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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 31, 2003 COMMISSION FILE NO. 0-13283
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REX STORES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 31-1095548
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2875 Needmore Road, Dayton, Ohio 45414
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code (937) 276-3931
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, $.01 par value New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No
At the close of business on July 31, 2002 the aggregate market value of the
registrant's outstanding Common Stock held by non-affiliates of the registrant
(for purposes of this calculation, 1,932,082 shares beneficially owned by
directors and executive officers of the registrant were treated as being held by
affiliates of the registrant), was $127,246,968.
There were 10,814,590 shares of the registrant's Common Stock outstanding as of
April 22, 2003.
Documents Incorporated by Reference
Portions of REX Stores Corporation's definitive Proxy Statement for its Annual
Meeting of Shareholders on May 29, 2003 are incorporated by reference into Part
III of this Form 10-K.
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AVAILABLE INFORMATION
REX makes available free of charge on its Internet website its annual report on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports as soon as reasonably practicable after such
material is electronically filed with or furnished to the SEC. REX's Internet
website address is www.rextv.com.
PART I
Item 1. Business
Overview
We are a leading specialty retailer in the consumer electronics/appliance
industry, serving over 200 small to medium-sized towns and communities. Since
1980, when our first four stores were acquired, we have expanded into a national
chain operating 252 stores in 37 states under the "REX" trade name. Our stores
average approximately 11,300 square feet and offer a broad selection of brand
name products within selected major product categories, including big screen and
standard-sized televisions, video and audio equipment, camcorders and major
household appliances.
Our business strategy emphasizes depth of selection within key product
categories. Brand name products are offered at everyday low prices combined with
frequent special sales and promotions. We concentrate our stores in small and
medium sized markets where we believe that by introducing a high volume, low
price merchandising concept, we can become a dominant retailer. We support our
merchandising strategy with extensive newspaper advertising in each of our local
markets and maintain a knowledgeable sales force which focuses on customer
service. We believe our low price policy, attention to customer satisfaction and
deep product selection provide customers with superior value.
Our strategy is to continue to open stores in small to medium sized markets when
market conditions merit. We will focus on markets with a newspaper circulation
which can efficiently and cost-effectively utilize our print advertising
materials and where we believe we can become a dominant retailer.
REX was incorporated in Delaware in 1984 as a holding company to succeed to the
entire ownership of three affiliated corporations, Rex Radio and Television,
Inc., Stereo Town, Inc. and Kelly & Cohen Appliances, Inc., which were formed in
1980, 1981 and 1983, respectively. Our principal offices are located at 2875
Needmore Road, Dayton, Ohio 45414. Our telephone number is (937) 276-3931.
Fiscal Year
All references in this report to a particular fiscal year are to REX's fiscal
year ended January 31. For example, "fiscal 2002" means the period February 1,
2002 to January 31, 2003. We refer to our fiscal year by reference to the year
immediately preceding the January 31 fiscal year end date.
Business Strategy
Our objective is to be a leading consumer electronics/appliance retailer in each
of our markets. The key elements of our business strategy include:
Focusing on Small Markets
We traditionally have concentrated our stores in markets with populations of
20,000 to 300,000. When opening stores, we focus in markets with populations
under 85,000, which generally are underserved by
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our competitors. We believe our low-overhead store format and our ability to
operate in free-standing as well as strip shopping centers and regional mall
locations makes us well suited to serve these small markets.
Maintaining Guaranteed Lowest Prices
We actively monitor prices at competing stores and adjust our prices as
necessary to meet or beat the competition. We guarantee the lowest price on our
products through a policy of refunding 125% of the difference between our price
and a competitor's price on the same item.
Offering a Broad Selection of Brand Name Products
We offer a broad selection of brand name products within key product categories.
We carry most major brands of consumer electronics and several major brands of
appliances. We offer merchandise in each of our product categories at a range of
price points and generally maintain sufficient product stock for immediate
delivery to customers.
Capitalizing on Our Opportunistic Buying
We frequently purchase large quantities of products directly from manufacturers
on an opportunistic basis at favorable prices. We believe this buying strategy
makes us a unique and attractive customer for manufacturers seeking to sell
cancelled orders and excess inventory and enables us to develop strong
relationships and extended trade credit support with vendors.
Striving to be the Low Cost Operator in Our Markets
Our current prototype store is approximately 12,000 square feet and provides us
with cost and space efficiencies. Our market selection criteria and operating
philosophy allow us to minimize both occupancy and labor costs. Generally, all
of our store employees, including our store managers, sell products, unload
trucks, stock merchandise and process sales, which helps minimize employee count
and overhead within each store. Most stores are staffed with between three and
six employees.
Leveraging Our Strong Operational Controls
Our information systems and point-of-sale computer systems, which are installed
in every store, allow management to monitor our merchandising programs, sales,
employee productivity and in-store inventory levels on a daily basis. Our
operational controls provide us with cost efficiencies which reduce overhead
while allowing us to maintain high levels of in-stock merchandise. Our three
distribution centers, strategically located in Dayton, Ohio, Pensacola, Florida
and Cheyenne, Wyoming, reduce inventory requirements at individual stores and
facilitate centralized inventory and accounting controls.
Store Openings
Site Selection. When expanding, we select locations for future stores based on
our evaluation of individual site economics and market conditions. When deciding
whether to enter a new market or open another store in an existing market, we
evaluate a number of criteria, including:
o sales volume potential;
o competition within the market area, including size, strength and
merchandising philosophy of former, existing and potential
competitors;
o cost of advertising;
o newspaper circulation; and
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o size and growth pattern of the population.
In choosing specific sites, we apply standardized site selection criteria taking
into account numerous factors, including:
o local demographics;
o real estate occupancy expense based upon ownership and/or leasing;
o traffic patterns; and
o overall retail activity.
Stores typically are located on high traffic arteries, adjacent to or in major
shopping areas, with adequate parking to support the stores' sales volume.
We either lease or purchase store sites depending upon opportunities available
to us and relative costs. We did not open any stores in fiscal 2002 and
currently have no stores under development for fiscal 2003.
Store Economics. For leased stores, we anticipate per store capital expenditures
of $100,000 to $250,000. This amount may increase to the extent we are
responsible for the remodeling or renovation of the new leased site. We
anticipate expenditures of approximately $950,000 to $1,400,000 when we build
and own a store location, which include the cost of the land purchased, building
construction and fixtures. The purchase amount varies depending upon the size
and location of the store. The purchase amount may be higher if we build or
purchase a location larger than our needs and attempt to lease a portion of the
store. Historically, we have normally obtained long-term mortgage financing of
approximately 75% of the land and building cost of opening owned stores.
Mortgage financing is generally obtained after a store is opened, either on a
site by site or multiple store basis. The extent to which we seek mortgage
financing for owned stores is dependent upon mortgage rates, terms, availability
and needs.
The gross inventory requirements for new stores are estimated at $250,000 to
$500,000 per store depending upon the season and store size.
Store Operations
Stores. We locate our stores in the general vicinity of major retail shopping
districts and design our stores to generate their own traffic. Currently, 181
stores are located in free-standing buildings, with the balance situated in
strip shopping centers and regional malls. Stores located in malls have exterior
access and signage rights.
Our stores are designed with minimal interior fixtures to provide an open
feeling and a view of all product categories upon entering the store. The stores
are generally equipped with neon signage above each product category to further
direct the customer to particular products. We believe the interior layout of
our stores provides an inviting and pleasant shopping environment for the
customer.
Our existing stores average approximately 11,300 square feet, including
approximately 7,800 square feet of selling space and approximately 3,500 square
feet of storage. New stores are planned to be approximately 12,000 square feet.
Stores are open seven days and six nights per week, except for certain holidays.
Hours of operation are 10:00 a.m. to 9:00 p.m. Monday through Saturday and 12:00
p.m. to 6:00 p.m., or 1:00 p.m. to 5:00 p.m. in some states, on Sunday.
Our operations are divided into regional districts, containing from two to 11
stores whose managers report to a district manager. Our 46 district managers
report to one of five regional vice presidents. Each store is staffed with a
full-time manager and one or two assistant managers, commissioned sales
personnel and, in higher-traffic stores, seasonal support personnel. Store
managers are paid on a commission basis and
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have the opportunity to earn bonuses based upon their store's sales and gross
margins. Sales personnel work on a commission basis.
We evaluate the performance of our stores on a continuous basis and, based on an
assessment of overall profitability, future cash flows and other factors we deem
relevant, will close any store which is not adequately contributing to our
profitability. We closed 10, 10 and 6 stores during fiscal 2002, 2001 and 2000,
respectively.
Store Locations. The following table shows the states in which we operated
stores and the number of stores in each state as of January 31, 2003:
State Number of Stores State Number of Stores
----- ---------------- ----- ----------------
Alabama 13 Nebraska 2
Arkansas 1 New Mexico 1
Colorado 3 New York 19
Florida 26 North Carolina 8
Georgia 7 North Dakota 3
Idaho 5 Ohio 22
Illinois 10 Oklahoma 5
Indiana 4 Pennsylvania 19
Iowa 10 South Carolina 9
Kansas 2 South Dakota 3
Kentucky 3 Tennessee 9
Louisiana 7 Texas 11
Maryland 1 Vermont 1
Massachusetts 1 Virginia 2
Michigan 8 Washington 3
Minnesota 1 West Virginia 6
Mississippi 13 Wisconsin 4
Missouri 3 Wyoming 2
Montana 5
Personnel. We train our employees to explain and demonstrate to customers the
use and operation of our merchandise and to develop good sales practices. Our
in-house training program for new employees combines on-the-job training with
use of a detailed company-developed manual entitled "The REX Way." Sales
personnel attend in-house training sessions conducted by experienced salespeople
or manufacturers' representatives and receive sales, product and other
information in meetings with managers. Management and sales personnel are
compensated on a commission basis.
We also have a manager-in-training program that consists of on-the-job training
of the assistant manager at the store. Our policy is to staff store management
positions with personnel promoted from within REX and to staff new store
management positions with existing managers or assistant managers.
Services. Virtually all of the products we sell carry manufacturers' warranties.
Except for our least expensive items, we offer extended service contracts to
customers, usually for an additional charge, which typically provide one to five
years of extended warranty coverage. We also provide a free two-year warranty on
products purchased for over $99 where permitted. We offer maintenance and repair
services for most of the products we sell. These services are generally
subcontracted to independent repair firms.
Our return policy provides that any merchandise may be returned for exchange or
refund within seven days of purchase if accompanied by original packaging
material and verification of sale.
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We accept MasterCard, Visa and Discover. We estimate that, during fiscal 2002,
approximately 37.1% of our total sales were made on these credit cards, and
approximately 17.5% were made on revolving or installment credit contracts
arranged through banks or independent finance companies which bear the credit
risk of these contracts. We work with local consumer finance companies in each
of our markets in implementing these credit arrangements and are able to offer
competitive credit packages, generally including interest-free financing
options. We offer a Rex private label credit card in approximately 182 stores
using a third party finance company.
Merchandising
Products. We offer a broad selection of brand name consumer electronics and home
appliance products at a range of price points. We emphasize depth of product
selection within selected key product categories. We sell approximately 1,000
products produced by approximately 50 manufacturers. Our product categories
include:
Televisions Video Audio Appliances Other
- ----------- ----------------- --------------- ---------------- -----------------
TVs VCRs Stereo Systems Air Conditioners Extended Service
Big Screen Camcorders Receivers Microwave Ovens Contracts
TVs Digital Satellite Compact Disc Washers Ready to Assemble
TV/VCR Systems Players Dryers Furniture
Combos DVD Players Tape Decks Ranges Recordable Tapes
Plazma/LCD DVD Recorders Speakers Dishwashers Telephones
TVs DVD/VCR Car Stereos Refrigerators Audio/Video
Combos Portable Radios Freezers Accessories
Turntables Vacuum Cleaners Radar Detectors
Home Theater Dehumidifiers CB Radios
Systems
Among the leading brands sold by us during fiscal 2002, in alphabetical order,
were General Electric, Hitachi, JVC, Panasonic, Philips, Pioneer, RCA, Sharp,
Sony, Toshiba and Whirlpool.
All our stores carry a broad range of televisions, video and audio products,
microwave ovens and air conditioners. In addition, all but three stores carry
major appliances.
The following table shows the approximate percent of net sales for each major
product group for the last three fiscal years:
Fiscal Year
------------------
Product Category 2002 2001 2000
- ---------------- ---- ---- ----
Televisions .... 48% 45% 45%
Appliances ..... 19 19 18
Audio .......... 15 16 16
Video .......... 10 12 13
Other .......... 8 8 8
--- --- ---
100% 100% 100%
=== === ===
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Pricing. Our policy is to offer our products at guaranteed lowest prices
combined with frequent special sales and promotions. Our retail prices are
established by our merchandising department, but each district manager is
responsible for monitoring the prices offered by competitors and has authority
to adjust prices to meet local market conditions. Our commitment to offer the
lowest prices is supported by our guarantee to refund 125% of the difference in
price if, within 30 days of purchase, a customer can locate the same item
offered by a local competitor at a lower price.
Advertising. We use a "price and item" approach in our advertising, stressing
the offering of nationally recognized brands at significant savings. The
emphasis of our advertising is our Guaranteed Lowest Price. Our guarantee
states:
"Our prices are guaranteed in writing. If you find any other local
store (excluding Internet) stocking and offering to sell for less the
identical item in a factory sealed box within 30 days after your REX
purchase, we'll refund the difference plus an additional 25% of the
difference."
Advertisements are concentrated principally in newspapers and preprinted
newspaper inserts, which are produced for us by an outside advertising agency.
When market conditions warrant, we supplement our newspaper advertising with
television and radio advertisements in certain markets. Advertisements are also
complemented by in-store signage highlighting special values, including "Value
Every Day," "Best Value," and "Top of the Line." Our advertising strategy
includes preferred customer private mailers, special events such as "Midnight
Madness Sales" and coupon sales to provide shopping excitement and generate
traffic.
Purchasing. Our merchandise purchasing and opportunistic buying are performed
predominantly by three members of senior management. Each individual has
responsibility for a specific product category, and two share appliance buying
responsibility. By purchasing merchandise in large volume, we are able to obtain
quality products at competitive prices and advertising subsidies from vendors to
promote the sale of their products. For fiscal 2002, ten vendors accounted for
approximately 76% of our purchases, with two vendors representing approximately
29% of our inventory purchases in 2002. We typically do not maintain long-term
purchase contracts with vendors and operate principally on an order-by-order
basis.
e-Commerce
In April 1999, we began selling selected televisions, audio and video products
and small appliances on our retail store Web site at www.rexstores.com. We are
currently in a two-year contract with Zengine, Inc. to host our Web site, which
expires on May 31, 2003. We also offer selected products on the eBay auction Web
site.
Distribution
Our stores are supplied by three regional distribution centers. The distribution
centers consist of:
o a 315,000 square foot owned facility in Dayton, Ohio;
o a 180,000 square foot owned facility in Pensacola, Florida, of which
we lease 30,000 square feet to an outside company; and
o a 145,000 square foot owned facility in Cheyenne, Wyoming.
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We also lease a 67,000 square foot auxiliary warehouse in Pensacola, Florida. In
addition, we lease overflow warehouse space as needed to accommodate seasonal
inventory requirements and opportunistic purchases. We currently have under
construction a 156,000 square foot addition to our Dayton facility to help
eliminate the need for overflow warehouse space.
Inventory Management
The regional distribution centers reduce inventory requirements at individual
stores, while preserving the benefits of volume purchasing and facilitating
centralized inventory and accounting controls. Virtually all of our merchandise
is distributed through our distribution centers, with the exception of major
appliances which are generally shipped directly by the vendor to the retail
location. All deliveries to stores are made by independent contract carriers.
Management Information Systems
We have developed a computerized management information system which operates an
internally developed software package. Our computer system provides management
with the information necessary to manage inventory by stock keeping unit (SKU),
monitor sales and store activity on a daily basis, capture marketing and
customer information, track productivity by salesperson and control our
accounting operations.
Our mainframe computer is an IBM A/S 400 model 720. The host computer is
integrated with our point-of-sale system which serves as the collection
mechanism for all sales activity. The combined system provides for next-day
review of inventory levels, sales by store and by SKU and commissions earned,
assists in cash management and enables management to track merchandise from
receipt at the distribution center until time of sale.
Competition
Our business is characterized by substantial competition. Our competitors
include national and regional large format merchandisers and superstores such as
Best Buy Co., Inc. and Circuit City Stores, Inc., other specialty electronics
retailers including RadioShack Corporation, department and discount stores such
as Sears, Roebuck and Co. and Wal-Mart Stores, Inc., furniture stores, warehouse
clubs, home improvement retailers and Internet and store-based retailers who
sell competitive products online. We also compete with small chains and
specialty single-store operators in some markets, as well as Sears'
dealer-operated units. Some of our competitors have greater financial and other
resources than us, which may increase their ability to purchase inventory at a
lower cost, better withstand economic downturns or engage in aggressive price
competition. Competition within the consumer electronics/appliance retailing
industry is based upon price, breadth of product selection, product quality,
customer service and credit availability. We expect competition within the
industry to increase.
Facilities
We own 153 of our stores. The remaining 99 stores operate on leased premises,
with the unexpired terms of the leases ranging from less than one year to 22
years, inclusive of options to renew. For fiscal 2002, the total net rent
expense for our leased facilities was approximately $6,838,000.
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To date, we have not experienced difficulty in securing leases or purchasing
sites for suitable store locations. We continue to remodel and upgrade existing
stores as appropriate. In addition, to minimize construction costs, we have
developed prototype formats for new store construction.
Employees
At January 31, 2003, we had 146 hourly and salaried employees and 903
commission-based sales employees. We also employ additional personnel during
peak selling seasons. None of our employees are represented by a labor union. We
consider our relationship with our employees to be good.
Service Marks
We have registered our rights in our service mark "REX" with the United States
Patent and Trademark Office. We are not aware of any adverse claims concerning
our service mark.
Synthetic Fuel Partnerships
In fiscal 1998, we invested in two limited partnerships, which owned facilities
producing synthetic fuel. The partnerships earn federal income tax credits under
Section 29 of the Internal Revenue Code based on the tonnage and content of
solid synthetic fuel sold to unrelated parties. We have sold our entire interest
in one of the partnerships and expect to receive payments from the sales, on a
quarterly basis, through 2007. We remain a limited partner in the other
partnership. On September 5, 2002 we closed on the purchase of an additional
synthetic fuel facility in Gillette, Wyoming, which is not currently
operational. See Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations and Note 2 to the Financial Statements for
further discussion.
Item 2. Properties
The information required by this Item 2 is set forth in Item 1 of this report
under "Store Operations--Stores," "Distribution" and "Facilities" and is
incorporated herein by reference.
Item 3. Legal Proceedings
We are involved in various legal proceedings incidental to the conduct of our
business. We believe that these proceedings will not have a material adverse
effect on our financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
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Executive Officers of the Company
Set forth below is certain information about each of our executive
officers.
Name Age Position
---- --- --------
Stuart Rose.......... 48 Chairman of the Board and Chief Executive Officer*
Lawrence Tomchin..... 75 President and Chief Operating Officer*
Douglas Bruggeman.... 42 Vice President-Finance and Treasurer
Edward Kress......... 53 Secretary*
- ----------
*Also serves as a director.
Stuart Rose has been our Chairman of the Board and Chief Executive Officer since
our incorporation in 1984 as a holding company to succeed to the ownership of
Rex Radio and Television, Inc., Kelly & Cohen Appliances, Inc. and Stereo Town,
Inc. Prior to 1984, Mr. Rose was Chairman of the Board and Chief Executive
Officer of Rex Radio and Television, Inc., which he founded in 1980 to acquire
the stock of a corporation which operated four retail stores.
Lawrence Tomchin has been our President and Chief Operating Officer since 1990.
From 1984 to 1990, he was our Executive Vice President and Chief Operating
Officer. Mr. Tomchin has been a director since 1984. Mr. Tomchin was Vice
President and General Manager of the corporation which was acquired by Rex Radio
and Television, Inc. in 1980 and served as Executive Vice President of Rex Radio
and Television, Inc. after the acquisition.
Douglas Bruggeman has been our Vice President - Finance and Treasurer since
1989. From 1987 to 1989, Mr. Bruggeman was our Manager of Corporate Accounting.
Mr. Bruggeman was employed with the accounting firm of Ernst & Young prior to
joining us in 1986.
Edward Kress has been our Secretary since 1984 and a director since 1985. Mr.
Kress has been a partner of the law firm of Chernesky, Heyman & Kress P.L.L.,
our legal counsel, since 1988. From 1985 to 1988, Mr. Kress was a member of the
law firm of Smith & Schnacke. Mr. Kress has practiced law in Dayton, Ohio since
1974.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
SHAREHOLDER INFORMATION
Common Share Information and Quarterly Share Prices
Our common stock is traded on the New York Stock Exchange under the symbol RSC.
Fiscal Quarter ended High Low
April 30, 2001 $ 9.18 $ 7.98
July 31, 2001 12.24 8.23
October 31, 2001 12.13 8.25
January 31, 2002 19.73 9.17
April 30, 2002 $19.87 $14.70
July 31, 2002 16.67 10.16
October 31, 2002 11.95 9.35
January 31, 2003 13.26 9.86
As of April 21, 2003, there were 177 holders of record of our common stock,
including shares held in nominee or street name by brokers. All share prices
reflect 3 for 2 stock splits paid in August 2001 and February 2002.
Dividend Policy
Our revolving credit agreement places restrictions on the payment of dividends.
We did not pay dividends in the current or prior years.
Item 6. Selected Financial Data
Five Year Financial Summary
January 31,
(In Thousands, Except Per ----------------------------------------------------
Share Amounts) 2003 2002 2001 2000 1999
Net sales $428,625 $464,503 $475,419 $466,386 $418,340
Net income $ 22,932 $ 22,309 $ 18,736 $ 18,293 $ 11,195
Basic net income per share $ 1.89 $ 1.91 $ 1.32 $ 1.01 $ 0.67
Diluted net income per share $ 1.61 $ 1.65 $ 1.21 $ 0.91 $ 0.64
Total assets $310,922 $307,329 $310,885 $304,036 $268,282
Long-term debt, net of current
maturities $ 64,426 $ 77,203 $ 81,262 $ 46,200 $ 55,478
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Quarterly Financial Data (Unaudited)
Quarters Ended
(In Thousands, Except Per Share Amounts)
------------------------------------------------
April 30, July 31, October 31, January 31,
2002 2002 2002 2003
Net sales $93,536 $93,070 $95,743 $146,276
Cost of merchandise sold 66,282 63,740 66,825 104,654
Net income 4,184 5,391 4,274 9,083
Basic net income per share (a) $ 0.34 $ 0.43 $ 0.35 $ 0.78
Diluted net income per share (a) $ 0.28 $ 0.37 $ 0.31 $ 0.68
Quarters Ended
(In Thousands, Except Per Share Amounts)
------------------------------------------------
April 30, July 31, October 31, January 31,
2001 2001 2001 2002
Net sales $104,789 $100,542 $107,335 $151,837
Cost of merchandise sold 75,514 70,967 76,220 107,409
Net income 3,105 3,870 4,438 10,896
Basic net income per share (b) $ 0.26 $ 0.34 $ 0.38 $ 0.92
Diluted net income per share (b) $ 0.24 $ 0.29 $ 0.33 $ 0.76
a) The total of the quarterly net income per share amounts is more than
the annual net income per share amounts due to the combination of
rounding, the disproportionate impact from the 1,549,000 shares
repurchased during the fourth quarter versus the full year, the impact
of the lower stock price resulting in less dilution from stock options
during the fourth quarter versus the full year and 40% of the net
income occurring in the fourth quarter of fiscal 2002.
b) The total of the quarterly net income per share amounts is less than
the annual net income per share amounts due to the combination of
rounding and the impact of higher stock price resulting in higher
dilution from stock options during the fourth quarter versus the full
year and 49% of the net income occurring in the fourth quarter of
fiscal 2001.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
We are a leading specialty retailer in the consumer electronics/appliance
industry. Since acquiring our first four stores in 1980, we have expanded into a
national chain operating 252 stores in 37 states under the "REX" trade name. By
offering a broad selection of brand name products at guaranteed lowest prices,
we believe we have become a leading consumer electronics/appliance retailer in
our markets.
Our comparable store sales declined 5.1%, 7.9% and 5.6% for fiscal 2002, 2001
and 2000, respectively. We believe our comparable store sales for fiscals 2002
and 2001 were adversely affected by the economy and the increasing competitive
environment. The decline in comparable store sales for fiscal 2000 was largely
caused by slower appliance sales due to an unseasonably cool summer and an
increasingly competitive environment. We consider a store to be comparable after
it has been open six full fiscal quarters. Comparable store sales comparisons do
not include sales of extended service contracts.
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Extended Service Contracts
Our extended service contract revenues, net of sales commissions, are deferred
and amortized on a straight-line basis over the life of the contracts after the
expiration of applicable manufacturers' warranty periods. Terms of coverage,
including the manufacturers' warranty periods, are usually for periods of 12 to
60 months. Extended service contract revenues represented 3.6% of net sales for
fiscal 2002, 3.3% of net sales for fiscal 2001 and 3.1% of net sales for fiscal
2000. Service contract costs are charged to operations as incurred. Gross profit
realized from extended service contract revenues was $11.4 million, $11.4
million and $10.9 million in fiscal 2002, 2001 and 2000, respectively.
Investment in Synthetic Fuel Partnerships
In fiscal 1998, we invested $3.2 million in two limited partnerships which owned
four facilities producing synthetic fuel. The partnerships earn federal income
tax credits under Section 29 of the Internal Revenue Code based on the tonnage
and content of solid synthetic fuel sold to unrelated parties. Our share of the
credits generated may be used to reduce our federal income tax liability down to
the alternative minimum tax (AMT) rate. Under current law, credits under Section
29 are available for qualified fuels sold before January 1, 2008. The tax
credits begin to phase out if the reference price of a barrel of oil exceeds
certain levels adjusted annually for inflation. The 2002 phase-out started at
$49.75 per barrel.
We initially held a 30% interest in one partnership and an 18.75% interest in
the other. We sold our ownership in the 30% partnership as described below. This
partnership is currently being audited by the Internal Revenue Service (IRS).
Certain quarterly payments from the sales are being held in escrow beginning in
fiscal 2002 pending the results of the audit. Subsequent payments relating to
these sales will also be held in escrow pending the results of the IRS audit.
Prior to the sales of the Company's interest in the partnership, the Company had
been allocated in aggregate approximately $19.0 million in tax credits from this
synthetic fuel limited partnership. Should the tax credits be denied on audit
and the Company fails to prevail through the IRS or the legal process, there
could be a significant tax liability owed for previously taken tax credits with
a significant impact on earnings and cash flows. In the Company's opinion, the
Partnership is complying with all the necessary requirements to be allowed such
credits and believes it is likely, although not certain, that the Partnership
will prevail if challenged by the IRS on any credits taken. The timing of the
completion of the audit has not been determined.
Effective February 1, 1999, we sold 13% of our interest in the 30% partnership,
reducing our ownership percentage from 30% to 17%. We expect to receive cash
payments from the sale on a quarterly basis through 2007. These payments are
contingent upon and equal to 75% of the federal income tax credits attributable
to the 13% interest sold and are subject to certain annual limitations. The
maximum amount of cash that can be received varies by year. The maximum that
could be received for calendar 2002 and 2001 was approximately $7.4 million and
$7.1 million, respectively. The maximum that can be received for calendar 2003
is approximately $7.7 million. We received approximately $5.9 million, $7.0
million and $6.5 million for fiscal 2002, 2001 and 2000, respectively. None of
these proceeds are being held in escrow.
Effective July 31, 2000, we sold an additional portion of our interest in the
same partnership, reducing our ownership percentage from 17% to 8%. We expect to
receive payments from the sale on a quarterly basis through 2007. These payments
are contingent upon and equal to the greater of 82.5% of the federal income tax
credits attributable to the 9% interest sold subject to annual limitations or
74.25% of the federal income tax credits amounts attributable to the interest
sold with no annual limitations. Quarterly payments from this sale are now being
held in escrow beginning in fiscal 2002 pending the results of the IRS audit.
The amount earned and reported as income was approximately $4.7 million for
fiscal 2002. We received approximately $1.4 million of these proceeds with the
remaining $3.3 million to be held in escrow. The amount earned and received for
fiscal 2001 was approximately $5.3 million. The amount earned and received for
fiscal 2000 was approximately $4.2 million, including a down payment of $1.6
million.
13
Effective May 31, 2001, we sold our remaining 8% ownership in the same
partnership. We expect to receive payments from the sale on a quarterly basis
through 2007. These payments are contingent upon and equal to the greater of
82.5% of the federal income tax credits attributable to the 8% interest sold
subject to annual limitations or 74.25% of the federal income tax credits
amounts attributable to the interest sold with no annual limitations. Quarterly
payments from this sale are now being held in escrow beginning in fiscal 2002
pending the results of the IRS audit. The amount earned and reported as income
was approximately $4.1 million for fiscal 2002. We received approximately $1.1
million of these proceeds with the remaining $3.0 million to be held in escrow.
The amount earned and received for fiscal 2001 was approximately $3.5 million,
including a down payment of $355,000.
We remain a limited partner in the other partnership. Net income for fiscal 2002
reflects pre-tax income, net of litigation expenses, of approximately $400,000
from the settlement of a previously filed lawsuit relating to our participation
in this partnership. As part of the settlement, which was effected without the
admission of liability by any party, we entered into an Amended and Restated
Agreement of Limited Partnership which facilitates increased participation in
future production of synthetic fuel. This facility is now operational and
producing synthetic fuel.
The tax credits applied to reduce tax expense were approximately $3.1 million,
$2.9 million and $9.9 million in fiscal 2002, 2001 and 2000, respectively.
On September 5, 2002, we closed on the purchase of a plant located in Gillette,
Wyoming designed and constructed for the production of synthetic fuel, which
qualifies for tax credits under Section 29 of the Internal Revenue Code. We have
obtained a Private Letter Ruling from the Internal Revenue Service which would
allow the disassembly, and reconstruction, of the facility at a yet to be
determined host site. We have executed a letter of intent with a potential
partner as to the relocation and commercialization of the plant and limiting our
maximum financial investment in the venture. If the plant cannot be relocated on
terms acceptable to us, we are obligated to remove the plant from its existing
site at a currently estimated cost to us of up to $2 million. Through January
31, 2003, approximately $500,000 had been spent and capitalized on this project,
with an additional $1 million being held in escrow to guarantee our future
performance. While the we believe this acquisition may result in the future
production of synthetic fuel, there can be no assurances that this facility will
ever be placed into commercial operation.
14
Results of Operations
The following table sets forth, for the periods indicated, the relative
percentages that certain income and expense items bear to net sales:
Fiscal Year Ended January 31,
-----------------------------
2003 2002 2001
Net sales 100.0% 100.0% 100.0%
Cost of merchandise sold 70.3 71.1 72.6
----- ----- -----
Gross profit 29.7 28.9 27.4
Selling, general and administrative expenses 24.9 24.1 22.8
----- ----- -----
Income from operations 4.8 4.8 4.6
Investment income 0.1 0.1 0.2
Interest expense (1.2) (1.8) (1.7)
Income from limited partnerships 3.5 3.4 2.2
----- ----- -----
Income before provision for income taxes 7.2 6.5 5.3
Provision for income taxes 1.9 1.6 1.3
----- ----- -----
Income before extraordinary item 5.3 4.9 4.0
Extraordinary loss from early extinguishment of debt -- 0.1 --
----- ----- -----
Net income 5.3% 4.8% 4.0%
===== ===== =====
Comparison of Fiscal Years Ended January 31, 2003 and 2002
Net Sales--Net sales in fiscal 2002 were $428.6 million, a 7.7% decrease from
$464.5 million in fiscal 2001. This decrease was primarily due to a decline in
comparable store sales of 5.1% for fiscal 2002. Sales also declined due to
closing 10 stores during fiscal 2002 with no store openings. During fiscal 2001,
we opened 10 stores and closed 10 stores. We had 252 stores open at January 31,
2003 compared to 262 stores at January 31, 2002.
All product categories, except television sales, contributed to the negative
comparable store sales for fiscal 2002. The television category positively
impacted comparable store sales by 1.3% primarily due to strong sales in high
definition ready large screen televisions offsetting declining sales of analog
projection and smaller screen televisions. The video category negatively
impacted comparable store sales by 2.8% primarily due to slower sales of
camcorders, video cassette recorders (VCR's) and digital satellite systems. The
audio category contributed 2.5% to the decline in comparable store sales. The
appliance category contributed 0.9% to the decline in comparable store sales
with strong air conditioner sales being offset by a decline in the remaining
products in this category. The other category contributed 0.2% to the decline in
comparable store sales.
Gross Profit--Gross profit was $127.1 million in fiscal 2002, or 29.7% of net
sales, versus $134.4 million for fiscal 2001 or 28.9% of net sales. The gross
profit margin has been positively impacted by a shift in sales mix toward higher
gross profit margin categories and more favorable pricing from vendors on
certain products.
Selling, General and Administrative Expenses--Selling, general and
administrative expenses for 2002 were $106.5 million, or 24.9% of net sales, a
5.0% decrease from $112.2 million, or 24.1% of net sales, for fiscal 2001. The
reduction in expenditures primarily relates to the reduction in the number of
stores in operation
15
and lower sales commission costs related to lower sales. We also had reduced
television advertising expenditures in the first half of fiscal 2002, which were
resumed later in fiscal 2002. The increase in selling, general and
administrative expense as a percentage of sales was primarily caused by the
decline of 7.7% in net sales.
Income from Operations--Income from operations was $20.6 million, or 4.8% of net
sales, for fiscal 2002, a 7.4% decrease from $22.2 million, or 4.8% of net sales
for fiscal 2001. The decline was primarily caused by the reduction in net sales.
Investment Income--Investment income increased to $393,000 in fiscal 2002 from
$210,000 in fiscal 2001 primarily as a result of increased excess cash available
for investment in the first half of fiscal 2002.
Interest Expense--Interest expense decreased to $5.4 million, or 1.2% of net
sales, for fiscal 2002 from $8.2 million, or 1.8% of net sales, for fiscal 2001.
The decline in interest expense was primarily caused by a reduction in the
amount of mortgage debt outstanding and restructuring a large portion of the
remaining debt to lower floating interest rates.
Income from Limited Partnerships--Results for fiscals 2002 and 2001 also reflect
the impact of our equity investment in two limited partnerships which produce
synthetic fuels. Effective February 1, 1999, we entered into an agreement to
sell a portion of our investment in one of the limited partnerships, which
resulted in the reduction in our ownership interest from 30% to 17%. Effective
July 31, 2000, we sold an additional portion of our ownership interest in that
partnership, reducing our ownership percentage from 17% to 8%. Effective May 31,
2001, we sold our remaining 8% ownership interest. We expect to receive payments
from the sales on a quarterly basis through 2007, which will range from 74.25%
to 82.5% of the federal income tax credits attributable to the interest sold.
This partnership is currently being audited by the Internal Revenue Service.
Proceeds from the 2000 and 2001 sales are now being put into escrow pending the
results of the audit. The amount to be held in escrow is approximately $6.3
million at January 31, 2003. All proceeds have been reported as income whether
received or put into escrow. Below is a table summarizing the income from the
sales, net of certain expenses.
Year Ended January 31,
----------------------
2003 2002
February 1, 1999 sale $ 5,939 $ 6,950
July 31, 2000 sale 4,655 5,261
May 31, 2001 sale 4,118 3,505
------- -------
$14,712 $15,716
======= =======
Net income for fiscal 2002 also reflects pre-tax income, net of litigation
expenses, of approximately $0.4 million from the settlement of a previously
filed lawsuit relating to our participation as a limited partner in a second
limited partnership formed to produce synthetic fuel which qualifies for tax
credits under Section 29 of the Internal Revenue Code. As part of the
settlement, which was effected without the admission of liability by any party,
the Company entered into an Amended and Restated Agreement of Limited
Partnership which facilitates increased participation in future production of
synthetic fuel.
Income Taxes--Our effective tax rate was 25.0% and 24.8% for fiscals 2002 and
2001, respectively, after reflecting our share of federal tax credits earned by
the limited partnerships.
Extraordinary Loss from Early Extinguishment of Debt--In fiscal 2002, we
recorded an extraordinary loss from the early extinguishment of debt of $91,000,
net of the income tax effect, as a result of paying off mortgage loans totaling
$7.0 million. In fiscal 2001, we recorded an extraordinary loss from the early
16
extinguishment of debt of $245,000, net of the income tax effect, as a result of
paying off approximately $7.7 million of mortgage debt and refinancing
approximately $21.5 million of mortgage debt.
Net Income--As a result of the foregoing, net income was $22.9 million for
fiscal 2002 versus $22.3 million for fiscal 2001.
Comparison of Fiscal Years Ended January 31, 2002 and 2001
Net Sales - Net sales in fiscal 2001 were $464.5 million, a 2.3% decrease from
$475.4 million in fiscal 2000. This decrease was primarily due to a decline in
comparable store sales of 7.9% for fiscal 2001. Partially offsetting this was
the sales contribution from 10 new stores in fiscal 2001 and the first full year
of sales from the 30 stores opened in fiscal 2000. During fiscal 2001, we opened
10 stores and closed 10 stores, while during fiscal 2000 we opened 30 stores and
closed six. We had 262 stores open at January 31, 2002 and 2001.
All product categories contributed to the decline in comparable store sales for
fiscal 2001. The television category contributed 2.6%, the video category
contributed 2.3%, the audio category contributed 1.4%, the appliance category
contributed 1.2% and the other category contributed 0.4%. Within the product
categories our strongest products were larger screen televisions (35 inch and
larger), DVD players and ready to assemble furniture. The products with the
largest decline for comparable store sales were smaller screen televisions (32
inch and smaller) and VCR's.
Gross Profit - Gross profit was $134.4 million in fiscal 2001, or 28.9% of net
sales, versus $130.4 million for fiscal 2000, or 27.4% of net sales. The
increase in gross profit as a percentage of sales was primarily caused by a
shift in sales toward higher gross profit margin categories such as large screen
televisions, additional vendor allowances and less aggressive retail pricing in
the stores.
Selling, General and Administrative Expenses - Selling, general and
administrative expenses for fiscal 2001 were $112.2 million, or 24.1% of net
sales, a 3.2% increase from $108.7 million, or 22.8% of net sales, in fiscal
2000. The increase in expense was primarily caused by the increased store
expenses associated with the first full year of operations of the 30 new stores
opened in fiscal 2000. The increase in selling, general and administrative
expense as a percentage of sales was also impacted by the decline of 7.9% in
comparable store sales.
Income from Operations - Income from operations was $22.2 million, or 4.8% of
net sales, for fiscal 2001, a 2.3% increase from $21.7 million, or 4.6% of net
sales for fiscal 2000. The increase was primarily caused by the increase in
gross profit margin for fiscal 2001.
Investment Income - Investment income decreased to $210,000 in fiscal 2001 from
$933,000 in fiscal 2000. In fiscal 2000 we recorded a $640,000 gain on the sale
of stock warrants held in an outside company.
Interest Expense - Interest expense was approximately $8.2 million for fiscal
2001 and $8.1 million for fiscal 2000. Interest expense on mortgage debt had a
net increase of approximately $2.7 million due to higher average outstanding
mortgage debt throughout the year partially offset by a reduction of interest
rates through debt refinancing. Average borrowings outstanding on mortgage debt
increased from $57.6 million in fiscal 2000 to $88.1 million in fiscal 2001.
This was partially offset by a decline of approximately $2.6 million in interest
expense on the line of credit primarily due to lower outstanding borrowings on
the line of credit. Average borrowings on the line of credit declined from
approximately $40.0 million in fiscal 2000 to approximately $8.7 million in
fiscal 2001.
Income from Limited Partnerships - Results for fiscals 2001 and 2000 also
reflect the impact of our equity investment in two limited partnerships which
produce synthetic fuels. Effective February 1, 1999, we entered into an
agreement to sell a portion of our investment in one of the limited
partnerships, which resulted in the reduction in our ownership interest from 30%
to 17%. Effective July 31, 2000, we sold an additional portion of our ownership
interest in that partnership, reducing our ownership percentage from 17% to 8%.
Effective
17
May 31, 2001, we sold our remaining 8% ownership interest. We expect to receive
cash payments from the sales on a quarterly basis through 2007 which will range
from 74.25% to 82.5% of the federal income tax credits attributable to the
interest sold. Below is a table summarizing the income from the sales, net of
certain expenses.
Year Ended January 31,
----------------------
2002 2001
---- ----
February 1, 1999 sale $ 6,950 $ 6,493
July 31, 2000 sale 5,261 4,242
May 31, 2001 sale 3,505 --
Share of partnership losses -- (298)
------- -------
$15,716 $10,437
======= =======
Income Taxes - Our effective tax rate was 24.8% and 25% in fiscal 2001 and 2000,
respectively, after reflecting our share of federal tax credits earned by the
limited partnerships.
Extraordinary Loss from Early Extinguishment of Debt - In fiscal 2001, we
recorded an extraordinary loss from the early extinguishment of debt of
$245,000, net of the income tax effect of $160,000, as a result of paying off
approximately $7.7 million of mortgage debt and refinancing approximately $21.5
million of mortgage debt.
Net Income - As a result of the foregoing, net income was $22.3 million in
fiscal 2001 versus $18.7 million in fiscal 2000.
Liquidity and Capital Resources
Our primary sources of financing have been income from operations and our
investment in synthetic fuel limited partnerships, supplemented by mortgages on
owned properties. We also use borrowings under our revolving line of credit to
fund our seasonal working capital needs.
Outlook - Our ongoing inventory and cash levels are expected to be consistent
with that at January 31, 2003, subject to seasonal fluctuations. The inventory
and resulting cash levels at January 31, 2002 were abnormal in part due to
vendor inventory shortages in the consumer electronics part of the business, in
the wake of the events of September 11, 2001.
Operating Activities--Net cash used in operating activities for fiscal 2002 was
$37.2 million compared to net cash provided by operating activities of $42.3
million in fiscal 2001. For fiscal 2002, operating cash flow was provided by net
income of $22.9 million adjusted for the impact of a $15.1 million gain on sales
of partnership interest and non-cash items of $6.3 million, which consist of
deferred income, the deferred income tax provision and depreciation and
amortization. The primary use of cash was an increase in inventory of $41.0
million to rebuild our inventory from a low level in the previous year partially
due to a shortage of inventory available in the consumer electronics portion of
the business. Cash was also used by a reduction in accounts payable of $5.2
million due to timing of inventory purchases and payments to vendors, and an
increase in accounts receivable of $2.3 million, an increase in other assets of
$1.7 million and a decrease in other liabilities of $1.1 million.
18
For fiscal 2001, operating cash flow was provided by net income of $22.3 million
adjusted for the impact of a $15.7 million gain on sales of partnership interest
and non-cash items of $2.5 million, which consist of deferred income, the
deferred income tax provision and depreciation and amortization. The primary
source of cash was a reduction in inventory of $43.1 million, offset by a
corresponding reduction in accounts payable of $15.1 million. This reduction in
inventory was partially due to a shortage of inventory available in the consumer
electronics portion of the business. Cash was also provided by a reduction in
accounts receivable of $2.0 million, a reduction in other current assets of $1.6
million and an increase in other current liabilities of $1.4 million.
Investing Activities--Net cash was provided by investing activities of $9.7
million for fiscal 2002. Cash of $10.0 million was provided by proceeds from the
sale of our partnership interest in synthetic fuel and $2.1 million from the
sale of real estate from closed stores. Capital expenditures in fiscal 2002
totaled $2.4 million. Expenditures included approximately $1.2 million with
respect to in-progress payments for an addition to the Dayton, Ohio distribution
center and approximately $1.2 million for improvements at existing facilities.
Capital expenditures in fiscal 2001 totaled $9.9 million. Expenditures included
approximately $5.4 million to acquire the Dayton, Ohio distribution center
previously leased, approximately $3.4 million to open 10 new retail stores in
addition to $3.8 million spent in fiscal 2000, and approximately $1.1 million
for equipment and improvements to existing stores.
Financing Activities--Cash used in financing activities was $10.5 million for
fiscal 2002. During fiscal 2002 we purchased 1,549,380 shares of our common
stock for approximately $16.8 million. During fiscal 2001 we purchased 1,550,588
(split adjusted) shares of our common stock for approximately $16.7 million. At
January 31, 2003 we had authorization from the Board of Directors to purchase an
additional 730,150 shares of our common stock. All acquired shares will be held
in treasury for possible future use.
At January 31, 2003, we had approximately $70.1 million of mortgage debt
outstanding at a weighted average interest rate of 5.90%, with maturities from
January 15, 2004 to October 1, 2019. We have balloon payments due totaling
approximately $4.3 million over the next two fiscal years, which we plan to
either refinance with long-term mortgage debt or satisfy through cash payment or
borrowings on our revolving credit agreement. During fiscal 2002, we paid off
$12.1 million of long-term mortgage debt from scheduled repayments and the early
extinguishment of debt for nine retail locations.
We received proceeds of approximately $2.8 million and $10.1 million for fiscal
2002 and 2001, respectively, from the exercise of stock options by employees and
directors. The exercise of non-qualified stock options resulted in a tax benefit
of approximately $2.2 million and $1.0 million for fiscals 2002 and 2001,
respectively, which was reflected as an increase in additional paid-in capital.
We have a revolving credit agreement with six banks through July 31, 2005 with
interest at prime or LIBOR plus 1.875% and commitment fees of 1/4% payable on
the unused portion. Amounts available for borrowing are equal to the lesser of
(1) $100 million for the months of January through June and $130 million for the
months of July through December or (2) the sum of specific percentages of
eligible accounts receivable and eligible inventories, as defined. Amounts
available for borrowing are reduced by any letter of credit commitments
outstanding. Borrowings on the revolving credit agreement are secured by certain
fixed assets, accounts receivable, inventories and the capital stock of our
subsidiaries.
At January 31, 2003 and 2002, we had borrowings outstanding of $13.5 million and
$66,000, respectively, on the revolving credit agreement. A total of
approximately $76.9 million was available at January 31, 2003. Borrowing levels
vary during the course of a year based upon our seasonal working capital needs.
The maximum direct borrowings outstanding during fiscal 2002 were approximately
$35.6 million, which existed immediately prior to the Christmas selling season
due to the build-up of seasonal inventory requirements. The weighted average
interest rate was 4.3% (7.9% including commitment fees) for fiscal 2002. The
19
revolving credit agreement contains restrictive covenants which require us to
maintain specified levels of consolidated tangible net worth and limit capital
expenditures and the incurrence of additional indebtedness. The revolving credit
agreement also places restrictions on common stock repurchases and the payment
of dividends.
Seasonality and Quarterly Fluctuations
Our business is seasonal. As is the case with many other retailers, our net
sales and net income are greatest in our fourth fiscal quarter, which includes
the Christmas selling season. The fourth fiscal quarter accounted for 34.1% and
32.7% of net sales and 59.5% and 57.6% of income from operations in fiscal 2002
and 2001, respectively. Year to year comparisons of quarterly results of
operations and comparable store sales can be affected by a variety of factors,
including the duration of the holiday selling season, weather conditions and the
timing of new store openings.
Impact of Inflation
The impact of inflation has not been material to our results of operations for
the past three fiscal years.
Critical Accounting Policies
Revenue Recognition - We recognize sales of products upon receipt by the
customer. We will honor returns from customers within seven days from the date
of sale. We establish liabilities for estimated returns at the point of sale.
We also sell product service contracts covering periods beyond the normal
manufacturers' warranty periods, usually with terms of coverage (including
manufacturers' warranty periods) of between 12 to 60 months. Contract revenues,
net of sales commissions, are deferred and amortized on a straight-line basis
over the life of the contracts after the expiration of applicable manufacturers'
warranty periods. We retain the obligation to perform warranty service and such
costs are charged to operations as incurred.
We recognize amounts billed to a customer for shipping and handling as revenue
and actual costs incurred for shipping as selling, general and administrative
expense in the income statement.
Inventory Reserves - Inventory is recorded at the lower of cost or market, net
of reserves established for estimated technological obsolescence. The market
value of inventory is often dependent upon changes in technology resulting in
significant changes in customer demand. If these estimates are inaccurate, we
may be exposed to market conditions that require an additional reduction in the
value of certain inventories affected.
Income Taxes - Income taxes are recorded based on the current year amounts
payable or refundable, as well as the consequences of events that give rise to
deferred tax assets and liabilities based on differences in how those events are
treated for tax purposes, net of valuation allowances. We base our estimate of
deferred tax assets and liabilities on current tax laws and rates and other
expectations about future outcomes, including the outcome of tax credits under
Section 29 of the Internal Revenue Code. Changes in existing regulatory tax laws
and rates may affect our ability to successfully manage regulatory matters, and
future business results may affect the amount of deferred tax liabilities or the
valuation of deferred tax assets over time. Our accounting for deferred tax
consequences represents management's best estimate of future events that can be
appropriately reflected in the accounting estimates.
Recoverability of Long-Lived Assets - Given the nature of our business, each
income producing property must be evaluated separately when events and
circumstances indicate that the value of that asset may not be
20
recoverable. We recognize an impairment loss when the estimated future
undiscounted cash flows expected to result from the use of the asset and its
value upon disposal are less than its carrying amount.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB), issued Statement
No. 143, "Accounting for Asset Retirement Obligations," which requires entities
to establish liabilities for legal obligations associated with the retirement of
tangible long-lived assets. We will adopt the Statement in 2003, but do not
believe adoption will have a material effect on our financial statements.
In April 2002, the FASB issued Statement No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." Among other amendments to previous pronouncements, which have
already taken effect, a provision in the Statement, requiring certain gains and
losses from extinguishment of debt to be reclassified from extraordinary items,
is effective January 31, 2003. As a result, in 2003, we will reclassify the 2002
and 2001 loss on retirement of debt to income from continuing operations.
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." The provisions of this
Statement are effective for exit or disposal activities that are initiated after
December 31, 2002. The Statement could have a material effect on our financial
statements to the extent that significant exit or disposal activities occur
subsequent to adoption.
In December 2002, the FASB issued Statement No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" which provides alternative methods of
transition for a voluntary change to the fair value method of accounting for
stock-based compensation. We currently use the intrinsic value method and, at
this time, do not anticipate making a voluntary change. We have adopted the
disclosure provisions of this Standard within Note 1 of Item 8.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." The Interpretation clarifies when a guarantor must
record a liability for the fair value of the obligation undertaken in issuing a
guarantee. We adopted the initial recognition and measurement provisions of this
Interpretation when required on January 1, 2003, and such adoption did not have
a material effect on our financial statements. The disclosure provisions of this
Interpretation have been adopted within the notes to the Financial Statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" which requires the consolidation of certain types of
entities. The Interpretation applies immediately to variable interest entities
created or acquired after January 31, 2003. The Interpretation is effective for
interim periods beginning after June 15, 2003 for an enterprise that has
variable interest entities acquired prior to February 1, 2003. We will adopt the
new Interpretation, as required, but do not expect the adoption to have a
material impact on our financial statements as we do not invest in Variable
Interest Entities.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
As of January 31, 2003, we had financial instruments which were sensitive to
changes in interest rates. These financial instruments consist of a revolving
credit agreement and various mortgage notes payable secured by certain land,
buildings and leasehold improvements.
21
The revolving credit agreement is with six banks through July 31, 2005, with
interest at prime or LIBOR plus 1.875% and commitment fees of 1/4% payable on
the unused portion. Amounts available for borrowing are equal to the lesser of
(1) $100 million for the months of January through June and $130 million for the
months of July through December or (2) the sum of specific percentages of
eligible accounts receivable and eligible inventories, as defined. Amounts
available for borrowing are reduced by any letter of credit commitments
outstanding. Borrowings on the revolving credit agreement are secured by certain
fixed assets, accounts receivable, inventories and the capital stock of our
subsidiaries. At January 31, 2003, a total of approximately $76.9 million was
available for borrowings under the revolving credit agreement. We had
outstanding borrowings of approximately $13.5 million under the revolving credit
agreement at January 31, 2003.
Approximately $27.8 million of the mortgage debt consists of fixed rate debt.
The interest rates range from 4.75% to 8.5%. The remaining $42.3 million of
mortgage debt is variable rate mortgage debt. In general, the rate on the
variable rate debt ranges from prime to prime plus 0.625%. If the prime interest
rate increased 1%, we estimate our annual interest cost would increase
approximately $0.4 million for the variable rate mortgage debt. Principal and
interest are payable monthly over terms which generally range from 10 to 15
years. Substantially all of the notes payable require balloon payments at the
end of the scheduled term. The fair value of our long-term fixed mortgage debt
at January 31, 2003 was approximately $31.5 million. The fair value was
estimated based on rates available to us for debt with similar terms and
maturities.
Maturities of long-term debt are as follows (amounts in thousands):
2004 $ 5,657
2005 9,750
2006 8,960
2007 10,735
2008 6,516
Thereafter 28,465
-------
$70,083
=======
22
REX STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 2003 AND 2002
(Amounts in thousands)
- ----------------------------------------------------------------------------------------------------------
2003 2002
ASSET
CURRENT ASSETS:
Cash and cash equivalents $ 1,380 $ 39,441
Accounts receivable--net of allowance for doubtful accounts of $200 and $852 in
2003 and 2002, respectively 3,413 1,120
Synthetic fuel receivable 6,619 1,545
Merchandise inventory 142,063 101,017
Prepaid expenses and other 2,567 2,554
Future income tax benefits 10,350 12,614
--------- ---------
Total current assets 166,392 158,291
PROPERTY AND EQUIPMENT--Net 134,563 139,496
OTHER ASSETS 1,656 --
FUTURE INCOME TAX BENEFITS 6,070 7,320
RESTRICTED INVESTMENTS 2,241 2,222
--------- ---------
TOTAL ASSETS $ 310,922 $ 307,329
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 13,451 $ 66
Current portion of long-term debt 5,657 5,012
Accounts payable--trade 27,417 32,619
Accrued income taxes -- 1,373
Current portion of deferred income and deferred gain on sale and leaseback 11,107 11,790
Accrued payroll 6,750 5,856
Other current liabilities 8,669 9,319
--------- ---------
Total current liabilities 73,051 66,035
--------- ---------
LONG-TERM LIABILITIES:
Long-term mortgage debt 64,426 77,203
Deferred income 13,993 15,173
Deferred gain on sale and leaseback 348 945
--------- ---------
Total long-term liabilities 78,767 93,321
--------- ---------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, 45,000 shares authorized, 27,746 and 27,358 shares issued at par 277 274
Paid-in capital 121,282 116,701
Retained earnings 157,640 134,708
Treasury stock, 16,607 and 15,113 shares (120,095) (103,710)
--------- ---------
Total shareholders' equity 159,104 147,973
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 310,922 $ 307,329
========= =========
See notes to consolidated financial statements.
23
REX STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED JANUARY 31, 2003, 2002 AND 2001
(Amounts in Thousands, Except Per Share Amounts)
- --------------------------------------------------------------------------------
2003 2002 2001
NET SALES $428,625 $464,503 $475,419
-------- -------- --------
COSTS AND EXPENSES:
Cost of merchandise sold 301,501 330,110 345,026
Selling, general and administrative expenses 106,535 112,157 108,661
-------- -------- --------
Total costs and expenses 408,036 442,267 453,687
-------- -------- --------
INCOME FROM OPERATIONS 20,589 22,236 21,732
INVESTMENT INCOME 393 210 933
INTEREST EXPENSE (5,378) (8,155) (8,121)
INCOME FROM LIMITED PARTNERSHIPS 15,080 15,716 10,437
-------- -------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES 30,684 30,007 24,981
PROVISION FOR INCOME TAXES 7,661 7,453 6,245
-------- -------- --------
INCOME BEFORE EXTRAORDINARY ITEM 23,023 22,554 18,736
EXTRAORDINARY LOSS FROM EARLY EXTINGUISHMENT
OF DEBT, NET OF TAX (91) (245) --
-------- -------- --------
NET INCOME $ 22,932 $ 22,309 $ 18,736
======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING--BASIC 12,142 11,698 14,141
======== ======== ========
BASIC NET INCOME PER SHARE BEFORE EXTRAORDINARY
ITEM $ 1.90 $ 1.93 $ 1.32
EXTRAORDINARY ITEM (0.01) (0.02) --
-------- -------- --------
BASIC NET INCOME PER SHARE $ 1.89 $ 1.91 $ 1.32
======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING--DILUTED 14,192 13,509 15,489
======== ======== ========
DILUTED NET INCOME PER SHARE BEFORE EXTRAORDINARY ITEM $ 1.62 $ 1.67 $ 1.21
EXTRAORDINARY ITEM (0.01) (0.02) --
-------- -------- --------
DILUTED NET INCOME PER SHARE $ 1.61 $ 1.65 $ 1.21
======== ======== ========
See notes to consolidated financial statements.
24
REX STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 31, 2003, 2002 AND 2001
(Amounts in thousands)
- --------------------------------------------------------------------------------------------------------
2003 2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 22,932 $ 22,309 $ 18,736
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization--net 4,325 4,198 3,917
Income from limited partnerships (15,080) (15,716) (10,700)
(Gain) loss on disposal of fixed assets 290 155 (21)
Deferred income (1,863) (1,265) 207
Deferred income tax 3,514 (574) (688)
Changes in assets and liabilities:
Accounts receivable (2,293) 2,043 (2,138)
Merchandise inventory (41,046) 43,133 (4,883)
Other current assets (19) 1,612 (2,083)
Other long term assets (1,656) -- --
Accounts payable--trade (5,202) (15,062) 1,428
Other current liabilities (1,129) 1,442 (2,743)
-------- -------- --------
Net cash provided by (used in) operating activities (37,227) 42,275 1,032
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,404) (9,948) (27,696)
Proceeds from sale of partnership interest 10,006 15,716 10,700
Proceeds from sale of real estate and fixed assets 2,131 943 1,142
Restricted investments (19) (56) (145)
-------- -------- --------
Net cash provided by (used in) investing activities 9,714 6,655 (15,999)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in note payable 13,385 (676) 742
Proceeds from long-term debt -- 8,200 41,505
Payments of long-term debt (12,132) (12,170) (4,823)
Stock options exercised and related tax effects 4,584 10,554 1,003
Treasury stock issued 377 579 130
Treasury stock acquired (16,762) (16,663) (48,512)
-------- -------- --------
Net cash used in financing activities (10,548) (10,176) (9,955)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (38,061) 38,754 (24,922)
CASH AND CASH EQUIVALENTS--Beginning of year 39,441 687 25,609
-------- -------- --------
CASH AND CASH EQUIVALENTS--End of year $ 1,380 $ 39,441 $ 687
======== ======== ========
See notes to consolidated financial statements.
25
REX STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JANUARY 31, 2003, 2002 AND 2001
(Amounts in thousands)
- ---------------------------------------------------------------------------------------------------------------------------
Common Shares
-----------------------------------
Issued Treasury
--------------- -----------------
Total
Paid-In Retained Shareholders'
Shares Amount Shares Amount Capital Earnings Equity
BALANCE--January 31, 2000 25,864 $259 7,709 $ 39,244 $105,159 $ 93,663 $159,837
Net income 18,736 18,736
Treasury stock acquired 5,969 48,512 (48,512)
Stock options exercised and related tax effects 137 1 (25) (130) 1,002 1,133
------ ---- ------ -------- -------- -------- --------
BALANCE--January 31, 2001 26,001 260 13,653 87,626 106,161 112,399 131,194
Net income 22,309 22,309
Treasury stock acquired 1,550 16,663 (16,663)
Stock options exercised and related tax effects 1,357 14 (90) (579) 10,540 11,133
------ ---- ------ -------- -------- -------- --------
BALANCE--January 31, 2002 27,358 274 15,113 103,710 116,701 134,708 147,973
Net income 22,932 22,932
Treasury stock acquired 1,549 16,762 (16,762)
Stock options exercised and related tax effects 388 3 (55) (377) 4,581 4,961
------ ---- ------ -------- -------- -------- --------
BALANCE--January 31, 2003 27,746 $277 16,607 $120,095 $121,282 $157,640 $159,104
====== ==== ====== ======== ======== ======== ========
See notes to consolidated financial statements.
26
REX STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation--The accompanying financial statements
consolidate the operating results and financial position of REX Stores
Corporation and its wholly-owned subsidiaries (the "Company"). All
significant intercompany balances and transactions have been eliminated.
The Company operates 252 retail consumer electronics and appliance stores
under the REX name in 37 states. The Company operates in one segment.
Fiscal Year--All references in these consolidated financial statements to a
particular fiscal year are to the Company's fiscal year ended January 31.
For example, "fiscal 2002" means the period February 1, 2002 to January 31,
2003.
Use of Estimates--The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Cash Equivalents--Cash equivalents are principally short-term investments
with original maturities of less than three months. The carrying amount of
cash equivalents approximate fair value.
Merchandise Inventory--Substantially all inventory is valued at the lower
of average cost or market, which approximates cost on a first-in, first-out
("FIFO") basis, including certain costs associated with purchasing,
warehousing and transporting merchandise. Reserves are established for
estimated technological obsolescence. The market value of inventory is
often dependent upon changes in technology resulting in significant changes
in customer demand. The inventory of an acquired subsidiary, Kelly & Cohen
Appliances, Inc. ("K&C"), is valued at the lower of cost or market using
the last-in, first-out ("LIFO") method. Following the lower of cost or
market principle, the K&C inventory value using the LIFO method
($38,729,000 and $29,969,000 at January 31, 2003 and 2002, respectively) is
equivalent to the FIFO value in all years presented. Ten suppliers
accounted for approximately 76% of the Company's purchases in fiscal 2002.
Two vendors represented approximately 29% of our inventory purchases in
2002.
27
Property and Equipment--Property and equipment is recorded at cost.
Depreciation is computed using the straight-line method. Estimated useful
lives are 15 to 40 years for buildings and improvements, and 3 to 12 years
for fixtures and equipment. Leasehold improvements are depreciated over 10
to 12 years. The components of property and equipment at January 31, 2003
and 2002 are as follows (amounts in thousands):
2003 2002
Land $ 38,567 $ 38,986
Buildings and improvements 99,448 98,916
Fixtures and equipment 18,471 20,177
Leasehold improvements 9,882 10,976
Construction in progress 1,251 --
-------- --------
167,619 169,055
Less: accumulated depreciation (33,056) (29,559)
-------- --------
$134,563 $139,496
======== ========
In 2002, the Company adopted FASB Statement No. 144 Accounting for the
Impairment or Disposal of Long-Lives Assets. The carrying value of
long-lived assets is assessed for recoverability by management when changes
in circumstances indicate that the carrying amount may not be recoverable,
based on an analysis of undiscounted future expected cash flows from the
use and ultimate disposition of the asset. There were no material
impairment losses incurred in the fiscal years ended January 31, 2003,
2002, and 2001.
Restricted Investments--Restricted investments, which are principally
marketable debt securities, are stated at cost plus accrued interest, which
approximates market. Restricted investments at January 31, 2003 and 2002
are restricted by two states to cover possible future claims under product
service contracts.
Revenue Recognition--The Company recognizes sales of products upon receipt
by the customer. The Company will honor returns from customers within seven
days from the date of sale. The Company establishes liabilities for
estimated returns at the point of sale.
The Company also sells product service contracts covering periods beyond
the normal manufacturers' warranty periods, usually with terms of coverage
(including manufacturers' warranty periods) of between 12 to 60 months.
Contract revenues, net of sales commissions, are deferred and amortized on
a straight-line basis over the life of the contracts after the expiration
of applicable manufacturers' warranty periods. The Company retains the
obligation to perform warranty service and such costs are charged to
operations as incurred.
The Company recognizes amounts billed to a customer for shipping and
handling as revenue and actual costs incurred for shipping as selling,
general and administrative expense in the income statement. Amounts
classified as selling, general and administrative expense was $3,309,000,
$3,209,000 and $3,058,000 in fiscal 2002, 2001 and 2000, respectively.
Interest Cost--Interest expense of $5,378,000, $8,155,000 and $8,121,000
for the years ended January 31, 2003, 2002 and 2001, respectively, is net
of approximately $5,000, $30,000, and $469,000 of interest capitalized
related to store or warehouse construction. Total interest expense
approximates interest paid for all years presented.
28
Deferred Financing Costs--Direct expense and fees associated with obtaining
notes payable or long-term mortgage debt are capitalized and amortized to
interest expense over the life of the loan.
Advertising Costs--Advertising costs are expensed as incurred. Advertising
expense was approximately $32,169,000, $34,775,000, and $35,281,600 for the
years ended January 31, 2003, 2002, and 2001, respectively.
Store Opening and Closing Costs--Store opening costs are expensed as
incurred. The costs associated with closing stores are accrued when the
decision is made to close a location. Store closing costs incurred in
fiscal year ended January 31, 2003 and 2001 were not material. Store
closing costs incurred in the fiscal year ended January 31, 2002 were
$1,460,000.
Stock Compensation -- The Company accounts for its stock-based compensation
plans under Accounting Principles Board Opinion ("APB Opinion") No. 25,
Accounting for Stock Issued to Employees, under which no compensation cost
has been recognized. Had compensation cost for these plans been determined
at fair value consistent with FASB Statement No. 123, Accounting for
Stock-Based Compensation, the Company's net income and net income per share
would have been reduced to the following pro forma amounts for the years
ended January 31, 2003, 2002 and 2001 (amounts in thousands, except
per-share amounts):
2003 2002 2001
Net income As reported $22,932 $22,309 $18,736
Compensation Cost 3,621 3,154 2,109
------- ------- -------
Pro forma 19,311 19,155 16,627
Basic net income per share As reported $ 1.89 $ 1.91 $ 1.32
Compensation Cost 0.30 0.27 0.14
------- ------- -------
Pro forma 1.59 1.64 1.18
Diluted net income per share As reported $ 1.61 $ 1.65 $ 1.21
Compensation Cost 0.25 0.23 0.13
------- ------- -------
Pro forma 1.36 1.42 1.08
The fair values of options granted were estimated as of the date of grant
using a Black-Scholes option pricing model with the following weighted
average assumptions used for grants in fiscal years ended January 31, 2003,
2002 and 2001, respectively: risk-free interest rate of 5.2%, 5.1% and
6.2%, expected volatility of 65.4%, 68.9% and 60.3% and a weighted average
stock option life of nine years for all years. In accordance with the
provisions of FASB Statement No. 123, the fair value method of accounting
was not applied to options granted prior to February 1, 1995 in estimating
the pro forma amounts. Therefore, the pro forma effect on net income and
net income per share may not be representative of that to be expected in
future years.
Extended Service Contracts -- Extended service contract revenues, net of
sales commissions, are deferred and amortized on a straight-line basis over
the life of the contracts after the expiration of applicable manufacturers'
warranty periods. Terms of coverage, including the manufacturers' warranty
periods, are usually for periods of 12 to 60 months. Extended service
contract revenues represented 3.6% of net sales for fiscal 2002, 3.3% of
net sales for fiscal 2001 and 3.1% of net sales for fiscal 2000. Service
contract costs are charged to operations as incurred. Gross profit realized
from extended service
29
contract revenues was $11.4 million, $11.4 million and $10.9 million in
fiscal 2002, 2001 and 2000, respectively. Amounts deferred were
approximately $3.0 million and $3.5 million at January 31, 2003 and 2002,
respectively.
New Accounting Pronouncements -- In June 2001, the FASB issued Statement
No. 143, "Accounting for Asset Retirement Obligations," which requires
entities to establish liabilities for legal obligations associated with the
retirement of tangible long-lived assets. The Company will adopt the
Statement in 2003, but does not believe adoption will have a material
effect on its financial statements.
In April 2002, the FASB issued Statement No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." Among other amendments to previous pronouncements,
which have already taken effect, a provision in the Statement, requiring
certain gains and losses from extinguishment of debt to be reclassified
from extraordinary items, is effective January 31, 2003. As a result, in
2003, the Company will reclassify the 2002 and 2001 loss on retirement of
debt to income from continuing operations.
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which addresses financial
accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." The provisions of this Statement are effective for exit or
disposal activities that are initiated after December 31, 2002. The
Statement could have a material effect on the Company's financial
statements to the extent that significant exit or disposal activities occur
subsequent to adoption.
In December 2002, the FASB issued Statement No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure" which provides
alternative methods of transition for a voluntary change to the fair value
method of accounting for stock-based compensation. The Company currently
uses the intrinsic value method and, at this time, does not anticipate
making a voluntary change. The Company has adopted the disclosure
provisions of this Standard within these financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." The Interpretation clarifies when a
guarantor must record a liability for the fair value of the obligation
undertaken in issuing a guarantee. The Company adopted the initial
recognition and measurement provisions of this Interpretation when required
on January 1, 2003, and such adoption did not have a material effect on the
financial statements. The disclosure provisions of this Interpretation have
been adopted within these financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" which requires the consolidation of certain
types of entities. The Interpretation applies immediately to variable
interest entities created or acquired after January 31, 2003. The
Interpretation is effective for interim periods beginning after June 15,
2003 for an enterprise that has variable interest entities acquired prior
to February 1, 2003. The Company will adopt the new Interpretation, as
required, but does not expect the adoption to have a material impact on its
financial statements.
2. INVESTMENTS IN LIMITED PARTNERSHIPS
During fiscal 1998, the Company invested $3,150,000 in two limited
partnerships which produce synthetic fuels. The limited partnerships earned
Federal income tax credits under Section 29 of the Internal Revenue Code
based upon the quantity and content of synthetic fuel production. Under
current
30
law, credits under Section 29 are available for qualified fuels sold before
January 1, 2008. The tax credits begin to phase out if the price of a
barrel of oil exceeds certain levels adjusted annually for inflation. The
2002 phase-out started at $49.75 per barrel. The Company accounts for its
share of the income tax credits as a reduction of the income tax provision
in the period earned and such credits totaled approximately $3,100,000,
$2,900,000 and $9,900,000 in fiscal 2002, 2001 and 2000, respectively (see
Note 9).
Effective February 1, 1999, the Company sold a 13% interest in one of the
limited partnerships reducing its initial 30% ownership interest to 17%.
The Company expects to receive cash payments from the sale on a quarterly
basis through December 31, 2007. These payments are contingent upon and
equal to 75% of the federal income tax credits attributable to the 13%
interest sold and are subject to certain annual limitations, as specified
in the sale agreement. The maximum amount that could be received for
calendar years 2002, 2001 and 2000 was approximately $7,400,000, $7,100,000
and $6,500,000 respectively. The Company earned and received approximately
$5,900,000, $7,000,000 and $6,800,000 for fiscal years 2002, 2001 and 2000,
respectively. The maximum that can be received for calendar 2003 is
approximately $7,700,000.
Effective July 31, 2000, the Company sold an additional portion of its
interest in the above partnership, reducing its ownership percentage from
17% to 8%. The Company expects to receive payments from the sale on a
quarterly basis through December 31, 2007. These payments are contingent
upon and equal to the greater of 82.5% of the federal income tax credits
attributable to the 9% interest sold subject to annual limitations or
74.25% of the federal income tax credits attributable to the 9% interest
sold with no annual limitations. Quarterly payments from this sale are now
being held in escrow beginning in fiscal 2002 pending the results of an
Internal Revenue Service (IRS) audit of the partnership. The amount earned
and reported as income was approximately $4.7 million for fiscal 2002. The
Company received approximately $1.4 million of these proceeds with the
remaining $3.3 million to be held in escrow. The amount earned and received
for fiscal 2001 and 2000 was approximately $5,300,000 and $4,300,000
respectively.
Effective May 31, 2001, the Company sold its remaining 8% ownership in the
above partnership. The Company expects to receive payments from the sale on
a quarterly basis through December 31, 2007. These payments are contingent
upon and equal to the greater of 82.5% of the federal income tax credits
attributable to the 8% interest sold, subject to annual limitations or
74.25% of the federal income tax credits attributable to the 8% interest
sold with no annual limitations. Quarterly payments from this sale are now
being held in escrow beginning in fiscal 2002 pending the results of the
IRS audit. The amount earned and reported as income was approximately $4.1
million for fiscal 2002. The Company received approximately $1.1 million of
the proceeds with the remaining $3.0 million to be held in escrow. The
amount earned and received for fiscal 2001 was approximately $3,500,000,
including a down payment of $355,000.
The Company remains a limited partner in the other partnership. Net income
for fiscal 2002 reflects pre-tax income, net of litigation expenses, of
approximately $400,000 from the settlement of a previously filed lawsuit
relating to the Company's participation in this partnership. As part of the
settlement, which was affected without the admission of liability by any
party, the Company entered into an Amended and Restated Agreement of
Limited Partnership which facilitates increased participation in future
production of synthetic fuel. This facility is now operational and
providing synthetic fuel.
The Company recorded a charge of approximately $300,000 in fiscal 2000 to
reflect the Company's share of the partnerships' losses. No charge was
incurred for fiscal 2002 and 2001.
On September 5, 2002, the Company closed on its purchase of a plant located
in Gillette, Wyoming designed and constructed for the production of
synthetic fuel, which qualifies for tax credits under
31
Section 29 of the Internal Revenue Code. The Company has obtained a Private
Letter Ruling from the IRS which would allow the disassembly, and
reconstruction, of the facility at a yet to be determined host site. The
Company has executed a letter of intent with a potential partner as to the
relocation and commercialization of the plant and limiting the Company's
maximum financial investment in the venture. If the plant cannot be
relocated on terms acceptable to the Company, the Company is obligated to
remove the plant from its existing site at a currently estimated cost to
the Company of up to $2.0 million. Through January 31, 2003, approximately
$500,000 had been spent on this project, with an additional $1.0 million
being held in escrow to guarantee the Company's future performance. While
this acquisition may result in the future production of synthetic fuel,
there can be no assurances that this facility will ever be placed into
commercial operation.
3. NET INCOME PER SHARE
The Company reports net income per share in accordance with FASB Statement
No. 128 Earnings per Share.
Basic net income per share is computed by dividing net income available to
common shareholders by the weighted average number of common shares
outstanding during the year. Diluted net income per share is computed by
dividing net income available to common shareholders by the weighted
average number of shares outstanding and dilutive common share equivalents
during the year. Common share equivalents for each year include the number
of shares issuable upon the exercise of outstanding options, less the
shares that could be purchased with the proceeds from the exercise of the
options, based on the average trading price of the Company's common stock
for fiscal 2002, 2001 and 2000.
The following table reconciles the basic and diluted net income per share
computations for each year presented for the years ended January 31, 2003,
2002, and 2001 (amounts in thousands, except per-share amounts):
2003
----------------------------
Income Shares Per Share
Basic net income per share $22,932 12,142 $1.89
Effect of stock options 2,050
------- ------
Diluted net income per share $22,932 14,192 $1.61
======= ====== =====
2002
----------------------------
Income Shares Per Share
Basic net income per share $22,309 11,698 $1.91
Effect of stock options 1,811
------- ------
Diluted net income per share $22,309 13,509 $1.65
======= ====== =====
32
2001
----------------------------
Income Shares Per Share
Basic net income per share $18,736 14,141 $1.32
Effect of stock options 1,348
------- ------
Diluted net income per share $18,736 15,489 $1.21
======= ====== =====
For the years ended January 31, 2003, 2002 and 2001, a total of 346,937,
-0-, and 220,000 shares, respectively, subject to outstanding options were
not included in the common equivalent shares outstanding calculation as the
exercise prices were above the average trading price of the Company's
common stock for those periods.
On both August 10, 2001 and February 11, 2002, the Company effected a
3-for-2 stock split. All per share data shown above has been retroactively
restated to reflect these splits.
4. COMMON STOCK
During the years ended January 31, 2003, 2002, and 2001, the Company
purchased 1,549,000, 1,550,000 and 5,969,000 shares of its common stock for
$16,762,000, $16,663,000 and $48,512,000, respectively. At January 31,
2003, the Company was authorized by its Board of Directors to purchase an
additional 730,150 shares of its common stock.
5. REVOLVING LINE OF CREDIT
The revolving credit agreement is with six banks and expires on July 31,
2005. Under the terms of the agreement, available revolving credit
borrowings are equal to the lesser of: (1) $100 million for the months of
January through June and $130 million for the months of July through
December or (ii) the sum of specific percentages of eligible accounts
receivable and eligible inventories, as defined. Borrowings available are
reduced by any letter of credit commitments outstanding. The Company had
outstanding borrowings under the revolving credit agreement of $13,451,000
and $66,000 at January 31, 2003 and 2002, respectively. At January 31,
2003, a total of approximately $76.9 million was available for borrowings
under the revolving credit agreement.
The interest rate charged on borrowings is prime or LIBOR plus 1.875%
(4.25% at January 31, 2003) and commitment fees of 1/4% are payable on the
unused portion. Borrowings are secured by certain fixed assets, accounts
receivable and inventories.
The revolving credit agreement contains restrictive covenants which require
the Company to maintain specified levels of consolidated tangible net worth
and limits capital expenditures and the incurrence of additional
indebtedness. The revolving credit agreement also places restrictions on
the amount of common stock repurchased and the payment of dividends. The
Company was in compliance with all covenants as of January 31, 2003.
6. LONG-TERM MORTGAGE DEBT
Long-term mortgage debt consists of notes payable secured by certain land,
buildings and leasehold improvements. During fiscal 2002 and 2001, the
Company refinanced certain of its variable rate debt. Interest rates ranged
from 3.215% to 8.5% in fiscal 2002 and 4.75% to 9.0% in fiscal 2001.
Principal and interest are payable monthly over terms which generally range
from 10 to 15 years. Substantially all of the notes payable require balloon
payments at the end of the scheduled term.
33
Maturities of long-term debt are as follows (amounts in thousands):
Year Ending
January 31
-----------
2004 $ 5,657
2005 9,750
2006 8,960
2007 10,735
2008 6,516
Thereafter 28,465
-------
$70,083
=======
In fiscal 2002, the Company paid off approximately $7.0 million in mortgage
debt prior to maturity. As a result, the Company expensed unamortized
financing cost of approximately $91,000 as an extraordinary loss net of the
income tax benefit, on early extinguishment.
In fiscal 2001, the Company paid off approximately $7.7 million in mortgage
debt and refinanced approximately $21.5 million in mortgage debt. As a
result, the Company expensed unamortized financing costs of approximately
$405,000 as an extraordinary loss before an income tax benefit of
approximately $160,000.
The fair value of the Company's long-term debt at January 31, 2003 and 2002
was approximately $73.0 and $83.6 million, respectively. At January 31,
2003, the Company had approximately $27.8 million of fixed rate mortgage
debt and approximately $42.3 million of variable rate mortgage debt.
7. EMPLOYEE BENEFITS
Stock Option Plans--The Company maintains the REX Stores Corporation 1995
Omnibus Stock Incentive Plan and the REX Stores Corporation 1999 Omnibus
Stock Incentive Plan (the Omnibus Plans). Under the Omnibus Plans, the
Company may grant to officers and key employees awards in the form of
incentive stock options (1995 Plan only), non-qualified stock options,
stock appreciation rights, restricted stock, other stock-based awards and
cash incentive awards. The Omnibus Plans also provide for yearly grants of
non-qualified stock options to directors who are not employees of the
Company. The exercise price of each option must be at least 100% of the
fair market value of the Company's common stock on the date of grant. A
maximum of 4,500,000 shares of common stock are authorized for issuance
under each of the Omnibus Plans. On January 31, 2003, 107,111 and 2,627,073
shares remain available for issuance under the 1995 and 1999 Plans,
respectively.
On October 14, 1998, the Company's Board of Directors approved a grant of
non-qualified stock options to two key executives for 1,462,500 shares at
an exercise price of $4.42, which represented the market price on the date
of grant. These options are fully vested as of December 31, 2002. All of
these options remained outstanding at January 31, 2003.
On April 17, 2001, the Company's Board of Directors approved a grant of
non-qualified stock options to two key executives for 1,462,500 shares at
an exercise price of $8.01, which represented the market price on the date
of grant. These options vest over a three-year period with the first
one-third vesting as of December 31, 2003, the second one-third vesting as
of December 31, 2004 and the third one-third vesting as of December 31,
2005. All of these options remained outstanding at January 31, 2003.
The fair values of options granted were estimated as of the date of grant
using a Black-Scholes option pricing model with the following weighted
average assumptions used for grants in fiscal years ended
34
January 31, 2003, 2002 and 2001, respectively: risk-free interest rate of
5.2%, 5.1% and 6.2%, expected volatility of 65.4%, 68.9% and 60.3% and a
weighted average stock option life of nine years for all years. In
accordance with the provisions of FASB Statement No. 123, the fair value
method of accounting was not applied to options granted prior to February
1, 1995 in estimating the pro forma amounts. Therefore, the pro forma
effect on net income and net income per share may not be representative of
that to be expected in future years.
The following summarizes stock option activity for the years ended January
31, 2003, 2002 and 2001 (amounts in thousands, except per-share amounts):
2003 2002 2001
------------------ ------------------ ------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
(000's) Price (000's) Price (000's) Price
Outstanding--Beginning of year 6,882 $ 6.40 6,224 $5.99 5,963 $ 5.62
Granted 354 14.84 2,120 8.05 488 10.10
Exercised (443) 6.34 (1,446) 7.01 (164) 4.73
Canceled or expired (57) 8.68 (16) 7.22 (63) 6.89
------ ------ ------- ----- ----- ------
Outstanding--End of year 6,736 $ 6.83 6,882 $6.40 6,224 $ 5.99
====== ====== ====== ===== ====== ======
Exercisable--End of year 3,958 $ 5.42 3,430 $5.47 3,816 $ 6.10
====== ====== ====== ===== ====== ======
Weighted average fair value of
options granted $11.06 $ 6.15 $ 6.97
====== ======= ======
Price ranges and other information for stock options outstanding as of
January 31, 2003 were as follows (amounts in thousands, except per share
amounts):
Outstanding Exercisable
------------------------------ ------------------
Weighted Weighted Weighted
Range of Average Average Average
Exercise Shares Exercise Remaining Shares Exercise
Prices (000's) Price Life (000's) Price
$3.61 to $5.42 2,668 $ 4.61 5.4 years 2,455 $ 4.56
$5.56 to $8.34 3,246 7.33 6.1 years 1,315 6.34
$9.51 to $14.265 475 10.11 7.2 years 188 10.10
$14.745 to $16.04 347 14.84 9.3 years -- --
----- ------ --------- ----- ------
6,736 $ 6.83 6.1 years 3,958 $ 5.42
===== ====== ========= ===== ======
Profit Sharing Plan--The Company has a qualified, noncontributory profit
sharing plan (the "Plan") covering full-time employees who meet certain
eligibility requirements. The Plan also allows for additional 401(k) saving
contributions by participants, along with certain company matching
contributions. Aggregate contributions to the Plan are determined annually
by the Board of Directors and are not to exceed 15% of total compensation
paid to all participants during such year. The Company contributed
approximately $36,000, $40,000 and $45,000 for the years ended January 31,
2003, 2002 and 2001, respectively, under the Plan.
35
8. LEASES AND COMMITMENTS
The Company is committed under operating leases for certain warehouse and
retail store locations. The lease agreements are for varying terms through
2011 and contain renewal options for additional periods. Real estate taxes,
insurance and maintenance costs are generally paid by the Company.
Contingent rentals based on sales volume are not significant. Certain
leases contain scheduled rent increases and rent expense is recognized on a
straight-line basis over the term of the leases.
On August 30, 1989, the Company completed a transaction for the sale and
leaseback of the corporate office, distribution center and certain stores
under an initial 15-year lease term. This transaction resulted in a pre-tax
financial statement gain of $15,600,000, which was deferred and is being
amortized as a reduction to lease expense over the term of the leases. The
unamortized deferred gain at January 31, 2003 was $945,000.
During the year ended January 31, 2002, the Company repurchased the
building which contains the corporate office, distribution center and
retail store in Dayton, Ohio for approximately $6.0 million. For financial
statement purposes, the purchase of this facility resulted in approximately
$600,000 of the deferred gain associated with the sale/leaseback being
recorded as a reduction in the carrying value of the property.
The following is a summary of rent expense under operating leases (amounts
in thousands):
Years Ended Minimum Gain Sublease
January 31 Rentals Amortization Income Total
2003 $ 8,801 $(597) $(1,366) $6,838
2002 10,280 (805) (1,313) 8,162
2001 9,992 (824) (1,376) 7,792
The Company is secondarily liable under certain lease arrangements when
there is a sublessee. These arrangements arise out of the normal course of
business when the Company decides to close stores prior to lease expiration
or on owned locations. Future minimum annual rentals, gain amortization on
non-cancelable leases and sublease income as of January 31, 2003 are as
follows (amounts in thousands):
Years Ended Minimum Gain Sublease
January 31 Rentals Amortization Income
2004 $ 8,025 $597 $1,259
2005 5,156 348 1,002
2006 2,723 528
2007 983 227
2008 165 70
Thereafter 98 97
------- ---- ------
$17,150 $945 $3,183
======= ==== ======
36
9. INCOME TAXES
The provision for income taxes for the years ended January 31, 2003, 2002
and 2001 consists of the following (amounts in thousands):
2003 2002 2001
Federal:
Current $3,171 $3,219 $4,935
Deferred 2,719 3,154 45
------ ------ ------
5,890 6,373 4,980
------ ------ ------
State and Local:
Current 819 250 2,189
Deferred 795 671 (924)
------ ------ ------
1,614 921 1,265
------ ------ ------
$7,504 $7,294 $6,245
====== ====== ======
For the fiscal years ended January 31, 2003 and 2002, the tax provision
currently payable shown above includes the tax benefit associated with the
extraordinary loss on debt extinguishment of $157,000 and $160,000,
respectively.
The tax effects of significant temporary differences representing deferred
tax assets and liabilities are as follows as of January 31, 2003 and 2003
(amounts in thousands):
2003 2002
Assets:
Deferral of service contract income $ 8,705 $ 9,264
Sale and leaseback deferred gain 331 539
Accrued liabilities 2,273 2,260
Inventory accounting 3,497 2,451
AMT credit carryforward 11,736 9,508
Valuation allowance (10,246) (6,100)
Other items 124 2,012
-------- -------
Total net future income tax benefits $ 16,420 $19,934
======== =======
For the fiscal year ended January 31, 2003 and 2002, the Company was
subject to the alternative minimum tax ("AMT") rules due to the Section 29
tax credits generated from the limited partnerships (see Note 2). The
Company's AMT liability was approximately $3,470,000 and $4,300,000 for the
years ended January 31, 2003 and 2002, respectively. The AMT liability in
excess of the regular tax liability results in AMT credit carryforwards
which can be used to offset future regular income tax, subject to certain
limitations. Therefore, for financial statements purposes, the required AMT
payment has been recorded as an AMT credit carryforward with a valuation
allowance of $10,246,000. The AMT credit carryforwards have no expiration
date.
37
One synfuel partnership is currently being audited by the IRS (see Note 2).
Certain quarterly payments from sales of partnership interests are being
held in escrow beginning in fiscal 2002 pending the results of the audit.
Subsequent payments relating to these sales will also be held in escrow
pending the results of the IRS audit. Prior to the sales of the Company's
interest in the partnership, the Company had been allocated in aggregate
approximately $19.0 million in tax credits from this synthetic fuel limited
partnership. Should the tax credits be denied on audit and the Company
fails to prevail through the IRS or the legal process, there could be a
significant tax liability owed for previously taken tax credits with a
significant impact on earnings and cash flows. In the Company's opinion,
the Partnership is complying with all the necessary requirements to be
allowed such credits and believes it is likely, although not certain, that
the Partnership will prevail if challenged by the IRS on any credits taken.
The timing of the completion of the audit has not been determined.
The Company paid income taxes of $3,817,000, $4,540,000 and $9,395,000 in
the years ended January 31, 2003, 2002 and 2001, respectively.
The effective income tax rate on consolidated pre-tax income differs from
the federal income tax statutory rate for the years ended January 31, 2003,
2002 and 2001 as follows:
2003 2002 2001
Federal income tax at statutory rate 35.0% 35.0% 35.0%
Tax credits from investment in limited partnership (10.1) (9.6) (15.0)
State and local taxes, net of federal tax benefit 3.4 2.0 3.3
Other (3.3) (2.6) 1.7
----- ---- -----
25.0% 24.8% 25.0%
===== ==== =====
10. CONTINGENCIES
The Company is involved in various legal actions arising in the normal
course of business. After taking into consideration legal counsels'
evaluation of such actions, management is of the opinion that their outcome
will not have a material effect on the Company's consolidated financial
statements.
******
38
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of
REX Stores Corporation
We have audited the accompanying consolidated balance sheet of REX Stores
Corporation (the "Company") (a Delaware corporation) and subsidiaries as of
January 31, 2003, and the related consolidated statements of income,
shareholders' equity and cash flows for the year then ended. Our audit also
included the financial statement schedule II listed in the Index at Item 15, for
the year ended January 31, 2003. These consolidated financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on the January 31, 2003 consolidated
financial statements and financial statement schedule based on our audit. The
consolidated financial statements and financial statement schedule as of January
31, 2002 and for each of the years in the two-year period then ended were
audited by other auditors who have ceased operations. Those auditors expressed
an unqualified opinion on those consolidated financial statements and stated
that such 2002 and 2001 financial statement schedules, when considered in
relation to the 2002 and 2001 financial statements taken as a whole, presented
fairly, in all material respects, the information set forth therein, in their
report dated March 26, 2002.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of the Company at January 31, 2003,
and the results of their operations and their cash flows for the year then
ended, in conformity with accounting principles generally accepted in the United
States of America. Also, in our opinion, the financial statement schedule for
the year ended January 31, 2003, when considered in relation to the basic
consolidated financial statements taken as a whole for the year ended January
31, 2003, presents fairly, in all material respects the information set forth
therein.
/s/ DELOITTE & TOUCHE LLP
Cincinnati, Ohio
March 25, 2003
39
The following report is a copy of a previously issued Arthur Andersen LLP
("Andersen") report, and the report has not been reissued by Andersen. The
Andersen report refers to the consolidated balance sheet as of January 31, 2001
and the consolidated statements of income, shareholders' equity and cash flows
for the year ended January 31, 2000, which are no longer included in the
accompanying financial statements.
Report of Independent Public Accountants
To the Shareholders and Board of Directors of REX Stores Corporation:
We have audited the accompanying consolidated balance sheets of REX Stores
Corporation (a Delaware corporation) and subsidiaries as of January 31, 2002 and
2001, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the three fiscal years in the period ended January
31, 2002. These consolidated financial statements and the schedule referred to
below are the responsibility of the Company's management. Our responsibility is
to express an opinion on these consolidated financial statements and the
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of REX Stores
Corporation and subsidiaries as of January 31, 2002 and 2001, and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended January 31, 2002 in conformity with accounting principles generally
accepted in the United States.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed under
Part IV, Item 14(a)(2) is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in our audit of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
Cincinnati, Ohio,
March 26, 2002
/s/ Arthur Andersen LLP
40
REX STORES CORPORATION AND SUBSIDIARIES
Schedule II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JANUARY 31, 2003, 2002 AND 2001
(Amounts in thousands)
- --------------------------------------------------------------------------------
Additions Deductions
--------- -------------
Balance Charged to Charges for Balance
Beginning Cost and Which Reserves End
of Year Expenses Were Created of Year
2003:
Allowance for doubtful accounts $852 $ 276 $928 $200
==== ====== ==== ====
2002:
Allowance for doubtful accounts $410 $1,003 $561 $852
==== ====== ==== ====
2001:
Allowance for doubtful accounts $483 $ 404 $477 $410
==== ====== ==== ====
41
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On June 13, 2002, our Board of Directors voted to approve the engagement of
Deloitte & Touche LLP as REX's independent auditor for the year ending January
31, 2003, subject to customary client acceptance procedures, and to dismiss the
firm of Arthur Andersen LLP. The decision to change accountants was recommended
and approved by the Audit Committee of the Board of Directors.
The reports of Arthur Andersen LLP on REX's financial statements for the
years ended January 31, 2002 and 2001 did not contain an adverse opinion or a
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principles.
In connection with the audits of REX's financial statements for the years
ended January 31, 2002 and 2001, and through June 13, 2002, there were no
disagreements with Arthur Andersen LLP on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure,
which, if not resolved to the satisfaction of Arthur Andersen LLP, would have
caused Arthur Andersen LLP to make reference thereto in its report on REX's
financial statements for such years.
No event of the type described in Item 304(a)(1)(v) of Regulation S-K
occurred during the period described above.
Prior to the Board's determination to engage Deloitte & Touche LLP as REX's
independent auditors for the year ending January 31, 2003, Deloitte & Touche LLP
was not consulted on accounting treatment and disclose requirements.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this Item 10 is incorporated herein by
reference to the Proxy Statement for our Annual Meeting of Shareholders on May
29, 2003, except for certain information concerning our executive officers which
is set forth in Part I of this report.
Item 11. Executive Compensation
The information required by this Item 11 is set forth in the Proxy
Statement for our Annual Meeting of Shareholders on May 29, 2003 and is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The information required by this Item 12 is set forth in the Proxy
Statement for our Annual Meeting of Shareholders on May 29, 2003 and is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information required by this Item 13 is set forth in the Proxy
Statement for our Annual Meeting of Shareholders on May 29, 2003 and is
incorporated herein by reference.
Item 14. Controls and Procedures
Within 90 days prior to the filing date of this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial
42
Officer, of the effectiveness of the design and operation of REX's disclosure
controls and procedures. Based on that evaluation, our Chief Executive Officer
and Chief Financial Officer concluded that REX's disclosure controls and
procedures are effective to ensure that information required to be disclosed by
us in the reports that we file or submit under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms.
There were no significant changes in our internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of their evaluation.
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Financial Statements
The following consolidated financial statements of REX Stores Corporation
and subsidiaries are filed as a part of this report at Item 8 hereof.
Consolidated Balance Sheets as of January 31, 2003 and 2002
Consolidated Statements of Income for the years ended January 31, 2003,
2002 and 2001
Consolidated Statements of Cash Flows for the years ended January 31, 2003,
2002 and 2001
Consolidated Statements of Shareholders' Equity for the years ended January
31, 2003, 2002 and 2001
Notes to Consolidated Financial Statements
Independent Auditors' Report
Report of Independent Public Accountants
(a)(2) Financial Statement Schedules
The following financial statement schedule is filed as a part of this
report at Item 8 hereof.
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or not
required, or because the required information is included in the consolidated
financial statements or notes thereto.
(a)(3) Exhibits
See Exhibit Index at page 49 of this report.
Management contracts and compensatory plans and arrangements filed as
exhibits to this report are identified by an asterisk in the exhibit index.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended January 31,
2003.
43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
REX STORES CORPORATION
By /s/ STUART A. ROSE
--------------------------------------
Stuart A. Rose
Chairman of the Board and
Chief Executive Officer
Date: April 23, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, 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 Capacity Date
- --------- -------- ----
)
/s/ STUART A. ROSE )
- ------------------------------------- Chairman of the Board )
Stuart A. Rose and Chief Executive )
Officer (principal )
executive officer) )
)
/s/ DOUGLAS L. BRUGGEMAN Vice President-Finance )
- ------------------------------------- and Treasurer (principal )
Douglas L. Bruggeman financial and accounting )
officer) )
)
LAWRENCE TOMCHIN* President, Chief Operating )
- ------------------------------------- Officer and Director )April 23, 2003
Lawrence Tomchin )
)
/s/ EDWARD M. KRESS Secretary and Director )
- ------------------------------------- )
Edward M. Kress )
)
ROBERT DAVIDOFF* Director )
- ------------------------------------- )
Robert Davidoff )
)
LEE FISHER* Director )
- ------------------------------------- )
Lee Fisher )
)
CHARLES A. ELCAN* Director )
- ------------------------------------- )
Charles A. Elcan )
)
)
*By /s/ STUART A. ROSE )
- ------------------------------------- )
(Stuart A. Rose, Attorney-in-Fact)
44
CERTIFICATIONS
I, Stuart A. Rose, certify that:
1. I have reviewed this annual report on Form 10-K of REX Stores
Corporation;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operation and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) Designed such disclosure controls and procedures 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 annual report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: April 23, 2003
By: /s/ STUART A. ROSE
------------------------------------
Stuart A. Rose
Chairman and Chief Executive Officer
45
I, Douglas L. Bruggeman, certify that:
1. I have reviewed this annual report on Form 10-K of REX Stores
Corporation;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operation and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) Designed such disclosure controls and procedures 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 annual report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: April 23, 2003
By: /s/ DOUGLAS L. BRUGGEMAN
--------------------------------
Douglas L. Bruggeman
Vice President - Finance and
Chief Financial Officer
46
EXHIBIT INDEX
Page
----
(3) Articles of incorporation and by-laws:
3(a) Certificate of Incorporation, as amended (incorporated by reference to
Exhibit 3(a) to Form 10-K for fiscal year ended January 31, 1994, File
No. 0-13283)
3(b)(1) By-Laws, as amended (incorporated by reference to Registration
Statement No. 2-95738, Exhibit 3(b), filed February 8, 1985)
3(b)(2) Amendment to By-Laws adopted June 29, 1987 (incorporated by reference
to Exhibit 4.5 to Form 10-Q for quarter ended July 31, 1987, File No.
0-13283)
(4) Instruments defining the rights of security holders, including indentures:
4(a) Amended and Restated Loan Agreement dated July 31, 1995 among Rex
Radio and Television, Inc., Kelly & Cohen Appliances, Inc., Stereo
Town, Inc. and Rex Kansas, Inc. (the "Borrowers"), the lenders named
therein, and NatWest Bank N.A. as agent (incorporated by reference to
Exhibit 4(a) to Form 10-Q for quarter ended July 31, 1995, File No.
0-13283)
4(b) Form of Amended and Restated Revolving Credit Note (incorporated by
reference to Exhibit 4(b) to Form 10-Q for quarter ended July 31,
1995, File No. 0-13283)
4(c) Guaranty of registrant dated July 31, 1995 (incorporated by reference
to Exhibit 4(c) to Form 10-Q for quarter ended July 31, 1995, File No.
0-13283)
4(d) Borrowers Pledge Agreement as amended and restated through July 31,
1995 (incorporated by reference to Exhibit 4(d) to Form 10-Q for
quarter ended July 31, 1995, File No. 0-13283)
4(e) Borrowers General Security Agreement as amended and restated through
July 31, 1995 (incorporated by reference to Exhibit 4(e) to Form 10-Q
for quarter ended July 31, 1995, File No. 0-13283)
4(f) Parent Pledge Agreement as amended and restated through July 31, 1995
(incorporated by reference to Exhibit 4(f) to Form 10-Q for quarter
ended July 31, 1995, File No. 0-13283)
4(g) Parent General Security Agreement as amended and restated through July
31, 1995 (incorporated by reference to Exhibit 4(g) to Form 10-Q for
quarter ended July 31, 1995, File No. 0-13283)
4(h) Amendment Agreement dated April 1, 1997 to Amended and Restated Loan
Agreement dated July 31, 1995 and to Guaranty of registrant dated July
31, 1995 among the Borrowers, the registrant, the lenders named
therein and Fleet Bank, N.A. (as successor to NatWest Bank N.A.) as
agent (incorporated by reference to Exhibit 4(h) to Form 10-Q for
quarter ended April 30, 1997, File No. 0-13283)
47
4(i) Amendment No. 2 dated October 19, 1999 to Amended and Restated Loan
Agreement dated July 31, 1995 among the Borrowers, the registrant, the
lenders named therein and Fleet Bank, N.A. (as successor to NatWest
Bank N.A.) as agent (incorporated by reference to Exhibit 4(i) to Form
10-Q for quarter ended October 31, 1999, File No. 0-13283)
4(j) Amendment No. 3 dated January 11, 2000 to Amended and Restated Loan
Agreement dated July 31, 1995 among the Borrowers, the registrant, the
lenders named therein and Fleet Bank, N.A. (as successor to NatWest
Bank N.A.) as agent (incorporated by reference to Exhibit 4(j) to Form
10-K for fiscal year ended January 31, 2000, File No. 0-13283)
4(k) Amendment No. 4 dated March 10, 2000 to Amended and Restated Loan
Agreement dated July 31, 1995 among the Borrowers, the registrant, the
lenders named therein and Fleet Bank, N.A. (as successor to Natwest
Bank N.A.) as agent (incorporated by reference to Exhibit 4(k) to Form
10-K for fiscal year ended January 31, 2000, File No. 0-13283)
4(l) Amendment No. 5 dated December 31, 2000 to Amended and Restated Loan
Agreement dated July 31, 1995 among the Borrowers, the registrant, the
lenders named therein and Fleet Bank, N.A. (as successor to NatWest
Bank N.A.) as agent (incorporated by reference to Exhibit (4)(1) to
Form 10-K for fiscal year ended January 31, 2001, File No. 0-13283)
4(m) Amendment No. 6 dated April 16, 2001 to Amended and Restated Loan
Agreement dated July 31, 1995 among the Borrowers, the registrant, the
lenders named therein and Fleet Bank, N.A. (as successor to NatWest
Bank N.A.) as agent (incorporated by reference to Exhibit 4(m) to Form
10-K for fiscal year ended January 31, 2001, File No. 0-13283)
4(n) Amendment No. 7 dated November 25, 2002 to Amended and Restated Loan
Agreement dated July 31, 1995 among the Borrowers, the registrant, the
lenders named therein and Fleet Bank, N.A. (as successor to NatWest
Bank N.A.) as agent...................................................
Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, the registrant
has not filed as an exhibit to this Form 10-K certain instruments with
respect to long-term debt where the total amount of securities
authorized thereunder does not exceed 10% of the total assets of the
registrant and its subsidiaries on a consolidated basis. The
registrant agrees to furnish a copy of such instruments to the
Commission upon request.
(10) Material contracts:
10(a)* Employment Agreement dated April 17, 2001 between Rex Radio and
Television, Inc. and Stuart Rose (incorporated by reference to Exhibit
10(c) to Form 10-K for fiscal year ended January 31, 2002, File No.
0-13283)
10(b)* Employment Agreement dated April 17, 2001 between Rex Radio and
Television, Inc. and Lawrence Tomchin (incorporated by reference to
Exhibit 10(d) to Form 10-K for fiscal year ended January 31, 2002,
File No. 0-13283)
48
10(c)* Executive Stock Option dated October 14, 1998 granting Stuart Rose an
option to purchase 500,000 shares of registrant's Common Stock
(incorporated by reference to Exhibit 10.3 to Form 10-Q for quarter
ended October 31, 1998, File No. 0-13283)
10(d)* Executive Stock Option dated October 14, 1998 granting Lawrence
Tomchin an option to purchase 150,000 shares of registrant's Common
Stock (incorporated by reference to Exhibit 10.4 to Form 10-Q for
quarter ended October 31, 1998, File No. 0-13283)
10(e)* Executive Stock Option dated April 17, 2001 granting Stuart Rose an
option to purchase 500,000 shares of registrant's Common Stock
(incorporated by reference to Exhibit 10(g) to Form 10-K for fiscal
year ended January 31, 2002, File No. 0-13283)
10(f)* Executive Stock Option dated April 17, 2001 granting Lawrence Tomchin
an option to purchase 150,000 shares of registrant's Common Stock
(incorporated by reference to Exhibit 10(h) to Form 10-K for fiscal
year ended January 31, 2002, File No. 0-13283)
10(g)* Subscription Agreement dated December 1, 1989 from Stuart Rose to
purchase 300,000 shares of registrant's Common Stock (incorporated by
reference to Exhibit 6.5 to Form 10-Q for quarter ended October 31,
1989, File No. 0-13283)
10(h)* Subscription Agreement dated December 1, 1989 from Lawrence Tomchin to
purchase 140,308 shares of registrant's Common Stock (incorporated by
reference to Exhibit 6.6 to Form 10-Q for quarter ended October 31,
1989, File No. 0-13283)
10(i)* 1995 Omnibus Stock Incentive Plan, as amended and restated effective
June 2, 1995 (incorporated by reference to Exhibit 4(c) to
Post-Effective Amendment No. 1 to Form S-8 Registration Statement No.
33-81706)
10(j)* 1999 Omnibus Stock Incentive Plan (incorporated by reference to
Exhibit 10(a) to Form 10-Q for quarter ended April 30, 2000, File No.
0-13283)
10(k) Real Estate Purchase and Sale Agreement (the "Agreement") dated March
8, 1989 between registrant as Guarantor, four of its subsidiaries (Rex
Radio and Television, Inc., Stereo Town, Inc., Kelly & Cohen
Appliances, Inc., and Rex Radio Warehouse Corporation) as Sellers and
Holman/Shidler Investment Corporation as Buyer (incorporated by
reference to Exhibit (b)(5)(1) to Amendment No. 1 to Schedule 13E-4
filed March 15, 1989, File No. 5-35828)
The Table of Contents to the Agreement lists Exhibits A through P to
the Agreement. Each of the following listed Exhibits to the Agreement
is incorporated herein by reference as indicated below. The registrant
will, upon request of the Commission, provide any of the additional
Exhibits to the Agreement.
10(l) Form of Full Term Lease (incorporated by reference to Exhibit
(b)(5)(2) to Amendment No. 1 to Schedule 13E-4 filed March 15, 1989,
File No. 5-35828)
49
10(m) Form of Divisible Lease (incorporated by reference to Exhibit
(b)(5)(3) to Amendment No. 1 to Schedule 13E-4 filed March 15, 1989,
File No. 5-35828)
10(n) Form of Terminable Lease (incorporated by reference to Exhibit
(b)(5)(4) to Amendment No. 1 to Schedule 13E-4 filed March 15, 1989,
File No. 5-35828)
10(o) Continuing Lease Guaranty (incorporated by reference to Exhibit
(b)(5)(5) to Amendment No. 1 to Schedule 13E-4 filed March 15, 1989,
File No. 5-35828)
10(p) Agreement Regarding Leases and Amending Amended and Restated Real
Property Purchase and Sale Agreement dated May 17, 1990 among
Shidler/West Finance Partners I (Limited Partnership); Rex Radio and
Television, Inc., Stereo Town, Inc., Kelly & Cohen Appliances, Inc.
and Rex Radio Warehouse Corporation; and registrant (incorporated by
reference to Exhibit (a)(10) to Form 10-Q for quarter ended April 30,
1990, File No. 0-13283)
10(q) Lease dated December 12, 1994 between Stuart Rose/Beavercreek, Inc.
and Rex Radio and Television, Inc. (incorporated by reference to
Exhibit 10(q) to Form 10-K for fiscal year ended January 31, 1995,
File No. 0-13283)
(21) Subsidiaries of the registrant:
21(a) Subsidiaries of registrant............................................
(23) Consents of experts and counsel:
23(a) Consent of Deloitte & Touche LLP to use its report dated March 25,
2003 included in this annual report on Form 10-K into registrant's
Registration Statements on Form S-8 (Registration Nos. 33-3836,
33-81706, 33-62645, 333-69081, 333-69089, 333-35118 and
333-69690)............................................................
(24) Power of attorney:
Powers of attorney of each person whose name is signed to this report
on Form 10-K pursuant to a power of attorney..........................
50
(99) Additional exhibits:
99(a) Risk Factors (incorporated by reference to Exhibit 99(a) to Form 10-K
for fiscal year ended January 31, 2002, File No. 0-13283)
99(b) Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002..................................................................
Copies of the Exhibits not contained herein may be obtained by writing
to Edward M. Kress, Secretary, REX Stores Corporation, 2875 Needmore
Road, Dayton, Ohio 45414.
- ------------
Those exhibits marked with an asterisk (*) above are management contracts
or compensatory plans or arrangements for directors or executive officers of the
registrant.
51
STATEMENT OF DIFFERENCES
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The section symbol shall be expressed as................................ 'SS'