FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------- --------
Commission File Number 0-13283
REX Stores Corporation
(Exact name of registrant as specified in its charter)
Delaware 31-1095548
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2875 Needmore Road, Dayton, Ohio 45414
(Address of principal executive offices) (Zip Code)
(937)276-3931
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(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 ( )
At the close of business on December 14, 1998, the registrant had
7,176,222 shares of Common Stock, par value $.01 per share,
outstanding.
REX STORES CORPORATION AND SUBSIDIARIES
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets......... 3
Consolidated Statements of Income............. 5
Consolidated Statements of Shareholders'
Equity...................................... 7
Consolidated Statements of Cash Flows......... 8
Notes to Consolidated Financial Statements.... 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 13
Item 3. Quantitative and Qualitative Disclosure About
Market Risk................................... 17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................ 18
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
REX STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
A S S E T S
October 31 January 31 October 31
1998 1998 1997
(In Thousands)
ASSETS:
Cash and cash equivalents $ 7,362 $ 16,937 $ 1,836
Short-term investments 1,816 1,637 1,627
Accounts receivable, net 1,154 2,775 791
Merchandise inventory 177,207 126,498 169,345
Prepaid expenses and other 3,357 2,078 3,929
Future income tax benefits 7,899 7,899 6,624
--------- --------- --------
Total current assets 198,795 157,824 184,152
PROPERTY AND EQUIPMENT, NET 95,624 93,165 93,676
FUTURE INCOME TAX BENEFITS AND
OTHER NON-CURRENT ASSETS 12,500 9,541 10,219
--------- --------- --------
Total assets $ 306,919 $ 260,530 $288,047
========= ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 36,797 $ - $29,861
Current portion of long-term debt 2,998 2,959 3,234
Accounts payable, trade 64,662 49,832 55,598
Accrued income taxes - 1,671 -
Current portion, deferred income
and deferred gain on sale and
leaseback 11,463 11,402 11,350
Accrued payroll 4,407 5,810 4,979
Other liabilities 10,740 7,263 5,868
--------- -------- --------
Total current liabilities 131,067 78,937 110,890
--------- -------- --------
Liabilities and Shareholders' Equity (Continued)
LONG-TERM LIABILITIES:
Long-term debt 52,634 52,661 51,499
Deferred income 16,452 17,886 17,364
Deferred gain on sale and
leaseback 4,557 5,264 5,500
--------- --------- --------
Total long-term liabilities 73,643 75,811 74,363
--------- --------- --------
SHAREHOLDERS' EQUITY:
Common stock 97 97 97
Paid-in capital 58,403 57,896 57,836
Retained earnings 67,505 64,175 59,302
Treasury stock (23,796) (16,386) (14,441)
--------- --------- --------
Total shareholders' equity 102,209 105,782 102,794
--------- --------- --------
Total liabilities and
shareholders' equity $ 306,919 $ 260,530 $288,047
========= ========= ========
[FN]
The accompanying notes are an integral part of
these unaudited consolidated statements.
REX STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Nine Months
Ended
October 31 October 31
1998 1997 1998 1997
(In Thousands, Except Per Share
Amounts)
NET SALES $ 92,634 $87,967 $273,044 $266,130
COSTS AND EXPENSES:
Cost of merchandise sold 67,326 63,475 197,710 191,396
Selling, general and
administrative expenses 22,152 21,973 65,186 65,205
-------- ------- -------- --------
Total costs and expenses 89,478 85,448 262,896 256,601
-------- ------- -------- --------
INCOME FROM OPERATIONS 3,156 2,519 10,148 9,529
INVESTMENT INCOME 64 23 287 72
INTEREST EXPENSE 1,911 1,911 4,829 5,406
EQUITY IN EARNINGS OF
LIMITED PARTNERSHIP (270) - (270) -
-------- ------- -------- --------
Income before income taxes 1,039 631 5,336 4,195
PROVISION FOR INCOME TAXES 307 248 2,006 1,656
-------- ------- -------- --------
NET INCOME $ 732 $ 383 $ 3,330 $ 2,539
======== ======= ======== ========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 7,202 7,917 7,512 7,933
======== ======= ======== ========
BASIC NET INCOME PER SHARE $ 0.10 $ 0.05 $ 0.44 $ 0.32
======== ======= ======== ========
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVA-
LENT SHARES OUTSTANDING 7,509 8,203 7,916 8,185
======== ======= ======== ========
DILUTED NET INCOME PER SHARE $ 0.10 $ 0.05 $ 0.42 $ 0.31
======== ======= ======== ========
[FN]
The accompanying notes are an integral part of
these unaudited consolidated statements.
REX STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In Thousands)
Common Shares
-------------------------------
Issued Treasury Paid-in Retained
Shares Amount Shares Amount Capital Earnings
Balance at
October 31, 1997 9,685 $ 97 1,763 $14,441 $57,836 $59,302
Common stock
issued 3 - - - 60 -
Treasury stock
acquired - - 192 1,945 - -
Net income - - - - - 4,873
----- ------ ----- ------- ------- -------
Balance at
January 31, 1998 9,688 $ 97 1,955 $16,386 $57,896 $64,175
Common stock
issued 68 - - - 507 -
Treasury stock
acquired - - 627 7,410 - -
Net income - - - - - 3,330
----- ------ ----- ------- ------- -------
Balance at
October 31, 1998 9,756 $ 97 2,582 $23,796 $58,403 $67,505
===== ====== ===== ======= ======= =======
[FN]
The accompanying notes are an integral part of
these unaudited consolidated statements.
REX STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
October 31
1998 1997
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $3,330 $2,539
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization, net 2,360 2,228
Deferred income (1,373) (409)
Future income tax benefits - (2,780)
Accounts receivable 1,621 686
Merchandise inventory (50,709) (34,312)
Other current assets (1,284) (1,715)
Accounts payable, trade 14,830 24,333
Other liabilities 403 (1,497)
-------- --------
NET CASH USED IN OPERATING ACTIVITIES (30,822) (10,927)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Short-term investments and
other assets (3,137) 18
Capital expenditures (7,926) (6,975)
Capital disposals 2,404 8
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (8,659) (6,949)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in notes payable 36,797 17,719
Payments of long-term debt (3,277) (2,030)
Long-term debt borrowings 3,289 2,530
Common stock issued 507 607
Treasury stock acquired (7,410) (3,073)
-------- --------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 29,906 15,753
-------- --------
NET DECREASE IN CASH AND
CASH EQUIVALENTS (9,575) (2,123)
CASH AND CASH EQUIVALENTS,
beginning of period 16,937 3,959
-------- --------
CASH AND CASH EQUIVALENTS,
end of period $7,362 $1,836
======== ========
[FN]
The accompanying notes are an integral part of
these unaudited consolidated statements.
REX STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1998
Note 1. Consolidated Financial Statements
The consolidated 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 generally accepted accounting
principles 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 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, 1998.
Note 2. Accounting Policies
The interim consolidated 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 1998 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.
Certain reclassifications have been made to prior year
amounts to conform with their fiscal 1999 presentation.
Notes to Consolidated Financial Statements (Continued)
Note 3. Stock Option Plans
The following summarizes options granted, exercised and
canceled or expired during the nine months ended October 31,
1998:
Shares Under Stock
Option Plans
Outstanding at January 31, 1998
($3.375 to $18.975 per share) 2,287,464
Granted ($9.9375 to $12.50 per share) 996,625
Exercised ($6.875 to $10.375 per share) 68,145
Canceled or expired ($14.30 per share) 6,993
---------
Outstanding at October 31, 1998
($3.375 to $18.975 per share) 3,208,951
=========
Note 4. Net Income Per Share
Effective February 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 128 (SFAS 128) "Earnings per
Share," which replaces the calculation of primary and fully
diluted earnings per share under previous accounting standards with basic
and diluted earnings per share. As a result, the Company's
reported net income per share amounts for the three and nine
month periods ended October 31, 1997 have been restated as follows:
Per Share Amounts
Three Months Nine Months
Ended Ended
October 31, 1997 October 31,
1997
Primary net income per share,
as reported $0.05 $0.31
Effect of SFAS 128 - 0.01
----- -----
Basic net income per share,
as restated $0.05 $0.32
===== =====
Fully diluted net income per
share, as reported $0.05 $0.31
Effect of SFAS 128 - -
----- -----
Diluted net income per share,
as restated $0.05 $0.31
===== =====
The following table reconciles the basic and diluted net
income per share computations for each period presented:
Three Months Ended
October 31, 1998 October 31, 1997
Per Per
Income Shares Share Income Shares Share
Basic net income
per share $ 732 7,202 $0.10 $ 383 7,917 $0.05
===== =====
Effect of stock
options - 307 - 286
------ ----- ------ -----
Diluted net income
per share $ 732 7,509 $0.10 $ 383 8,203 $0.05
====== ===== ===== ====== ===== =====
Nine Months Ended
October 31, 1998 October 31, 1997
Per Per
Income Shares Share Income Shares Share
Basic net income
per share $3,330 7,512 $0.44 $2,539 7,933 $0.32
===== =====
Effect of stock
options - 404 - 252
------ ----- ------ -----
Diluted net income
per share $3,330 7,916 $0.42 $2,539 8,185 $0.31
====== ===== ===== ====== ===== =====
For the three and nine months ended October 31, 1998, a
total of 1,463,967 and 1,163,967 shares, respectively, subject to
outstanding options at exercise prices ranging from $11.50 to
$18.975 per share were not included in the common equivalent
shares outstanding calculation as the exercise prices were above the
average trading price of the Company's stock for those periods.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
The Company is a leader in the consumer electronics/appliance
retailing industry with 223 stores in 35 states, operating
predominantly in small to medium sized markets under the trade
name "REX".
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
1998 1997 1998 1997
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of merchandise sold 72.7 72.2 72.4 71.9
----- ----- ----- -----
Gross profit 27.3 27.8 27.6 28.1
Selling, general and
administrative expense 23.9 25.0 23.9 24.5
----- ----- ----- -----
Income from operations 3.4 2.8 3.7 3.6
Interest, net 2.0 2.1 1.7 2.0
Equity in earnings of
limited partnership (0.3) - (0.1) -
----- ----- ----- -----
Income before income
taxes 1.1 0.7 1.9 1.6
Provision for income taxes 0.3 0.3 0.7 0.6
----- ----- ----- -----
Net income 0.8% 0.4% 1.2% 1.0%
===== ===== ===== =====
Comparison of Three and Nine Months Ended October 31, 1998 and 1997
Net sales for the three months ended October 31, 1998 were
$92.6 million compared to $88.0 million in the prior year's
comparable period, representing an increase of $4.6 million or
5.3%. This increase is primarily a result of an increase in
comparable store sales of 4.4% along with increased sales at
non-comparable stores. Net sales for the first nine months of
fiscal 1999 were $273.0 million compared to $266.1 million in the first
nine months of fiscal 1998, representing an increase of $6.9
million or 2.6%. Comparable store sales increased 1.4% for the
first nine months of fiscal 1999. The Company considers a store
to be comparable after it has been open six fiscal quarters.
As of October 31, 1998, the Company has 223 stores compared
to 218 stores one year earlier. There were six stores opened and
five closed in the first nine months of fiscal 1999. In the prior
year's comparable period there were three stores opened and seven
closed. The Company evaluates the performance of its stores on a
continuous basis and, based on an assessment of factors it deems
relevant, will close any store which is not adequately
contributing to Company profitability.
Gross profit of $25.3 million in the third quarter of fiscal
1999 (27.3% of net sales) was 3.3% higher than the $24.5 million
gross profit (27.8% of net sales) recorded in the third quarter
of fiscal 1998. In the first nine months of fiscal 1999 gross profit
was $75.3 million (27.6% of net sales), a 0.8% increase from
$74.7 million (28.1% of net sales) for the first nine months of fiscal
1998. The reduced gross profit margin, as a percent of net sales,
is primarily the result of a change in the merchandise mix,
partially offset by the recognition of a higher amount of
extended service contract revenues, which generally have a higher gross
profit margin.
Selling, general and administrative expenses for the third
quarter of fiscal 1999 were $22.2 million (23.9% of net sales), a
0.8% increase over the $22.0 million (25.0% of net sales) for the
third quarter of fiscal 1998. Selling, general and
administrative expenses for the first nine months of fiscal 1999 and 1998 were
$65.2 million (23.9% and 24.5% of net sales for the first nine
months of fiscal 1999 and 1998, respectively). The decrease in
expense, as a percent of net sales, is primarily attributable to
lower advertising expenditures in certain markets, partially
offset by an increase in incentive commissions for sales personnel.
Interest expense for the quarters ended October 31, 1998 and
1997 was $1.9 million (2.1% and 2.2% of net sales, respectively).
Interest expense for the first nine months of fiscal 1999 decreased
to $4.8 million (1.8% of net sales) from $5.4 million (2.0% of
net sales) for the first nine months of fiscal 1998. The decrease in
interest expense is a result of lower average borrowings ($14.6
million during the first nine months of fiscal 1999 compared to
$22.9 million during the comparable period of fiscal 1998 )on the
line of credit primarily due to lower inventory levels during the
first half of fiscal 1999 compared to fiscal 1998.
Results for the third quarter of fiscal 1999 also reflect the
impact of the Company's recent investment in two limited
partnerships which produce synthetic fuels which totals
approximately $2.9 million at October 31, 1998. The Company
recorded a pre-tax charge of $270,000 to record its share of the
partnerships' operating results and, as a result of the
investment, the Company's effective tax rate was reduced from 39.5% to 29.5%
to reflect the Company's estimated share of Federal tax credits
earned by the partnerships under Section 29 of the Internal Revenue
Code. The Company's effective tax rate for the third quarter of fiscal
1999 is based upon an estimated annual effective tax rate of 33%.
As a result of the foregoing, net income for the third
quarter of fiscal 1999 was $732,000, a 91.1% increase from $383,000 for
the third quarter of fiscal 1998. Net income for the first nine
months of fiscal 1999 was $3.3 million, a 31.2% increase from $2.5
million for the first nine months of fiscal 1998.
Liquidity and Capital Resources
Net cash used in operating activities was $30.8 million for
the first nine months of fiscal 1999, compared to $10.9 million
for the prior year's first nine months. Cash was provided by net
income of $3.3 million, adjusted for non-cash charges of $1.0
million. The primary use of cash was an increase in inventory of
$50.7 million primarily due to seasonal fluctuations and
opportunistic inventory purchases. This was partially offset by
an increase in trade payables of $14.8 million. Changes in other
working capital items provided cash of approximately $0.8
million.
At October 31, 1998, working capital was $67.7 million
compared to $78.9 million at January 31, 1998. The ratio of
current assets to current liabilities was 1.5 to 1 at October 31,
1998 and 2.0 to 1 at January 31, 1998.
The Company had outstanding borrowings on its revolving line
of credit of $36.8 million at October 31, 1998 at an average
interest rate of approximately 7.42%. At October 31, 1998, the
Company had approximately $75.0 million borrowing availability on
the revolving line of credit.
Year 2000
The statements in this section include "Year 2000 readiness
disclosure" within the meaning of the Year 2000 Information and
Readiness Disclosure Act.
Certain software and hardware systems are time sensitive.
Older time sensitive systems often use a two digit dating
convention ("00" rather than "2000") that could result in system
failure and disruption of operations as the Year 2000 approaches.
This is referred to as the Year 2000 issue. The Year 2000 issue
will impact the Company, its suppliers, customers and other third
parties that transact business with the Company.
The Company has dedicated a staff of internal resources (the
"Year 2000 Team") to address Year 2000 issues. This team
believes it has identified substantially all hardware and software systems
within the Company and significant suppliers and other third
parties that transact business with the Company which may be
susceptible to Year 2000 issues. Projects have been established
to address all significant Year 2000 issues. The Year 2000 Team
reports regularly to senior management on the progress of
significant Year 2000 projects.
Most Year 2000 activities are to test hardware and software
systems, including non-information technology systems such as
telephones and store security systems. The Company has
determined that it needs to modify some of its software. The Company
believes all hardware systems are Year 2000 compliant. The Company is
reprogramming all of the systems impacted by Year 2000 issues.
The Company is currently working with the outside vendors on the
compliance status of the telephones and store security systems.
The Company has initiated communications with significant
suppliers, customers and other relevant third parties to identify
and minimize disruptions to the Company's operations and to
assist in resolving Year 2000 issues. However, there can be no
certainty that the impacted systems and products of other parties on which
the Company relies will be Year 2000 compliant.
The Company generally believes that its vendors who supply
products to the Company for resale are responsible for Year 2000
functionality of those products. However, should product
failures occur, the Company may be required to address the administrative
aspects of those failures such as handling product returns or
repairs.
The estimated cost for resolving Year 2000 issues are
approximately $175,000. Most of these costs are labor related to
reprogramming existing software. Estimates of Year 2000 costs
are based on numerous assumptions; actual costs could be greater than
estimates. Specific factors that might cause such differences
include, but are not limited to, the continuing availability of
personnel trained in this area and the ability to timely identify
and correct all relevant software and hardware systems.
While the Company believes it is diligently addressing the
Year 2000 issues to ensure Year 2000 readiness, there can be no
absolute assurance that the objective will be achieved either
internally or as it relates to third parties. The Company
anticipates completing substantially all of its Year 2000
projects by the end of the second quarter of 1999. In the event the
Company falls short of these milestones, additional internal resources
will be focused on completing these projects or implementing
contingency plans.
Forward-Looking Statements
This Form 10-Q contains or may contain forward-looking
statements as defined in the Private Securities Litigation Reform
Act of 1995. The words "believes", "estimates", "plans",
"expects", "intends", "anticipates" and similar expressions as they relate
to the Company or its management are intended to identify such
forward-looking statements. Forward-looking statements are
inherently subject to risks and uncertainties. Factors that could
cause actual results to differ materially from those in the
forward-looking statements are set forth in Exhibit 99 to the
Company's Form 10-Q for the quarter ended October 31, 1997 (File
No. 0-13283).
Item 3. Quantitative and Qualitative Disclosure About Market Risk
None.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. The following exhibits are filed with this
report:
10.1 Employment Agreement dated October 14,
1998 between Rex Radio and Television, Inc.
and Stuart Rose............................
10.2 Employment Agreement dated October 14,
1998 between Rex Radio and Television, Inc.
and Lawrence Tomchin.......................
10.3 Executive Stock Option dated October 14,
1998 granting Stuart Rose an option to
purchase 500,000 shares of registrant's
Common Stock...............................
10.4 Executive Stock Option dated October 14,
1998 granting Lawrence Tomchin an
option to purchase 150,000 shares of
registrant's Common Stock..................
27 Financial Data Schedule....................
(b) Reports on Form 8-K. No reports on Form 8-K were filed
during the quarter ended October 31, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
REX STORES CORPORATION
Registrant
December 15, 1998 /s/Stuart A. Rose
Stuart A. Rose
Chairman of the Board
(Chief Executive Officer)
December 15, 1998 /s/Douglas L. Bruggeman
Douglas L. Bruggeman
Vice President, Finance and
Treasurer
(Principal Financial and
Chief Accounting Officer)