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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------- ---------
Commission File Number 0-13283
REX Stores Corporation
(Exact name of registrant as specified in its charter)
Delaware 31-1095548
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2875 Needmore Road, Dayton, Ohio 45414
(Address of principal executive offices) (Zip Code)
(937) 276-3931
(Registrant's telephone number, including area code)
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, and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
At the close of business on December 10, 2003, the registrant had 10,958,815
shares of Common Stock, par value $.01 per share, outstanding.
REX STORES CORPORATION AND SUBSIDIARIES
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Condensed Balance Sheets......... 3
Consolidated Condensed Statements of Income... 4
Consolidated Condensed Statements of
Shareholders' Equity....................... 5
Consolidated Condensed Statements of
Cash Flows................................. 6
Notes to Consolidated Condensed Financial
Statements................................. 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations....................................12
Item 3. Quantitative and Qualitative Disclosures About
Market Risk...................................18
Item 4. Controls and Procedures.........................18
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................19
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
REX STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
A S S E T S
October 31 January 31 October 31
2003 2003 2002
(In Thousands)
Unaudited Unaudited
CURRENT ASSETS:
Cash and cash equivalents $ 1,503 $ 1,380 $ 1,495
Accounts receivable, net 1,551 3,413 626
Synthetic fuel receivable 655 6,619 5,592
Merchandise inventory 155,354 142,063 167,616
Prepaid expenses and other 2,704 2,567 3,282
Future income tax benefits 10,350 10,350 12,614
--------- --------- ---------
Total current assets 172,117 166,392 191,225
PROPERTY AND EQUIPMENT, NET 131,560 134,563 136,280
OTHER ASSETS 2,596 1,656 -
FUTURE INCOME TAX BENEFITS 6,070 6,070 7,320
SYNTHETIC FUEL ESCROW 7,886 - -
RESTRICTED INVESTMENTS 2,253 2,241 2,237
--------- --------- ---------
Total assets $ 322,482 $ 310,922 $ 337,062
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 18,901 $ 13,451 $ 21,829
Current portion of long-term debt 7,708 5,657 4,845
Current portion of deferred income
and deferred gain on sale and
leaseback 10,985 11,107 11,154
Accounts payable, trade 34,690 27,417 46,075
Accrued income taxes 1,371 - 3,005
Accrued payroll 4,885 6,750 5,209
Other current liabilities 8,449 8,669 9,349
--------- --------- ---------
Total current liabilities 86,989 73,051 101,466
--------- --------- ---------
LONG-TERM LIABILITIES:
Long-term mortgage debt 57,752 64,426 66,493
Deferred income 12,632 13,993 13,679
Deferred gain on sale and
leaseback - 348 497
--------- --------- ---------
Total long-term liabilities 70,384 78,767 80,669
--------- --------- ---------
SHAREHOLDERS' EQUITY:
Common stock 281 277 277
Paid-in capital 123,677 121,282 119,082
Retained earnings 168,026 157,640 148,557
Treasury stock (126,875) (120,095) (112,989)
--------- --------- ---------
Total shareholders' equity 165,109 159,104 154,927
--------- --------- ---------
Total liabilities and
shareholders' equity $ 322,482 $ 310,922 $ 337,062
========= ========= =========
The accompanying notes are an integral part of
these unaudited consolidated condensed financial statements.
3
REX STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
Unaudited
Three Months Ended Nine Months Ended
October 31 October 31
2003 2002 2003 2002
(In Thousands, Except Per Share Amounts)
NET SALES $96,556 $95,743 $283,404 $282,349
COSTS AND EXPENSES:
Cost of merchandise sold 67,869 66,825 198,521 196,847
Selling, general and
administrative expenses 26,111 25,716 78,012 76,733
------- ------- -------- --------
Total costs and expenses 93,980 92,541 276,533 273,580
------- ------- -------- --------
INCOME FROM OPERATIONS 2,576 3,202 6,871 8,769
INVESTMENT INCOME 14 16 54 299
INTEREST EXPENSE (1,275) (1,388) (3,773) (4,238)
GAIN ON SALE OF REAL ESTATE 393 - 779 -
INCOME FROM LIMITED
PARTNERSHIPS 3,733 3,854 9,916 13,494
------- ------- -------- --------
Income before provision for
income taxes 5,441 5,684 13,847 18,324
PROVISION FOR INCOME TAXES 1,360 1,410 3,461 4,475
------- ------- -------- --------
NET INCOME $ 4,081 $ 4,274 $ 10,386 $ 13,849
======= ======= ======== ========
WEIGHTED AVERAGE SHARES
OUTSTANDING - BASIC 10,819 12,179 10,820 12,333
======= ======= ======== ========
BASIC NET INCOME PER SHARE $ 0.38 $ 0.35 $ 0.96 $ 1.12
======= ======= ======== ========
WEIGHTED AVERAGE SHARES
OUTSTANDING - DILUTED 12,866 13,791 12,608 14,482
======= ======= ======== ========
DILUTED NET INCOME PER SHARE $ 0.32 $ 0.31 $ 0.82 $ 0.96
======= ======= ======== ========
The accompanying notes are an integral part of
these unaudited consolidated condensed financial statements.
4
REX STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
Unaudited
Common Shares
--------------------------------
Issued Treasury Total
-------------------------------- Paid-in Retained Shareholders'
Shares Amount Shares Amount Capital Earnings Equity
(In Thousands)
Balance at
January 31, 2003 27,746 $277 16,607 $120,095 $121,282 $157,640 $159,104
Net income - - - - - 10,386 10,386
Treasury stock
acquired - - 651 7,415 - - (7,415)
Stock options
exercised and
related tax effects 371 4 (87) (635) 2,395 - 3,034
------ ---- ------ -------- -------- -------- --------
Balance at
October 31, 2003 28,117 $281 17,171 $126,875 $123,677 $168,026 $165,109
====== ==== ====== ======== ======== ======== ========
The accompanying notes are an integral part of
these unaudited consolidated condensed financial statements.
5
REX STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Unaudited
Nine Months Ended
October 31
2003 2002
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 10,386 $ 13,849
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization, net 3,039 3,246
Income of limited partnerships (9,916) (13,494)
(Gain) Loss on disposal of fixed assets (713) 81
Deferred income (1,360) (2,130)
Changes in assets and liabilities:
Accounts receivable 1,862 493
Merchandise inventory (13,292) (66,599)
Other current assets (138) (732)
Other long term assets (940) -
Accounts payable, trade 7,273 13,457
Other current liabilities (715) 1,015
-------- --------
NET CASH USED IN
OPERATING ACTIVITIES (4,514) (50,814)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,486) (1,663)
Proceeds from sale of partnership
interest 7,995 9,448
Proceeds from sale of real estate
and fixed assets 2,693 1,108
Restricted investments (12) (15)
-------- --------
NET CASH PROVIDED BY
INVESTING ACTIVITIES 8,190 8,878
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in notes payable 5,451 21,763
Payments of long-term debt (4,623) (10,878)
Stock options exercised and related
tax effects 2,399 2,384
Treasury stock issued 635 372
Treasury stock acquired (7,415) (9,651)
-------- --------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (3,553) 3,990
-------- --------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 123 (37,946)
CASH AND CASH EQUIVALENTS,
beginning of period 1,380 39,441
-------- --------
CASH AND CASH EQUIVALENTS,
end of period $ 1,503 $ 1,495
======== ========
The accompanying notes are an integral part of
these unaudited consolidated condensed financial statements.
6
REX STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
October 31, 2003
Note 1. Consolidated Condensed Financial Statements
The consolidated condensed financial statements included in this report
have been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission and include, in the
opinion of management, all adjustments necessary to state fairly the information
set forth therein. Any such adjustments were of a normal recurring nature.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information presented not misleading. It is suggested that these
unaudited consolidated condensed financial statements be read in conjunction
with the consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the year ended January 31, 2003 (fiscal
2002). The results of operations for the interim periods are not necessarily
indicative of the results to be expected for the year.
Note 2. Accounting Policies
The interim consolidated condensed financial statements have been
prepared in accordance with the accounting policies described in the notes to
the consolidated financial statements included in the Company's 2002 Annual
Report on Form 10-K. While management believes that the procedures followed in
the preparation of interim financial information are reasonable, the accuracy of
some estimated amounts is dependent upon facts that will exist or calculations
that will be accomplished at fiscal year end. Examples of such estimates include
changes in the LIFO reserve (based upon the Company's best estimate of inflation
to date), management bonuses and the provision for income taxes. Any adjustments
pursuant to such estimates during the quarter were of a normal recurring nature.
The provision for income taxes could vary based upon full year synthetic fuel
production levels, federal income tax law changes and Internal Revenue Service
audits.
The Company accounts for vendor allowances in accordance with Emerging
Issues Task Force (EITF) 02-16 "Accounting by a Customer for Certain
Consideration Received from a Vendor," which addresses how and when to reflect
consideration received from vendors in the consolidated financial statements.
Vendors often fund, up front, certain advertising costs and exposure to general
changes in pricing to customers due to technological change. Allowances are
deferred as received from vendors and recognized into income as an offset to
the cost of merchandise sold when the related product is sold or expense
incurred. Advertising costs are expensed as incurred.
Cost of sales includes the cost of merchandise, markdowns and
inventory shortage, receiving, warehousing and freight charges to get
merchandise to retail stores, service repair bills as well as cash discounts
and rebates. The Company classifies purchasing costs as selling and
administrative expenses. Due to this classification, the Company's gross
margins may not be comparable to those of other retailers that include
costs related to their distribution network in selling and administrative
expense.
The Company includes stores expenses (such as payroll and occupancy
costs), advertising, buying, depreciation, insurance, and overhead costs in
selling and administrative expenses.
Interest expense of $3,773,000 for the nine months ended October 31,
2003 is net of approximately $65,000 of interest capitalized. Total interest
expense approximated interest paid for the first nine months of fiscal 2003.
Interest expense of $4,238,000 for the nine months ended
7
October 31, 2002 includes approximately $248,000 for loan fee write-offs related
to early termination of mortgage loans resulting in actual interest paid of
approximately $3,990,000.
The Company paid income taxes of approximately $1,605,000 and
$3,015,000 for the nine months ended October 31, 2003 and 2002, respectively.
Note 3. Recently Issued Accounting Standards
In November 2002, the Financial Accounting Standards Board issued
Emerging Issues Task Force No. 00-21, "Accounting for Revenue Arrangements
with Multiple Deliverables." EITF No. 00-21 addresses when and how an
arrangement involving multiple deliverables should be divided into
separate units of accounting, as well as how the arrangement consideration
should be measured and allocated to the separate units of accounting in
the arrangement. The Company adopted the provisions of EITF No. 00-21 during
the third quarter of fiscal 2003 with no material impact to the Company's
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 adopted the new Interpretation, as required,
but such adoption did not have a material impact on the financial statements
as the Company does not have an investment in Variable Interest Entities.
Note 4. Stock Option Plans
The Company has stock-based compensation plans under which stock
options are granted to officers, directors and key employees at the market
price on the date of the grant.
The following summarizes options granted, exercised and canceled or
expired during the nine months ended October 31, 2003:
Outstanding at January 31, 2003 ($3.61 to $16.04 per share).......... 6,735,594
Issued ($12.04 to $13.01 per share).................................. 363,220
Exercised ($3.61 to $10.14 per share)................................ (459,805)
Canceled or expired ($5.11 to $14.745 per share)..................... (35,000)
---------
Outstanding at October 31, 2003 ($3.61 to $16.04 per share).......... 6,604,009
=========
8
Pursuant to SFAS No. 123, "Accounting for Stock-Based Compensation,"
the Company has elected to account for its employee stock option plans under APB
Opinion No. 25, "Accounting for Stock Issued to Employees," which recognizes
expense based on the intrinsic value at date of grant. As stock options have
been issued with exercise prices equal to grant date fair value, no compensation
cost has resulted. Had compensation cost for all options granted been determined
based on the fair value at grant date consistent with SFAS No. 123, the
Company's net earnings and earnings per share would have been as follows:
Three Months Ended Nine Months Ended
October 31 October 31
------------------ -----------------
2003 2002 2003 2002
------ ------ ------- -------
Net Income As Reported $4,081 $4,274 $10,386 $13,849
Compensation Cost 664 934 2,086 2,754
Pro forma 3,417 3,340 8,300 11,095
Basic net
income per
share As Reported $ 0.38 $ 0.35 $ 0.96 $ 1.12
Compensation Cost .06 .08 .19 .22
Pro forma 0.32 0.27 0.77 0.90
Diluted net
income per
share As Reported $ 0.32 $ 0.31 $ 0.82 $ 0.95
Compensation Cost .05 .07 .16 .19
Pro forma 0.27 0.24 0.66 0.76
The assumptions used to calculate the fair value of options granted are
evaluated and revised, as necessary, to reflect market conditions and
experience.
9
Note 5. Net Income Per Share
The following table reconciles the basic and diluted net income per
share computation for each period presented:
Three Months Ended Nine Months Ended
October 31, 2003 October 31, 2003
---------------- ----------------
Per Per
Income Shares Share Income Shares Share
------ ------ ----- ------- ------ -----
Basic net income per share $4,081 10,819 $0.38 $10,386 10,820 $0.96
===== =====
Effect of stock options 2,047 1,788
------ ------ ------- ------
Diluted net income per
share $4,081 12,866 $0.32 $10,386 12,608 $0.82
====== ====== ===== ======= ====== =====
Three Months Ended Nine Months Ended
October 31, 2002 October 31, 2002
---------------- ----------------
Per Per
Income Shares Share Income Shares Share
------ ------ ----- ------- ------ -----
Basic net income per share $4,274 12,179 $0.35 $13,849 12,333 $1.12
===== =====
Effect of stock options 1,612 2,149
------ ------ ------- ------
Diluted net income per
share $4,274 13,791 $0.31 $13,849 14,482 $0.95
====== ====== ===== ======= ====== =====
For the three months ended October 31, 2003 and 2002, a total of
337,136 shares and 349,936 shares, respectively, and for the nine months ended
October 31, 2003 and 2002, a total of 667,136 and 349,936 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 that period.
10
On February 11, 2002, the Company effected a 3-for-2 stock split. The
year-to-date per share data shown above has been retroactively restated to
reflect this split.
Note 6. Synthetic Fuel
Net income for the third quarter and first nine months of fiscal 2003
reflects approximately $3.7 million and $9.9 million, respectively, of pre-tax
investment income from the sales of the Company's entire Partnership interest in
Colona SynFuel Limited Partnership, L.L.L.P., a synthetic fuel limited
partnership. The Internal Revenue Service is presently auditing this limited
partnership. Approximately $2.2 million and $6.0 million of the payments due the
Company and reported as income during the fiscal 2003 third quarter and first
nine months, respectively, relating to sales of certain portions of the limited
partnership interest is being held in escrow pending the results of the IRS
audit. Subsequent payments relating to certain of these sales will also be held
in escrow pending the results of the IRS audit. During the third quarter of
fiscal 2003, the Company substituted a Letter of Credit for $4.4 million to
Colona and received proceeds of $4.4 million from the escrowed funds. The amount
to be held in escrow is approximately $7.9 million at October 31, 2003. Both the
escrowed money and Letter of Credit amount totaling $12.3 million is at risk if
there is an unfavorable IRS ruling. The Letter of Credit guarantees the
Company's own performance. The Company has classified the escrowed money as
a long-term asset at October 31, 2003. The timing of the completion of the
audit has not been determined.
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 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 previously disclosed letter of intent as to the
potential relocation and commercialization of the plant has been terminated. The
Company has completed the disassembly of the plant and remains obligated to
remove it from its existing site at a currently estimated total cost of
$2.4 million, including related expenses. Through October 31, 2003,
approximately $2.0 million has been spent on this project, with an additional
$0.5 million being held in escrow to guarantee the Company's future performance.
The total of $2.5 million is classified as a long-term asset on the balance
sheet. 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, and if not placed into commercial operation this asset
could be deemed impaired.
In July, 2003, the Internal Revenue Service (IRS) issued Announcement
2003-46, stating it has reason to question the scientific validity of testing
procedures and results related to Section 29 income
11
tax credits. The notice also announced that it would suspend the issuance of new
rulings until its review is complete and that rulings could be revoked if the
IRS did not determine that the test procedures demonstrate a significant
chemical change between the feedstock coal and the synthetic fuel.
Colona SynFuel Limited Partnership, L.L.L.P. advised the Company that
in October 2003, the National Office of the IRS concluded that the experts,
engaged by Colona who test the synthetic fuel for chemical change, used
reasonable scientific methods to reach their conclusions. The Company has been
informed by Colona that the National Office will not take any adverse action on
the private letter ruling that has been issued for the Colona facility. A
written decision memorializing the National Office's conclusions should be
available within approximately the next two months. At that time, the IRS field
auditors will have the right to ask for reconsideration of the National
Office's decision. Although this is a significant event, the audit of the
Colona facility is not yet completed. This determination applies only to the
Colona facility in which the Company has sold its interest but is still
receiving pre-tax investment income.
The Company also owns an interest in another synthetic fuel
partnership, Somerset SynFuel, L.P., for which the Company continues to
receive tax credits. The IRS has notified the parent company of the general
partner of Somerset SynFuel, L.P. of its intention to audit the synthetic fuel
operations of the parent company's subsidiaries as part of its normal audit
program for the parent company.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
We are a specialty retailer in the consumer electronics/appliance
industry. As of October 31, 2003 we operated 248 stores in 37 states,
predominantly in small to medium-sized markets under the trade name "REX".
Fiscal Year
All references in this report to a particular fiscal year are to REX's
fiscal year ended January 31. For example, "fiscal 2003" means the period
February 1, 2003 to January 31, 2004.
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:
12
Three Months Ended Nine Months Ended
October 31 October, 31
---------------------- ------------------
2003 2002 2003 2002
---- ---- ---- ----
Net sales............................................. 100.0% 100.0% 100.0% 100.0%
Cost of merchandise sold.............................. 70.3 69.8 70.1 69.7
------ ------ ----- -----
Gross profit..................................... 29.7 30.2 29.9 30.3
Selling, general and administrative expenses ......... 27.0 26.9 27.5 27.2
------ ------ ----- -----
Income from operations........................... 2.7 3.3 2.4 3.1
Investment income..................................... - - - 0.1
Interest expense...................................... (1.3) (1.4) (1.3) (1.5)
Gain on sale of real estate........................... 0.4 - 0.3 -
Income from limited partnerships...................... 3.8 4.0 3.5 4.8
------ ------ ----- -----
Income before provision for income taxes......... 5.6 5.9 4.9 6.5
Provision for income taxes............................ 1.4 1.4 1.2 1.6
------ ------ ----- -----
Net income............................................ 4.2% 4.5% 3.7% 4.9%
====== ====== ===== =====
Comparison of Three and Nine Months Ended October 31, 2003 and 2002
Net sales in the third quarter ended October 31, 2003 were $96.6
million compared to $95.7 million in the prior year's third quarter,
representing an increase of $0.8 million or 0.8%. This increase was primarily
due to an increase in comparable store sales of 2.0% for the third quarter of
fiscal 2003. This increase was partially offset by a reduction of seven stores
since the end of the third quarter of fiscal 2002. We consider a store to be
comparable after it has been open for six full fiscal quarters. Comparable store
sales comparisons do not include sales of extended service contracts.
The strongest product category for the Company for the third quarter of
fiscal 2003 was televisions which positively impacted comparable store sales by
4.6%. This increase was primarily caused by increased demand for high definition
ready large screen televisions. The appliance category positively impacted
comparable store sales for the quarter by 0.2%. All other major product
categories negatively impacted comparable store sales with the audio category
impact being 1.1%, the other category being 0.9% and the video category being
0.8%.
Net sales for the first nine months of fiscal 2003 were $283.4 million
compared to $282.3 million for the first nine months of fiscal 2002,
representing an increase of $1.1 million or 0.4%. Comparable store sales
increased 2.1% for the first nine months of fiscal 2003. There was a net
decrease of seven stores since the end of the third quarter of fiscal 2002.
13
The strongest product category for the Company for the first nine
months of fiscal 2003 was the television category which positively impacted
comparable store sales by 8.4%. This increase was primarily caused by increased
demand for high definition ready large screen televisions. All other major
product categories negatively impacted comparable store sales with the video
category impact being 2.3%, the appliance category being 1.6%, the audio
category being 1.3% and the other category being 1.1%.
The following table reflects the approximate percent of net sales for
each major product group for the periods presented.
Three Months Ended Nine Months Ended
October 31 October 31
------------------------ --------------------
Product Category 2003 2002 2003 2002
- ---------------- ----- ----- ----- -----
Televisions........................................... 53.5% 50.2% 50.6% 44.9%
Appliances............................................ 20.3 20.4 21.6 23.5
Audio................................................. 11.4 12.6 12.9 14.4
Video................................................. 7.1 8.1 6.9 8.0
Other................................................. 7.7 8.7 8.0 9.2
----- ----- ----- -----
100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
As of October 31, 2003, we had 248 stores compared to 255 stores one
year earlier. We did not open any stores and closed four stores during the first
nine months of fiscal 2003. We did not open any stores and closed seven stores
during the first nine months of fiscal 2002.
Gross profit of $28.7 million (29.7% of net sales) in the third quarter
of fiscal 2003 was approximately $0.2 million lower than the $28.9 million
(30.2% of net sales) recorded in the third quarter of fiscal 2002. Gross profit
for the first nine months of fiscal 2003 was $84.9 million (29.9% of net sales)
compared to $85.5 million (30.3% of net sales) for the first nine months of
fiscal 2002. Gross profit margin has been reduced both due to more aggressive
promotional activity and recognizing a reduced amount of extended service
contract sales which generally have higher gross profit margin associated
with it.
Selling, general and administrative expenses were $26.1 million (27.0%
of net sales) for the third quarter of fiscal 2003 compared to $25.7 million
(26.9% of net sales) for the third quarter of fiscal 2002.
14
This represents an increase of $0.4 million or 1.5%. Selling, general and
administrative expenses were $78.0 million (27.5% of net sales) for the first
nine months of fiscal 2003 compared to $76.7 million (27.2% of net sales) for
the comparable period of fiscal 2002. This is an increase of $1.3 million or
1.7% for the first nine months of fiscal 2003. The increase in expenditures was
primarily due to increased cost of commissioning to the sales staff.
Interest expense was $1.3 million (1.3% of net sales) for the third
quarter of fiscal 2003, a reduction of $0.1 million from the $1.4 million (1.4%
of net sales) for the third quarter of fiscal 2002. Interest expense was $3.8
million (1.3% of net sales) for the first nine months of fiscal 2003 compared to
$4.2 million (1.5% of net sales) for the first nine months of fiscal 2002. The
first nine months of fiscal 2002 includes a charge of approximately $250,000 for
early extinguishment of mortgage loans of $7.0 million. For the current year we
have had higher borrowing costs on the line of credit due to on average higher
outstanding borrowings. This has been offset by lower interest cost from
mortgage debt due to lower outstanding borrowings and on average lower interest
rates on the variable rate mortgage loans.
During the third quarter of fiscal 2003, we sold two properties for a
gain of approximately $393,000. This related to the one store closed during the
third quarter and another store that was closed earlier in the fiscal year.
During the first quarter of fiscal 2003, we sold one property for a gain of
approximately $386,000. We had previously closed this store and leased it to an
unrelated party.
Results for the third quarter and first nine months of fiscals 2003 and
2002 also reflect the impact of our equity investment in two limited
partnerships, Colona SynFuel Limited Partnership, L.L.L.P., and Somerset
SynFuel, L.P., which produce synthetic fuels. We remain a limited partner in the
Somerset limited partnership but have sold our ownership interest in the Colona
limited partnership through a series of three sales. Effective February 1, 1999,
we entered into an agreement to sell a portion of our investment in the Colona
limited partnership, 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 related to the July 31, 2000 and May
31, 2001 sales are now being put into escrow pending the results of the audit.
During the third quarter of fiscal 2003, we delivered a $4.4 million Letter of
Credit to Colona and received proceeds of $4.4 million from the escrowed
funds. The Letter of Credit guarantees our own performance. The amount to be
held in escrow, net of the $4.4 million received, is approximately $7.9 million
at October 31, 2003. All proceeds have been
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reported as income whether received or put into escrow. Below is a table
summarizing the income from the sales, net of certain expenses. The lower income
for the current year generally reflects lower production levels compared to the
previous year.
Three Months Ended Nine Months Ended
October 31 October 31
------------------------ ----------------------
2003 2002 2003 2002
(In Thousands)
February 1, 1999.................................. $1,489 $1,666 $3,955 $5,365
July 31, 2000 sale................................ 1,188 1,350 3,139 4,050
May 31, 2001 sale................................. 1,056 838 2,822 3,711
------ ------ ------ -------
$3,733 $3,854 $9,916 $13,126
====== ====== ====== =======
Net income for the first nine months of fiscal 2002 also reflects
pre-tax income, net of expenses, of approximately $0.4 million from the
settlement of a previously filed lawsuit relating to our participation as a
limited partner in Somerset SynFuel, L.P. 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 future production of synthetic fuel.
Our effective tax rate was 25.0% and 24.8% for the third quarter of
fiscals 2003 and 2002, respectively, and 25.0% and 24.4% for the first nine
months of fiscals 2003 and 2002, respectively, after reflecting our share of
federal income tax credits earned by the Somerset limited partnership under
Section 29 of the Internal Revenue Code.
In July, 2003, the Internal Revenue Service (IRS) issued Announcement
2003-46, stating it has reason to question the scientific validity of testing
procedures and results related to Section 29 income tax credits. The notice also
announced that it would suspend the issuance of new rulings until its review is
complete and that rulings could be revoked if the IRS did not determine that the
test procedures demonstrate a significant chemical change between the feedstock
coal and the synthetic fuel.
Colona SynFuel Limited Partnership, L.L.L.P. advised us that in
October 2003, the National Office of the IRS concluded that the experts, engaged
by Colona who test the synthetic fuel for chemical change, use reasonable
scientific methods to reach their conclusions. We have been informed by Colona
that the National Office will not take any adverse action on the private letter
ruling that has been issued for the Colona facility. A written decision
memorializing the National Office's conclusions should be available within
approximately the next two months. At that time, the IRS field auditors will
have the right to ask for reconsideration of the National Office's decision.
Although this is a significant event, the audit of the Colona facility is
not yet completed. This determination applies only to the Colona facility
in which the Company has sold its interest but continues to receive pre-tax
investment income.
The IRS has notified the parent company of the general partner of
Somerset SynFuel, L.P. of its intention to audit the synthetic fuel operations
of the parent company's subsidiaries as part of its normal audit program for
the parent company.
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As a result of the foregoing, net income for the third quarter of
fiscal 2003 was $4.1 million, a 4.5% decrease from $4.3 million for the third
quarter of fiscal 2002. Net income for the first nine months of fiscal 2003 was
$10.4 million, a 25.0% decrease from $13.8 million for the first nine months of
fiscal 2002.
Liquidity and Capital Resources
Net cash used in operating activities was approximately $4.5 million
for the first nine months of fiscal 2003, compared to $50.8 million for the
first nine months of fiscal 2002. For the first nine months of fiscal 2002, cash
was provided by net income of $10.4 million, adjusted for the impact of $9.9
million for gains on our installment sales of the limited partnership interest,
non-cash items of $1.7 million which consisted of deferred income and
depreciation and amortization and $0.7 million gain on disposal of fixed assets.
The primary use of cash was an increase in inventory of $13.3 million primarily
due to seasonal fluctuations. The other use of cash was an increase in other
assets of $1.1 million. Cash was provided by an increase in accounts payable
of $7.3 million due to the increase in inventory and the timing of purchases
and payments to vendors. Cash was also provided by a decrease in accounts
receivable of $1.9 million.
At October 31, 2003, working capital was $85.1 million compared to
$93.3 million at January 31, 2003. The ratio of current assets to current
liabilities was 2.0 to 1 at October 31, 2003 and 2.3 to 1 at January 31, 2003.
During the first nine months of fiscal 2003, we received proceeds of
$8.0 million from installment sales of our portion of our ownership interest in
a limited partnership, including $4.4 million received from escrow funds after
we substituted a letter of credit for the funds. We also received proceeds of
$2.7 million from the sale of three closed store locations. We had capital
expenditures of approximately $2.5 million during the first nine months of
fiscal 2003, primarily for the addition in process to the warehouse in Dayton,
Ohio.
Cash provided by financing activities totaled approximately $3.6
million for the first nine months of fiscal 2003. Cash was provided by increased
borrowings of approximately $5.5 million on the line of credit. We received
proceeds of approximately $2.7 million from the exercise of stock options by
employees and directors. We also booked a tax benefit of approximately $300,000
during the first nine months of fiscal 2003 from the exercise of non-qualified
stock options as an increase in additional paid-in capital. Cash of $4.6 million
was used for scheduled payments of mortgage debt. Cash of approximately $7.4
million was also used to acquire 650,000 shares of our common stock. We
currently have approximately 170,500 authorized shares remaining under the stock
buy-back program.
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Recently Issued Accounting Standards
In November 2002, the Financial Accounting Standards Board issued
Emerging Issues Task Force No. 00-21, "Accounting for Revenue Arrangements
with Multiple Deliverables." EITF No. 00-21 addresses when and how an
arrangement involving multiple deliverables should be divided into
separate units of accounting, as well as how the arrangement consideration
should be measured and allocated to the separate units of accounting in
the arrangement. The Company adopted the provisions of EITF No. 00-21 during
the third quarter of fiscal 2003 with no material impact to the Company's
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 adopted the new Interpretation, as required,
but such adoption did not have a material impact on the financial statements
as the Company does not have an investment in Variable Interest Entities.
Forward-Looking Statements
This Form 10-Q contains or may contain forward-looking statements as
defined in the Private Securities Litigation Reform Act of 1995. The words
"believes", "estimates", "plans", "expects", "intends", "anticipates" and
similar expressions as they relate to the Company or its management are intended
to identify such forward-looking statements. Forward-looking statements are
inherently subject to risks and uncertainties. Factors that could cause actual
results to differ materially from those in the forward-looking statements are
set forth in Exhibit 99(a) to the Company's Annual Report on Form 10-K for the
fiscal year ended January 31, 2003 (File No. 0-13283).
Item 3. Quantitative and Qualitative Disclosures About Market Risk
No material changes since January 31, 2003.
Item 4. Controls and Procedures
The Company's management evaluated, with the participation of the
Company's Chief Executive Officer and Chief Financial Officer, the effectiveness
of the Company's disclosure controls and procedures, as of
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the end of the period covered by this report. Based on that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective to ensure that information
required to be disclosed by the Company in the reports that it files or submits
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 changes in the Company's internal control over financial
reporting that occurred during the Company's last fiscal quarter that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. The following exhibits are filed with this report:
31 Certifications Pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002
32 Certifications Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002
(b) Reports on Form 8-K.
On September 4, 2003, the Company filed a Form 8-K reporting under Item
12 the issuance of a press release announcing financial results for the fiscal
quarter ended July 31, 2003.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
REX STORES CORPORATION
Registrant
December 11, 2003 STUART A. ROSE
Stuart A. Rose
Chairman of the Board
(Chief Executive Officer)
December 11, 2003 DOUGLAS L. BRUGGEMAN
Douglas L. Bruggeman
Vice President, Finance and
Treasurer
(Chief Financial Officer)
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