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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended October 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number 001-09097
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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
incorporation or organization) Identification Number)
2875 Needmore Road, Dayton, Ohio 45414
(Address of principal executive offices) (Zip Code)
(937) 276-3931
(Registrant's telephone number, including area code)
------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes (X) No ( )
At the close of business on December 8, 2004 the registrant had 11,065,030
shares of Common Stock, par value $.01 per share, outstanding.
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REX STORES CORPORATION AND SUBSIDIARIES
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Condensed Balance Sheets ..................................................... 3
Consolidated Condensed Statements of Income ............................................... 4
Consolidated Condensed Statements of Shareholders' Equity ................................. 5
Consolidated Condensed Statements of Cash Flows ........................................... 6
Notes to Consolidated Condensed Financial Statements ...................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................................................ 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk ............................... 19
Item 4. Controls and Procedures .................................................................. 19
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds .............................. 20
Item 6. Exhibits ................................................................................. 20
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
REX STORES CORPORATION AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
October 31 January 31 October 31
2004 2004 2003
---- ---- ----
(In Thousands)
Unaudited Unaudited
CURRENT ASSETS:
Cash and cash equivalents $ 3,959 $ 29,026 $ 1,503
Accounts receivable, net 2,204 2,560 1,551
Synthetic fuel receivable 1,848 3,098 655
Merchandise inventory 152,215 116,755 155,354
Prepaid expenses and other 2,897 1,481 2,704
Future income tax benefits 8,703 8,703 8,860
--------- --------- ---------
Total current assets 171,826 161,623 170,627
PROPERTY AND EQUIPMENT, NET 130,487 131,409 131,560
ASSETS HELD FOR SALE 2,569 - -
OTHER ASSETS 612 3,477 2,596
FUTURE INCOME TAX BENEFITS 16,082 14,645 7,560
SYNTHETIC FUEL ESCROW - - 7,886
RESTRICTED INVESTMENTS 2,265 2,257 2,253
--------- --------- ---------
Total assets $ 323,841 $ 313,411 $ 322,482
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 15,169 - $ 18,901
Current portion of long-term debt 2,939 5,258 7,708
Current portion of deferred income
and deferred gain on sale and leaseback 10,378 10,544 10,985
Accounts payable, trade 49,259 32,745 34,690
Accrued income taxes - 806 1,371
Accrued payroll and related items 5,101 6,602 4,885
Other current liabilities 7,454 7,214 8,449
--------- --------- ---------
Total current liabilities 90,300 63,169 86,989
--------- --------- ---------
LONG-TERM LIABILITIES:
Long-term mortgage debt 31,633 53,548 57,752
Deferred income 11,522 12,762 12,632
--------- --------- ---------
Total long-term liabilities 43,155 66,310 70,384
--------- --------- ---------
SHAREHOLDERS' EQUITY:
Common stock 287 283 281
Paid-in capital 130,705 126,124 123,677
Retained earnings 195,830 185,080 168,026
Treasury stock (136,436) (127,555) (126,875)
--------- --------- ---------
Total shareholders' equity 190,386 183,932 165,109
--------- --------- ---------
Total liabilities and shareholders' equity $ 323,841 $ 313,411 $ 322,482
========= ========= =========
The accompanying notes are an integral part of these unaudited consolidated
condensed financial statements.
3
REX STORES CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements Of Income
Unaudited
Three Months Ended Nine Months Ended
October 31 October 31
---------- ----------
2004 2003 2004 2003
---- ---- ---- ----
(In Thousands, Except Per Share Amounts)
NET SALES $ 93,606 $94,493 $267,564 $277,058
COSTS AND EXPENSES:
Cost of merchandise sold 68,419 66,310 192,226 193,818
Selling, general and administrative expenses 25,789 25,478 74,024 76,075
------ ------ ------ ------
Total costs and expenses 94,208 91,788 266,250 269,893
------ ------ ------- -------
Income (loss) from continuing operations before
interest, other items, income taxes and
discontinued operations (602) 2,705 1,314 7,165
INVESTMENT INCOME 7 14 152 54
INTEREST EXPENSE (716) (1,247) (2,426) (3,687)
LOSS ON EARLY TERMINATION OF DEBT - - (614) -
GAIN ON SALE OF REAL ESTATE 121 393 121 779
INCOME FROM LIMITED PARTNERSHIPS 5,219 3,733 13,798 9,916
----- ----- ------ -----
Income from continuing operations before provision
for income taxes and discontinued operations 4,029 5,598 12,345 14,227
PROVISION FOR INCOME TAXES 530 1,421 1,165 3,609
--- ----- ----- -----
Income from continuing operations 3,499 4,177 11,180 10,618
Loss from discontinued operations, net of tax (118) (96) (430) (232)
----- ---- ----- -----
Net Income $3,381 $4,081 $10,750 $10,386
====== ====== ======= =======
WEIGHTED AVERAGE SHARES
OUTSTANDING - BASIC 10,897 10,819 11,092 10,820
====== ====== ====== ======
Basic income per share from continuing operations $0.32 $0.39 $1.01 $0.98
Basic loss per share from discontinued operations (0.01) (0.01) (0.04) (0.02)
------ ------ ------ ------
BASIC NET INCOME PER SHARE $0.31 $0.38 $0.97 $0.96
===== ===== ===== =====
WEIGHTED AVERAGE SHARES
OUTSTANDING - DILUTED 12,610 12,866 12,778 12,608
====== ====== ====== ======
Diluted income per share from continuing operations $0.28 $0.33 $0.87 $0.84
Diluted loss per share from discontinued operations (0.01) (0.01) (0.03) (0.02)
------ ------ ------ ------
DILUTED NET INCOME PER SHARE $0.27 $0.32 $0.84 $0.82
===== ===== ===== =====
The accompanying notes are an integral part of these unaudited consolidated
condensed financial statements.
4
REX STORES CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements Of Shareholders' Equity
Unaudited
In Thousands
Common Shares
Issued Treasury Total
------ -------- Paid-in Retained Shareholders'
Shares Amount Shares Amount Capital Earnings Equity
------ ------ ------ ------ ------- -------- ------
Balance at January 31, 2004 28,308 $283 17,214 $127,555 $126,124 $ 185,080 $183,932
Net income - - - - - 10,750 10,750
Treasury stock acquired - - 761 10,032 - - (10,032)
Stock options exercised
and related tax effects 422 4 (155) (1,151) 4,581 - 5,736
------ ---- ------ -------- -------- -------- --------
Balance at October 31, 2004 28,730 $287 17,820 $136,436 $130,705 $195,830 $190,386
====== ==== ====== ======== ======== ======== ========
The accompanying notes are an integral part of these unaudited consolidated
condensed financial statements.
5
REX STORES CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements Of Cash Flows
Unaudited
Nine Months Ended
October 31
----------
2004 2003
---- ----
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 10,750 $ 10,386
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization, net 3,051 3,039
Income from limited partnerships (13,798) (9,916)
Loss (gain) on disposal of fixed assets 246 (713)
Deferred income (1,106) (1,360)
Deferred income taxes (1,437) -
Changes in assets and liabilities:
Accounts receivable 356 1,862
Merchandise inventory (35,460) (13,292)
Other current assets (1,416) (138)
Other long term assets 2,865 (940)
Accounts payable, trade 16,514 7,273
Other current liabilities (2,067) (715)
-------- --------
NET CASH USED IN OPERATING ACTIVITIES (21,502) (4,514)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (5,438) (2,486)
Proceeds from sale of partnership interest 15,048 7,995
Proceeds from sale of real estate and fixed assets 194 2,693
Restricted investments (8) (12)
-------- --------
NET CASH PROVIDED BY INVESTING ACTIVITIES 9,796 8,190
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in notes payable 15,169 5,451
Payments of long-term debt (24,234) (4,623)
Stock options exercised and related tax effects 2,910 2,399
Treasury stock issued 1,151 635
Treasury stock acquired (8,357) (7,415)
-------- --------
NET CASH USED IN FINANCING ACTIVITIES (13,361) (3,553)
-------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (25,067) 123
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 29,026 1,380
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,959 $ 1,503
======== ========
The accompanying notes are an integral part of these unaudited consolidated
condensed financial statements.
6
REX STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
October 31, 2004
Note 1. Consolidated Condensed Financial Statements
The consolidated condensed financial statements included in this report
have been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission and include, in the
opinion of management, all adjustments necessary to state fairly the information
set forth therein. Any such adjustments were of a normal recurring nature.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information presented not misleading. It is suggested that these
unaudited consolidated condensed financial statements be read in conjunction
with the consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the year ended January 31, 2004 (fiscal
2003). The results of operations for the interim periods are not necessarily
indicative of the results to be expected for the year.
Note 2. Accounting Policies
The interim consolidated condensed financial statements have been
prepared in accordance with the accounting policies described in the notes to
the consolidated financial statements included in the Company's 2003 Annual
Report on Form 10-K. While management believes that the procedures followed in
the preparation of interim financial information are reasonable, the accuracy of
some estimated amounts is dependent upon facts that will exist or calculations
that will be accomplished at fiscal year end. Examples of such estimates include
changes in the LIFO reserve (based upon the Company's best estimate of inflation
to date), management bonuses and the provision for income taxes. Any adjustments
pursuant to such estimates during the quarter were of a normal recurring nature.
The provision for income taxes could vary based upon full year synthetic fuel
production levels, federal income tax law changes, and the price of certain fuel
products adjusted for inflation and Internal Revenue Service audits.
The following table reflects the approximate percent of net sales for
each major product group for the periods presented.
Three Months Ended Nine Months Ended
October 31 October 31
---------- ----------
Product Category 2004 2003 2004 2003
- ---------------- ---- ---- ---- ----
Televisions............................................... 57.2% 53.5% 52.2% 50.6%
Appliances................................................ 19.5 20.3 21.6 21.6
Audio..................................................... 9.9 11.4 11.8 12.9
Video..................................................... 5.6 7.1 6.3 6.9
Other..................................................... 7.8 7.7 8.1 8.0
------ ------ ------ ------
100.0% 100.0% 100.0% 100.0%
====== ====== ====== ======
7
The Company accounts for vendor allowances in accordance with Emerging
Issues Task Force (EITF) 02-16 "Accounting by a Customer for Certain
Consideration Received from a Vendor," which addresses how and when to reflect
consideration received from vendors in the consolidated financial statements.
Vendors often fund, up front, certain advertising costs and exposure to general
changes in pricing to customers due to technological change. Allowances are
deferred as received from vendors and recognized into income as an offset to the
cost of merchandise sold when the related product is sold or expense incurred.
Advertising costs are expensed as incurred.
Cost of merchandise sold includes the cost of merchandise, markdowns
and inventory shortage, receiving, warehousing and freight charges to deliver
merchandise to retail stores, service repair bills as well as cash discounts and
rebates. The Company classifies purchasing costs as selling, general and
administrative expenses. As a result of 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, general and administrative
expense.
The Company includes stores expenses (such as payroll and occupancy
costs), advertising, purchasing, depreciation, insurance and overhead costs in
selling, general and administrative expenses.
Interest expense of $2,426,000 for the nine months ended October 31,
2004 is net of approximately $30,000 of interest capitalized. Interest expense
of $3,687,000 for the nine months ended October 31, 2003 is net of approximately
$65,000 of interest capitalized. Cash paid for interest for the nine months
ended October 31, 2004 and 2003 was approximately $2,320,000 and $3,838,000,
respectively.
During the first nine months of fiscal 2004 the Company completed the
early payoff of mortgages for 42 retail locations totaling approximately $21.6
million. The scheduled payment on these notes included approximately $0.5
million for the last three months of fiscal 2004, $6.2 million for fiscal 2005,
$6.9 million for fiscal 2006, $1.6 million for fiscal 2007, $1.4 million for
fiscal 2008 and $4.3 million thereafter. The Company incurred a charge of
approximately $614,000, including cash payments of approximately $341,000, for
the first nine months of fiscal 2004 related to this termination of debt.
During the first nine months of fiscal 2004 the Company received
113,346 shares of common stock into treasury with a market value of
approximately $1.7 million as payment for the exercise of options for 271,525
shares of common stock.
The Company applies an effective tax rate to interim periods that is
consistent with the Company's estimated annual tax rate. The tax credits
generated from synthetic fuel operations reduce the Company's overall effective
tax rate. The Company projects the effective tax rate for the year and records a
provision in that quarter to reflect the projected tax rate. Estimates of the
effective tax rate may change based upon synthetic fuel production and the
Company's projected income.
8
The Company paid income taxes of approximately $2,390,000 and
$1,605,000 for the nine months ended October 31, 2004 and 2003, respectively.
Note 3. Revolving Line of Credit
On September 14, 2004, the Company entered into an amended and restated
loan agreement which provides for a $115,000,000 five year revolving credit
facility through September 14, 2009. Amounts available for borrowing under the
loan agreement are subject to a borrowing base equal to the sum of 85% of net
appraised liquidation value of eligible inventory and 85% of eligible
receivables. Borrowings accrue interest at prime minus 0.5% or LIBOR plus 1.75%.
Borrowings are guaranteed by the Company and are presently secured by all of the
Company's non real estate assets and the capital stock of the Company's
subsidiaries. Aggregate commitments under the loan agreement may be increased by
up to an additional $50,000,000.
The loan agreement replaces the Company's prior $130,000,000 bank
credit facility. The loan agreement does not contain any financial covenants.
The loan agreement requires the maintenance of excess borrowing availability of
10% of the borrowing base, contains covenants limiting indebtedness, liens,
mergers and permitted acquisitions, asset divestitures, dividends, loans,
investments and transactions with affiliates, and contains customary default
provisions including, but not limited to, failure to pay interest or principal
when due and failure to comply with covenants.
Note 4. Stock Option Plans
The Company has stock-based compensation plans under which stock
options are granted to officers and key employees at the market price on the
date of the grant.
The following summarizes options granted, exercised and canceled or
expired during the nine months ended October 31, 2004:
Outstanding at January 31, 2004 ($3.61 to $16.04 per share)............................. 6,391,069
Issued ($12.18 to $12.45 per share)..................................................... 369,050
Exercised ($3.61 to $10.14 per share)................................................... (576,336)
Canceled or expired ($8.01 to $14.745 per share)........................................ (22,900)
---------
Outstanding at October 31, 2004 ($3.61 to $16.04 per share)............................. 6,160,883
=========
Pursuant to SFAS No. 123, "Accounting for Stock-Based Compensation,"
the Company has elected to account for its employee stock option plans under APB
Opinion No. 25, "Accounting for Stock Issued to Employees," which recognizes
expense based on the intrinsic value at date of grant. As stock options have
been issued with exercise prices equal to grant date fair value, no compensation
cost has resulted.
9
Had compensation cost for all options granted been determined based on the fair
value at grant date consistent with SFAS No. 123, the Company's net earnings and
earnings per share would have been as follows (in thousands, except per share
amounts):
Three Months Ended Nine Months Ended
October 31 October 31
---------- ----------
2004 2003 2004 2003
---- ---- ---- ----
Net Income As Reported $3,381 $4,081 $10,750 $10,386
Compensation Cost 821 664 2,361 2,086
Pro forma 2,560 3,417 8,389 8,300
Basic net income per share As Reported $ 0.31 $ 0.38 $ 0.97 $ 0.96
Compensation Cost .08 .06 .21 .19
Pro forma 0.23 0.32 0.76 0.77
Diluted net income per share As Reported $ 0.27 $ 0.32 $ 0.84 $ 0.82
Compensation Cost .07 .05 .18 .16
Pro forma 0.20 0.27 0.66 0.66
The assumptions used to calculate the fair value of options granted are
evaluated and revised, as necessary, to reflect market conditions and
experience.
10
Note 5. Income Per Share from Continuing Operations
The following table reconciles the basic and diluted net income per
share from continuing operations computation for each period presented (in
thousands, except per share amounts):
Three Months Ended Nine Months Ended
October 31, 2004 October 31, 2004
---------------- ----------------
Per Per
Income Shares Share Income Shares Shares
------ ------ ----- ------ ------ ------
Basic income per share from continuing
operations $3,499 10,897 $0.32 $11,180 11,092 $1.01
===== =====
Effect of stock options 1,713 1,686
------ ------ ------- ------
Diluted income per share from continuing
operations $3,499 12,610 $0.28 $11,180 12,778 $0.87
====== ====== ===== ======= ====== =====
Three Months Ended Nine Months Ended
October 31, 2003 October 31, 2003
---------------- ----------------
Per Per
Income Shares Share Income Shares Share
------ ------ ----- ------ ------ -----
Basic income per share from continuing
operations $4,177 10,819 $0.39 $10,618 10,820 $0.98
===== =====
Effect of stock options 2,047 1,788
------ ------ ------- ------
Diluted income per share from continuing
operations $4,177 12,866 $0.33 $10,618 12,608 $0.84
====== ====== ===== ======= ====== =====
For the three months ended October 31, 2004 and 2003, a total of
333,536 shares and 337,136 shares, respectively, and for the nine months ended
October 31, 2004 and 2003, a total of 333,536 and 667,136 shares, respectively,
subject to outstanding options were not included in the common equivalent shares
outstanding calculation as the exercise prices were above the average trading
price of the Company's common stock for that period.
Note 6. Synthetic Fuel
Net income for the third quarter and first nine months of fiscal 2004
includes approximately $5.2 million and $13.3 million, respectively, of pre-tax
investment income from the sales of the Company's entire Partnership interest in
Colona SynFuel Limited Partnership, L.L.L.P., a synthetic fuel limited
partnership. The Internal Revenue Service has completed an audit on the Colona
partnership. The audit was finalized in February 2004 and a closing agreement
was signed with the Internal Revenue Service that confirms that the Colona
facility was placed in service before July 1, 1998, and that the fuel produced
by the Colona facilities in 2001 is a "qualified fuel" for purposes of the
Section 29 federal income tax credits. Beginning in fiscal 2002, certain
quarterly payments from
11
the sales were being held in escrow pending the results of the audit. All
remaining funds were released from escrow upon the completion of the audit.
Net income for the nine months ended October 31, 2004 also includes
approximately $468,000 of pre-tax investment income from the sale of the
Company's membership interest in the limited liability company that owns a
synthetic fuel facility in Gillette, Wyoming. The Company received $2,750,000 at
the time of sale on March 30, 2004 along with a secured contingent payment note
that could provide additional investment income to the Company if certain
federal income tax issues are favorably resolved for the buyer with the Internal
Revenue Service and/or the facility resumes commercial operations. If the issues
are favorably resolved prior to January 1, 2005, or if thereafter the facility
resumes commercial operations, the Company is eligible to receive an additional
$3.5 million; in addition the Company is eligible to receive $1.50 per ton of
"qualified production" produced by the facility and sold.
The Company remains a limited partner in Somerset SynFuel, L.P., from
which we are receiving Section 29 federal income tax credits. In June 2004 the
Internal Revenue Service concluded its examination of the partnership's Section
29 federal income tax credits for certain years reporting no change in the
credits for those years. As a result, the effective tax rate was reduced for
fiscal 2004 by a $1.4 million reduction in the valuation allowance related to
alternative minimum tax carry forwards.
A United States Senate Subcommittee has initiated an investigation into
federal income tax credits involving synthetic fuel operations.
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 price started at $50.14 per barrel. The 2004 phase-out
price has not been determined.
Note 7. Discontinued Operations
During the second and third quarters of fiscal 2004 the Company closed
six stores in which the Company vacated the market. Those stores and two stores
that are not closed were classified as discontinued operations for all periods
presented. Certain of the closed stores and certain other assets are classified
as held for sale. The net assets of those stores at October 31, 2004 were
approximately $2,569,000. The Company expects to sell the assets related to
these stores within the next twelve months through normal real estate channels.
No loss has been recognized as the estimated net realizable values exceed the
carrying values of these assets.
12
Below is a table reflecting certain items of the income statement that
were reclassified as discontinued operations for the period indicated.
Three Months Ended Nine Months Ended
October 31 October 31
---------- ----------
2004 2003 2004 2003
---- ---- ---- ----
(In Thousands)
Net sales...................................................... $771 $2,064 $4,239 $6,346
Loss before benefit for income taxes .......................... 193 157 704 380
Benefit for income taxes....................................... 75 61 274 148
Net loss....................................................... $118 $ 96 $ 430 $ 232
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
We are a specialty retailer in the consumer electronics/appliance
industry. As of October 31, 2004 we operated 238 stores in 37 states,
predominantly in small to medium-sized markets under the trade name "REX".
Fiscal Year
All references in this report to a particular fiscal year are to REX's
fiscal year ended January 31. For example, "fiscal 2004" means the period
February 1, 2004 to January 31, 2005.
13
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:
Three Months Ended Nine Months Ended
October 31 October 31
---------- ----------
2004 2003 2004 2003
---- ---- ---- ----
Net sales ................................................ 100.0% 100.0% 100.0% 100.0%
Cost of merchandise sold ................................. 73.1 70.2 71.8 70.0
----- ----- ----- -----
Gross profit .......................................... 26.9 29.8 28.2 30.0
Selling, general and administrative expenses ............. 27.5 26.9 27.7 27.4
----- ----- ----- -----
Income (loss) from continuing operations
before interest, other items, income taxes and
discontinued operations ............................... (0.6) 2.9 0.5 2.6
Interest expense ......................................... (0.8) (1.3) (0.9) (1.4)
Loss on early termination of debt ........................ - - (0.2) -
Gain on sale of real estate .............................. 0.1 0.4 - 0.3
Income from limited partnerships ......................... 5.6 3.9 5.2 3.6
----- ----- ----- -----
Income from continuing operations before provision
for income taxes and discontinued operations.......... 4.3 5.9 4.6 5.1
Provision for income taxes ............................... 0.6 1.5 0.4 1.3
----- ----- ----- -----
Income from continuing operations ........................ 3.7 4.4 4.2 3.8
Loss from discontinued operations, net of tax ............ 0.1 0.1 0.2 0.1
----- ----- ----- -----
Net income ............................................... 3.6% 4.3% 4.0% 3.7%
===== ===== ===== =====
Comparison of Three and Nine Months Ended October 31, 2004 and 2003
Net sales from continuing operations in the quarter ended October 31,
2004 were $93.6 million compared to $94.5 million in the prior year's third
quarter, representing a decrease of $0.9 million or 1.0%. This decline was
primarily caused by a reduction in stores since the end of the third quarter
of fiscal 2003. There was a decrease of ten stores since the end of the third
quarter of fiscal 2003, six of which are classified as discontinued operations.
Comparable store sales increased by 1.4% for the third quarter of fiscal 2004.
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.
Our strongest product category for the third quarter of fiscal 2004 was
the television category which positively impacted comparable store sales by
4.7%. This increase is primarily due to higher demand for the LCD, DLP and
plasma televisions. The "other" category also positively impacted comparable
store sales by 0.5% primarily due to higher sales of the ready to assemble
television furniture stands. The appliance category negatively impacted
comparable store sales by 0.6% for the third quarter of fiscal 2004. The audio
category negatively impacted comparable store sales by 1.5%
14
and the video category negatively impacted comparable store sales by 1.8% for
the third quarter of fiscal 2004.
Net sales for the first nine months of fiscal 2004 were $267.6 million
compared to $277.1 million for the first nine months of fiscal 2003 net of the
impact of including eight stores as discontinued operations. This represents a
decrease of $9.5 million or 3.4%. Comparable store sales declined by
approximately 1.9% for the first nine months of fiscal 2004. There was a
decrease of ten stores since the end of the third quarter of fiscal 2003, six of
which were included as discontinued operations.
Our strongest product category for the first nine months of fiscal 2004
was the television category which positively impacted comparable store sales by
0.6%. The "other" category also positively impacted comparable store sales by
0.3%. The audio category negatively impacted comparable store sales by 1.4%, the
video category negatively impacted comparable store sales by 0.8% and the
appliance category negatively impacted comparable store sales by 0.5%.
The following table reflects the approximate percent of net sales for
each major product group for the periods presented.
Three Months Ended Nine Months Ended
October 31 October 31
---------- ----------
Product Category 2004 2003 2004 2003
- ---------------- ---- ---- ---- ----
Televisions............................................... 57.2% 53.5% 52.2% 50.6%
Appliances................................................ 19.5 20.3 21.6 21.6
Audio..................................................... 9.9 11.4 11.8 12.9
Video..................................................... 5.6 7.1 6.3 6.9
Other..................................................... 7.8 7.7 8.1 8.0
------ ------ ------ ------
100.0% 100.0% 100.0% 100.0%
====== ====== ====== ======
As of October 31, 2004, we had 238 stores compared to 248 stores one
year earlier. We did not open any stores and closed ten stores during the first
nine months of fiscal 2004. We did not open any stores and closed four stores
during the first nine months of fiscal 2003.
Gross profit of $25.2 million (26.9% of net sales) from continuing
operations in the third quarter of fiscal 2004 was approximately $3.0 million
lower than the $28.2 million (29.8% of net sales) recorded from continuing
operations in the third quarter of fiscal 2003. Gross profit from continuing
operations for the first nine months of fiscal 2004 was $75.3 million (28.2% of
net sales) compared to $83.2 million (30.0% of net sales) for the first nine
months of fiscal 2003. Gross profit margin has been reduced primarily due to
more aggressive promotional activity and recognizing a lower amount of extended
service contract sales which generally have higher gross profit margin
associated with it.
Selling, general and administrative expenses from continuing operations
for the third quarter of fiscal 2004 were $25.8 million (27.5% of net sales), an
increase of $0.3 million or 1.2% from $25.5 million (26.9% of net sales) for the
third quarter of fiscal 2003. The increase in expenditures was primarily a
result of costs associated with hurricane damage to stores in the southeastern
United
15
States and costs associated with abandoning leased locations. Selling, general
and administrative expenses from continuing operations were $74.0 million (27.7%
of net sales) for the first nine months of fiscal 2004 representing a reduction
of $2.1 million or 2.7% from $76.1 million (27.4% of net sales) for the first
nine months of fiscal 2003. The reduction in expenditures was primarily due to:
(i) lower salespeople commission costs due to lower gross profit margins which
generally results in lower commission cost; and (ii) lower advertising
expenditures primarily due to reduced television advertising.
Interest expense from continuing operations was $716,000 (0.8% of net
sales) for the third quarter of fiscal 2004 compared to $1.2 million (1.3% of
net sales) for the third quarter of fiscal 2003. Interest expense from
continuing operations was $2.4 million (0.9% of net sales) for the first nine
months of fiscal 2004 compared to $3.7 million (1.4% of net sales) for the first
nine months of fiscal 2003. Interest expense for the current year has been
lowered due to lower average borrowings on the line of credit and the pay off of
approximately $24.2 million in mortgage debt in the current year. We incurred a
charge of approximately $614,000 in the current year related to the early
termination of approximately $21.6 million of mortgage debt.
There were two parcels of land attached to owned properties sold in the
first nine months of fiscal 2004 for a gain of approximately $121,000. In the
first nine months of fiscal 2003 we sold three properties for gains of
approximately $779,000.
Results for the third quarter and first nine months of fiscals 2004 and
2003 also reflect the impact of our equity investment in two limited
partnerships, Colona SynFuel Limited Partnership, L.L.L.P., and Somerset
SynFuel, L.P., which produce synthetic fuels. We remain a limited partner in the
Somerset limited partnership but have sold our ownership interest in the Colona
limited partnership through a series of three sales. 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. The Colona partnership had been under audit by the Internal Revenue
Service. As a result, certain proceeds from the sales were held in escrow
beginning in fiscal 2002 pending the results of the audit. The audit was
finalized and a closing agreement was signed with the Internal Revenue Service
in February 2004. All remaining proceeds were released from escrow and letters
of credit were cancelled.
16
Below is a table summarizing the income from the sales, net of certain
expenses. The higher income for the current year generally reflects higher
production levels compared to the previous year.
Three Months Ended Nine Months Ended
October 31 October 31
---------- ----------
2004 2003 2004 2003
---- ---- ---- ----
(In Thousands)
February 1, 1999 sale....................................... $2,083 $1,489 $5,260 $3,955
July 31, 2000 sale.......................................... 1,660 1,188 4,298 3,139
May 31, 2001 sale........................................... 1,476 1,056 3,772 2,822
------ ------ ------- ------
$5,219 $3,733 $13,330 $9,916
====== ====== ======= ======
Income from synfuel investment for the first nine months of fiscal 2004
also includes income of approximately $468,000 from our sale of our membership
interest in the limited liability company that owns a synthetic fuel facility in
Gillette, Wyoming. We also received a secured contingent payment note that could
provide additional investment income for the Company if certain tax issues are
favorably resolved for the buyer with the Internal Revenue Service and/or the
facility resumes commercial operation. If the tax issues are favorably resolved
with the Internal Revenue Service prior to January 1, 2005, or, if thereafter
the facility resumes commercial operations, we are eligible to receive an
additional $3.5 million; in addition, we are eligible to receive $1.50 per ton
of "qualified production" produced by the facility and sold.
Our effective tax rate was 13.2% and 25.4% for the third quarter of
fiscals 2004 and 2003, respectively, and 9.4% and 25.4% for the first nine
months of fiscals 2004 and 2003, respectively, after reflecting our share of
federal income tax credits earned by the limited partnerships under Section 29
of the Internal Revenue Code. Our effective tax rate was reduced in fiscal 2004
as a result of a $1.4 million reduction in the valuation allowance related to
alternative minimum tax credit carry forwards as a result of the conclusion in
June 2004 of the Internal Revenue Service audit of the Somerset partnership for
certain years. The audit resulted in no change in federal income tax credits
under Section 29 taken for the period audited.
During the third quarter and first nine months of fiscal 2004, we
closed one and six stores, respectively, that were classified as discontinued
operations. We also reported two stores that did not close as discontinued
operations as we have executed contracts to sell the properties. As a result, we
had a loss from discontinued operations, net of tax benefit, of $118,000 and
$96,000 for the third quarter of fiscals 2004 and 2003, respectively, and
$430,000 and $232,000 for the nine months ended October 31, 2004 and 2003,
respectively.
As a result of the foregoing, net income for the third quarter of
fiscal 2004 was $3.4 million, a 17.2% decrease from $4.1 million for the third
quarter of fiscal 2003. Net income for the first nine months of fiscal 2004 was
$10.8 million, a 3.5% increase from $10.4 million for the first nine months of
fiscal 2003.
17
Liquidity and Capital Resources
Net cash used in operating activities was approximately $21.5 million
for the first nine months of fiscal 2004, compared to $4.5 million for the first
nine months of fiscal 2003. For the first nine months of fiscal 2004, cash was
provided by net income of $10.8 million, adjusted for the impact of $13.8
million for gains on our installment sales of the limited partnership interest,
non-cash items of $0.8 million, which consisted of deferred income, deferred
taxes, loss on disposal of fixed assets and depreciation and amortization.
The primary use of cash was an increase in inventory of $35.5 million
primarily due to seasonal fluctuations. The other use of cash was a
decrease in other current liabilities of $2.1 million. Cash was provided
by an increase in accounts payable of $16.5 million due to the increase
in inventory and the timing of purchases and payments to vendors. Cash
was also provided by a decrease in other long term assets of $2.9 million.
At October 31, 2004, working capital was $81.5 million compared to
$98.5 million at January 31, 2004. This decline is primarily caused by seasonal
fluctuations as we build inventory levels for the fourth quarter. The ratio of
current assets to current liabilities was 1.9 to 1 at October 31, 2004 and 2.6
to 1 at January 31, 2004.
During the first nine months of fiscal 2004, we received proceeds of
$15.0 million from installment sales of our ownership interest in the Colona
synfuel limited partnership. We had capital expenditures of approximately $5.4
million during the first nine months of fiscal 2004, primarily related to the
relocation of eight retail stores.
Cash used in financing activities totaled approximately $13.4 million
for the first nine months of fiscal 2004. Cash was provided by increased
borrowings of approximately $15.2 million on the line of credit. We received
proceeds of approximately $2.0 million from the exercise of stock options by
employees and directors. We also recorded a tax benefit of approximately $2.1
million during the first nine months of fiscal 2004 from the exercise of
non-qualified stock options as an increase in additional paid-in capital. Cash
of $24.2 million was used for scheduled payments of mortgage debt and the early
payoff of mortgage debt of approximately $21.6 million. Cash of approximately
$8.4 million was also used to acquire 647,000 shares of our common stock. We
currently have approximately 523,000 authorized shares remaining available for
purchase under the stock buy-back program.
On September 14, 2004, we entered into an amended and restated loan
agreement which provides for a $115,000,000 five year revolving credit facility
through September 14, 2009. Amounts available for borrowing under the loan
agreement are subject to a borrowing base equal to the sum of 85% of net
appraised liquidation value of eligible inventory and 85% of eligible
receivables. Borrowings accrue interest at prime minus 0.5% or LIBOR plus 1.75%.
Borrowings are guaranteed by the Company and are presently secured by all of our
non real estate assets and the capital stock of our subsidiaries. Aggregate
commitments under the loan agreement may be increased by up to an additional
$50,000,000.
The loan agreement replaces our prior $130,000,000 bank credit
facility. The loan agreement does not contain any financial covenants. The loan
agreement requires the maintenance of excess borrowing availability of 10% of
the borrowing base, contains covenants limiting indebtedness, liens,
18
mergers and permitted acquisitions, asset divestitures, dividends, loans,
investments and transactions with affiliates, and contains customary default
provisions including, but not limited to, failure to pay interest or principal
when due and failure to comply with covenants.
Forward-Looking Statements
This Form 10-Q contains or may contain forward-looking statements as
defined in the Private Securities Litigation Reform Act of 1995. The words
"believes", "estimates", "plans", "expects", "intends", "anticipates" and
similar expressions as they relate to the Company or its management are intended
to identify such forward-looking statements. Forward-looking statements are
inherently subject to risks and uncertainties. These risks and uncertainties
include among other things: the highly competitive nature of the consumer
electronics retailing industry, changes in the national or regional economies,
weather, the effects of terrorism or acts of war on consumer spending patterns,
the availability of certain products, technological changes, new regulatory
restrictions or tax law changes relating to the Company's synthetic fuel
investments, the fluctuating amount of quarterly payments received by the
Company with respect to sales of its partnership interests in synthetic fuel
investments, the uncertain amount of synthetic fuel production and tax credits
received from time to time from the Company's synthetic fuel investments, and
the potential for Section 29 tax credits to phase out based on the price of
crude oil adjusted for inflation. Other factors that could cause actual
results to differ materially from those in the forward-looking statements
are set forth in Exhibit 99(a) to the Company's Annual Report on Form 10-K for
the fiscal year ended January 31, 2004 (File No. 001-09097).
Item 3. Quantitative and Qualitative Disclosures About Market Risk
No material changes since January 31, 2004.
Item 4. Controls and Procedures
The Company's management evaluated, with the participation of the
Company's Chief Executive Officer and Chief Financial Officer, the effectiveness
of the Company's disclosure controls and procedures, as of 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.
19
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
Total Number of Shares Maximum Number
Purchased of Shares that May Yet
Total Number Average Price as Part of Publicly Be Purchased Under the
of Shares Paid per Announced Plans Plans
Period Purchased (1) Share or Programs (2) or Programs (2)
- ------ ------------- ----- --------------- ---------------
August 1-31, 2004 103,235 $12.67 103,235 596,845
September 1-30, 2004 73,656 $13.88 29,300 567,545
October 1-31, 2004 44,500 $14.08 44,500 523,045
------ ------ ------ -------
Total 221,391 $13.35 177,035 523,045
======= ====== ======= =======
- ------------------------
(1) A total of 44,356 shares of common stock were purchased by the Company
other than through a publicly announced plan or program. These shares were
acquired on September 21, 2004 in payment of the exercise price of stock
options exercised by Stuart A. Rose, Chairman, President and Chief
Executive Officer of the Company. The purchase price was $13.91 per share.
(2) On February 27, 2004, the Company announced it had authorized the purchase
of up to 1,000,000 shares of its common stock from time to time in private
or market transactions at prevailing market prices. At October 31, 2004, a
total of 523,045 shares remained available to purchase under this
authorization.
Item 6. Exhibits.
The following exhibits are filed with this report:
10(a) Form of Stock Option Agreement under 1999 Omnibus Stock
Incentive Plan (Nonqualified Stock Option)
10(b) Form of Stock Option Agreement under 1999 Omnibus Stock
Incentive Plan (Nonemployee Director Stock Option)
31 Rule 13a-14(a)/15d-14(a) Certifications
32 Section 1350 Certifications
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
REX STORES CORPORATION
Registrant
Signature Title Date
--------- ----- ----
STUART A. ROSE Chairman of the Board December 9, 2004
-------------- (Chief Executive Officer)
(Stuart A. Rose)
DOUGLAS L. BRUGGEMAN Vice President, Finance and Treasurer December 9, 2004
-------------------- (Chief Financial Officer)
(Douglas L. Bruggeman)
21