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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, 2004 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
- ---------------------------- -----------------------
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, 2003 the aggregate market value of the
registrant's outstanding Common Stock held by non-affiliates of the registrant
(for purposes of this calculation, 1,896,784 shares beneficially owned by
directors and executive officers of the registrant were treated as being held by
affiliates of the registrant), was $117,326,622.
There were 11,390,493 shares of the registrant's Common Stock outstanding as of
April 14, 2004.
Documents Incorporated by Reference
Portions of REX Stores Corporation's definitive Proxy Statement for its Annual
Meeting of Shareholders on May 27, 2004 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 248 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 2003" means the period February 1,
2003 to January 31, 2004. 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 our competitors. We believe our
low-overhead store format and our ability to operate in free-standing as
2
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
o size and growth pattern of the population.
3
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 2003 and
currently have no new stores under development for fiscal 2004. We are, however,
currently working on relocating seven existing stores to new locations in the
same markets. Six of these new locations will be owned rather than leased.
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, 178
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 42 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,
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in higher-traffic stores, seasonal support personnel. Store managers are paid on
a commission basis and 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 4, 10 and 10 stores during fiscal 2003, 2002 and 2001,
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, 2004:
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 7
Georgia 7 North Dakota 3
Idaho 5 Ohio 21
Illinois 10 Oklahoma 5
Indiana 4 Pennsylvania 19
Iowa 10 South Carolina 9
Kansas 2 South Dakota 3
Kentucky 3 Tennessee 9
Louisiana 6 Texas 11
Maryland 1 Vermont 1
Massachusetts 1 Virginia 2
Michigan 8 Washington 3
Minnesota 1 West Virginia 6
Mississippi 12 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.
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.
5
We accept MasterCard, Visa and Discover. We estimate that, during fiscal 2003,
approximately 38.8% of our total sales were made on these credit cards, and
approximately 17.4% 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. During fiscal 2003 we offered a Rex private label credit card in
approximately 183 stores using a third party finance company. As of April 1,
2004, we began to offer the REX private label credit card in all stores.
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 1,200
products produced by approximately 60 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
DVD DVD Players Tape Decks Ranges Recordable Tapes
Combos DVD Recorders Speakers Dishwashers Telephones
Plazma/LCD DVD/VCR Car Stereos Refrigerators Audio/Video
TVs Combos Portable Radios Freezers Accessories
Turntables Vacuum Cleaners Radar Detectors
Home Theater Dehumidifiers CB Radios
Systems
Satellite Radio
Among the leading brands sold by us during fiscal 2003, in alphabetical order,
were Frigidaire, Hitachi, JVC, Panasonic, Philips Magnavox, 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 two 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 2003 2002 2001
---------------- ---- ---- ----
Televisions.......................................... 52% 48% 45%
Appliances .......................................... 19 19 19
Audio................................................ 13 15 16
Video................................................ 8 10 12
Other................................................ 8 8 8
--- --- ---
100% 100% 100%
=== === ===
6
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 "Moonlight
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 2003, 11 vendors accounted for
approximately 89% of our purchases, with two vendors representing approximately
29% of our inventory purchases in 2003. We typically do not maintain long-term
purchase contracts with vendors and operate principally on an order-by-order
basis.
e-Commerce
We sell selected televisions, audio and video products and small appliances on
our retail store Web site at www.rexstores.com.
Distribution
Our stores are supplied by three regional distribution centers. The distribution
centers consist of:
o a 470,000 square foot owned facility in Dayton, Ohio;
o a 180,000 square foot owned facility in Pensacola, Florida; and
o a 145,000 square foot owned facility in Cheyenne, Wyoming.
We also lease a 67,000 square foot auxiliary warehouse in Pensacola, Florida,
which expires August 31, 2004. In addition, we may lease overflow warehouse
space as needed to accommodate seasonal
7
inventory requirements and opportunistic purchases. During fiscal 2003 we
completed the construction of 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 151 of our stores. The remaining 97 stores operate on leased premises,
with the unexpired terms of the leases ranging from less than one year to 21
years, inclusive of options to renew. For fiscal 2003, the total net rent
expense for our leased facilities was approximately $6,680,000.
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.
8
Employees
At January 31, 2004, we had 151 hourly and salaried employees and 893
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. We sold our membership interest in
the entity that owned the Gillette facility on March 30, 2004 for $2,750,000
along with a secured contingent payment note that could provide additional
investment income to us if certain tax issues are favorably resolved for the
buyer with the Internal Revenue Service and/or the facility resumes commercial
operation.
In 2003, the Internal Revenue Service (IRS) questioned the scientific validity
of the testing procedures used to support synthetic fuel credits. The IRS has
completed its review of these procedures and resumed issuing letter rulings
based on its previous requirements. The IRS has completed an audit on the
partnership we have sold with no impact on related tax credits generated. The
IRS has commenced auditing the other partnership which is currently in operation
as part of its normal audit program of the general partner. In addition, a U.S.
Senate subcommittee has initiated an investigation into income tax credits
involving synthetic fuel operations. REX has been allocated income tax credits
of approximately $33.1 million through fiscal 2003, including approximately $7.3
million for fiscal 2003. All of the tax credits for fiscal 2003 and
approximately $13.3 million of our total tax credits are from the partnership
currently under audit. In addition, REX has recognized investment income of
approximately $62.6 million from the sales of its partnership interest including
$16.0 million for fiscal 2003.
Although we believe the retroactive disallowance of our synthetic fuel credits
is unlikely, any such disallowance could result in a significant liability for
income tax credits previously taken. In addition, REX's use of income tax
credits and investment income in the future could be limited by any new IRS
interpretations or regulations or by any new income tax legislation.
See Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations and Note 2 to the Consolidated Financial Statements for
further discussions.
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
9
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.
Executive Officers of the Company
Set forth below is certain information about each of our executive
officers.
Name Age Position
---- --- --------
Stuart Rose........................ 49 Chairman of the Board, President and Chief Executive
Officer*
Douglas Bruggeman.................. 43 Vice President-Finance, Chief Financial Officer and
Treasurer
Edward Kress....................... 54 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. Upon the retirement of Lawrence Tomchin in 2004, Mr. Rose was also elected
President. 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.
Douglas Bruggeman has been our Vice President - Finance and Treasurer since
1989 and was elected Chief Financial Officer in 2003. 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. Mr. Kress has practiced law in Dayton, Ohio since
1974.
10
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, 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
April 30, 2003 $11.46 $ 9.84
July 31, 2003 14.91 10.40
October 31, 2003 16.10 12.71
January 31, 2004 16.59 12.55
As of April 14, 2004, there were 178 holders of record of our common stock,
including shares held in nominee or street name by brokers.
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
(In Thousands, Except Per January 31,
Share Amounts) ----------------------------------------------------
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
Net sales $417,402 $428,625 $464,503 $475,419 $466,386
Net income $ 27,440 $ 22,932 $ 22,309 $ 18,736 $ 18,293
Basic net income per share $ 2.53 $ 1.89 $ 1.91 $ 1.32 $ 1.01
Diluted net income per share $ 2.17 $ 1.61 $ 1.65 $ 1.21 $ 0.91
Total assets $313,411 $310,922 $307,329 $310,885 $304,036
Long-term debt, net of current
maturities $ 53,548 $ 64,426 $ 77,203 $ 81,262 $ 46,200
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Quarterly Financial Data (Unaudited)
Quarters Ended
(In Thousands, Except Per Share Amounts)
------------------------------------------------
April 30, July 31, October 31, January 31,
2003 2003 2003 2004
--------- -------- ----------- -----------
Net sales $95,411 $91,436 $96,556 $133,999
Cost of merchandise sold 67,573 63,079 67,869 96,635
Net income 3,138 3,167 4,081 17,054
Basic net income per share (a) $ 0.29 $ 0.30 $ 0.38 $ 1.55
Diluted net income per share (a) $ 0.25 $ 0.25 $ 0.32 $ 1.32
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 (b) $ 0.34 $ 0.43 $ 0.35 $ 0.78
Diluted net income per share (b) $ 0.28 $ 0.37 $ 0.31 $ 0.68
a) The total of the quarterly net income per share amounts is less than
the annual net income amounts primarily due to the impact of more
shares outstanding and higher stock price resulting in higher dilution
from stock options during the fourth quarter versus the full year and
62% of the net income occurring in the fourth quarter of fiscal 2003.
b) 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.
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 248 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 0.9%, 5.1%, and 7.9% for fiscal 2003, 2002
and 2001, respectively. We believe our comparable store sales have been
adversely affected by the economy, price deflation in certain categories and the
increasing 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 3.4% of net sales for
fiscal 2003, 3.6% of net sales for fiscal 2002 and 3.3% of net sales for fiscal
2001. Service contract costs are charged to operations as incurred. Gross profit
realized from extended service contract revenues was $10.7 million, $11.4
million and $11.4 million in fiscal 2003, 2002 and 2001, respectively.
Investment in Synthetic Fuel Partnerships
In fiscal 1998, we invested 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 2003 phase-out started at
$50.14 per barrel.
We initially held a 30% interest in Colona Synfuel Limited Partnership, L.L.L.P.
(Colona) and an 18.75% interest in Somerset Synfuel, L.P. (Somerset). We sold
our ownership in the Colona partnership as described below. This partnership was
being audited by the Internal Revenue Service (IRS). The audit was finalized in
February, 2004 and a closing agreement signed with the IRS with no impact on tax
credits generated. Certain quarterly payments from the sales had been held in
escrow, beginning in fiscal 2002, pending the results of the audit.
Effective February 1, 1999, we sold 13% of our interest in the Colona
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 2003 and 2002 was approximately $7.7
million and $7.4 million, respectively. The maximum that can be received for
calendar 2004 is approximately $8.1 million. We received approximately $6.4
million, $5.9 million and $7.0 million for fiscal 2003, 2002 and 2001,
respectively. None of these proceeds were held in escrow.
Effective July 31, 2000, we sold an additional portion of our interest in the
Colona 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
were being held in escrow beginning in fiscal 2002 pending the results of the
IRS audit. The amount earned and reported as income was approximately $5.0
million for fiscal 2003, all of which was put into escrow. 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
held in escrow. The amount earned and received for fiscal 2001 was approximately
$5.3 million. During fiscal 2003 we took $6.5 million from escrow and delivered
a letter of credit for the same amount. The letter of credit guaranteed our own
performance. In February, 2004 the audit was finalized and we received our
remaining money from escrow and the letter of credit was cancelled.
Effective May 31, 2001, we sold our remaining 8% ownership in the Colona
partnership. We expect to receive payments from the sale on a quarterly basis
through 2007. These payments are contingent upon and
13
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 were being held in escrow
beginning in fiscal 2002 pending the results of the IRS audit. The amount earned
and reported as income was approximately $4.6 million for fiscal 2003, all of
which was put into escrow. 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 held in escrow. The
amount earned and received for fiscal 2001 was approximately $3.5 million,
including a down payment of $355,000. During fiscal 2003 we took $6.9 million
from escrow and delivered letters of credit for the same amount. The letters of
credit guaranteed our own performance. In February, 2004 the audit was finalized
and we received our remaining money from escrow and the letters of credit were
cancelled.
We remain a limited partner in the Somerset 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 partnership is now
operational and producing synthetic fuel. The IRS has notified the parent
company of the general partner of Somerset 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.
The tax credits applied to reduce tax expense were approximately $7.3 million,
$3.1 million and $2.9 million in fiscal 2003, 2002 and 2001, 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
obtained a Private Letter Ruling from the Internal Revenue Service, which would
allow the disassembly, and reconstruction, of the facility. We incurred
approximately $2.2 million of direct cost on this project, with approximately an
additional $325,000 being held in escrow to guarantee our contractual
obligation. On March 30, 2004, we sold our membership interest in the limited
liability company that owned the Gillette facility to an outside party. We
received $2,750,000 at the time of sale along with a secured contingent payment
note that could provide additional investment income to us if certain tax
issues are favorably resolved for the buyer with the IRS and/or the facility
resumes 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,
-----------------------------
2004 2003 2002
----- ----- -----
Net sales 100.0% 100.0% 100.0%
Cost of merchandise sold 70.7 70.3 71.1
----- ----- -----
Gross profit 29.3 29.7 28.9
Selling, general and administrative expenses 26.1 24.9 24.1
----- ----- -----
Income from operations 3.2 4.8 4.8
Investment income -- 0.1 0.1
Interest expense (1.1) (1.3) (1.9)
Gain on sale of real estate 0.3 -- --
Income from limited partnerships 3.8 3.5 3.4
----- ----- -----
Income before provision for income taxes 6.2 7.1 6.4
(Benefit) Provision for income taxes (0.4) 1.8 1.6
----- ----- -----
Net income 6.6% 5.3% 4.8%
===== ===== =====
Comparison of Fiscal Years Ended January 31, 2004 and 2003
Net Sales - Net sales in fiscal 2003 were $417.4 million, a 2.6% decrease from
$428.6 million in fiscal 2002. This decrease was due to a decline in comparable
store sales of 0.9% for fiscal 2003 and a reduction in store count. We closed 4
stores during fiscal 2003 and 10 stores during fiscal 2002. We did not open any
stores in fiscals 2003 and 2002. We had 248 stores open at January 31, 2004
compared to 252 stores at January 31, 2003.
All product categories, except television sales, contributed to the negative
comparable store sales for fiscal 2003. The television category positively
impacted comparable store sales by 3.6% primarily due to increased sales of 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 1.6% primarily due to lower sales of
camcorders and video cassette recorders (VCR's). The audio category contributed
1.5% to the decline in comparable store sales. The appliance category
contributed 0.7% to the decline in comparable store sales primarily due to lower
air conditioner sales. Air conditioner sales were impacted by lower demand
primarily due to cooler temperatures in certain markets as compared to the prior
year and lower average selling price. The other category contributed 0.7% to the
decline in comparable store sales.
15
The following table reflects the approximate percent of net sales for each
product group for the periods presented.
Fiscal Year
------------------
Product Category 2003 2002 2001
- ---------------- ---- ---- ----
Televisions..... 52% 48% 45%
Appliances...... 19 19 19
Audio........... 13 15 16
Video........... 8 10 12
Other........... 8 8 8
--- --- ---
100% 100% 100%
=== === ===
Gross Profit - Gross profit was $122.2 million in fiscal 2003, or 29.3% of net
sales, versus $127.1 million for fiscal 2002 or 29.7% of net sales. The primary
factors impacting the gross profit margin have been an increased promotional
activity and recognizing a reduced amount of extended service contracts sales
which generally have higher gross profit margin associated with them. Demand for
extended service contracts has declined, which is partially due to lower prices
on many products we sell.
Selling, General and Administrative Expenses - Selling, general and
administrative expenses for 2003 were $108.9 million, or 26.1% of net sales, a
2.3% increase from $106.5 million, or 24.9% of net sales, for fiscal 2002. The
increase in expenditures was primarily due to increased commission cost of
approximately $1.1 million to the sales staff, increased delivery charges of
approximately $500,000 due to selling more deliverable items and an increase in
other administrative cost of approximately $700,000.
Income from Operations - Income from operations was $13.3 million, or 3.2% of
net sales, for fiscal 2003, a 35.3% decrease from 20.6 million, or 4.8% of net
sales for fiscal 2002.
Investment Income - Investment income decreased to $77,000 in fiscal 2003 from
$393,000 in fiscal 2002 primarily as a result of more excess cash available for
investment in the first half of fiscal 2002.
Interest Expense - Interest expense decreased to $4.9 million, or 1.1% of net
sales, for fiscal 2003 from $5.6 million, or 1.3% of net sales, for fiscal 2002.
Interest expense for fiscal 2002 includes a charge of approximately $250,000 for
early extinguishment of mortgage loans of $7.0 million. 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 at lower
floating interest rates.
Gain on Sale of Real Estate - During fiscal 2003, we sold four retail store
locations for a gain of $1.2 million. This included two stores we closed during
fiscal 2003 and two stores we had closed in prior years that were being leased
to outside companies.
Income from Limited Partnerships - Results for 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. Effective February 1, 1999, we entered into an agreement to
sell a portion of our investment in the Colona 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 was being audited by the Internal Revenue Service (IRS). The
audit was finalized in
16
February, 2004 and a closing agreement signed with the IRS. Proceeds from the
2000 and 2001 sales were being put into escrow pending the results of the audit.
During fiscal 2003 we removed $13.4 million from escrow and replaced it with
letters of credit to guarantee our performance. At January 31, 2004 we had
approximately $1.7 million held in escrow in addition to the $13.4 million
outstanding letters of credit. All proceeds were released from escrow and the
letters of credit canceled in February, 2004 when the audit was finalized. All
proceeds were reported as income at the time of production, whether received or
put into escrow. Below is a table summarizing the income from the sales, net of
certain expenses.
Year Ended January 31,
----------------------
2004 2003
------- -------
February 1, 1999 sale $ 6,409 $ 5,939
July 31, 2000 sale 5,041 4,655
May 31, 2001 sale 4,561 4,118
------- -------
$16,011 $14,712
======= =======
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 the Somerset
limited partnership.
Income Taxes - Our effective tax rate was (6.9)% and 24.6% for fiscals 2003 and
2002, respectively, after reflecting our share of federal tax credits earned by
the limited partnerships. Our effective tax rate was reduced for fiscal 2003 as
a result of a $4.2 million increase in tax credits generated by the Somerset
partnership and a $3.6 million net reduction in our valuation allowance on the
alternative minimum tax carryforwards due to the current status of the IRS
audits of the limited partnerships.
Net Income - As a result of the foregoing, net income was $27.4 million for
fiscal 2003 versus $22.9 million for fiscal 2002.
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.
17
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 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 $5.6 million, or 1.3% of net
sales, for fiscal 2002 from $8.6 million, or 1.9% 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. Interest expense includes a
charge of approximately $250,000 in fiscal 2002 for early extinguishment of
mortgage loans of $7.0 million. Fiscal 2001 includes a charge of approximately
$400,000 for paying off approximately $7.7 million of mortgage debt and
refinancing approximately $21.5 million of mortgage debt.
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.
18
Income Taxes--Our effective tax rate was approximately 24.6% for fiscals 2002
and 2001 after reflecting our share of federal tax credits earned by the limited
partnerships.
Net Income--As a result of the foregoing, net income was $22.9 million for
fiscal 2002 versus $22.3 million for fiscal 2001.
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 - We would expect our ongoing inventory levels to be higher than the
balance of $116.7 million reflected at January 31, 2004. There is currently a
short supply on certain televisions which is contributing to our lower inventory
levels. Our inventory levels are also subject to seasonal fluctuations, with
January 31 traditionally a time of lower inventory levels. Our cash levels will
tend to fluctuate with our inventory levels. Separately, in August of 2004, a
sale lease-back agreement covering 25 stores will expire. We have renewed the
leases of five stores, have plans to relocate seven stores and the remaining 13
stores are still under management review.
Operating Activities - Net cash provided by operating activities was $35.9
million for fiscal 2003 compared to net cash used in operating activities of
$37.2 million in fiscal 2002. For fiscal 2003, operating cash flow was provided
by net income of $27.4 million adjusted for the impact of a $16.0 million gain
on sales of partnership interest and non-cash items of $5.5 million, which
consist of deferred income, the deferred income tax provision and depreciation
and amortization. The primary sources of cash were the decrease in inventory of
$25.3 million and an increase in accounts payable of $5.3 million. Inventory
levels are reduced largely due to tight supply on certain televisions and lower
demand in our stores for the lower end television products. Accounts payable has
increased primarily due to timing of purchases and terms with manufacturers.
Another source of cash was a reduction in accounts receivable of $0.9 million.
Cash was used by an increase in other assets of $0.7 million and a decrease in
other current liabilities of $0.8 million.
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, 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.
Investing Activities - Net cash was provided by investing activities of $19.1
million for fiscal 2003. Cash of $19.5 million was provided by proceeds from the
sale of our partnership interest in synthetic fuel and $3.6 million from the
sale of real estate from closed stores. Capital expenditures in fiscal 2003
totaled $4.0 million. Expenditures included approximately $2.3 million with
respect to the completion of an addition to the Dayton, Ohio distribution
center, approximately $0.5 million for improvements at existing facilities and
approximately $1.2 million in land purchases toward the relocation of three
store sites for fiscal 2004. We currently have plans to relocate a total of
seven stores in fiscal 2004, with six of those sites to be owned store
locations.
19
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.
Financing Activities - Cash used in financing activities was $27.3 million for
fiscal 2003. During fiscal 2003 we acquired 711,153 shares of our common stock
for approximately $8.2 million. During fiscal 2002 we acquired 1,549,380 shares
of our common stock for approximately $16.8 million. At January 31, 2004 we had
authorization from the Board of Directors to purchase an additional 170,480
shares of our common stock. In February, 2004 we increased our share repurchase
authorization for up to an additional 1,000,000 shares. All acquired shares will
be held in treasury for possible future use.
At January 31, 2004, we had approximately $58.8 million of mortgage debt
outstanding at a weighted average interest rate of 5.73%, with maturities from
October 1, 2004 to September 30, 2016. We have balloon payments due totaling
approximately $5.3 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 2003, we paid off
$11.3 million of long-term mortgage debt from scheduled repayments and the early
extinguishment of debt for 17 retail locations primarily which had balloon
payments due within a year.
We received proceeds of approximately $4.0 million and $2.8 million for fiscal
2003 and 2002, 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 $1.6 million and $2.2 million for fiscals 2003 and 2002,
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.
We had no borrowings outstanding on the line of credit at January 31, 2004. At
January 31, 2003, we had borrowings outstanding of $13.5 million. A total of
approximately $59.1 million was available at January 31, 2004, net of letters of
credit outstanding of $14.2 million at that time. We currently have only one
letter of credit outstanding for $807,000. Borrowing levels vary during the
course of a year based upon our seasonal working capital needs. The maximum
direct borrowings outstanding during fiscal 2003 were approximately $37.4
million. The weighted average interest rate was 3.5% (4.7% including commitment
fees) for fiscal 2003. The 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.
Tabular Disclosure of Contractual Obligations
In the ordinary course of business, the Company enters into agreements under
which it is obligated to make legally enforceable future cash payments. These
agreements include those related to purchasing inventory, mortgaging and leasing
retail space. The following table summarizes by category expected future cash
outflows associated with contractual obligations in effect as of January 31,
2004.
20
Payment due by period
-------------------------------------------------
Less
than 1 1-3 3-5 More than
Contractual Obligations Total Year Years Years 5 Years
- --------------------------- ------- ------- ------- ------- ---------
Operating lease obligations $15,839 $ 6,330 $ 6,992 $ 2,030 $ 487
Long-term debt obligations 58,806 5,258 19,249 11,289 23,010
Inventory purchase orders 20,370 20,370 -- -- --
------- ------- ------- ------- -------
Total $95,015 $31,958 $26,241 $13,319 $23,497
======= ======= ======= ======= =======
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 32.1% and
34.1% of net sales and 62.1% and 59.5% of income from operations in fiscal 2003
and 2002, 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
We believe the application of the following accounting policies, which are
important to our financial position and results of operations, require
significant assumptions, judgments and estimates on the part of management. We
base our assumptions, judgments and estimates on historical experience, current
trends and other factors that management believes to be relevant at the time our
consolidated financial statements are prepared. However, because future events
and their effects cannot be determined with certainty, actual results could
differ from our assumptions and estimates, and such differences could be
material. Further, if different assumptions, judgments and estimates had been
used, the results could have been different and such differences could be
material. For a summary of all of our accounting policies, including the
accounting policies discussed below, see Note 1 of the Consolidated Financial
Statements.
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.
Vendor allowances - 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
21
recognized into income as an offset to the cost of merchandise sold when the
related product is sold. Advertising costs are expensed as incurred, with no
offset of vendor allowances.
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 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 December 2003, the Financial Accounting Standards Board issued a revised FASB
Interpretation No. 46, entitled, "Consolidation of Variable Interest Entities."
As revised, the new Interpretation requires that the Company consolidate all
variable interest entities in its financial statements under certain
circumstances. The Company will adopt the revised Interpretation for our interim
period ending April 30, 2004, as required, and does not expect the
Interpretation to have a material effect on the financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
As of January 31, 2004, 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.
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, 2004, a total of approximately $59.1 million was
available for borrowings under the revolving credit agreement, net of letters of
credit outstanding of $14.2 million. We had no outstanding borrowings under the
revolving credit agreement at January 31, 2004.
Approximately $24.3 million of the mortgage debt consists of fixed rate debt.
The interest rates range from 3.7% to 8.5%. The remaining $34.5 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%,
22
we estimate our annual interest cost would increase approximately $0.3 million
for the variable rate mortgage debt. Principal and interest are payable monthly
over terms which generally range from 5 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, 2004 was
approximately $26.2 million. The fair value was estimated based on rates
available to us for debt with similar terms and maturities.
23
Item 8. Financial Statements and Supplementary Data
REX STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 2004 AND 2003
(Amounts in thousands)
- ----------------------------------------------------------------------------------------------------------
2004 2003
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 29,026 $ 1,380
Accounts receivable--net of allowance for doubtful accounts of $235 and $200 in
2004 and 2003, respectively 2,560 3,413
Synthetic fuel receivable 3,098 6,619
Merchandise inventory 116,755 142,063
Prepaid expenses and other 1,481 1,546
Future income tax benefits 8,703 8,860
--------- ---------
Total current assets 161,623 163,881
PROPERTY AND EQUIPMENT--Net 131,409 134,563
OTHER ASSETS 3,477 2,677
FUTURE INCOME TAX BENEFITS 14,645 7,560
RESTRICTED INVESTMENTS 2,257 2,241
--------- ---------
TOTAL ASSETS $ 313,411 $ 310,922
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ -- $ 13,451
Current portion of long-term debt 5,258 5,657
Accounts payable--trade 32,745 27,417
Accrued income taxes 806 --
Current portion of deferred income and deferred gain on sale and leaseback 10,544 11,107
Accrued payroll 6,602 6,750
Other current liabilities 7,214 8,669
--------- ---------
Total current liabilities 63,169 73,051
--------- ---------
LONG-TERM LIABILITIES:
Long-term mortgage debt 53,548 64,426
Deferred income 12,762 13,993
Deferred gain on sale and leaseback -- 348
--------- ---------
Total long-term liabilities 66,310 78,767
--------- ---------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, 45,000 shares authorized, 28,308 and 27,746 shares issued at par 283 277
Paid-in capital 126,124 121,282
Retained earnings 185,080 157,640
Treasury stock, 17,214 and 16,607 shares (127,555) (120,095)
--------- ---------
Total shareholders' equity 183,932 159,104
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 313,411 $ 310,922
========= =========
See notes to consolidated financial statements.
24
REX STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED JANUARY 31, 2004, 2003 AND 2002
(Amounts in Thousands, Except Per Share Amounts)
- --------------------------------------------------------------------------------
2004 2003 2002
-------- -------- --------
NET SALES $417,402 $428,625 $464,503
-------- -------- --------
COSTS AND EXPENSES:
Cost of merchandise sold 295,156 301,501 330,110
Selling, general and administrative expenses 108,933 106,535 112,157
-------- -------- --------
Total costs and expenses 404,089 408,036 442,267
-------- -------- --------
INCOME FROM OPERATIONS 13,313 20,589 22,236
INVESTMENT INCOME 77 393 210
INTEREST EXPENSE (4,885) (5,626) (8,560)
GAIN ON SALE OF REAL ESTATE 1,153 -- --
INCOME FROM LIMITED PARTNERSHIPS 16,011 15,080 15,716
-------- -------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES 25,669 30,436 29,602
(BENEFIT) PROVISION FOR INCOME TAXES (1,771) 7,504 7,293
-------- -------- --------
NET INCOME $ 27,440 $ 22,932 $ 22,309
======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING--BASIC 10,863 12,142 11,698
======== ======== ========
BASIC NET INCOME PER SHARE $ 2.53 $ 1.89 $ 1.91
======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING--DILUTED 12,648 14,192 13,509
======== ======== ========
DILUTED NET INCOME PER SHARE $ 2.17 $ 1.61 $ 1.65
======== ======== ========
See notes to consolidated financial statements.
25
REX STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 31, 2004, 2003 AND 2002
(Amounts in thousands)
- ---------------------------------------------------------------------------------------------------------
2004 2003 2002
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 27,440 $ 22,932 $ 22,309
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization--net 3,994 4,325 4,198
Income from limited partnerships (16,011) (15,080) (15,716)
(Gain) loss on disposal of fixed assets (1,077) 290 155
Deferred income (1,498) (1,863) (1,265)
Deferred income tax (6,928) 3,514 (574)
Changes in assets and liabilities:
Accounts receivable 853 (2,293) 2,043
Merchandise inventory 25,308 (41,046) 43,133
Other current assets 65 1,002 1,612
Other long term assets (800) (2,677) --
Accounts payable--trade 5,328 (5,202) (15,062)
Other current liabilities (797) (1,129) 1,442
-------- -------- --------
Net cash provided by (used in) operating activities 35,877 (37,227) 42,275
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (4,043) (2,404) (9,948)
Proceeds from sale of partnership interest 19,532 10,006 15,716
Proceeds from sale of real estate and fixed assets 3,636 2,131 943
Restricted investments (16) (19) (56)
-------- -------- --------
Net cash provided by investing activities 19,109 9,714 6,655
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in note payable (13,451) 13,385 (676)
Proceeds from long-term debt -- -- 8,200
Payments of long-term debt (11,277) (12,132) (12,170)
Stock options exercised and related tax effects 4,848 4,584 10,554
Treasury stock issued 754 377 579
Treasury stock acquired (8,214) (16,762) (16,663)
-------- -------- --------
Net cash used in financing activities (27,340) (10,548) (10,176)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 27,646 (38,061) 38,754
CASH AND CASH EQUIVALENTS--Beginning of year 1,380 39,441 687
-------- -------- --------
CASH AND CASH EQUIVALENTS--End of year $ 29,026 $ 1,380 $ 39,441
======== ======== ========
See notes to consolidated financial statements.
26
REX STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JANUARY 31, 2004, 2003 AND 2002
(Amounts in thousands)
- ---------------------------------------------------------------------------------------------------------------------------
Common Shares
-----------------------------------
Issued Treasury Total
----------------------------------- Paid-In Retained Shareholders'
Shares Amount Shares Amount Capital Earnings Equity
------ ------ ------ -------- -------- -------- -------------
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
Net income 27,440 27,440
Treasury stock acquired 711 8,214 (8,214)
Stock options exercised and related tax effects 562 6 (104) (754) 4,842 5,602
------ ---- ------ -------- -------- -------- --------
BALANCE--January 31, 2004 28,308 $283 17,214 $127,555 $126,124 $185,080 $183,932
------ ---- ------ -------- -------- -------- --------
See notes to consolidated financial statements
27
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 248 retail consumer electronics and appliance stores
under the REX name in 37 states. The Company operates in one segment.
Reclassifications - Extraordinary charges of $248,000 ($91,000 net of tax)
and $405,000 ($245,000 net of tax), in fiscal 2003 and 2002, respectively,
related to the extinguishment of debt have been reclassified to interest
expense, as an effect of the Company's adoption, as of February 1, 2003, of
SFAS No. 145.
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 2003" means the period February 1, 2003 to January 31,
2004.
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
($34,679,000 and $38,729,000 at January 31, 2004 and 2003, respectively) is
equivalent to the FIFO value in all years presented. Eleven suppliers
accounted for approximately 89% of the Company's purchases in fiscal 2003.
Two vendors represented approximately 29% of our inventory purchases in
fiscal 2003.
28
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, 2004
and 2003 are as follows (amounts in thousands):
2004 2003
-------- --------
Land $ 38,519 $ 38,567
Buildings and improvements 101,448 99,448
Fixtures and equipment 18,567 18,471
Leasehold improvements 9,797 9,882
Construction in progress 1,251
-------- --------
168,331 167,619
Less: accumulated depreciation (36,922) (33,056)
-------- --------
$131,409 $134,563
======== ========
In accordance with FASB Statement No. 144 Accounting for the Impairment or
Disposal of Long-Lived 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, 2004, 2003, and 2002.
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, 2004 and 2003
are required 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 $3,817,000,
$3,309,000 and $3,209,000 in fiscal 2003, 2002 and 2001, respectively.
Merchandise sold under interest-free financing arrangements is recorded as
a sale when the customer receives the merchandise. In general, the Company
receives payment within 3 to 10 business days from the third-party lender.
The amount the Company receives from the third-party lender is generally
discounted for the interest free financing option, which is recorded as a
marketing expense in selling, general and administrative expense. The net
expense for third party financing was approximately $1,096,000, $930,000,
and $87,000 for the years ended January 31, 2004, 2003 and 2002,
respectively.
29
Costs of Merchandise Sold - 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.
Selling and Administrative Expenses - The Company includes store expenses
(such as payroll and occupancy costs), advertising, buying, depreciation,
insurance and overhead costs in selling and administrative expenses.
Vendor Allowances and Advertising Costs - 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. Advertising costs are
expensed as incurred. Advertising expense was approximately $31,680,000,
$32,169,000 and $34,775,000 for the years ended January 31, 2004, 2003 and
2002, respectively and was not offset by vendor allowances.
Interest Cost - Interest expense of $4,885,000, $5,626,000 and $8,560,000
for the years ended January 31, 2004, 2003 and 2002, respectively, is net
of approximately $79,000, $5,000 and $30,000 of interest capitalized
related to store or warehouse construction. Interest expense includes
approximately $18,000, $248,000 and $405,000 for fiscals 2003, 2002 and
2001, respectively related to the early termination of mortgage debt. Cash
paid for interest in fiscals 2003, 2002 and 2001 was approximately
$4,767,000, $5,199,000 and $8,047,000, respectively.
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.
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, 2004 and 2003 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, 2004, 2003 and 2002 (amounts in thousands, except
per-share amounts):
2004 2003 2002
------- ------- -------
Net income As reported $27,440 $22,932 $22,309
Compensation Cost 2,901 3,621 3,154
------- ------- -------
Pro forma 24,539 19,311 19,155
Basic net income per share As reported $ 2.53 $ 1.89 $ 1.91
Compensation Cost 0.27 0.30 0.27
------- ------- -------
Pro forma 2.26 1.59 1.64
Diluted net income per share As reported $ 2.17 $ 1.61 $ 1.65
Compensation Cost 0.23 0.25 0.23
------- ------- -------
Pro forma 1.94 1.36 1.42
30
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, 2004,
2003 and 2002, respectively: risk-free interest rate of 4.3%, 5.2% and
5.1%, expected volatility of 65.9%, 65.4% and 68.9% 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 3.4% of net sales for fiscal 2003, 3.6% of
net sales for fiscal 2002 and 3.3% of net sales for fiscal 2001. Service
contract costs are charged to operations as incurred. Gross profit realized
from extended service contract revenues was $10.7 million, $11.4 million
and $11.4 million in fiscal 2003, 2002 and 2001, respectively.
New Accounting Pronouncements - In December 2003, the Financial Accounting
Standards Board issued a revised FASB Interpretation No. 46, entitled,
"Consolidation of Variable Interest Entities." As revised, the new
Interpretation requires that the Company consolidate all variable interest
entities in its financial statements under certain circumstances. The
Company will adopt the revised Interpretation for our interim period ending
April 30, 2004, as required, and does not expect the Interpretation to have
a material effect on the financial statements.
2. INVESTMENTS IN LIMITED PARTNERSHIPS
During fiscal 1998, the Company invested 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 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
2003 phase-out started at $50.14 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 $7,300,000,
$3,100,000 and $2,900,000 in fiscal 2003, 2002 and 2001, respectively (see
Note 9).
Effective February 1, 1999, the Company sold a 13% interest in Colona
Synfuel Limited Partnership, L.L.L.P (Colona) 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 2003, 2002 and 2001 was
approximately $7,700,000, $7,400,000 and $7,100,000 respectively. The
Company earned and received approximately $6,400,000, $5,900,000 and
$7,000,000 for fiscal years 2003, 2002 and 2001, respectively. The maximum
that can be received for calendar 2004 is approximately $8,100,000.
Effective July 31, 2000, the Company sold an additional portion of its
interest in the Colona 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 were
held in escrow beginning in fiscal 2002
31
pending the results of an Internal Revenue Service (IRS) audit of the
partnership. The amount earned and reported as income was approximately
$5.0 million for fiscal 2003, all of which was put into escrow. 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 held in escrow. The amount earned and
received for fiscal 2001 was approximately $5,300,000. During fiscal 2003
we took $6.5 million from escrow and delivered a letter of credit for the
same amount. The letter of credit guaranteed our own performance. In
February 2004, the audit was finalized and we received our remaining money
from escrow and the letter of credit was cancelled.
Effective May 31, 2001, the Company sold its remaining 8% ownership in the
Colona 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 were
being held in escrow beginning in fiscal 2002 pending the results of the
IRS audit. The amount earned and reported as income was approximately $4.6
million for fiscal 2003, all of which was put into escrow. 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 held in escrow. The amount earned and received
for fiscal 2001 was approximately $3,500,000, including a down payment of
$355,000. During fiscal 2003 we received $6.9 million from escrow and
delivered a letter of credit for the same amount. The letters of credit
guaranteed our own performance. In February 2004, the audit was finalized
and we received our remaining money from escrow and the letters of credit
were cancelled.
The Company remains a limited partner in Somerset Synfuel, L.P. 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. This
partnership is operational and producing synthetic fuel.
In 2003, the Internal Revenue Service (IRS) issued Announcement 2003-46,
stating it had 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 was complete and that ruling 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. The IRS completed
its review and announced that it would again be issuing private letter
rulings based on the previous requirements. The Permanent Subcommittee on
Investigations of the U.S. Senate's Committee on Government Affairs has
initiated an investigation on the subject of these income tax credits.
The IRS has completed an audit on the Colona partnership. The audit was
finalized in February, 2004 and a closing agreement was signed with the IRS
with no impact on tax credits generated. Beginning in fiscal 2002, certain
quarterly payments from the sales were being held in escrow pending the
results of the audit. The IRS is auditing the Somerset partnership as part
of its normal audit program of the general partner.
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 obtained a Private Letter Ruling from the Internal Revenue
Service, which would allow the disassembly, and reconstruction, of the
facility. We incurred approximately $2.2 million of direct costs on this
project, with approximately an additional $325,000 being held in escrow to
guarantee our contractual obligation. On March 30, 2004, we sold our
membership interest in the limited liability company that owned the
Gillette facility to an outside party. We received $2,750,000 at the time
of sale along with a secured contingent payment note that could provide
additional investment
32
income to us if certain tax issues are favorably resolved for the buyer
with the IRS and/or the facility resumes 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 2004, 2003 and 2002.
The following table reconciles the basic and diluted net income per share
computations for each year presented for the years ended January 31, 2004,
2003, and 2002 (amounts in thousands, except per-share amounts):
2004
----------------------------
Income Shares Per Share
------- ------ ---------
Basic net income per share $27,440 10,863 $2.53
Effect of stock options 1,785
------- ------
Diluted net income per share $27,440 12,648 $2.17
======= ====== =====
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
======= ====== =====
For the years ended January 31, 2004, 2003 and 2002, a total of 666,336,
346,937 and -0- shares, respectively, subject to outstanding options were
not included in the common equivalent shares
33
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, 2004, 2003, and 2002, the Company
purchased 711,153, 1,549,000 and 1,550,000 shares of its common stock for
$8,214,000, $16,762,000 and $16,663,000, respectively. At January 31, 2004,
the Company was authorized by its Board of Directors to purchase an
additional 170,480 shares of its common stock. Effective February 27, 2004
the Company increased its authorization by 1,000,000 shares bringing the
total authorization to 1,170,480 shares.
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 letter of credit commitments outstanding of $14.2 million
and $500,000 at January 31, 2004 and 2003, respectively. The Company had
outstanding borrowings under the revolving credit agreement of $-0- and
$13,451,000 at January 31, 2004 and 2003, respectively. At January 31,
2004, a total of approximately $59.1 million was available for borrowings
under the revolving credit agreement.
The interest rate charged on borrowings is prime or LIBOR plus 1.875% (4.0%
at January 31, 2004) 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, 2004.
6. LONG-TERM MORTGAGE DEBT
Long-term mortgage debt consists of notes payable secured by certain land,
buildings and leasehold improvements. During fiscal 2003 and 2002, the
Company switched certain of its fixed rate debt to variable rate debt.
Interest rates ranged from 2.975% to 8.5% in fiscal 2003 and 3.215% to 8.5%
in fiscal 2002. Principal and interest are payable monthly over terms which
generally range from 5 to 15 years. Substantially all of the notes payable
require balloon payments at the end of the scheduled term. The following
provides information on rates segregated as fixed or variable and by term
for fiscal 2003 and fiscal 2002:
34
Fiscal 2003
Interest Rates Maturity Balance (in thousands)
-------------- -------------------- ----------------------
Variable
2.98% - 6.00% Within five years $17,119
4.00% - 5.00% Five to ten years $ 5,755
4.00% - 4.50% Ten to fifteen years $11,650
Fixed
6.49% - 8.00% Within five years $ 2,890
3.70% - 8.50% Five to ten years $ 5,928
6.49% - 8.40% Ten to fifteen years $15,464
Fiscal 2002
Interest Rates Maturity Balance (in thousands)
-------------- -------------------- ----------------------
Variable
3.20% - 6.00% Within five years $20,863
4.25% - 5.00% Five to ten years $ 7,133
4.25% - 5.00% Ten to fifteen years $14,294
Fixed
4.75% - 6.90% Within five years $ 1,247
5.75% - 8.50% Five to ten years $ 6,854
6.25% - 8.40% Ten to fifteen years $19,691
Maturities of long-term debt are as follows (amounts in thousands):
Year Ending
January 31
-----------
2005 $ 5,258
2006 9,200
2007 10,049
2008 6,628
2009 4,661
Thereafter 23,010
-------
$58,806
=======
In fiscal 2003, the Company paid off approximately $4.8 million in mortgage
debt prior to maturity. As a result, the Company expensed unamortized
financing cost of approximately $18,000 as interest expense.
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 $248,000 as interest expense.
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 cost of approximately
$405,000 as interest expense.
35
The fair value of the Company's long-term debt at January 31, 2004 and 2003
was approximately $60.7 million and $73.0 million, respectively. At January
31, 2004, the Company had approximately $24.3 million of fixed rate
mortgage debt and approximately $34.5 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, 2004, 108,011 and 2,304,153
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, 2003. All of
these options remained outstanding at January 31, 2004.
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, 2004.
36
The following summarizes stock option activity for the years ended January
31, 2004, 2003 and 2002 (amounts in thousands, except per-share amounts):
2004 2003 2002
------------------ ------------------- ------------------
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 6,736 $ 6.83 6,882 $ 6.40 6,224 $ 5.99
Granted 363 12.92 354 14.84 2,120 8.05
Exercised (667) 6.06 (443) 6.34 (1,446) 7.01
Canceled or expired (41) 9.84 (57) 8.68 (16) 7.22
----- ------ ----- ------ ------ ------
Outstanding--End of year 6,391 $ 7.24 6,736 $ 6.83 6,882 $ 6.40
===== ====== ===== ====== ====== ======
Exercisable--End of year 4,238 $ 5.94 3,958 $ 5.42 3,430 $ 5.47
===== ====== ===== ====== ====== ======
Weighted average fair value of
options granted $9.50 $11.06 $ 6.15
===== ====== ======
Price ranges and other information for stock options outstanding as of
January 31, 2004 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 2,489 $ 4.60 4.45 2,437 $ 4.59
$5.56 to $8.34 2,761 7.50 5.63 1,475 7.05
$9.51 to $14.265 805 11.38 7.75 259 10.09
$14.745 to $16.04 336 14.84 8.25 67 14.84
----- ------ ---- ----- ------
6,391 $ 7.24 5.57 4,238 $ 5.94
===== ====== ==== ===== ======
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 $29,000, $36,000 and $40,000 for the years ended January 31,
2004, 2003 and 2002, respectively, under the Plan.
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.
37
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, 2004 was $300,000.
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
----------- ------- ------------ -------- ------
2004 $ 8,553 $(645) $(1,228) $6,680
2003 8,801 (597) (1,366) 6,838
2002 10,280 (805) (1,313) 8,162
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, 2004 are as
follows (amounts in thousands):
Years Ended Minimum Gain Sublease
January 31 Rentals Amortization Income
----------- ------- ------------ --------
2005 $ 6,330 $300 $ 931
2006 4,211 493
2007 2,781 305
2008 1,132 224
2009 898 207
Thereafter 487 120
------- ---- ------
$15,839 $300 $2,280
======= ==== ======
38
9. INCOME TAXES
The provision for income taxes for the years ended January 31, 2004, 2003
and 2002 consists of the following (amounts in thousands):
2004 2003 2002
------- ------ ------
Federal:
Current $ 4,550 $3,171 $3,219
Deferred (6,948) 2,719 3,154
------- ------ ------
(2,398) 5,890 6,373
------- ------ ------
State and Local:
Current 607 819 250
Deferred 20 795 671
------- ------ ------
627 1,614 921
------- ------ ------
$(1,771) $7,504 $7,294
======= ====== ======
The tax effects of significant temporary differences representing deferred
tax assets and liabilities are as follows as of January 31, 2004 and 2003
(amounts in thousands):
2004 2003
------- --------
Assets:
Deferral of service contract income $ 8,857 $ 8,705
Sale and leaseback deferred gain 117 331
Accrued liabilities 2,191 2,273
Inventory accounting 3,835 3,497
AMT credit carryforward 15,458 11,736
Valuation allowance (6,651) (10,246)
Other items (459) 124
------- --------
Total net future income tax benefits $23,348 $ 16,420
======= ========
For the fiscal year ended January 31, 2004 and 2003, 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 $3,582,000 and $3,470,000 for the
years ended January 31, 2004 and 2003, 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 $6,651,000. The AMT credit carryforwards have no expiration
date.
The Company has been allocated in aggregate approximately $33.1 million in
Section 29 tax credits from its investment in two partnership (see Note 2).
The Internal Revenue Service (IRS) has completed an audit of the Colona
partnership and has recently commenced an audit of the Somerset
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
39
impact on earnings and cash flows. In the Company's opinion, the Somerset
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 $2,710,000, $3,817,000 and $4,540,000 in
the years ended January 31, 2004, 2003 and 2002, 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, 2004,
2003 and 2002 as follows:
2004 2003 2002
----- ----- -----
Federal income tax at statutory rate 35.0% 35.0% 35.0%
Tax credits from investment in limited partnership (28.5) (10.1) (9.6)
State and local taxes, net of federal tax benefit 1.6 3.4 2.0
Net reduction in Section 29 credit valuation allowance (14.0)
Other (1.0) (3.3) (2.6)
----- ----- ----
(6.9)% 25.0% 24.8%
===== ===== ====
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.
******
40
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of
REX Stores Corporation
We have audited the accompanying consolidated balance sheets of REX Stores
Corporation (the "Company") (a Delaware corporation) and subsidiaries as of
January 31, 2004 and 2003, and the related consolidated statements of income,
shareholders' equity and cash flows for the years then ended. Our audit also
included the financial statement schedule II listed in the Index at Item 15, for
the years ended January 31, 2004 and 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, 2004 and 2003 consolidated financial statements and financial statement
schedule based on our audits. The consolidated financial statements and
financial statement schedule for the year ended January 31, 2002 (fiscal 2001)
were audited by other auditors who have ceased operations. Those auditors
expressed an unqualified opinion on those consolidated financial statements
and stated that such fiscal 2001 financial statement schedule, when considered
in relation to the fiscal 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 audits 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 audits provide 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, 2004 and
2003, and the results of their operations and their cash flows for the years
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 years ended January 31, 2004 and 2003, when considered in relation to
the basic consolidated financial statements taken as a whole for the year ended
January 31, 2004 and 2003, presents fairly, in all material respects the
information set forth therein.
As discussed above, the consolidated financial statements of the Company for the
year ended January 31, 2002 were audited by other auditors who have ceased
operations. As described in Note 1, those consolidated financial statements have
been reclassified to give effect to Statement of Financial Accounting Standards
No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections (SFAS 145), which was adopted by the
Company on February 1, 2003. We audited the adjustment described in Note 1 that
was applied to conform the consolidated financial statements for the year ended
January 31, 2002 to the presentation required by SFAS 145. Our audit procedures
with respect to the disclosures in Note 1 for the year ended January 31, 2002
included (1) comparing the previously reported loss on extinguishment of debt,
net of tax, to the previously issued consolidated financial statements and (2)
tracing the reclassification adjustment amounts into interest expense and tax
provision in the Company's fiscal 2001 consolidated statement of operations. In
our opinion, such reclassification has been properly applied. However, we were
not engaged to audit, review, or apply any procedures to the fiscal 2001
financial statements of the Company other than with respect to such
reclassification and, accordingly, we do not express an opinion or any form of
assurance on the fiscal 2001 financial statements taken as a whole.
/s/ DELOITTE & TOUCHE LLP
April 8, 2004
41
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, 2002
and 2001 and the consolidated statements of income, shareholders' equity and
cash flows for the year ended January 31, 2001, 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
42
REX STORES CORPORATION AND SUBSIDIARIES
Schedule II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JANUARY 31, 2004, 2003 AND 2002
(Amounts in thousands)
- --------------------------------------------------------------------------------
Additions Deductions
Balance Charged to Charges for Balance
Beginning Cost and Which Reserves End
of Year Expenses Were Created of Year
--------- ---------- -------------- -------
2004:
Allowance for doubtful accounts $ 200 $ 556 $ 521 $ 235
====== ====== ====== ======
2003:
Allowance for doubtful accounts $ 852 $ 276 $ 928 $ 200
====== ====== ====== ======
2002:
Allowance for doubtful accounts $ 410 $1,003 $ 561 $ 852
====== ====== ====== ======
2004
Inventory Reserve $5,726 $ 956 $1,296 $5,386
====== ====== ====== ======
2003
Inventory Reserve $5,194 $1,362 $ 830 $5,726
====== ====== ====== ======
2002
Inventory Reserve $5,723 $ 320 $ 849 $5,194
====== ====== ====== ======
43
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
Item 9A. 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 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.
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
27, 2004, 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 27, 2004 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 27, 2004 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 27, 2004 and is
incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
The information required by this Item 14 is set forth in the Proxy
Statement for our Annual Meeting of Shareholders on May 27, 2004 and is
incorporated herein by reference.
44
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, 2004 and 2003
Consolidated Statements of Income for the years ended January 31, 2004,
2003 and 2002
Consolidated Statements of Cash Flows for the years ended January 31, 2004,
2003 and 2002
Consolidated Statements of Shareholders' Equity for the years ended January
31, 2004, 2003 and 2002
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 47 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
On December 2, 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 October 31, 2003.
45
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, President and
Chief Executive Officer
Date: April 15, 2004
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, )
- --------------------------------------- President and )
Stuart A. Rose Chief Executive Officer )
(principal executive officer) )
)
)
/s/ DOUGLAS L. BRUGGEMAN Vice President-Finance, )
- --------------------------------------- Chief Financial Officer )
Douglas L. Bruggeman and Treasurer (principal )
financial and accounting )
officer) )
)
)
LAWRENCE TOMCHIN* Director )
- --------------------------------------- )April 15, 2004
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) )
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 (incorporated by reference to Exhibit 4(n) to Form
10-K for fiscal year ended January 31, 2003, File No.
0-13283)
4(o) Amendment No. 8 dated January 30, 2004 to Amended and
Restated Loan Agreement dated July 31, 1995 among the
Borrowers, the registrant, the Lenders named therein and
Fleet Capital Corporation (as successor to 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)
48
10(b)* Employment Agreement dated January 31, 2004 between Rex
Radio and Television, Inc. and Lawrence Tomchin.............
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)
(14) Code of Ethics:
14(a) Code of Business Conduct and Ethics.........................
(21) Subsidiaries of the registrant:
21(a) Subsidiaries of registrant..................................
(23) Consents of experts and counsel:
23 Consent of Deloitte & Touche LLP to use its report dated
April 8, 2004 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.................................................
(31) Rule 13a-14(a)/15d-14(a) Certifications:
31 Certifications..............................................
(32) Section 1350 Certifications:
32 Certifications..............................................
50
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)
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