EXHIBIT 99(a)
RISK FACTORS
You should carefully consider the risk factors described below as well
as the other information in our SEC filings before making an investment in REX
common stock.
We face significant competition from other retailers many of whom have greater
financial resources.
We face significant competition from a diverse group of retailers. 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, the retail operating
format of Tandy Corporation, department and discount stores such as Sears,
Roebuck and Co. and Wal-Mart Stores, Inc., furniture stores, warehouse clubs and
home improvement retailers. In addition, we compete with small chains and
specialty single-store operators in some markets, as well as Sears'
dealer-operated units. We also face additional competition from Internet and
store-based retailers who sell consumer electronics and home appliance products
online. Some of our competitors have greater financial 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.
We expect competition within the consumer electronics/appliance
retailing industry to increase. National merchandisers are expanding their
geographic markets and entering markets traditionally served by us. In the event
that competitors enter markets we serve, we may experience pricing pressures,
reduced gross margins and declines in same store sales.
We may be unable to execute a new store expansion program and cannot assure you
that our newly opened stores will be profitable.
Our success depends, in part, on our ability to open and operate new
stores profitably. Several factors could affect our ability to execute a store
expansion program or could adversely impact new store sales and profitability.
These factors include:
o identifying new geographic markets in which we can successfully
compete;
o identifying and acquiring or leasing suitable new store sites at an
acceptable cost;
o obtaining governmental and other third-party consents, permits and
licenses needed to operate new stores;
o securing favorable economic terms for newspaper, television and
radio advertising;
o hiring, promoting and training qualified personnel, including new
store managers;
o integrating new stores into our existing operations;
o adapting our existing information systems and distribution
infrastructure to a growing number of stores; and
o having adequate financial resources available to us.
Although we believe that we have the management, operational and
information systems, distribution infrastructure and other resources required to
implement a store expansion program, we may not be able to do so within expected
time frames, if at all. To execute a store expansion program, we may need to
expend significant effort and additional managerial and financial resources to
ensure the
continuing adequacy of our financial controls, operating procedures, information
systems, product purchasing and distribution systems and employee training
programs.
A decline in economic conditions could lead to reduced consumer demand for the
products we sell.
Demand for consumer electronics and home appliance products is
dependent upon various economic factors outside of our control. These factors
include:
o general economic conditions;
o consumer confidence;
o consumer spending patterns and preferences; and
o new housing starts.
A slowdown in the national or regional economies or an uncertain
economic outlook could adversely affect discretionary consumer spending habits
and negatively impact our sales and operating results.
If new products are not introduced or consumers do not accept new products our
sales may decline.
We rely upon the periodic introduction of new products to help
stimulate consumer demand. The lack of new products could reduce consumer
interest and lower our sales.
In addition, many products which incorporate the newest technologies,
such as high definition television, are subject to technological and pricing
limitations and may not achieve widespread or rapid consumer acceptance in the
markets we serve. If these new products do not meet with widespread or rapid
market acceptance, our results of operations may be impaired.
Furthermore, the introduction or expected introduction of new products
may depress sales of existing products and technologies.
If we do not adequately anticipate and respond to changing consumer demand and
preferences our results of operations may be impaired.
Our success depends, in part, on our ability to anticipate and respond
in a timely manner to changing consumer demand and preferences regarding
consumer electronics and home appliances. Our failure to adequately anticipate
and respond to these changes could have a material adverse effect on our
business, results of operation and financial condition either from lost sales or
lower margins due to the need to mark down excess inventory.
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Our opportunistic product buying strategy could negatively impact our sales and
gross margins.
We frequently purchase large quantities of merchandise on an
opportunistic or when-available basis at favorable prices. Our inability to find
suitable opportunistic product buying opportunities could negatively impact our
sales and gross margins.
Products purchased on an opportunistic basis generally are held in
inventory longer than our other products. This can result in increased inventory
levels and lower inventory turnover, which increase our working capital
requirements and inventory carrying costs. Increased inventory levels and lower
turnover rates also increase the risk of inventory mark-downs.
The loss of tax credits and investment income resulting from our investment in
synthetic fuel limited partnerships could significantly increase our effective
tax rate and reduce our net income.
Our net income for fiscal 2000 and 2001 was positively impacted by our
equity investment in two limited partnerships which own facilities producing
solid synthetic fuel. As a result of our share of the federal income tax credits
earned by the partnerships under Section 29 of the Internal Revenue Code, our
effective tax rate for fiscal 2000 and 2001 was reduced to 25.0% and 24.8%,
respectively, versus 39.5% prior to our investment. In addition to reducing our
tax rate, we have sold our interest in one of the limited partnerships and
reported investment income from the sale of $10.4 million and $15.7 million for
fiscal 2000 and 2001, respectively, based on the tax credits attributable to the
interest sold. Loss of these tax credits could significantly increase our
effective tax rate and reduce our net income.
The limited partnerships earn tax credits based upon the tonnage and
content of solid synthetic fuel sold to unrelated parties. As production and
sales levels change, so will the amount of tax credits available to us. This
could result in fluctuations in our effective tax rate and net income.
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 2001 phase-out started at $49.16 per barrel. Significant
increases in oil prices could result in reduction or loss of the tax credits.
The loss of the services of our Chief Executive Officer, our President or our
other key employees could jeopardize our ability to maintain our competitive
position.
We believe that our success depends on the continued service of our key
executive management personnel. Loss of the services of Stuart Rose, our
Chairman and Chief Executive Officer, Lawrence Tomchin, our President and Chief
Operating Officer, or other key employees could jeopardize our ability to
maintain our competitive position in the industry. We have entered into
employment agreements with Mr. Rose and Mr. Tomchin which run through December
31, 2005, but we do not have employment agreements with any other members of our
executive management team.
Fluctuations in our comparable store sales may cause the price of our common
stock to fluctuate substantially.
A number of factors have historically affected and will continue to
affect our comparable store sales, including the following:
o competition;
o national and regional economic conditions;
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o consumer trends;
o new product introductions;
o weather conditions which can impact store traffic as well as sales
of seasonal products such as air conditioners;
o changes in our product mix;
o duration of the holiday selling season; and
o timing of promotional events.
Comparable store sales are often followed closely by the investment
community and significant fluctuations in these results could cause the price of
our common stock to fluctuate substantially.
Our quarterly operating results are subject to seasonality.
Our business is seasonal. Our net sales and net income historically
have been highest in our fourth fiscal quarter, which includes the Christmas
selling season. The fourth quarter accounted for approximately 34% and 33% of
our net sales, 47% and 58% of our income from operations, and 46% and 49% of our
net income in fiscal 2000 and 2001, respectively. Our annual financial results
would be adversely impacted if our sales were to fall substantially below what
we normally expect during this period.
We depend on our suppliers for products and our business could be adversely
affected if we do not maintain relationships with our key vendors.
Our success depends to a significant degree upon our suppliers of
consumer electronics and home appliance products. We do not have any long-term
supply agreements or exclusive arrangements with vendors. We typically order
merchandise by issuing individual purchase orders to vendors. We rely
significantly on a few suppliers. Our nine largest suppliers accounted for
approximately 70% of our purchases during fiscal 2001. The loss of any of these
key vendors, our failure to establish and maintain relationships with our
vendors, or any prolonged disruptions in product supply, could have a material
adverse impact on our business.
We may incur higher costs or decreased sales and gross margins because we
purchase imported products.
A significant portion of our inventory is manufactured outside the
United States. Changes in trade regulations, currency fluctuations or other
factors may increase the cost of items manufactured outside the United States or
create shortages of those items. We purchase all of our products in U.S.
dollars. Significant reductions in the cost of such items in U.S. dollars may
cause a significant reduction in retail price levels of those products, which
could adversely effect our sales and gross margins.
Our management, including our principal shareholder, owns a significant portion
of our common stock and will be able to exercise significant influence over our
affairs.
As of April 17, 2002, Stuart Rose, our Chairman and Chief Executive
Officer, owned approximately 15.1% of our outstanding common stock and held
exercisable options to acquire an additional 1,643,000 shares. In addition, our
directors and executive officers as a group owned approximately 18.1% of our
common stock as of April 17, 2002 and held exercisable options to acquire an
additional 2,657,311 shares. As a result of this share ownership, our
management, and in particular
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Mr. Rose, will be able to exert significant influence on corporate action
requiring shareholder approval, including the election of directors. This share
ownership could delay or prevent a change in control. It could also prevent our
shareholders from realizing a premium over the market price for their common
stock or effecting a change in management.
We do not anticipate paying cash dividends on our common stock in the
foreseeable future.
We have not paid cash dividends on our common stock in prior years. We
currently intend to retain all of our earnings for use in our business and do
not anticipate paying any cash dividends in the foreseeable future. Our
revolving credit agreement limits and potentially prohibits the payment of
dividends. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" in our Annual Report on
Form 10-K for a description of the revolving credit agreement.
The substantial number of shares that are eligible for public sale may adversely
affect our stock price.
As of April 17, 2002, there were 12,453,088 shares of our common stock
outstanding. Of these outstanding shares, 10,199,395 shares are freely tradable
without restriction or registration under the Securities Act. The remaining
2,253,693 shares are currently eligible for public sale under Rule 144 of the
Securities Act.
As of April 17, 2002, 6,854,210 shares of common stock were issuable
pursuant to options granted under our stock option plans. Of these option
shares, 3,573,003 shares are currently exercisable. All shares issuable under
our stock option plans have been registered under the Securities Act.
Sales of substantial amounts of common stock in the public market,
including shares issued upon the exercise of stock options, or the perception
that such sales could occur, could adversely impact the market price for our
common stock.
Our stock price may fluctuate significantly and you could lose a significant
part of your investment as a result.
The trading price of our common stock has been volatile and is likely
to continue to be volatile. Our stock price could be subject to wide
fluctuations in response to a variety of factors. The stock market has
experienced significant price and volume fluctuations that have often been
unrelated or disproportionate to the operating performance of particular
companies. Broad market factors may have a material adverse effect on our stock
price, regardless of our actual operating performance.
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