experience Rating/Contingent  Compensation  Addendum,  based upon which a payment  shall be made at the end of the  respective  quarter,  shall be 90% for that month  (each month being considered as a full month rather than day-by-day) and thereafter.                                         11    EX-10.22 11 a5112243ex10-22.txt EXHIBIT 10.22          Consolidated Addendum and Amendment to Service Expense Reimbursement       --------------------------------------------------------------------     Agreements by and among Certain Member Companies of Assurant Solutions,     -----------------------------------------------------------------------     CAI Credit Insurance Agency, Inc., and Affiliates Insurance Agency, Inc.     ------------------------------------------------------------------------    This  Consolidated  Addendum and Amendment  ("Amendment") is entered into by and among  certain  member  companies  of  Assurant  Solutions,  as set forth  below (collectively  "Company"),  and their  affiliates  and  assigns,  and CAI Credit Insurance Agency,  Inc., and Affiliates  Insurance Agency,  Inc.,  (collectively "Customer"),  and their  affiliates and assigns,  and amends the Service Expense Reimbursement  Agreements and the related Group  Experience  Rating  /Contingent Compensation Addendums between the parties dated July 1, 1998 (respectively "CAI Agreement" and "Affiliates Agreement" and collectively "Agreements").  Whereas,  the parties desire to modify certain  agreements  they have related to investment income;  Now therefore, it is agreed by and between Company and Customer the following:        1.    The effective date of this Amendment is April 1, 2004.        2.    The  parties  agree to amend  Paragraph  I of the  Group  Experience             Rating/Contingent  Compensation under both the CAI Agreement and the             Affiliates  Agreement  to change the term of "one year" to "eighteen             months" for the CD term for  establishment  of the interest rate for             calculation of investment income in Paragraph I.        3.    This  Amendment  shall not be construed to modify or amend any other             terms or provisions of the Agreements unless set forth herein.    In  Witness  Whereof,  the  parties  hereto  have  executed  this  Amendment  on _______4/1_______________, 2004.        AMERICAN BANKERS LIFE ASSURANCE             CAI CREDIT INSURANCE AGENCY, INC.         COMPANY OF FLORIDA  Signature:    /s/ Gary Bursevich               Signature:    /s/ David R. Atnip          -----------------------------                  ------------------------  Printed Name: Gary Bursevich                   Printed Name: David R. Atnip             --------------------------                     ---------------------  Witness:                                       Witness:        -------------------------------                --------------------------  Date:         2/22/2005                        Date:         4/1/2004     ----------------------------------             -----------------------------                                          1         VOYAGER PROPERTY & CASUALTY                      CONN APPLIANCES, INC.              INSURANCE COMPANY  Signature:    /s/ Gary Bursevich               Signature:    /s/ David R. Atnip          -----------------------------                  ------------------------  Printed Name: Gary Bursevich                   Printed Name: David R. Atnip             --------------------------                     ---------------------  Witness:                                       Witness:        -------------------------------                --------------------------  Date:         2/22/2005                        Date:         4/1/2004     ----------------------------------             -----------------------------   RANCHERS & FARMERS COUNTY MUTUAL  Signature:    /s/ Charles D. Helton          -----------------------------  Printed Name: Charles D. Helton             --------------------------  Witness:        -------------------------------  Date:     ----------------------------------        AMERICAN BANKERS INSURANCE           COMPANY OF FLORIDA  Signature:    /s/ Gary Bursevich          -----------------------------  Printed Name: Gary Bursevich             --------------------------  Witness:        -------------------------------  Date:         2/22/2005     ----------------------------------   AMERICAN RELIABLE INSURANCE COMPANY  Signature:    /s/ Arthur W. Heggen          -----------------------------  Printed Name: Arthur W. Heggen, Assist. Secretary             -------------------------------------  Witness:        -------------------------------  Date:         3/15/2005        -------------------------------                                         2    EX-23.1 12 a5112243ex23-1.txt EXHIBIT 23.1                                                                      Exhibit 23.1              Consent of Independent Registered Public Accounting Firm  We consent to the  incorporation by reference in the Registration  Statements on Forms S-8 (Nos.  333-111280,  333-111281,  and  333-111282) of our reports dated March 29,  2006,  with  respect to the  consolidated  financial  statements  and schedule  of  Conn's,  Inc.,  Conn's,  Inc.   management's   assessment  of  the effectiveness   of  internal   control  over   financial   reporting,   and  the effectiveness  of internal  control over  financial  reporting of Conn's,  Inc., included in this Annual Report (Form 10-K) for the year ended January 31, 2006.                                                       Ernst & Young LLP     EX-31.1 13 a5112243ex31-1.txt EXHIBIT 31.1                                                                      Exhibit 31.1                       RULE 13a-14(a)/15d-14(a) CERTIFICATION                             (CHIEF EXECUTIVE OFFICER)  I, Thomas J. Frank, Sr., certify that:  1.    I have reviewed this annual report on Form 10-K of Conn's, Inc.;  2.    Based on my knowledge,  this report does not contain any untrue  statement       of a material fact or omit to state a material fact  necessary to make the       statements made, in light of the circumstances under which such statements       were made,  not  misleading  with  respect  to the period  covered by this       report;  3.    Based on my  knowledge,  the  financial  statements,  and other  financial       information  included  in this  report,  fairly  present  in all  material       respects the financial condition,  results of operations and cash flows of       the registrant as of, and for, the periods presented in this report;  4.    The  registrant's  other  certifying  officer(s) and I are responsible for       establishing  and  maintaining  disclosure  controls  and  procedures  (as       defined in  Exchange  Act Rules  13a-15(e)  and  15d-15(e))  and  internal       control  over  financial  reporting  (as  defined  in  Exchange  Act Rules       13a-15(f) and 15d-15(f)) for the registrant and have:        (a)   Designed such  disclosure  controls and  procedures,  or caused such             disclosure   controls  and  procedures  to  be  designed  under  our             supervision,  to ensure that  material  information  relating to the             registrant,  including its consolidated subsidiaries,  is made known             to us by others  within  those  entities,  particularly  during  the             period in which this report is being prepared;        (b)   Designed such internal control over financial  reporting,  or caused             such internal control over financial  reporting to be designed under             our  supervision,  to provide  reasonable  assurance  regarding  the             reliability of financial  reporting and the preparation of financial             statements  for  external  purposes  in  accordance  with  generally             accepted accounting principles;        (c)   Evaluated the effectiveness of the registrant's  disclosure controls             and  procedures and presented in this report our  conclusions  about             the effectiveness of the disclosure  controls and procedures,  as of             the  end  of the  period  covered  by  this  report  based  on  such             evaluation; and        (d)   Disclosed  in this  report any change in the  registrant's  internal             control  over   financial   reporting   that  occurred   during  the             registrant's  most recent fiscal  quarter (the  registrant's  fourth             fiscal  quarter in the case of an annual report) that has materially             affected,   or  is  reasonably  likely  to  materially  affect,  the             registrant's internal control over financial reporting; and  5.    The registrant's other certifying  officer(s) and I have disclosed,  based       on  our  most  recent   evaluation  of  internal  control  over  financial       reporting,  to the  registrant's  auditors and the audit  committee of the       registrant's  board of directors  (or persons  performing  the  equivalent       functions):        (a)   All significant  deficiencies and material  weaknesses in the design             or operation of internal control over financial  reporting which are             reasonably  likely to adversely affect the  registrant's  ability to             record, process, summarize and report financial information; and        (b)   Any fraud,  whether or not  material,  that  involves  management or             other  employees  who have a  significant  role in the  registrant's             internal control over financial reporting.                           /s/ Thomas J. Frank, Sr.                          ------------------------------------------------------                          Thomas J. Frank, Sr.                          Chairman of the Board and Chief Executive Officer   Date:   March 30, 2006    EX-31.2 14 a5112243ex31-2.txt EXHIBIT 31.2                                                                      Exhibit 31.2                       RULE 13a-14(a)/15d-14(a) CERTIFICATION                             (CHIEF FINANCIAL OFFICER)  I, David L. Rogers, certify that:  1.    I have reviewed this annual report on Form 10-K of Conn's, Inc.;  2.    Based on my knowledge,  this report does not contain any untrue  statement       of a material fact or omit to state a material fact  necessary to make the       statements made, in light of the circumstances under which such statements       were made,  not  misleading  with  respect  to the period  covered by this       report;  3.    Based on my  knowledge,  the  financial  statements,  and other  financial       information  included  in this  report,  fairly  present  in all  material       respects the financial condition,  results of operations and cash flows of       the registrant as of, and for, the periods presented in this report;  4.    The  registrant's  other  certifying  officer(s) and I are responsible for       establishing  and  maintaining  disclosure  controls  and  procedures  (as       defined in  Exchange  Act Rules  13a-15(e)  and  15d-15(e))  and  internal       control  over  financial  reporting  (as  defined  in  Exchange  Act Rules       13a-15(f) and 15d-15(f)) for the registrant and have:        (a)   Designed such  disclosure  controls and  procedures,  or caused such             disclosure   controls  and  procedures  to  be  designed  under  our             supervision,  to ensure that  material  information  relating to the             registrant,  including its consolidated subsidiaries,  is made known             to us by others  within  those  entities,  particularly  during  the             period in which this report is being prepared;        (b)   Designed such internal control over financial  reporting,  or caused             such internal control over financial  reporting to be designed under             our  supervision,  to provide  reasonable  assurance  regarding  the             reliability of financial  reporting and the preparation of financial             statements  for  external  purposes  in  accordance  with  generally             accepted accounting principles;        (c)   Evaluated the effectiveness of the registrant's  disclosure controls             and  procedures and presented in this report our  conclusions  about             the effectiveness of the disclosure  controls and procedures,  as of             the  end  of the  period  covered  by  this  report  based  on  such             evaluation; and        (d)   Disclosed  in this  report any change in the  registrant's  internal             control  over   financial   reporting   that  occurred   during  the             registrant's  most recent fiscal  quarter (the  registrant's  fourth             fiscal  quarter in the case of an annual report) that has materially             affected,   or  is  reasonably  likely  to  materially  affect,  the             registrant's internal control over financial reporting; and  5.    The registrant's other certifying  officer(s) and I have disclosed,  based       on  our  most  recent   evaluation  of  internal  control  over  financial       reporting,  to the  registrant's  auditors and the audit  committee of the       registrant's  board of directors  (or persons  performing  the  equivalent       functions):        (a)   All significant  deficiencies and material  weaknesses in the design             or operation of internal control over financial  reporting which are             reasonably  likely to adversely affect the  registrant's  ability to             record, process, summarize and report financial information; and        (b)   Any fraud,  whether or not  material,  that  involves  management or             other  employees  who have a  significant  role in the  registrant's             internal control over financial reporting.                                /s/ David L. Rogers                             ----------------------------------------------------                             David L. Rogers                             Chief Financial Officer    Date:   March 30, 2006    EX-32.1 15 a5112243ex32-1.txt EXHIBIT 32.1                                                                      Exhibit 32.1                               CERTIFICATION PURSUANT TO                              18 U.S.C. SECTION 1350,                              AS ADOPTED PURSUANT TO                   SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002           In connection with the Annual Report of Conn's, Inc. (the "Company") on Form 10-K for the period ended January 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, Thomas J. Frank, Sr., Chairman  of the Board and Chief  Executive  Officer of the Company and David L. Rogers, Chief Financial Officer of the Company,  hereby certify,  pursuant to 18 U.S.C.  Section 1350, as adopted  pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002, that, to the best of our knowledge:  (1)   The Report fully complies with the  requirements of Section 13(a) or 15(d)       of the Securities Exchange Act of 1934; and  (2)   The information  contained in the Report fairly presents,  in all material       respects,  the  financial  condition  and  results  of  operations  of the       Company.                                              /s/ Thomas J. Frank Sr.                                           -------------------------------------                                           Thomas J. Frank, Sr.                                           Chairman of the Board and                                           Chief Executive Officer                                             /s/ David L. Rogers                                           -------------------------------------                                           David L. Rogers                                           Chief Financial Officer   Dated:  March 30, 2006   A signed  original of this  written  statement  required by Section 906 has been provided to Conn's,  Inc. and will be retained by Conn's,  Inc. and furnished to the Securities and Exchange Commission or its staff upon request.  The foregoing certification is being furnished  solely pursuant to 18 U.S.C.  Section 1350 and is not being filed as part of the Report or as a separate disclosure document.    EX-99.1 16 a5112243ex99-1.txt EXHIBIT 99.1                                                                      Exhibit 99.1           SUBCERTIFICATION OF CHIEF OPERATING OFFICER IN SUPPORT OF RULE           13a-14(a)/15d-14(a) CERTIFICATION (CHIEF EXECUTIVE OFFICER)  I, William C. Nylin Jr., certify that:  1.    I have reviewed this annual report on Form 10-K of Conn's, Inc.;  2.    Based on my knowledge,  this report does not contain any untrue  statement       of a material fact or omit to state a material fact  necessary to make the       statements made, in light of the circumstances under which such statements       were made,  not  misleading  with  respect  to the period  covered by this       report;  3.    Based on my  knowledge,  the  financial  statements,  and other  financial       information  included  in this  report,  fairly  present  in all  material       respects the financial condition,  results of operations and cash flows of       the registrant as of, and for, the periods presented in this report;  4.    The  registrant's  other  certifying  officer(s) and I are responsible for       establishing  and  maintaining  disclosure  controls  and  procedures  (as       defined in  Exchange  Act Rules  13a-15(e)  and  15d-15(e))  and  internal       control  over  financial  reporting  (as  defined  in  Exchange  Act Rules       13a-15(f) and 15d-15(f)) for the registrant and have:        (a)   Designed such  disclosure  controls and  procedures,  or caused such             disclosure   controls  and  procedures  to  be  designed  under  our             supervision,  to ensure that  material  information  relating to the             registrant,  including its consolidated subsidiaries,  is made known             to us by others  within  those  entities,  particularly  during  the             period in which this report is being prepared;        (b)   Designed such internal control over financial  reporting,  or caused             such internal control over financial  reporting to be designed under             our  supervision,  to provide  reasonable  assurance  regarding  the             reliability of financial  reporting and the preparation of financial             statements  for  external  purposes  in  accordance  with  generally             accepted accounting principles;        (c)   Evaluated the effectiveness of the registrant's  disclosure controls             and  procedures and presented in this report our  conclusions  about             the effectiveness of the disclosure  controls and procedures,  as of             the  end  of the  period  covered  by  this  report  based  on  such             evaluation; and        (d)   Disclosed  in this  report any change in the  registrant's  internal             control  over   financial   reporting   that  occurred   during  the             registrant's  most recent fiscal  quarter (the  registrant's  fourth             fiscal  quarter in the case of an annual report) that has materially             affected,   or  is  reasonably  likely  to  materially  affect,  the             registrant's internal control over financial reporting; and  5.    The registrant's other certifying  officer(s) and I have disclosed,  based       on  our  most  recent   evaluation  of  internal  control  over  financial       reporting,  to the  registrant's  auditors and the audit  committee of the       registrant's  board of directors  (or persons  performing  the  equivalent       functions):        (a)   All significant  deficiencies and material  weaknesses in the design             or operation of internal control over financial  reporting which are             reasonably  likely to adversely affect the  registrant's  ability to             record, process, summarize and report financial information; and        (b)   Any fraud,  whether or not  material,  that  involves  management or             other  employees  who have a  significant  role in the  registrant's             internal control over financial reporting.                                              /s/ William C. Nylin, Jr.                                           -------------------------------------                                           William C. Nylin, Jr.                                           President and Chief Operating Officer    Date:    March 30, 2006    EX-99.2 17 a5112243ex99-2.txt EXHIBIT 99.2                                                                      Exhibit 99.2                  SUBCERTIFICATION OF TREASURER IN SUPPORT OF RULE           13a-14(a)/15d-14(a) CERTIFICATION (CHIEF FINANCIAL OFFICER)  I, David R. Atnip, certify that:  1.    I have reviewed this annual report on Form 10-K of Conn's, Inc.;  2.    Based on my knowledge,  this report does not contain any untrue  statement       of a material fact or omit to state a material fact  necessary to make the       statements made, in light of the circumstances under which such statements       were made,  not  misleading  with  respect  to the period  covered by this       report;  3.    Based on my  knowledge,  the  financial  statements,  and other  financial       information  included  in this  report,  fairly  present  in all  material       respects the financial condition,  results of operations and cash flows of       the registrant as of, and for, the periods presented in this report;  4.    The  registrant's  other  certifying  officer(s) and I are responsible for       establishing  and  maintaining  disclosure  controls  and  procedures  (as       defined in  Exchange  Act Rules  13a-15(e)  and  15d-15(e))  and  internal       control  over  financial  reporting  (as  defined  in  Exchange  Act Rules       13a-15(f) and 15d-15(f)) for the registrant and have:        (a)   Designed such  disclosure  controls and  procedures,  or caused such             disclosure   controls  and  procedures  to  be  designed  under  our             supervision,  to ensure that  material  information  relating to the             registrant,  including its consolidated subsidiaries,  is made known             to us by others  within  those  entities,  particularly  during  the             period in which this report is being prepared;        (b)   Designed such internal control over financial  reporting,  or caused             such internal control over financial  reporting to be designed under             our  supervision,  to provide  reasonable  assurance  regarding  the             reliability of financial  reporting and the preparation of financial             statements  for  external  purposes  in  accordance  with  generally             accepted accounting principles;        (c)   Evaluated the effectiveness of the registrant's  disclosure controls             and  procedures and presented in this report our  conclusions  about             the effectiveness of the disclosure  controls and procedures,  as of             the  end  of the  period  covered  by  this  report  based  on  such             evaluation; and        (d)   Disclosed  in this  report any change in the  registrant's  internal             control  over   financial   reporting   that  occurred   during  the             registrant's  most recent fiscal  quarter (the  registrant's  fourth             fiscal  quarter in the case of an annual report) that has materially             affected,   or  is  reasonably  likely  to  materially  affect,  the             registrant's internal control over financial reporting; and  5.    The registrant's other certifying  officer(s) and I have disclosed,  based       on  our  most  recent   evaluation  of  internal  control  over  financial       reporting,  to the  registrant's  auditors and the audit  committee of the       registrant's  board of directors  (or persons  performing  the  equivalent       functions):        (a)   All significant  deficiencies and material  weaknesses in the design             or operation of internal control over financial  reporting which are             reasonably  likely to adversely affect the  registrant's  ability to             record, process, summarize and report financial information; and        (b)   Any fraud,  whether or not  material,  that  involves  management or             other  employees  who have a  significant  role in the  registrant's             internal control over financial reporting.                                              /s/ David R. Atnip                                             -----------------------------------                                             David R. Atnip                                             Senior Vice President and Treasurer  Date:    March 30, 2006    EX-99.3 18 a5112243ex99-3.txt EXHIBIT 99.3                                                                      Exhibit 99.3                  SUBCERTIFICATION OF SECRETARY IN SUPPORT OF RULE           13a-14(a)/15d-14(a) CERTIFICATION (CHIEF EXECUTIVE OFFICER)  I, Sydney K. Boone, Jr., certify that:  1.    I have reviewed this annual report on Form 10-K of Conn's, Inc.;  2.    Based on my knowledge,  this report does not contain any untrue  statement       of a material fact or omit to state a material fact  necessary to make the       statements made, in light of the circumstances under which such statements       were made,  not  misleading  with  respect  to the period  covered by this       report;  3.    Based on my  knowledge,  the  financial  statements,  and other  financial       information  included  in this  report,  fairly  present  in all  material       respects the financial condition,  results of operations and cash flows of       the registrant as of, and for, the periods presented in this report;  4.    The  registrant's  other  certifying  officer(s) and I are responsible for       establishing  and  maintaining  disclosure  controls  and  procedures  (as       defined in  Exchange  Act Rules  13a-15(e)  and  15d-15(e))  and  internal       control  over  financial  reporting  (as  defined  in  Exchange  Act Rules       13a-15(f) and 15d-15(f)) for the registrant and have:        (a)   Designed such  disclosure  controls and  procedures,  or caused such             disclosure   controls  and  procedures  to  be  designed  under  our             supervision,  to ensure that  material  information  relating to the             registrant,  including its consolidated subsidiaries,  is made known             to us by others  within  those  entities,  particularly  during  the             period in which this report is being prepared;        (b)   Designed such internal control over financial  reporting,  or caused             such internal control over financial  reporting to be designed under             our  supervision,  to provide  reasonable  assurance  regarding  the             reliability of financial  reporting and the preparation of financial             statements  for  external  purposes  in  accordance  with  generally             accepted accounting principles;        (c)   Evaluated the effectiveness of the registrant's  disclosure controls             and  procedures and presented in this report our  conclusions  about             the effectiveness of the disclosure  controls and procedures,  as of             the  end  of the  period  covered  by  this  report  based  on  such             evaluation; and        (d)   Disclosed  in this  report any change in the  registrant's  internal             control  over   financial   reporting   that  occurred   during  the             registrant's  most recent fiscal  quarter (the  registrant's  fourth             fiscal  quarter in the case of an annual report) that has materially             affected,   or  is  reasonably  likely  to  materially  affect,  the             registrant's internal control over financial reporting; and  5.    The registrant's other certifying  officer(s) and I have disclosed,  based       on  our  most  recent   evaluation  of  internal  control  over  financial       reporting,  to the  registrant's  auditors and the audit  committee of the       registrant's  board of directors  (or persons  performing  the  equivalent       functions):        (a)   All significant  deficiencies and material  weaknesses in the design             or operation of internal control over financial  reporting which are             reasonably  likely to adversely affect the  registrant's  ability to             record, process, summarize and report financial information; and        (b)   Any fraud,  whether or not  material,  that  involves  management or             other  employees  who have a  significant  role in the  registrant's             internal control over financial reporting.                                          /s/ Sydney K. Boone, Jr.                                         ---------------------------------------                                         Sydney K. Boone, Jr.                                         Corporate General Counsel and Secretary  Date:    March 30, 2006    EX-99.4 19 a5112243ex99-4.txt EXHIBIT 99.4                                                                      Exhibit 99.4                    SUBCERTIFICATION OF CHIEF OPERATING OFFICER,                       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       In  connection  with the Annual Report of Conn's,  Inc. (the  "Company") on Form 10-K for the period ended January 31, 2006 as filed with the Securities and Exchange  Commission on the date hereof (the  "Report"),  we,  William C. Nylin, Jr.,  President  and Chief  Operating  Officer of the  Company,  David R. Atnip, Senior Vice  President and Treasurer of the Company,  and Sydney K. Boone,  Jr., Corporate General Counsel and Secretary of the Company, hereby certify, pursuant to  18  U.S.C.  Section  1350,  as  adopted  pursuant  to  Section  906  of  the Sarbanes-Oxley Act of 2002, that, to the best of our knowledge:  (1)   The Report fully complies with the  requirements of Section 13(a) or 15(d)       of the Securities Exchange Act of 1934; and  (2)   The information  contained in the Report fairly presents,  in all material       respects,  the  financial  condition  and  results  of  operations  of the       Company.                                     /s/ William C. Nylin, Jr.                                  ----------------------------------------------                                  William C. Nylin, Jr.                                  President and Chief Operating Officer                                    /s/ David R. Atnip                                  ----------------------------------------------                                  David R. Atnip                                  Senior Vice President and Treasurer                                    /s/ Sydney K. Boone, Jr.                                  ----------------------------------------------                                  Sydney K. Boone, Jr.                                  Corporate General Counsel and Secretary   Dated:  March 30, 2006   A signed  original of this written  statement has been provided to Conn's,  Inc. and will be  retained  by Conn's,  Inc.  The  foregoing  certification  is being furnished solely to support  certifications  pursuant to 18 U.S.C.  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