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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 July 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 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
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 September 8, 2004 the registrant had 10,854,643
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 ....................................................10
Item 3. Quantitative and Qualitative Disclosures About Market Risk .......................14
Item 4. Controls and Procedures ..........................................................14
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.......................15
Item 6. Exhibits..........................................................................15
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
REX STORES CORPORATION AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
July 31 January 31 July 31
2004 2004 2003
---- ---- ----
(In Thousands)
Unaudited Unaudited
CURRENT ASSETS:
Cash and cash equivalents $ 3,360 $ 29,026 $ 2,116
Accounts receivable, net 1,771 2,560 1,844
Synthetic fuel receivable 2,288 3,098 400
Merchandise inventory 156,167 116,755 169,101
Prepaid expenses and other 1,670 1,481 3,068
Future income tax benefits 8,703 8,703 8,860
--------- --------- ---------
Total current assets 173,959 161,623 185,389
PROPERTY AND EQUIPMENT, NET 132,953 131,409 133,439
OTHER ASSETS 639 3,477 2,434
FUTURE INCOME TAX BENEFITS 16,082 14,645 7,560
SYNTHETIC FUEL ESCROW -- -- 10,042
RESTRICTED INVESTMENTS 2,262 2,257 2,250
--------- --------- ---------
Total assets $ 325,895 $ 313,411 $ 341,114
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 11,560 $ -- $ 30,775
Current portion of long-term debt 2,899 5,258 6,478
Current portion of deferred income
and deferred gain on sale and leaseback 10,348 10,544 11,301
Accounts payable, trade 57,522 32,745 45,407
Accrued income taxes 575 806 51
Accrued payroll 4,406 6,602 4,495
Other current liabilities 7,576 7,214 8,738
--------- --------- ---------
Total current liabilities 94,886 63,169 107,245
--------- --------- ---------
LONG-TERM LIABILITIES:
Long-term mortgage debt 32,406 53,548 60,504
Deferred income 11,809 12,762 13,015
Deferred gain on sale and leaseback -- -- 49
--------- --------- ---------
Total long-term liabilities 44,215 66,310 73,568
--------- --------- ---------
SHAREHOLDERS' EQUITY:
Common stock 286 283 278
Paid-in capital 127,734 126,124 121,786
Retained earnings 192,449 185,080 163,945
Treasury stock (133,675) (127,555) (125,708)
--------- --------- ---------
Total shareholders' equity 186,794 183,932 160,301
--------- --------- ---------
Total liabilities and shareholders' equity $ 325,895 $ 313,411 $ 341,114
========= ========= =========
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 Six Months Ended
July 31 July 31
------- -------
2004 2003 2004 2003
---- ---- ---- ----
(In Thousands, Except Per Share Amounts)
NET SALES $88,429 $90,150 $175,605 $184,212
COSTS AND EXPENSES:
Cost of merchandise sold 63,350 62,135 125,028 128,722
Selling, general and administrative expenses 24,410 25,561 48,704 51,088
------- ------- -------- --------
Total costs and expenses 87,760 87,696 173,732 179,810
------- ------- -------- --------
Income from continuing operations before interest,
other items, income taxes and discontinued
operations 669 2,454 1,873 4,402
INVESTMENT INCOME 58 23 145 40
INTEREST EXPENSE (796) (1,292) (1,750) (2,488)
LOSS ON EARLY TERMINATION OF DEBT (592) - (614) -
GAIN ON SALE OF REAL ESTATE - - - 386
INCOME FROM SYNFUEL INVESTMENTS 3,343 3,119 8,579 6,183
------- ------- -------- --------
Income from continuing operations before provision for
income taxes and discontinued operations 2,682 4,304 8,233 8,523
PROVISION (BENEFIT) FOR INCOME TAXES (800) 1,088 603 2,147
------- ------- -------- --------
Income from continuing operations 3,482 3,216 7,630 6,376
Loss from discontinued operations, net of tax (198) (49) (261) (71)
------- ------- -------- --------
Net Income $ 3,284 $3,167 $ 7,369 $ 6,305
======= ======= ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 11,225 10,705 11,190 10,821
======= ======= ======== ========
Basic income per share from continuing operations 0.31 0.30 0.68 0.59
Basic loss per share from discontinued operations (0.02) (0.00) (0.02) (0.01)
------- ------- -------- --------
BASIC NET INCOME PER SHARE $ 0.29 $ 0.30 $ 0.66 $ 0.58
======= ======= ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 12,854 12,626 12,925 12,567
======= ======= ======== ========
Diluted income per share from continuing operations 0.27 0.25 0.59 0.51
Diluted loss per share from discontinued operations (0.01) (0.00) (0.02) (0.01)
------- ------- -------- --------
DILUTED NET INCOME PER SHARE $ 0.26 $ 0.25 $ 0.57 $ 0.50
======= ======= ======== ========
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 7,369 7,369
Treasury stock acquired 539 7,076 (7,076)
Stock options exercised
and related tax effects 271 3 (129) (956) 1,610 2,569
------ ----- ------ -------- -------- -------- --------
Balance at July 31, 2004 28,579 $ 286 17,624 $133,675 $127,734 $192,449 $186,794
====== ===== ====== ======== ======== ======== ========
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
Six Months Ended
July 31
2004 2003
---- ----
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,369 $ 6,305
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization, net 1,989 2,056
Income from synfuel investments (8,579) (6,183)
(Gain) Loss on disposal of fixed assets 291 (320)
Loss on early termination of debt 273 0
Deferred income (891) (784)
Deferred income tax (1,437) -
Changes in assets and liabilities:
Accounts receivable 789 1,569
Merchandise inventory (39,412) (27,038)
Other current assets (463) (503)
Other long term assets 2,838 (778)
Accounts payable, trade 24,777 17,990
Other current liabilities (2,065) (2,135)
-------- --------
NET CASH USED IN OPERATING ACTIVITIES (14,521) (9,821)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (4,082) (1,752)
Proceeds from sale of synfuel investments 9,389 2,361
Proceeds from sale of real estate and fixed assets - 843
Restricted investments (5) (9)
-------- --------
NET CASH PROVIDED BY INVESTING ACTIVITIES 5,302 1,443
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in notes payable 11,560 17,324
Payments of long-term debt (23,501) (3,101)
Stock options exercised and related tax effects 555 504
Treasury stock issued 956 447
Treasury stock acquired (6,017) (6,060)
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (16,447) 9,114
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (25,666) 736
CASH AND CASH EQUIVALENTS,
beginning of period 29,026 1,380
-------- --------
CASH AND CASH EQUIVALENTS,
end of period $ 3,360 $ 2,116
======== ========
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
July 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 Internal Revenue Service
audits.
The Company accounts for vendor allowances in accordance with Emerging
Issues Task Force (EITF) 02-16 "Accounting by a Customer for Certain
Consideration Received from a Vendor," which addresses how and when to reflect
consideration received from vendors in the consolidated financial statements.
Vendors often fund, up front, certain advertising costs and exposure to general
changes in pricing to customers due to technological change. Allowances are
deferred as received from vendors and recognized into income as an offset to the
cost of merchandise sold when the related product is sold or expense incurred.
Advertising costs are expensed as incurred.
Cost of sales includes the cost of merchandise, markdowns and inventory
shortage, receiving, warehousing and freight charges to get merchandise to
retail stores, service repair bills as well as cash discounts and rebates. The
Company classifies purchasing costs as selling and administrative expenses. Due
to this classification, the Company's gross margins may not be comparable to
those of other retailers that include costs related to their distribution
network in selling and administrative expense.
The Company includes store expenses (such as payroll and occupancy
costs), advertising, buying, depreciation, insurance, and overhead costs in
selling and administrative expenses.
Interest expense of $1,750,000 for the six months ended July 31, 2004
is net of interest capitalized of approximately $11,000. Interest expense of
$2,488,000 for the six months ended July 31, 2003 is net of interest capitalized
of approximately $37,000. Cash paid for interest for the six months ended July
31, 2004 and 2003 was approximately $1,649,000 and $2,396,000, respectively.
7
During the first six 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 $1.2
million for the last six 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 fist six months of fiscal 2004 related to this termination of debt.
During the first half of fiscal 2004 the Company received 68,990
shares of common stock into treasury with a market value of approximately
$1.1 million as payment for the exercise of options for 171,525 shares of common
stock.
The Company paid income taxes of approximately $2,139,000 and
$1,522,000 for the six months ended July 31, 2004 and 2003, respectively.
Note 3. Stock Option Plans
The Company has stock-based compensation plans under which stock
options are granted to officers, directors and key employees at the market price
on the date of the grant.
The following summarizes options granted, exercised and canceled or
expired during the six months ended July 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)............................... (400,486)
Canceled or expired ($8.01 to $14.745 per share).................... (16,300)
---------
Outstanding at July 31, 2004 ($3.61 to $16.04 per share)............ 6,343,333
=========
Pursuant to SFAS No. 123, "Accounting for Stock-Based Compensation,"
the Company has elected to account for its employee stock option plans under APB
Opinion No. 25, "Accounting for Stock Issued to Employees," which recognizes
expense based on the intrinsic value at date of grant. As stock options have
been issued with exercise prices equal to grant date fair value, no compensation
cost has resulted. Had compensation cost for all options granted been determined
based on the fair value at grant date consistent with SFAS No. 123, the
Company's net earnings and earnings per share would have been as follows:
Three Months Ended Six Months Ended
July 31 July 31
------- -------
2004 2003 2004 2003
---- ---- ---- ----
(In Thousands, except per share amounts)
Net Income As Reported $3,284 $3,167 $7,369 $6,305
Compensation Cost 787 682 1,540 1,416
Pro forma 2,497 2,485 5,829 4,889
Basic net income per share As Reported $0.29 $0.30 $0.66 $0.58
Compensation Cost .07 .06 .14 .13
Pro forma 0.22 0.24 0.52 0.45
Diluted net income per share As Reported $0.26 $0.25 $0.57 $0.50
Compensation Cost .06 .05 .12 .11
Pro forma 0.20 0.20 0.45 0.39
The assumptions used to calculate the fair value of options granted are
evaluated and revised, as necessary, to reflect market conditions and
experience.
8
Note 4. Income Per Share from Continuing Operations
The following table reconciles the basic and diluted income per
share from continuing operations computation for each period presented (in
thousands, except per share amounts):
Three Months Ended Six Months Ended
July 31, 2004 July 31, 2004
------------- -------------
Per Per
Income Shares Share Income Shares Share
------ ------ ----- ------ ------ -----
Basic income per share from continuing
operations.......................... $3,482 11,225 $0.31 $7,630 11,190 $0.68
===== =====
Effect of stock options................. 1,629 1,735
------ ------
Diluted income per share from continuing
operations.......................... $3,482 12,854 $0.27 $7,630 12,925 $0.59
====== ====== ===== ====== ====== =====
Three Months Ended Six Months Ended
July 31, 2003 July 31, 2003
------------- -------------
Per Per
Income Shares Share Income Shares Share
------ ------ ----- ------ ------ -----
Basic income per share from continuing
operations........................... $3,216 10,705 $0.30 $6,376 10,821 $0.59
===== =====
Effect of stock options................. 1,921 1,746
------ ------
Diluted income per share from continuing
operations........................... $3,216 12,626 $0.25 $6,376 12,567 $0.51
====== ====== ===== ====== ====== =====
For the three months ended July 31, 2004 and 2003, a total of 656,736
shares and 341,936 shares, respectively, and for the six months ended July 31,
2004 and 2003, a total of 334,736 shares and 375,156 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 5. Synthetic Fuel
Net income for the second quarter and six months ended July 31, 2004
includes approximately $3.3 million and $8.1 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 which 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 tax credits. Beginning in fiscal 2002, certain quarterly payments
from 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 six months ended July 31, 2004 also includes
approximately $468,000 of pre-tax investment income from the sale of our
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 tax issues are
favorably resolved for the buyer with the Internal Revenue Service and/or the
facility resumes commercial operation. If the issues are favorably resolved
prior to January 1, 2005, or 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.
9
<Page>
The Company remains a limited partner in Somerset SynFuel, L.P. from
which we are currently receiving Section 29 income tax credits. In June, 2004
the Internal Revenue Service concluded its examination of the partnership's
Section 29 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 on the
alternative minimum tax carry forwards.
A U.S. Senate Subcommittee has initiated an investigation into income
tax credits involving synthetic fuel operations.
Note 6. Discontinued Operations
During the second quarter of fiscal 2004 the Company closed five stores
in which we vacated the market. As such those stores were classified as
discontinued operations for all periods presented. The net assets of these
stores at July 31, 2004 were not significant.
Below is a table reflecting certain items of the income statement that
were reclassified as discontinued operations for the period indicated.
<Table>
<Caption>
Three Months Ended Six Months Ended
July 31 July 31
----------------- -----------------
2004 2003 2004 2003
------ ------ ------ ------
(In Thousands)
Net sales...................................... $797 $1,286 $1,821 $2,635
Loss before provision for income taxes......... 324 81 428 117
Benefit for income taxes....................... 126 32 167 46
Net loss....................................... $198 $ 49 $ 261 $ 71
</Table>
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 July 31, 2004 we operated 239 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.
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 Six Months Ended
July 31 July 31
------- -------
2004 2003 2004 2003
---- ---- ---- ----
Net sales...................................................... 100.0% 100.0% 100.0% 100.0%
Cost of merchandise sold....................................... 71.6 68.9 71.2 69.9
---- ---- ---- ----
Gross profit............................................... 28.4 31.1 28.8 30.1
Selling, general and administrative expenses................... 27.6 28.4 27.7 27.7
---- ---- ---- ----
Income from continuing operations.......................... 0.8 2.7 1.1 2.4
Interest expense............................................... (0.9) (1.4) (1.0) (1.4)
Loss on early termination of debt.............................. (0.7) - (0.3) -
Gain on sale of real estate.................................... - - - 0.2
Income from synfuel investments................................ 3.8 3.5 4.9 3.4
---- ---- ---- ----
Income from continuing operations before provision for
income taxes and discontinued operations................... 3.0 4.8 4.7 4.6
Provision (benefit) for income taxes........................... (0.9) 1.2 0.4 1.2
---- ---- ---- ----
Income from continuing operations.............................. 3.9 3.6 4.3 3.4
Loss from discontinued operations, net of tax.................. (0.2) (0.1) (0.1) ( -)
---- ---- ---- ----
Net income..................................................... 3.7% 3.5% 4.2% 3.4%
==== ==== ==== ====
Comparison of Three and Six Months Ended July 31, 2004 and 2003
Net sales from continuing operations in the second quarter ended July
31, 2004 were $88.4 million compared to $90.1 million in the prior year's second
quarter, representing a decrease of $1.7 million or
10
<Page>
1.9%. This decline was primarily caused by a net reduction of five stores (ten
in total were closed, five of which were classified as discontinued operations)
since the end of the second quarter of fiscal 2003. Comparable store sales
increased by 0.1% for the second 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 second quarter of fiscal 2004
was the television category which positively impacted comparable store sales by
2.5%. 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 ready to assemble
television furniture stands. The appliance category negatively impacted
comparable store sales by 1.5% for the second quarter of fiscal 2004. This was
due to lower sales of air conditioners which negatively impacted comparable
store sales by 3.2%. Air conditioner sales were impacted by lower demand
primarily due to cooler temperatures in certain markets as compared to the prior
year. The audio category negatively impacted comparable store sales by 1.0% and
the video category negatively impacted comparable store sales by 0.4% for the
second quarter of fiscal 2004.
Net sales for the first half of fiscal 2004 were $175.6 million
compared to $184.2 million for the first half of fiscal 2003 net of the impact
of including five stores as discontinued operations. This represents a decrease
of $8.6 million or 4.7%. Comparable store sales declined by approximately 3.6%
for the first half of fiscal 2004. There was a decrease of ten stores since the
end of the second quarter of fiscal 2003, five of which were included as
discontinued operations.
All of the major product categories negatively impacted comparable
store sales for the first half of fiscal 2004 with the television category
impact being 1.5%, the audio category being 1.4%, the appliance category being
0.5% and the video category being 0.4%. The "other" category positively impacted
comparable store sales by 0.2%. In the first half of fiscal 2004 higher demand
for LCD, DLP and plasma televisions was more than offset by lower sales of
analog televisions as the industry transitioned away from analog television.
Excluding air conditioners, the appliance category would have positively
impacted comparable store sales by approximately 1.3%. Air conditioner sales
were impacted by cooler temperatures in certain markets.
The following table reflects the approximate percent of net sales for
each major product group for the periods presented.
Three Months Ended Six Months Ended
July 31 July 31
------- -------
Product Category 2004 2003 2004 2003
---------------- ---- ---- ---- ----
Televisions........................ 48.2% 46.4% 49.5% 49.2%
Appliances......................... 25.4 26.7 22.6 22.2
Audio.............................. 11.3 12.3 12.8 13.7
Video.............................. 6.5 6.8 6.7 6.8
Other.............................. 8.6 7.8 8.4 8.1
----- ----- ----- -----
100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
As of July 31, 2004 we had 239 stores compared to 249 stores one year
earlier. We did not open any new stores and closed nine stores in the first half
of fiscal 2004. We did not open any stores and closed three stores in the first
half of fiscal 2003.
Gross profit of $25.1 million (28.4% of net sales) from continuing
operations in the second quarter of fiscal 2004 was approximately $2.9 million
lower than the $28.0 million (31.1% of net sales) recorded from continuing
operations in the second quarter of fiscal 2003. Gross profit from continuing
operations for the first half of fiscal 2004 was $50.6 million (28.8% of net
sales) compared to $55.5 million (30.1%
11
<Page>
of net sales) from continuing operations for the first half of fiscal 2003.
Gross profit margin for the second quarter of fiscal 2004 was negatively
impacted by selling less air conditioners due to cooler temperatures in certain
markets in the current year. Air conditioners generally have a higher gross
profit margin. Gross profit margins also declined in the current year due to an
increased amount of promotional activity.
Selling, general and administrative expenses from continuing operations
were $24.4 million (27.6% of net sales), a reduction of $1.2 million or 4.5%
from $25.6 million (28.4% of net sales) for the second quarter of fiscal 2003.
Selling, general and administrative expenses from continuing operations were
$48.7 million (27.7% of net sales) for the first half of fiscal 2004
representing a reduction of $2.4 million or 4.7% from $51.1 million (27.7% of
net sales) for the first half 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 was $796,000 (0.9% of net sales) for the second
quarter of fiscal 2004 compared to $1.3 million (1.4% of net sales) for the
second quarter of fiscal 2003. Interest expense was $1.8 million (1.0% of net
sales) for the first half of fiscal 2004 compared to $2.5 million (1.4% of net
sales) for the first half of fiscal 2003. Interest expense for the current
year has been lowered due to lower borrowings on the line of credit (average
balance of approximately $1.6 million for the first half fiscal 2004 versus
approximately $15.8 million for the first half fiscal 2003) and the pay off
of approximately $23.5 million in mortgage debt in the current year. We did
incur 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 no properties sold in the first half of fiscal 2004. In the
first half of fiscal 2003 we sold one property for a gain of approximately
$386,000.
Results for the second quarter and first half 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
with certain proceeds from the sales being put into escrow beginning in fiscal
2002 pending the results of the audit. The audit was finalized and a closing
agreement signed with the Internal Revenue Service in February 2004 and all
remaining proceeds released from escrow or letters of credit cancelled. Below
is a table summarizing the income from the sales, net of certain expenses.
The higher income for the current year primarily reflects higher production
levels compared to the previous year comparable period.
Three Months Ended Six Months Ended
July 31 July 31
------- -------
2004 2003 2004 2003
---- ---- ---- ----
(In Thousands) (In Thousands)
February 1, 1999 sale................ $1,331 $1,244 $3,178 $2,466
July 31, 2000 sale................... 1,078 993 2,637 1,951
May 31, 2001 sale.................... 944 882 2,296 1,766
------ ------ ------ ------
$3,353 $3,119 $8,111 $6,183
====== ====== ====== ======
Income from synfuel investments for the first six months and the second
quarter of fiscal 2004 also reflects income of approximately $468,000 and
expenses of $10,000, respectively, 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
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that could provide additional investment income for us if certain tax issues are
favorably resolved for the buyer with the Internal Revenue Service and/or the
facility resumes commercial operation. If the issues are favorably resolved
prior to January 1, 2005, or 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 (29.8%) and 7.3% for the second quarter and
six months ended July 31, 2004 after reflecting our share of federal tax credits
earned by the limited partnerships. Our effective tax rate was approximately
25.2% for both the second quarter and six months ended July 31, 2003. Our
effective tax rate was reduced for fiscal 2004 as a result of a $1.4 million
reduction in our valuation allowance on the alternative minimum tax carry
forwards due to the conclusion in June 2004 of the Internal Revenue Service
audit of the Somerset partnership for certain years. The audit resulted in no
change to the credits for the period audited.
During the second quarter of fiscal 2004 we closed five stores that
were classified as discontinued operations. As a result we had a loss from
discontinued operations, net of tax benefit, of $198,000 and $49,000 for the
second quarter of fiscal 2004 and 2003, respectively, and $261,000 and $71,000
for the six months ended July 31, 2004 and 2003, respectively.
As a result of the foregoing, net income for the second quarter of
fiscal 2004 was $3.3 million, a 3.7% increase from $3.2 million for the second
quarter of fiscal 2003. Net income for the first half of fiscal 2004 was $7.4
million, a 16.9% increase from $6.3 million for the first six months of fiscal
2003.
Liquidity and Capital Resources
Net cash used in operating activities was approximately $14.5 million
for the first six months of fiscal 2004 compared to $9.8 million for the first
six months of fiscal 2003. For the first half of fiscal 2004 cash was provided
by net income of $7.4 million, adjusted for the impact of an $8.6 million gain
on our synfuel investments, non-cash items of approximately $0.3 million which
consisted of deferred income tax, deferred income and depreciation, $0.3
million loss on disposal of fixed assets and $0.3 for loss on early termination
of debt. The primary use of cash was an increase in inventory of $39.4 million
primarily due to seasonal fluctuations and inventory availability. The other
uses of cash were a decrease in other liabilities of $2.1 million and an
increase in other current assets of $0.5 million. Cash was provided by an
increase in accounts payable of $24.8 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 $2.8 million and a decrease in accounts
receivable of $0.8 million.
At July 31, 2004, working capital was $79.1 million compared to $98.5
million at January 31, 2004. The ratio of current assets to current liabilities
was 1.8 to 1 at July 31, 2004 and 2.6 to 1 at January 31, 2004.
We received proceeds of approximately $9.4 million from installment
sales of our ownership interest in the Colona synfuel facility. We had capital
expenditures of $4.1 million primarily towards the relocation of eight retail
stores.
Cash used in financing activities totaled approximately $16.4 million
for the first six months of fiscal 2004. Cash of $23.5 million was used to
reduce mortgage debt including the early payoff of mortgages for 42 retail
locations totaling approximately $21.6 million. Cash was also used to acquire
470,400 shares of our common stock in open market transactions for approximately
$6.0 million. As of July 31, 2004 we had approximately 700,000 authorized
shares remaining under the stock buy-back program. We received proceeds of
approximately $1.5 million from the exercise of stock options by employees
during the first half of fiscal 2004.
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Forward-Looking Statements
This Form 10-Q contains or may contain forward-looking statements as
defined in the Private Securities Litigation Reform Act of 1995. The words
"believes", "estimates", "plans", "expects", "intends", "anticipates" and
similar expressions as they relate to the Company or its management are intended
to identify such forward-looking statements. Forward-looking statements are
inherently subject to risks and uncertainties. Factors that could cause actual
results to differ materially from those in the forward-looking statements are
set forth in Exhibit 99(a) to the Company's Annual Report on Form 10-K for the
fiscal year ended January 31, 2004 (File No. 0-13283).
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.
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PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
Total Number of Maximum Number
Shares Purchased of Shares that May
Total Number as Part of Publicly Yet Be Purchased
of Shares Average Price Announced Plans Under the Plans
Period Purchased Paid per Share or Programs (1)(2) or Programs (1)(2)
- ------ ---------- -------------- ------------------ ------------------
May 1-31, 2004 - $ - - 1,120,480
June 1-30, 2004 230,600 $ 12.78 230,600 889,880
July 1-31, 2004 189,800 $ 12.44 189,800 700,080
------- ------ ------- ---------
Total 420,400 $ 12.63 420,400 700,080
======= ===== ======= =========
- ------------------------
(1) On January 14, 2003, 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 April 30, 2004, a
total of 120,480 shares remained available to purchase under this
authorization.
(2) On February 27, 2004, the Company announced it had increased its share
repurchase authorization up to an additional 1,000,000 shares.
Item 6. Exhibits.
The following exhibits are filed with this report:
31 Rule 13a-14(a)/15d-14(a) Certifications
32 Section 1350 Certifications
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
REX STORES CORPORATION
Registrant
Signature Title Date
--------- ----- ----
STUART A. ROSE Chairman of the Board September 9, 2004
--------------- (Chief Executive Officer)
(Stuart A. Rose)
DOUGLAS L. BRUGGEMAN Vice President, Finance and Treasurer September 9, 2004
- ---------------------- (Chief Financial Officer)
(Douglas L. Bruggeman)
16