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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 31, 2005 COMMISSION FILE NO. 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 Identification No.)
incorporation or organization)
2875 Needmore Road, Dayton, Ohio 45414
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code (937) 276-3931
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
- ---------------------------- -----------------------
Common Stock, $.01 par value New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [_]
At the close of business on July 31, 2004 the aggregate market value of the
registrant's outstanding Common Stock held by non-affiliates of the registrant
(for purposes of this calculation, 1,600,533 shares beneficially owned by
directors and executive officers of the registrant were treated as being held by
affiliates of the registrant), was $121,516,839.
There were 11,150,422 shares of the registrant's Common Stock outstanding as of
April 13, 2005.
Documents Incorporated by Reference
Portions of REX Stores Corporation's definitive Proxy Statement for its Annual
Meeting of Shareholders on May 26, 2005 are incorporated by reference into Part
III of this Form 10-K.
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AVAILABLE INFORMATION
REX makes available free of charge on its Internet website its annual report on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports as soon as reasonably practicable after such
material is electronically filed with or furnished to the SEC. REX's Internet
website address is www.rextv.com.
PART I
Item 1. Business
Overview
We are a leading specialty retailer in the consumer electronics/appliance
industry, serving over 200 small to medium-sized towns and communities. Since
1980, when our first four stores were acquired, we have expanded into a national
chain operating 234 stores in 37 states under the "REX" trade name. Our stores
average approximately 11,300 square feet and offer a broad selection of brand
name products within selected major product categories, including big screen and
standard-sized televisions, video and audio equipment, camcorders and major
household appliances.
Our business strategy emphasizes depth of selection within key product
categories. Brand name products are offered at everyday low prices combined with
frequent special sales and promotions. We concentrate our stores in small and
medium sized markets where we believe that by introducing a high volume, low
price merchandising concept, we can become a dominant retailer. We support our
merchandising strategy with extensive newspaper advertising in each of our local
markets and maintain a knowledgeable sales force which focuses on customer
service. We believe our low price policy, attention to customer satisfaction and
deep product selection provide customers with superior value.
Our strategy is to open stores in small to medium sized markets when market
conditions merit. We will focus on markets with a newspaper circulation which
can efficiently and cost-effectively utilize our print advertising materials and
where we believe we can become a dominant retailer.
REX was incorporated in Delaware in 1984 as a holding company to succeed to the
entire ownership of three affiliated corporations, Rex Radio and Television,
Inc., Stereo Town, Inc. and Kelly & Cohen Appliances, Inc., which were formed in
1980, 1981 and 1983, respectively. Our principal offices are located at 2875
Needmore Road, Dayton, Ohio 45414. Our telephone number is (937) 276-3931.
Fiscal Year
All references in this report to a particular fiscal year are to REX's fiscal
year ended January 31. For example, "fiscal 2004" means the period February 1,
2004 to January 31, 2005. We refer to our fiscal year by reference to the year
immediately preceding the January 31 fiscal year end date.
Business Strategy
Our objective is to be a leading consumer electronics/appliance retailer in each
of our markets. The key elements of our business strategy include:
Focusing on Small Markets
We traditionally have concentrated our stores in markets with populations of
20,000 to 300,000. When opening stores, we focus in markets with populations
under 85,000, which generally are underserved by our competitors. We believe our
low-overhead store format and our ability to operate in free-standing as
2
well as strip shopping centers and regional mall locations makes us well suited
to serve these small markets.
Maintaining Guaranteed Lowest Prices
We actively monitor prices at competing stores and adjust our prices as
necessary to meet or beat the competition. We guarantee the lowest price on our
products through a policy of refunding 125% of the difference between our price
and a competitor's price on the same item.
Offering a Broad Selection of Brand Name Products
We offer a broad selection of brand name products within key product categories.
We carry most major brands of consumer electronics and several major brands of
appliances. We offer merchandise in each of our product categories at a range of
price points and generally maintain sufficient product stock for immediate
delivery to customers.
Capitalizing on Our Opportunistic Buying
We frequently purchase large quantities of products directly from manufacturers
on an opportunistic basis at favorable prices. We believe this buying strategy
makes us a unique and attractive customer for manufacturers seeking to sell
cancelled orders and excess inventory and enables us to develop strong
relationships and extended trade credit support with vendors.
Striving to be the Low Cost Operator in Our Markets
Our current prototype store is approximately 12,000 square feet and provides us
with cost and space efficiencies. Our market selection criteria and operating
philosophy allow us to minimize both occupancy and labor costs. Generally, all
of our store employees, including our store managers, sell products, unload
trucks, stock merchandise and process sales, which helps minimize employee count
and overhead within each store. Most stores are staffed with between three and
six employees.
Leveraging Our Strong Operational Controls
Our information systems and point-of-sale computer systems, which are installed
in every store, allow management to monitor our merchandising programs, sales,
employee productivity and in-store inventory levels on a daily basis. Our
operational controls provide us with cost efficiencies which reduce overhead
while allowing us to maintain high levels of in-stock merchandise. Our three
distribution centers, strategically located in Dayton, Ohio, Pensacola, Florida
and Cheyenne, Wyoming, reduce inventory requirements at individual stores and
facilitate centralized inventory and accounting controls.
Store Openings
Site Selection. When expanding, we select locations for future stores based on
our evaluation of individual site economics and market conditions. When deciding
whether to enter a new market or open another store in an existing market, we
evaluate a number of criteria, including:
o sales volume potential;
o competition within the market area, including size, strength and
merchandising philosophy of former, existing and potential
competitors;
o cost of advertising;
o newspaper circulation; and
o size and growth pattern of the population.
3
In choosing specific sites, we apply standardized site selection criteria taking
into account numerous factors, including:
o local demographics;
o real estate occupancy expense based upon ownership and/or leasing;
o traffic patterns; and
o overall retail activity.
Stores typically are located on high traffic arteries, adjacent to or in major
shopping areas, with adequate parking to support the stores' sales volume.
We either lease or purchase store sites depending upon opportunities available
to us and relative costs. We did not open any stores in fiscal 2004 and
currently have no new stores under development for fiscal 2005. During fiscal
2004, we relocated six leased stores. Five of these were relocated to owned
locations and one to a new leased location. We are currently working on
relocating two existing leased stores to new locations in the same markets. Both
of these new locations will be owned rather than leased.
Store Economics. To open a new leased store, we anticipate per store capital
expenditures of $100,000 to $250,000. This amount may increase to the extent we
are responsible for the remodeling or renovation of the new leased site. To open
a new company owned store, we anticipate expenditures of approximately $950,000
to $1,400,000, which includes the cost of the land purchased, building
construction and fixtures. The purchase amount varies depending upon the size
and location of the store. The purchase amount may be higher if we build or
purchase a location larger than our needs and attempt to lease a portion of the
store. Historically, we have normally obtained long-term mortgage financing of
approximately 75% of the land and building cost of opening owned stores.
Mortgage financing is generally obtained after a store is opened, either on a
site by site or multiple store basis. The extent to which we seek mortgage
financing for owned stores is dependent upon mortgage rates, terms, availability
and needs.
The gross inventory requirements for new stores are estimated at $250,000 to
$500,000 per store depending upon the season and store size.
Store Operations
Stores. We locate our stores in the general vicinity of major retail shopping
districts and design our stores to generate their own traffic. Currently, 169
stores are located in free-standing buildings, with the balance situated in
strip shopping centers and regional malls. Stores located in malls generally
have exterior access and signage rights.
Our stores are designed with minimal interior fixtures to provide an open
feeling and a view of all product categories upon entering the store. The stores
are generally equipped with neon signage above each product category to further
direct the customer to particular products. We believe the interior layout of
our stores provides an inviting and pleasant shopping environment for the
customer.
Our existing stores average approximately 11,300 square feet, including
approximately 7,800 square feet of selling space and approximately 3,500 square
feet of storage. New stores are planned to be approximately 12,000 square feet.
Stores are open seven days and six nights per week, except for certain holidays.
Hours of operation are 10:00 a.m. to 9:00 p.m. Monday through Saturday and 12:00
p.m. to 6:00 p.m., or 1:00 p.m. to 5:00 p.m. in some states, on Sunday.
Our operations are divided into regional districts, containing from two to 11
stores whose managers report to a district manager. Our 39 district managers
report to one of four regional vice presidents. The
4
regional vice presidents report to the Vice President of Store Operations. Each
store is staffed with a full-time manager and one or two assistant managers,
commissioned sales personnel and, in higher-traffic stores, seasonal support
personnel. Store managers are paid on a commission basis and have the
opportunity to earn bonuses based upon their store's sales and gross margins.
Sales personnel work on a commission basis.
We evaluate the performance of our stores on a continuous basis and, based on an
assessment of overall profitability, future cash flows and other factors we deem
relevant, will close any store which is not adequately contributing to our
profitability. We closed 14, 4 and 10 stores during fiscal 2004, 2003 and 2002,
respectively.
Store Locations. The following table shows the states in which we operated
stores and the number of stores in each state as of January 31, 2005:
State Number of Stores State Number of Stores
- ----- ---------------- ----- ----------------
Alabama 12 Nebraska 2
Arkansas 1 New Mexico 1
Colorado 3 New York 19
Florida 25 North Carolina 6
Georgia 7 North Dakota 3
Idaho 5 Ohio 19
Illinois 10 Oklahoma 5
Indiana 2 Pennsylvania 19
Iowa 8 South Carolina 9
Kansas 2 South Dakota 3
Kentucky 2 Tennessee 9
Louisiana 5 Texas 9
Maryland 1 Vermont 1
Massachusetts 1 Virginia 2
Michigan 7 Washington 3
Minnesota 1 West Virginia 6
Mississippi 12 Wisconsin 4
Missouri 3 Wyoming 2
Montana 5
Personnel. We train our employees to explain and demonstrate to customers the
use and operation of our merchandise and to develop good sales practices. Our
in-house training program for new employees combines on-the-job training with
use of a detailed company-developed manual entitled "The REX Way." Sales
personnel attend in-house training sessions conducted by experienced salespeople
or manufacturers' representatives and receive sales, product and other
information in meetings with managers.
We also have a manager-in-training program that consists of on-the-job training
of the assistant manager at the store. Our policy is to staff store management
positions with personnel promoted from within REX and to staff new store
management positions with existing managers or assistant managers.
Services. Virtually all of the products we sell carry manufacturers' warranties.
Except for our least expensive items, we offer extended service contracts to
customers, usually for an additional charge, which typically provide one to five
years of extended warranty coverage. We offer maintenance and repair services
for most of the products we sell. These services are generally subcontracted to
independent repair firms.
5
Our return policy provides that any merchandise may be returned for exchange or
refund within seven days of purchase if accompanied by original packaging
material and verification of sale.
We accept MasterCard, Visa and Discover. We estimate that, during fiscal 2004,
approximately 40.9% of our total sales were made on these credit cards, and
approximately 18.3% were made on revolving or installment credit contracts
arranged through banks or independent finance companies which bear the credit
risk of these contracts. We offer a REX private label credit card in all of our
stores which makes up the bulk of the financing through banks or independent
finance companies.
Merchandising
Products. We offer a broad selection of brand name consumer electronics and home
appliance products at a range of price points. We emphasize depth of product
selection within selected key product categories. We sell approximately 1,100
products produced by approximately 59 manufacturers. Our product categories
include:
Televisions Video Audio Appliances Other
- ----------- ----- ----- ---------- -----
TVs VCRs Stereo Systems Air Conditioners Extended Service
Big Screen Camcorders Receivers Microwave Ovens Contracts
TVs Digital Satellite Compact Disc Washers Ready to Assemble
TV/VCR/ Systems Players Dryers Furniture
DVD DVD Players Tape Decks Ranges Recordable Tapes
Combos DVD Recorders Speakers Dishwashers Telephones
Plasma/LCD DVD/VCR Car Stereos Refrigerators Audio/Video
TVs Combos Portable Radios Freezers Accessories
Turntables Vacuum Cleaners Radar Detectors
Home Theater Dehumidifiers CB Radios
Systems
Satellite Radio
Among the leading brands sold by us during fiscal 2004, in alphabetical order,
were Frigidaire, Hitachi, JVC, Panasonic, Philips Magnavox, RCA, Sharp, Sony,
Toshiba and Whirlpool.
All our stores carry a broad range of televisions, video and audio products,
microwave ovens and air conditioners. In addition, all but two stores carry
major appliances.
The following table shows the approximate percent of net sales for each major
product group for the last three fiscal years:
Fiscal Year
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Product Category 2004 2003 2002
- ---------------- ---- ---- ----
Televisions .... 55% 52% 48%
Appliances ..... 19 19 19
Audio .......... 11 13 15
Video .......... 7 8 10
Other .......... 8 8 8
--- --- ---
100% 100% 100%
=== === ===
6
Pricing. Our policy is to offer our products at guaranteed lowest prices
combined with frequent special sales and promotions. Our retail prices are
established by our merchandising department, but each district manager is
responsible for monitoring the prices offered by competitors and has authority
to adjust prices to meet local market conditions. Our commitment to offer the
lowest prices is supported by our guarantee to refund 125% of the difference in
price if, within 30 days of purchase, a customer can locate the same item
offered by a local competitor at a lower price.
Advertising. We use a "price and item" approach in our advertising, stressing
the offering of nationally recognized brands at significant savings. The
emphasis of our advertising is our Guaranteed Lowest Price. Our guarantee
states:
"Our prices are guaranteed in writing. If you find any other local store
(excluding Internet) stocking and offering to sell for less the identical
item in a factory sealed box within 30 days after your REX purchase, we'll
refund the difference plus an additional 25% of the difference."
Advertisements are concentrated principally in newspapers and preprinted
newspaper inserts, which are produced for us by an outside advertising agency.
When market conditions warrant, we supplement our newspaper advertising with
television and radio advertisements in certain markets. Advertisements are also
complemented by in-store signage highlighting special values, including "Value
Every Day," "Best Value," and "Top of the Line." Our advertising strategy
includes preferred customer private mailers, special events such as "Moonlight
Madness Sales" and coupon sales to provide shopping excitement and generate
traffic.
Purchasing. Our merchandise purchasing and opportunistic buying are performed
predominantly by three members of management. Each individual has responsibility
for a specific product category, and two share appliance buying responsibility.
By purchasing merchandise in large volume, we are able to obtain quality
products at competitive prices and advertising subsidies from vendors to promote
the sale of their products. For fiscal 2004, 10 vendors accounted for
approximately 83% of our purchases, with two vendors representing approximately
34% of our inventory purchases in 2004. We typically do not maintain long-term
purchase contracts with vendors and operate principally on an order-by-order
basis.
e-Commerce
We sell selected televisions, audio and video products and small appliances on
our retail store Web site at www.rexstores.com. We also use the site to support
our retail sales by listing our advertisements and our store locations.
Distribution
Our stores are supplied by three regional distribution centers. The distribution
centers consist of:
o a 470,000 square foot owned facility in Dayton, Ohio;
o a 180,000 square foot owned facility in Pensacola, Florida; and
o a 145,000 square foot owned facility in Cheyenne, Wyoming.
Periodically, we may lease overflow warehouse space as needed to accommodate
seasonal inventory requirements and opportunistic purchases.
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Inventory Management
The regional distribution centers reduce inventory requirements at individual
stores, while preserving the benefits of volume purchasing and facilitating
centralized inventory and accounting controls. Virtually all of our merchandise
is distributed through our distribution centers, with the exception of major
appliances which are generally shipped directly by the vendor to the retail
location. All deliveries to stores are made by independent contract carriers.
Management Information Systems
We have developed a computerized management information system which operates an
internally developed software package. Our computer system provides management
with the information necessary to manage inventory by stock keeping unit (SKU),
monitor sales and store activity on a daily basis, capture marketing and
customer information, track productivity by salesperson and control our
accounting operations.
Our mainframe computer is an IBM A/S 400 model 720. The host computer is
integrated with our point-of-sale system which serves as the collection
mechanism for all sales activity. The combined system provides for next-day
review of inventory levels, sales by store and by SKU and commissions earned,
assists in cash management and enables management to track merchandise from
receipt at the distribution center until time of sale.
Competition
Our business is characterized by substantial competition. Our competitors
include national and regional large format merchandisers and superstores such as
Best Buy Co., Inc. and Circuit City Stores, Inc., other specialty electronics
retailers including RadioShack Corporation, department and discount stores such
as Sears, Roebuck and Co. and Wal-Mart Stores, Inc., furniture stores, warehouse
clubs, home improvement retailers and Internet and store-based retailers who
sell competitive products online. We also compete with small chains and
specialty single-store operators in some markets, as well as Sears'
dealer-operated units. Some of our competitors have greater financial and other
resources than us, which may increase their ability to purchase inventory at a
lower cost, better withstand economic downturns or engage in aggressive price
competition. Competition within the consumer electronics/appliance retailing
industry is based upon price, breadth of product selection, product quality,
customer service and credit availability. We expect competition within the
industry to increase.
Facilities
We own 152 of our stores. The remaining 82 stores operate on leased premises,
with the unexpired terms of the leases ranging from less than one year to 20
years, inclusive of options to renew. For fiscal 2004, the total net rent
expense for our leased facilities was approximately $5,816,000.
To date, we have not experienced difficulty in securing leases or purchasing
sites for suitable store locations. We continue to remodel and upgrade existing
stores as appropriate. In addition, to minimize construction costs, we have
developed prototype formats for new store construction.
8
Employees
At January 31, 2005, we had 147 hourly and salaried employees and 878
commission-based sales employees. We also employ additional personnel during
peak selling seasons. None of our employees are represented by a labor union. We
consider our relationship with our employees to be good.
Service Marks
We have registered our rights in our service mark "REX" with the United States
Patent and Trademark Office. We are not aware of any adverse claims concerning
our service mark.
Synthetic Fuel Partnerships
In fiscal 1998, we invested in two limited partnerships, Colona SynFuel Limited
Partnership, L.L.L.P. and Somerset Synfuel, L.P. which own facilities producing
synthetic fuel. The partnerships earn federal income tax credits under Section
29 of the Internal Revenue Code based on the tonnage and content of solid
synthetic fuel produced and sold to unrelated parties. We have sold our entire
interest in the Colona Partnership (through a series of transactions) and expect
to receive payments from the sales, on a quarterly basis, through 2007. We
remain a limited partner in the Somerset Synfuel partnership. On September 5,
2002, we purchased an additional synthetic fuel facility in Gillette, Wyoming.
We sold our membership interest in the entity that owned the Gillette facility
on March 30, 2004 for $2,750,000 along with a secured contingent payment note
that could provide additional investment income to us if the facility resumes
commercial operation.
In 2003, the Internal Revenue Service (IRS) questioned the scientific validity
of the testing procedures used to support synthetic fuel credits. The IRS has
completed its review of these procedures and resumed issuing letter rulings
based on its previous requirements. The IRS has completed an audit on the Colona
partnership with no impact on related tax credits generated. The IRS has
completed an audit of the Somerset partnership for calendar year 2001 as part of
its normal audit program of the general partner. The audit resulted in no impact
on related tax credits generated. In addition, a U.S. Senate subcommittee has
initiated an investigation into income tax credits involving synthetic fuel
operations. REX has been allocated income tax credits of approximately $41.1
million through fiscal 2004, including approximately $8.0 million for fiscal
2004. In addition, REX has recognized investment income of approximately $81.2
million from the sales of its partnership interest including $18.6 million for
fiscal 2004.
Although we believe the retroactive disallowance of our synthetic fuel credits
is unlikely, any such disallowance could result in a significant liability for
income tax credits previously taken. REX's use of income tax credits and
investment income in the future could be limited by any new IRS interpretations
or regulations or by any new income tax legislation. Additionally, the price of
oil could have a significant impact on future synthetic fuel production. This
could significantly impact future earnings and tax credits from our synthetic
fuel production and sales.
See Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations and Notes 2 and 12 to the Consolidated Financial
Statements for further discussions.
Item 2. Properties
The information required by this Item 2 is set forth in Item 1 of this report
under "Store Operations--Stores," "Distribution" and "Facilities" and is
incorporated herein by reference.
9
Item 3. Legal Proceedings
We are involved in various legal proceedings incidental to the conduct of our
business. We believe that these proceedings will not have a material adverse
effect on our financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Executive Officers of the Company
Set forth below is certain information about each of our executive
officers.
Name Age Position
---- --- --------
Stuart Rose......... 50 Chairman of the Board, President and Chief Executive
Officer*
Douglas Bruggeman... 44 Vice President-Finance, Chief Financial Officer and
Treasurer
Edward Kress........ 55 Secretary*
- ----------
*Also serves as a director.
Stuart Rose has been our Chairman of the Board and Chief Executive Officer since
our incorporation in 1984 as a holding company to succeed to the ownership of
Rex Radio and Television, Inc., Kelly & Cohen Appliances, Inc. and Stereo Town,
Inc. Upon the retirement of Lawrence Tomchin in 2004, Mr. Rose was also elected
President. Prior to 1984, Mr. Rose was Chairman of the Board and Chief Executive
Officer of Rex Radio and Television, Inc., which he founded in 1980 to acquire
the stock of a corporation which operated four retail stores.
Douglas Bruggeman has been our Vice President - Finance and Treasurer since 1989
and was elected Chief Financial Officer in 2003. From 1987 to 1989, Mr.
Bruggeman was our Manager of Corporate Accounting. Mr. Bruggeman was employed
with the accounting firm of Ernst & Young prior to joining us in 1986.
Edward Kress has been our Secretary since 1984 and a director since 1985. Mr.
Kress has been a partner of the law firm of Chernesky, Heyman & Kress P.L.L.,
our legal counsel, since 1988. Mr. Kress has practiced law in Dayton, Ohio since
1974.
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PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
SHAREHOLDER INFORMATION
Common Share Information and Quarterly Share Prices
Our common stock is traded on the New York Stock Exchange under the symbol RSC.
High Low
------ ------
Fiscal Quarter ended
April 30, 2003 $11.46 $ 9.84
July 31, 2003 14.91 10.27
October 31, 2003 16.10 12.71
January 31, 2004 16.59 12.55
April 30, 2004 $16.00 $12.10
July 31, 2004 15.23 10.98
October 31, 2004 15.59 12.20
January 31, 2005 18.63 14.12
As of April 13, 2005, there were 172 holders of record of our common stock,
including shares held in nominee or street name by brokers.
Dividend Policy
Our revolving credit agreement places restrictions on the payment of dividends.
We did not pay dividends in the current or prior years.
Issuer Purchases of Equity Securities
Total Number of Maximum Number
Shares Purchased of Shares that May
Total Number Average Price as Part of Publicly Yet Be Purchased
of Shares Paid per Announced Plans Under the Plans
Period Purchased (1) Share or Programs (2) or Programs (2)
- ------ ------------- ------------- ------------------- ------------------
November 1-30, 2004 -- $ -- -- 523,045
December 1-31, 2004 35,582 $17.34 -- 523,045
January 1-31, 2005 105,166 $14.50 70,000 453,045
------- ------ ------ -------
Total 140,748 $15.22 70,000 453,045
======= ====== ====== =======
- ----------
(1) A total of 35,582 and 35,166 shares of common stock were purchased by the
Company other than through a publicly announced plan or program. These
shares were acquired on December 6, 2004 and January 10, 2005, respectively
in payment of the exercise price of stock options exercised by Stuart A.
Rose, Chairman, President and Chief Executive Officer of the Company, all
pursuant to the Stock-for-Stock and Cashless Option Exercise Rules and
Procedures, adopted by the Company on June 4, 2001. The purchase price
was $17.34 and $14.42 per share, respectively.
11
(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 January 31, 2005, a
total of 453,045 shares remained available to purchase under this
authorization.
Item 6. Selected Financial Data
Five Year Financial Summary
January 31,
(In Thousands, Except Per Share ----------------------------------------------------
Amounts) 2005 2004 2003 2002 2001
-------- -------- -------- -------- --------
Net sales $391,300 $405,413 $415,770 $448,470 $456,818
Income from continuing operations $ 27,886 $ 27,773 $ 23,068 $ 21,973 $ 18,127
Net income $ 27,549 $ 27,440 $ 22,932 $ 22,309 $ 18,736
Basic income per share from
continuing operations $ 2.52 $ 2.56 $ 1.90 $ 1.88 $ 1.28
Diluted income per share from
continuing operations $ 2.19 $ 2.20 $ 1.62 $ 1.63 $ 1.17
Basic net income per share $ 2.49 $ 2.53 $ 1.89 $ 1.91 $ 1.32
Diluted net income per share $ 2.17 $ 2.17 $ 1.61 $ 1.65 $ 1.21
Total assets $310,951 $313,411 $310,922 $307,329 $310,885
Long-term debt, net of current
maturities $ 30,501 $ 53,548 $ 64,426 $ 77,203 $ 81,262
12
Quarterly Financial Data (Unaudited)
Quarters Ended
(In Thousands, Except Per Share Amounts)
------------------------------------------------
April 30, July 31, October 31, January 31,
2004 2004 2004 2005
--------- -------- ----------- -----------
Net sales (a) $85,755 $87,084 $93,026 $125,435
Cost of merchandise sold (a) 60,655 62,352 68,010 91,030
Net income 4,085 3,284 3,381 16,799
Basic net income per share (b) $ 0.37 $ 0.29 $ 0.31 $ 1.52
Diluted net income per share (b) $ 0.32 $ 0.26 $ 0.27 $ 1.30
Quarters Ended
(In Thousands, Except Per Share Amounts)
------------------------------------------------
April 30, July 31, October 31, January 31,
2003 2003 2003 2004
--------- -------- ----------- -----------
Net sales (a) $92,579 $88,790 $93,874 $130,170
Cost of merchandise sold (a) 65,519 61,126 65,852 93,776
Net income 3,138 3,167 4,081 17,054
Basic net income per share (c) $ 0.29 $ 0.30 $ 0.38 $ 1.55
Diluted net income per share (c) $ 0.25 $ 0.25 $ 0.32 $ 1.32
a) Amounts differ from those previously reported as a result of certain
stores being reclassified into discontinued operations. See Note 11 of
the Consolidated Financial Statements for further discussion and
analysis of discontinued operations.
b) The total of the quarterly net income per share amount is less than
the annual net income per share amount primarily due to the impact of
more shares outstanding and higher stock price resulting in greater
dilution from stock options during the fourth quarter versus the full
year and 60% of the net income occurring in the fourth quarter of
fiscal 2004.
c) The total of the quarterly net income per share amount is less than
the annual net income per share amount primarily due to the impact of
more shares outstanding and higher stock price resulting in greater
dilution from stock options during the fourth quarter versus the full
year and 62% of the net income occurring in the fourth quarter of
fiscal 2003.
Item7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
We are a leading specialty retailer in the consumer electronics/appliance
industry. Since acquiring our first four stores in 1980, we have expanded into a
national chain operating 234 stores in 37 states under the "REX" trade name. By
offering a broad selection of brand name products at guaranteed lowest prices,
we believe we have become a leading consumer electronics/appliance retailer in
our markets.
Our comparable store sales declined 2.0%, 0.9%, and 5.1% for fiscal 2004, 2003
and 2002, respectively. We believe our comparable store sales have been
adversely affected by the economy, price deflation in certain categories and the
increasing competitive environment. We consider a store to be comparable after
it has
13
been open six full fiscal quarters. Comparable store sales comparisons do not
include sales of extended service contracts.
Extended Service Contracts
Our extended service contract revenues, net of sales commissions, are deferred
and amortized on a straight-line basis over the life of the contracts after the
expiration of applicable manufacturers' warranty periods. Terms of coverage,
including the manufacturers' warranty periods, are usually for periods of 12 to
60 months. Extended service contract revenues represented 3.3% of net sales for
fiscal 2004, 3.5% of net sales for fiscal 2003 and 3.6% of net sales for fiscal
2002. Service contract costs are charged to operations as incurred. Gross profit
realized from extended service contract revenues was $9.4 million, $10.5 million
and $11.1 million in fiscal 2004, 2003 and 2002, respectively.
Investment in Synthetic Fuel Partnerships
In fiscal 1998, we invested in two limited partnerships which owned four
facilities producing synthetic fuel. The partnerships earn federal income tax
credits under Section 29 of the Internal Revenue Code based on the tonnage and
content of solid synthetic fuel produced and sold to unrelated parties. Our
share of the credits generated may be used to reduce our federal income tax
liability down to the alternative minimum tax (AMT) rate. Under current law,
credits under Section 29 are available for qualified fuels sold before January
1, 2008. The tax credits begin to phase out if the reference price of a barrel
of oil exceeds certain levels adjusted annually for inflation. The 2004
phase-out started at $51.34 per barrel and based upon information published by
the Internal Revenue Service, we do not believe there will be a phase out of
Section 29 credits generated in fiscal 2004. See Notes 2, 10 and 12 of the Notes
to the Consolidated Financial Statements for further discussion.
We initially held a 30% interest in Colona Synfuel Limited Partnership, L.L.L.P.
(Colona) and an 18.75% interest in Somerset Synfuel, L.P. (Somerset). We sold
our ownership in the Colona partnership as described below.
Effective February 1, 1999, we sold 13% of our interest in the Colona
partnership, reducing our ownership percentage from 30% to 17%. We expect to
receive cash payments from the sale on a quarterly basis through 2007. These
payments are contingent upon and equal to 75% of the federal income tax credits
attributable to the 13% interest sold and are subject to certain annual
limitations. The maximum amount of cash that can be received varies by year. The
maximum that could be received for calendar 2004, 2003 and 2002 was
approximately $8.1 million, $7.7 million and $7.4 million, respectively. The
maximum that can be received for calendar 2005 is approximately $8.6 million. We
reported income of approximately $7.2 million, $6.4 million and $5.9 million for
fiscal 2004, 2003 and 2002, respectively.
Effective July 31, 2000, we sold an additional portion of our interest in the
Colona partnership, reducing our ownership percentage from 17% to 8%. We expect
to receive payments from the sale on a quarterly basis through 2007. These
payments are contingent upon and equal to the greater of 82.5% of the federal
income tax credits attributable to the 9% interest sold subject to annual
limitations or 74.25% of the federal income tax credits amounts attributable to
the interest sold with no annual limitations. Quarterly payments from this sale
were held in escrow beginning in fiscal 2002 pending the results of an Internal
Revenue Service (IRS) audit of the partnership. We reported income of
approximately $5.8 million for fiscal 2004; none of which was held in escrow. We
reported income of approximately $5.0 million for fiscal 2003, all of which was
put into escrow. We reported income of approximately $4.7 million for fiscal
2002; we received approximately $1.4 million of these proceeds with the
remaining $3.3 million held in escrow. During fiscal 2003, we took $6.5 million
from escrow and delivered a letter of credit for the same amount. The letter of
credit guaranteed
14
our own performance. In February 2004, the audit was finalized and we received
our remaining money from escrow and the letter of credit was cancelled.
Effective May 31, 2001, we sold our remaining 8% ownership in the Colona
partnership. We expect to receive payments from the sale on a quarterly basis
through 2007. These payments are contingent upon and equal to the greater of
82.5% of the federal income tax credits attributable to the 8% interest sold
subject to annual limitations or 74.25% of the federal income tax credits
amounts attributable to the interest sold with no annual limitations. Quarterly
payments from this sale were held in escrow beginning in fiscal 2002 pending the
results of an Internal Revenue Service (IRS) audit of the partnership. We
reported income of approximately $5.1 million for fiscal 2004; none of which was
held in escrow. We reported income of approximately $4.6 million for fiscal
2003; all of which was put into escrow. We reported income of approximately $4.1
million for fiscal 2002; we received approximately $1.1 million of the proceeds
with the remaining $3.0 million held in escrow. During fiscal 2003, we received
$6.9 million from escrow and delivered a letter of credit for the same amount.
The letter of credit guaranteed our own performance. In February 2004, the audit
was finalized and we received the balance of our money from escrow and the
letter of credit was cancelled.
We remain a limited partner in the Somerset partnership. Net income for fiscal
2002 reflects pre-tax income, net of litigation expenses, of approximately
$400,000 from the settlement of a previously filed lawsuit relating to our
participation in this partnership. As part of the settlement, which was effected
without the admission of liability by any party, we entered into an Amended and
Restated Agreement of Limited Partnership which facilitates increased
participation in future production of synthetic fuel. This partnership is
operational and producing synthetic fuel. The IRS has completed an audit of the
Somerset partnership in 2004 for calendar year 2001 as part of its normal audit
program of the general partner. The audit resulted in no impact on related tax
credits generated.
Tax credits generated from the Somerset partnership were applied to reduce tax
expense in the amounts of approximately $8.0 million, $7.3 million and $3.1
million in fiscal 2004, 2003 and 2002, respectively.
On September 5, 2002, we purchased a plant located in Gillette, Wyoming designed
and constructed for the production of synthetic fuel, which qualifies for tax
credits under Section 29 of the Internal Revenue Code. We obtained a Private
Letter Ruling from the Internal Revenue Service, which allowed for the
disassembly, and reconstruction, of the facility. On March 30, 2004, we sold our
membership interest in the limited liability company that owned the Gillette
facility to an outside party. We received $2,750,000 at the time of sale,
resulting in pre-tax income of approximately $468,000 along with a secured
contingent payment note that could provide additional investment income to us if
the facility resumes commercial operation. If the facility resumes commercial
operation, we are eligible to receive $3.5 million and an additional $1.50 per
ton of "qualified production" fuel produced by the facility and sold.
15
Results of Operations
The following table sets forth, for the periods indicated, the relative
percentages that certain income and expense items bear to net sales:
Fiscal Year Ended January 31,
-----------------------------
2005 2004 2003
----- ----- -----
Net sales 100.0% 100.0% 100.0%
Cost of merchandise sold 72.1 70.6 70.3
----- ----- -----
Gross profit 27.9 29.4 29.7
Selling, general and administrative expenses 26.4 26.0 24.8
----- ----- -----
Operating income 1.5 3.4 4.9
Investment income -- -- 0.1
Interest expense (0.8) (1.2) (1.3)
Loss on early termination of debt (0.2) -- --
Gain on sale of real estate 0.1 0.3 --
Income from limited partnerships 4.8 4.0 3.6
----- ----- -----
Income from continuing operations before income
taxes and discontinued operations 5.4 6.5 7.3
(Benefit) Provision for income taxes (1.7) (0.4) 1.8
----- ----- -----
Income from continuing operations 7.1 6.9 5.5
----- ----- -----
Loss from discontinued operations, net of tax (0.1) (0.1) --
Gain on disposal of discontinued operations, net of tax -- -- --
----- ----- -----
Net income 7.0% 6.8% 5.5%
===== ===== =====
Comparison of Fiscal Years Ended January 31, 2005 and 2004
Net Sales - Net sales in fiscal 2004 were $391.3 million, a 3.5% decrease from
$405.4 million in fiscal 2003. This decrease was due to a decline in comparable
store sales of 2.0% for fiscal 2004 and a reduction in store count. 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. We closed 14 stores (ten of which were classified as discontinued
operations) during fiscal 2004 and 4 stores during fiscal 2003. We did not open
any new stores in fiscals 2004 and 2003. We had 234 stores open at January 31,
2005 compared to 248 stores at January 31, 2004.
The television category was our strongest product category for fiscal 2004. It
positively impacted comparable store sales by 2.0% primarily due to increased
sales of LCD, DLP, plasma and other high definition ready televisions. The
"other" category also positively impacted comparable store sales by 0.2%,
primarily due to higher sales of ready to assemble furniture stands. The audio
and video categories negatively impacted comparable store sales by 2.2% and
1.8%, respectively. Both the audio and video categories have been
16
impacted by lower price points of their respective products and these products
becoming more of a commodity item with very high levels of competition. The
appliance category contributed 0.2% to the decline in comparable store sales
primarily due to lower air conditioner sales. Air conditioner sales were
impacted by lower demand primarily due to cooler temperatures in certain markets
as compared to the prior year and lower average selling prices.
The following table reflects the approximate percent of net sales for each
product group for the periods presented.
Fiscal Year
------------------
Product Category 2004 2003 2002
- ---------------- ---- ---- ----
Televisions..... 55% 52% 48%
Appliances ..... 19 19 19
Audio........... 11 13 15
Video........... 7 8 10
Other........... 8 8 8
--- --- ---
100% 100% 100%
=== === ===
Gross Profit - Gross profit was $109.3 million in fiscal 2004, or 27.9% of net
sales, versus $119.1 million for fiscal 2003 or 29.4% of net sales. The primary
factors impacting the gross profit margin have been an increased promotional
activity and recognizing a reduced amount of extended service contracts sales,
which generally have higher gross profit margin, associated with them. Demand
for extended service contracts has declined, which is partially due to lower
prices on many products we sell.
Selling, General and Administrative Expenses - Selling, general and
administrative expenses for 2004 were $103.4 million, or 26.4% of net sales, a
2.0% decrease from $105.6 million, or 26.0% of net sales, for fiscal 2003. The
decrease in expenditures was primarily due to lower commission cost to the sales
staff due to lower sales, lower newspaper advertising costs as we had fewer
markets to serve after our store closings, and a reduction in television
advertising.
Operating Income - Operating income was $5.8 million, or 1.5% of net sales, for
fiscal 2004, a 57.2% decrease from $13.6 million, or 3.4% of net sales for
fiscal 2003. A majority of the decline in operating income results from lower
sales and lower gross profit margin.
Investment Income - Investment income increased to $178,000 in fiscal 2004 from
$77,000 in fiscal 2003 primarily as a result of more excess cash available for
investment in fiscal 2004.
Interest Expense - Interest expense decreased to $3.1 million, or 0.8% of net
sales, for fiscal 2004 from $4.8 million, or 1.2% of net sales, for fiscal 2003.
The decline in interest expense was primarily caused by a reduction in the
amount of mortgage debt outstanding.
Loss on Early Termination of Debt - During fiscal 2004, we completed the early
payoff of mortgages for 43 retail locations totaling approximately $21.6
million. The company incurred a charge of approximately $679,000 related to this
termination of debt. In fiscal 2003, we completed the early payoff of mortgages
totaling approximately $4.8 million, incurring a charge of approximately
$18,000.
Gain on Sale of Real Estate - During fiscal 2004, we sold three parcels of land
attached to owned properties for a gain of $246,000. In fiscal 2003, we sold
four retail store locations for a gain of $1.2 million. This
17
included two stores we closed during fiscal 2003 and two stores we had closed in
prior years that were being leased to outside companies.
Income from Limited Partnerships - Results for fiscals 2004 and 2003 reflect the
impact of our equity investment in two limited partnerships (Colona Synfuel
Limited Partnership L.L.L.P. (Colona) and Somerset Synfuel, L.P. (Somerset)),
which produce synthetic fuels. Effective February 1, 1999, we entered into an
agreement to sell a portion of our investment in the Colona partnership, which
resulted in the reduction in our ownership interest from 30% to 17%. Effective
July 31, 2000, we sold an additional portion of our ownership interest in that
partnership, reducing our ownership percentage from 17% to 8%. Effective May 31,
2001, we sold our remaining 8% ownership interest. We expect to receive payments
from the sales on a quarterly basis through 2007, which will range from 74.25%
to 82.5% of the federal income tax credits attributable to the interest sold.
Below is a table summarizing the income from the sales, net of certain expenses.
Year Ended January 31,
----------------------
2005 2004
------- -------
(In Thousands)
February 1, 1999 sale $ 7,181 $ 6,409
July 31, 2000 sale 5,831 5,041
May 31, 2001 sale 5,134 4,561
------- -------
Total $18,146 $16,011
======= =======
In addition, for fiscal 2004, we recognized pre-tax income of approximately
$469,000 from our sale of our membership interest in the limited liability
company that owned a synthetic fuel facility in Gillette, Wyoming. We received
$2,750,000 at the time of sale along with a secured contingent payment note that
could provide additional investment income to us if the facility resumes
commercial operation.
Income Taxes - Our effective tax rate was (32.5)% and (6.6)% for fiscals 2004
and 2003, respectively, after reflecting our share of federal tax credits earned
by the Somerset limited partnership. Our effective tax rate was reduced for
fiscal 2004 as a result of $8.0 million in tax credits generated by Somerset and
a $6.6 million net reduction in our valuation allowance on the alternative
minimum tax carryforwards due to the favorable resolution of the IRS audits of
the Somerset limited partnership and of the Company. Our effective tax rate was
reduced for fiscal 2003 as a result of a $4.2 million increase in tax credits
generated by the Somerset partnership and a $3.6 million net reduction in our
valuation allowance on the alternative minimum tax carryforwards due to the then
current status of the IRS audits of the Colona and Somerset limited
partnerships.
Income from Continuing Operations - As a result of the foregoing, income from
continuing operations was $27.9 million for fiscal 2004 versus $27.8 million for
fiscal 2003.
Discontinued Operations - During fiscal 2004, we closed ten stores that were
classified as discontinued operations. As a result, we had a loss from
discontinued operations, net of tax benefit, of $549,000 in fiscal 2004 compared
to $333,000 in fiscal 2003. We sold one of these store locations and as a result
had a gain from disposal of discontinued operations, net of a tax provision, of
$212,000 in fiscal 2004 compared to $0 in fiscal 2003.
Net Income - As a result of the foregoing, net income was $27.5 million for
fiscal 2004 versus $27.4 million for fiscal 2003.
18
Comparison of Fiscal Years Ended January 31, 2004 and 2003
Net Sales--Net sales in fiscal 2003 were $405.4 million, a 2.5% decrease from
$415.7 million in fiscal 2002. This decrease was primarily due to a decline in
comparable store sales of 0.9% for fiscal 2003. Sales also declined due to
closing 4 stores during fiscal 2003 with no store openings. We did not open any
new stores in fiscals 2003 and 2002. We had 248 stores open at January 31, 2004
compared to 252 stores at January 31, 2003.
All product categories, except television sales, contributed to the negative
comparable store sales for fiscal 2003. The television category positively
impacted comparable store sales by 3.6% primarily due to strong sales in high
definition ready large screen televisions offsetting declining sales of analog
projection and smaller screen televisions. The video category negatively
impacted comparable store sales by 1.6% primarily due to lower sales of
camcorders and video cassette recorders (VCR's). The audio category contributed
1.5% to the decline in comparable store sales. The appliance category
contributed 0.7% to the decline in comparable store sales primarily due to lower
air conditioner sales. Air conditioner sales were impacted by lower demand
primarily due to cooler temperatures in certain markets as compared to the prior
year and lower average selling price. The other category contributed 0.7% to the
decline in comparable store sales.
Gross Profit--Gross profit was $119.1 million in fiscal 2003, or 29.4% of net
sales, versus $123.6 million for fiscal 2002 or 29.7% of net sales. The primary
factors impacting the gross profit margin have been an increased promotional
activity and recognizing a reduced amount of extended service contracts sales,
which generally have higher gross profit margin, associated with them. Demand
for extended service contracts has declined, which is partially due to lower
prices on many products we sell.
Selling, General and Administrative Expenses--Selling, general and
administrative expenses for 2003 were $105.6 million, or 26.0% of net sales, a
2.4% increase from $103.1 million, or 24.8% of net sales, for fiscal 2002. The
increase in expenditures was primarily due to increased sales commission costs
of approximately $1.1 million to the sales staff, increased delivery charges of
approximately $500,000 due to selling more deliverable items and an increase in
other administrative cost of approximately $700,000.
Operating Income--Income from operations was $13.6 million, or 3.4% of net
sales, for fiscal 2003, a 33.6% decrease from $20.5 million, or 4.9% of net
sales for fiscal 2002. The decline was primarily caused by the reduction in net
sales.
Investment Income--Investment income decreased to $77,000 in fiscal 2003 from
$393,000 in fiscal 2002 primarily as a result of more excess cash available for
investment in the first half of fiscal 2002.
Interest Expense--Interest expense decreased to $4.8 million, or 1.2% of net
sales, for fiscal 2003 from $5.3 million, or 1.3% of net sales, for fiscal 2002.
The decline in interest expense was primarily caused by a reduction in the
amount of mortgage debt outstanding and restructuring a large portion of the
remaining debt to lower floating interest rates.
Loss on Early Termination of Debt - During fiscal 2003, we completed the early
payoff of mortgages totaling approximately $4.8 million. The company incurred a
charge of approximately $18,000 related to this termination of debt. In fiscal
2002, we completed the early payoff of mortgages totaling approximately $7.0
million, incurring a charge of approximately $248,000.
Income from Limited Partnerships--Results for fiscals 2003 and 2002 also reflect
the impact of our equity investment in two limited partnerships (Colona Synfuel
Limited Partnership L.L.L.P. and Somerset Synfuel, L.P.) which produce synthetic
fuels. Effective February 1, 1999, we entered into an agreement to sell a
portion of our investment in the Colona partnership, which resulted in the
reduction in our ownership interest from 30% to 17%. Effective July 31, 2000, we
sold an additional portion of our ownership interest in that partnership,
reducing our ownership percentage from 17% to 8%. Effective May 31, 2001, we
sold our
19
remaining 8% ownership interest. We expect to receive payments from the sales on
a quarterly basis through 2007, which will range from 74.25% to 82.5% of the
federal income tax credits attributable to the interest sold. Below is a table
summarizing the income from the sales, net of certain expenses.
Year Ended January 31,
----------------------
(In Thousands)
2004 2003
------- -------
February 1, 1999 sale $ 6,409 $ 5,939
July 31, 2000 sale 5,041 4,655
May 31, 2001 sale 4,561 4,118
------- -------
Total $16,011 $14,712
======= =======
Net income for fiscal 2002 also reflects pre-tax income, net of litigation
expenses, of approximately $0.4 million from the settlement of a previously
filed lawsuit relating to our participation as a limited partner in the
Somerset limited partnership.
Income Taxes--Our effective tax rate was approximately (6.6)% and 24.2% for
fiscals 2003 and 2002, respectively. Our effective tax rate was reduced for
fiscal 2003 as a result of a $4.2 million increase in tax credits generated by
the Somerset partnership and a $3.6 million net reduction in our valuation
allowance on the alternative minimum tax carryforwards due to the then current
status of the IRS audits of the limited partnerships.
Income from Continuing Operations - As a result of the foregoing, income from
continuing operations was $27.8 million for fiscal 2003 versus $23.1 million for
fiscal 2002.
Discontinued Operations -We have classified ten stores as discontinued
operations. As a result, we had a loss from discontinued operations, net of tax
benefit, of $333,000 in fiscal 2003 compared to $136,000 in fiscal 2002. We had
no gain from disposal of discontinued operations in fiscal 2003 or fiscal 2002.
Net Income--As a result of the foregoing, net income was $27.4 million for
fiscal 2003 versus $22.9 million for fiscal 2002.
Liquidity and Capital Resources
Our primary sources of financing have been income from operations and our
investment in synthetic fuel limited partnerships, supplemented by mortgages on
owned properties. We also use borrowings under our revolving line of credit to
fund our seasonal working capital needs.
Outlook - We consider our inventory balance of $124.2 million at January 31,
2005 to be a normal balance for that time of the year. Our inventory levels are
subject to seasonal fluctuations, with January 31 traditionally a time of lower
inventory levels. Our cash levels will tend to fluctuate with our inventory
levels.
Operating Activities - Net cash used in operating activities was $8.2 million
for fiscal 2004 compared to net cash provided by operating activities of $34.8
million in fiscal 2003. For fiscal 2004, operating cash flow was
20
provided by net income of $27.5 million adjusted for the impact of a $18.6
million gain on sales of partnership interest and non-cash items of $11.5
million, which consist of deferred income, the deferred income tax provision and
depreciation and amortization. Cash was provided by the decrease in other assets
of $2.9 million. The largest use of cash was an increase in inventory of $7.4
million. Inventory levels at January 31, 2004 were lower due to a short supply
on certain televisions. Cash was also used by an increase in accounts receivable
of $0.7 million and a decrease in other current liabilities of $0.6 million.
For fiscal 2003, operating cash flow was provided by net income of $27.4 million
adjusted for the impact of a $16.0 million gain on sales of partnership interest
and non-cash items of $5.5 million, which consist of deferred income, the
deferred income tax provision and depreciation and amortization. The primary
sources of cash were the decrease in inventory of $25.3 million and an increase
in accounts payable of $5.3 million. Inventory levels were reduced largely due
to tight supply on certain televisions and lower demand in our stores for the
lower end television products. Accounts payable had increased primarily due to
timing of purchases and terms with manufacturers. Cash was used by an increase
in other assets of $0.7 million and a decrease in other current liabilities of
$0.8 million.
Investing Activities - Net cash was provided by investing activities of $21.4
million for fiscal 2004. Cash of $20.0 million was provided by proceeds from the
sale of our partnership interest in synthetic fuel and $1.3 million from the
sale of real estate and buildings. Cash of $7.0 million was also provided from
the sale of our investment in an auction rate security. Capital expenditures in
fiscal 2004 totaled $6.9 million. Expenditures included approximately $4.4
million towards the relocation of six stores during fiscal 2004, approximately
$1.5 million towards two stores being relocated in fiscal 2005 and approximately
$1.0 million for improvements at existing locations.
Net cash was provided by investing activities of $12.1 million for fiscal 2003.
Cash of $19.5 million was provided by proceeds from the sale of our partnership
interest in synthetic fuel and $3.6 million from the sale of real estate from
closed stores. Capital expenditures in fiscal 2003 totaled $4.0 million.
Expenditures included approximately $2.3 million with respect to the completion
of an addition to the Dayton, Ohio distribution center, approximately $0.5
million for improvements at existing facilities and approximately $1.2 million
in land purchases toward the relocation of three store sites for fiscal 2004.
Cash of $7.0 million was also used to purchase an investment in an auction rate
security.
Financing Activities - Cash used in financing activities was $28.3 million for
fiscal 2004. During fiscal 2004, we acquired 717,435 shares of our common stock
in open market transactions for approximately $9.4 million. During fiscal 2003,
we acquired 559,670 shares of our common stock in open market transactions for
approximately $6.1 million. At January 31, 2005, we had authorization from the
Board of Directors to purchase 453,045 shares of our common stock. All acquired
shares will be held in treasury for possible future use.
At January 31, 2005, we had approximately $33.4 million of mortgage debt
outstanding at a weighted average interest rate of 6.3%, with maturities from
March 18, 2005 to September 30, 2016. During fiscal 2004, we paid off $25.4
million of long-term mortgage debt from scheduled repayments and the early
extinguishment of debt for 43 retail locations.
We received proceeds of approximately $3.5 million and $1.9 million for fiscal
2004 and 2003, respectively, from the exercise of stock options by employees and
directors. The exercise of non-qualified stock options resulted in a tax benefit
of approximately $3.0 million and $1.6 million for fiscals 2004 and 2003,
respectively, which was reflected as an increase in additional paid-in capital.
On September 14, 2004, we entered into an Amended and Restated Loan Agreement
(the "Loan Agreement") with five banks. The Loan Agreement provides for a
$115,000,000 five-year revolving credit facility, with a $50,000,000 sub-limit
for letters of credit, through September 14, 2009. Amounts available for
borrowing are based upon the sum of specific percentages of eligible accounts
receivable and eligible inventories, as
21
defined. Amounts available for borrowing are reduced by any letter of credit
commitments outstanding. Borrowings on the revolving credit agreement accrue
interest at prime minus .50% or LIBOR plus 1.75%. Borrowings are secured by
certain fixed assets, accounts receivable, inventories and the capital stock of
our subsidiaries. Aggregate commitments under the loan agreement may be
increased by up to an additional $50,000,000. This 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, 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.
We had no borrowings outstanding on the line of credit at January 31, 2005 or
January 31, 2004. A total of approximately $72.9 million was available at
January 31, 2005, net of one letter of credit outstanding of $0.9 million.
Borrowing levels vary during the course of a year based upon our seasonal
working capital needs. The maximum direct borrowings outstanding during fiscal
2004 were approximately $22.2 million. The weighted average interest rate was
4.2% (7.8% including commitment fees) for fiscal 2004.
Tabular Disclosure of Contractual Obligations
In the ordinary course of business, the Company enters into agreements under
which it is obligated to make legally enforceable future cash payments. These
agreements include those related to purchasing inventory, mortgaging and leasing
retail space. The following table summarizes by category expected future cash
outflows associated with contractual obligations in effect as of January 31,
2005.
Payment due by period
-------------------------------------------------
Less
than 1 1-3 3-5 More than
Contractual Obligations Total Year Years Years 5 Years
- --------------------------- ------- ------- ------- ------- ---------
Operating lease obligations $14,689 $ 5,574 $ 6,213 $ 2,781 $ 121
Long-term debt obligations 33,398 2,897 7,950 8,785 13,766
Inventory purchase orders 15,973 15,973 -- -- --
Interest on fixed rate debt 5,445 933 1,629 1,271 1,612
------- ------- ------- ------- -------
Total $69,505 $25,377 $15,792 $12,837 $15,499
======= ======= ======= ======= =======
Seasonality and Quarterly Fluctuations
Our business is seasonal. As is the case with many other retailers, our net
sales and net income are greatest in our fourth fiscal quarter, which includes
the Christmas selling season. The fourth fiscal quarter accounted for 32.1% of
net sales for fiscals 2004 and 2003. The fourth fiscal quarter accounted for
80.0% and 47.5% of operating income in fiscal 2004 and 2003, respectively. Year
to year comparisons of quarterly results of operations and comparable store
sales can be affected by a variety of factors, including the duration of the
holiday selling season, weather conditions and the timing of new store openings.
Impact of Inflation
The impact of inflation has not been material to our results of operations for
the past three fiscal years.
22
Critical Accounting Policies
We believe the application of the following accounting policies, which are
important to our financial position and results of operations, require
significant assumptions, judgments and estimates on the part of management. We
base our assumptions, judgments and estimates on historical experience, current
trends and other factors that management believes to be relevant at the time our
consolidated financial statements are prepared. On a regular basis, management
reviews the accounting policies, assumptions, estimates and judgments to ensure
that our financial statements are presented in accordance with generally
accepted accounting principles (GAAP). However, because future events and their
effects cannot be determined with certainty, actual results could differ from
our assumptions and estimates, and such differences could be material. Further,
if different assumptions, judgments and estimates had been used, the results
could have been different and such differences could be material. For a summary
of all of our accounting policies, including the accounting policies discussed
below, see Note 1 of the Consolidated Financial Statements. Management believes
that the following accounting policies are the most critical to aid in fully
understanding and evaluating our reported financial results, and they require
management's most difficult, subjective or complex judgments, resulting from the
need to make estimates about the effect of matters that are inherently
uncertain.
Revenue Recognition - We recognize sales of products upon receipt by the
customer. We will honor returns from customers within seven days from the date
of sale. We establish liabilities for estimated returns at the point of sale.
We also sell product service contracts covering periods beyond the normal
manufacturers' warranty periods, usually with terms of coverage (including
manufacturers' warranty periods) of between 12 to 60 months. Contract revenues,
net of sales commissions, are deferred and amortized on a straight-line basis
over the life of the contracts after the expiration of applicable manufacturers'
warranty periods. We retain the obligation to perform warranty service and such
costs are charged to operations as incurred.
We recognize amounts billed to a customer for shipping and handling as revenue
and actual costs incurred for shipping as selling, general and administrative
expense in the income statement.
Vendor allowances - Vendors often fund, up front, certain advertising costs and
exposure to general changes in pricing to customers due to technological change.
Allowances are deferred as received from vendors and recognized into income as
an offset to the cost of merchandise sold when the related product is sold.
Advertising costs are expensed as incurred, with no offset of vendor allowances.
Inventory Reserves - Inventory is recorded at the lower of cost or market, net
of reserves established for estimated technological obsolescence. The market
value of inventory is often dependent upon changes in technology resulting in
significant changes in customer demand. If these estimates are inaccurate, we
may be exposed to market conditions that require an additional reduction in the
value of certain inventories affected.
Income Taxes - Income taxes are recorded based on the current year amounts
payable or refundable, as well as the consequences of events that give rise to
deferred tax assets and liabilities based on differences in how those events are
treated for tax purposes, net of valuation allowances. We base our estimate of
deferred tax assets and liabilities on current tax laws and rates and other
expectations about future outcomes, including the outcome of tax credits under
Section 29 of the Internal Revenue Code. Changes in existing regulatory tax laws
and rates may affect our ability to successfully manage regulatory matters, and
future business results may affect the amount of deferred tax liabilities or the
valuation of deferred tax assets over time. Our accounting for deferred tax
consequences represents management's best estimate of future events that can be
appropriately reflected in the accounting estimates.
23
Recoverability of Long-Lived Assets - Given the nature of our business, each
income producing property must be evaluated separately when events and
circumstances indicate that the value of that asset may not be recoverable. We
recognize an impairment loss when the estimated future undiscounted cash flows
expected to result from the use of the asset and its value upon disposal are
less than its carrying amount. Changes in the real estate market for particular
locations could result in changes to our estimates of the property's value upon
disposal.
Costs Associated with Exit Activities-We occasionally vacate stores prior to the
expiration of the related lease. For vacated locations that are under long-term
leases, we record an expense for the difference between our future lease
payments and related costs (real estate taxes, maintenance, etc.) from the date
of closure through the end of the remaining lease term, net of expected future
sublease rental income. If actual results related to sublease income, vacancy
periods and the payment of settlements and repairs differ from our estimates, we
may be exposed to gains and or losses that could be material.
New Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board ("FASB") issued FASB
Statement No. 123(R), Share-Based Payment. Among other items, the standard
requires the Company to recognize compensation cost for all share-based
payments, including stock options, in our consolidated statements of income.
Note 1 of the Notes to Consolidated Financial Statements, contains pro forma
disclosures regarding the effect on net earnings and earnings per share as if we
had applied the fair value method of accounting for stock-based compensation.
The new standard is effective for the first period that begins after June 15,
2005, and allows two different methods of transition. We expect to implement the
new standard during the third quarter of fiscal 2005, which begins August 1,
2005. We have not determined the impact of the adoption of FASB Statement No.
123(R) on the Company's results of operations.
In December 2004, FASB issued FASB Statement No. 151, Inventory Costs, an
amendment of ARB No. 43, Chapter 4. The standard clarifies the accounting for
inventory when there are abnormal amounts of idle facility expense, freight,
handling costs, and wasted materials. Under existing GAAP, items such as idle
facility expense, excessive spoilage, double freight, and re-handling costs may
be "so abnormal" as to require treatment as current period charges rather than
recorded as adjustments to the value of the inventory. FASB Statement No. 151
requires that those items be recognized as current-period charges regardless of
whether they meet the criterion of "so abnormal." The provisions of this
standard shall be effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. The Company was in compliance with this standard
for the periods ended January 31, 2005, 2004 and 2003; therefore, there will be
no impact on the Company's financial position or results of operations by
adopting this standard.
There were other new accounting standards issued during fiscal 2004 that did not
have a material impact on the Company's financial position or results of
operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
As of January 31, 2005, we had financial instruments which were sensitive to
changes in interest rates. These financial instruments consist of a revolving
credit agreement and various mortgage notes payable secured by certain land,
buildings and leasehold improvements.
The revolving credit agreement is with five banks through September 14, 2009,
with interest at prime minus .50% or LIBOR plus 1.75% and commitment fees of
1/4% payable on the unused portion. Amounts available for borrowing are based
upon the sum of specific percentages of eligible accounts receivable and
eligible inventories, as defined. Amounts available for borrowing are reduced by
any letter of credit commitments outstanding. Borrowings are secured by certain
fixed assets, accounts receivable, inventories and the capital
24
stock of our subsidiaries. At January 31, 2005, a total of approximately $72.9
million was available for borrowings under the revolving credit agreement, net
of letters of credit outstanding of $0.9 million. We had no outstanding
borrowings under the revolving credit agreement at January 31, 2005.
Approximately $13.0 million of the mortgage debt consists of fixed rate debt.
The interest rates range from 3.7% to 8.5%. The remaining $20.4 million of
mortgage debt is variable rate mortgage debt. In general, the rate on the
variable rate debt ranges from prime to prime plus 0.625%. If the prime interest
rate increased 1%, we estimate our annual interest cost would increase
approximately $0.2 million for the variable rate mortgage debt. Principal and
interest are payable monthly over terms which generally range from 5 to 15
years. Substantially all of the notes payable require balloon payments at the
end of the scheduled term. The fair value of our long-term fixed rate mortgage
debt at January 31, 2005 was approximately $13.9 million. The fair value was
estimated based on rates available to us for debt with similar terms and
maturities.
25
Item 8. Financial Statements and Supplementary Data
REX STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 2005 AND 2004
(Amounts in thousands)
- --------------------------------------------------------------------------------
2005 2004
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,671 $ 19,780
Accounts receivable--net of allowance for doubtful
accounts of $157 and $235 in 2005 and 2004,
respectively 5,460 4,806
Synthetic fuel receivable 1,675 3,098
Investments available for sale -- 7,000
Merchandise inventory 124,188 116,755
Prepaid expenses and other 1,230 1,481
Future income tax benefits 10,929 8,703
--------- ---------
Total current assets 148,153 161,623
PROPERTY AND EQUIPMENT--Net 129,723 131,409
ASSETS HELD FOR SALE 1,986 --
OTHER ASSETS 841 3,477
FUTURE INCOME TAX BENEFITS 27,978 14,645
RESTRICTED INVESTMENTS 2,270 2,257
--------- ---------
TOTAL ASSETS $ 310,951 $ 313,411
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 2,897 $ 5,258
Accounts payable--trade 32,842 32,745
Accrued income taxes 1,567 806
Current portion of deferred income and deferred gain
on sale and leaseback 10,432 10,544
Accrued payroll and related items 6,303 6,602
Other current liabilities 6,152 7,214
--------- ---------
Total current liabilities 60,193 63,169
--------- ---------
LONG-TERM LIABILITIES:
Long-term mortgage debt 30,501 53,548
Deferred income 11,703 12,762
--------- ---------
Total long-term liabilities 42,204 66,310
--------- ---------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, 45,000 shares authorized, 29,038 and
28,308 shares issued at par 290 283
Paid-in capital 133,474 126,124
Retained earnings 212,629 185,080
Treasury stock, 17,865 and 17,214 shares (137,839) (127,555)
--------- ---------
Total shareholders' equity 208,554 183,932
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 310,951 $ 313,411
========= =========
See notes to consolidated financial statements.
26
REX STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED JANUARY 31, 2005, 2004 AND 2003
(Amounts in Thousands, Except Per Share Amounts)
- --------------------------------------------------------------------------------
2005 2004 2003
-------- -------- --------
NET SALES $391,300 $405,413 $415,770
COST OF MERCHANDISE SOLD 282,047 286,273 292,175
-------- -------- --------
GROSS PROFIT 109,253 119,140 123,595
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 103,437 105,564 103,137
-------- -------- --------
OPERATING INCOME 5,816 13,576 20,458
INVESTMENT INCOME 178 77 393
INTEREST EXPENSE (3,130) (4,751) (5,250)
LOSS ON EARLY TERMINATION OF DEBT (679) (18) (248)
GAIN ON SALE OF REAL ESTATE 246 1,153 --
INCOME FROM LIMITED PARTNERSHIPS 18,615 16,011 15,080
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 21,046 26,048 30,433
(BENEFIT) PROVISION FOR INCOME TAXES (6,840) (1,725) 7,365
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS 27,886 27,773 23,068
LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX (549) (333) (136)
GAIN ON DISPOSAL OF DISCONTINUED OPERATIONS, NET OF TAX 212 -- --
-------- -------- --------
NET INCOME $ 27,549 $ 27,440 $ 22,932
======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING--BASIC 11,081 10,863 12,142
======== ======== ========
BASIC INCOME PER SHARE FROM CONTINUING OPERATIONS $ 2.52 $ 2.56 $ 1.90
BASIC LOSS PER SHARE FROM DISCONTINUED OPERATIONS (0.05) (0.03) (0.01)
BASIC GAIN ON DISPOSAL OF DISCONTINUED OPERATIONS 0.02 0.00 0.00
-------- -------- --------
BASIC NET INCOME PER SHARE $ 2.49 $ 2.53 $ 1.89
======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING--DILUTED 12,714 12,648 14,192
======== ======== ========
DILUTED INCOME PER SHARE FROM CONTINUING OPERATIONS $ 2.19 $ 2.20 $ 1.62
DILUTED LOSS PER SHARE FROM DISCONTINUED OPERATIONS (0.04) (0.03) (0.01)
DILUTED GAIN ON DISPOSAL OF DISCONTINUED OPERATIONS 0.02 0.00 0.00
-------- -------- --------
DILUTED NET INCOME PER SHARE $ 2.17 $ 2.17 $ 1.61
======== ======== ========
See notes to consolidated financial statements.
27
REX STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 31, 2005, 2004 AND 2003
(Amounts in thousands)
- --------------------------------------------------------------------------------
2005 2004 2003
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 27,549 $ 27,440 $ 22,932
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Depreciation and amortization--net 4,158 3,994 4,325
Impairment charges 875 -- --
Income from limited partnerships (18,615) (16,011) (15,080)
(Gain) loss on disposal of fixed assets (60) (1,077) 290
Deferred income (871) (1,498) (1,863)
Deferred income tax (15,559) (6,928) 3,514
Changes in assets and liabilities:
Accounts receivable (654) (219) (3,467)
Merchandise inventory (7,433) 25,308 (41,046)
Other current assets 251 65 1,002
Other long term assets 2,636 (800) (2,677)
Accounts payable--trade 97 5,328 (5,202)
Other current liabilities (600) (797) (1,129)
-------- -------- --------
Net cash (used in) provided by operating activities (8,226) 34,805 (38,401)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (6,919) (4,043) (2,404)
Proceeds from sale of partnership interest 20,038 19,532 10,006
Proceeds from sale of real estate and fixed assets 1,346 3,636 2,131
Purchase of investments -- (7,000) --
Sale of investments 7,000 -- --
Restricted investments (13) (16) (19)
-------- -------- --------
Net cash provided by investing activities 21,452 12,109 9,714
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in note payable -- (13,451) 13,385
Payments of long-term debt (25,408) (11,277) (12,132)
Stock options exercised and related tax effects 4,557 2,694 2,553
Treasury stock issued 1,890 754 377
Treasury stock acquired (9,374) (6,060) (14,731)
-------- -------- --------
Net cash used in financing activities (28,335) (27,340) (10,548)
-------- -------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (15,109) 19,574 (39,235)
CASH AND CASH EQUIVALENTS--Beginning of year 19,780 206 39,441
-------- -------- --------
CASH AND CASH EQUIVALENTS--End of year $ 4,671 $ 19,780 $ 206
======== ======== ========
See notes to consolidated financial statements.
28
REX STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JANUARY 31, 2005, 2004 AND 2003
(Amounts in thousands)
- --------------------------------------------------------------------------------
Common Shares
-----------------------------------
Issued Treasury Total
--------------- ----------------- Paid-In Retained Shareholders'
Shares Amount Shares Amount Capital Earnings Equity
------ ------ ------ -------- -------- -------- -------------
BALANCE--January 31, 2002 27,358 $274 15,113 $103,710 $116,701 $134,708 $147,973
Net income 22,932 22,932
Treasury stock acquired 1,549 16,762 (16,762)
Stock options exercised
and related tax effects 388 3 (55) (377) 4,581 4,961
------ ---- ------ -------- -------- -------- --------
BALANCE--January 31, 2003 27,746 277 16,607 120,095 121,282 157,640 159,104
Net income 27,440 27,440
Treasury stock acquired 711 8,214 (8,214)
Stock options exercised
and related tax effects 562 6 (104) (754) 4,842 5,602
------ ---- ------ -------- -------- -------- --------
BALANCE--January 31, 2004 28,308 283 17,214 127,555 126,124 185,080 183,932
Net income 27,549 27,549
Treasury stock acquired 902 12,174 (12,174)
Stock options exercised
and related tax effects 730 7 (251) (1,890) 7,350 9,247
------ ---- ------ -------- -------- -------- --------
BALANCE--January 31, 2005 29,038 $290 17,865 $137,839 $133,474 $212,629 $208,554
====== ==== ====== ======== ======== ======== ========
See notes to consolidated financial statements
29
REX STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The accompanying financial statements
consolidate the operating results and financial position of REX Stores
Corporation and its wholly-owned subsidiaries (the "Company"). All
significant intercompany balances and transactions have been eliminated.
The Company operates 234 retail consumer electronics and appliance stores
under the REX name in 37 states. The Company operates in one segment.
Reclassifications - Investments in auction rate securities have been
reclassified from cash to investments for all years presented. See Note 3
for a further discussion of the reclassification of cash and investments
the Company made. Additionally, certain items have been reclassified from
prior years' presentation to conform to the current year presentation.
Fiscal Year - All references in these consolidated financial statements to
a particular fiscal year are to the Company's fiscal year ended January 31.
For example, "fiscal 2004" means the period February 1, 2004 to January 31,
2005.
Use of Estimates - The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Cash Equivalents - Cash equivalents are principally short-term investments
with original maturities of less than three months. The carrying amount of
cash equivalents approximate fair value.
Merchandise Inventory - Substantially all inventory is valued at the lower
of average cost or market, which approximates cost on a first-in, first-out
("FIFO") basis, including certain costs associated with purchasing,
warehousing and transporting merchandise. Reserves are established for
estimated technological obsolescence. The market value of inventory is
often dependent upon changes in technology resulting in significant changes
in customer demand. The inventory of an acquired subsidiary, Kelly & Cohen
Appliances, Inc. ("K&C"), is valued at the lower of cost or market using
the last-in, first-out ("LIFO") method. Following the lower of cost or
market principle, the K&C inventory value using the LIFO method
($37,972,000 and $34,679,000 at January 31, 2005 and 2004, respectively) is
equivalent to the FIFO value in all years presented. Ten suppliers
accounted for approximately 83% of the Company's purchases in fiscal 2004.
Eleven suppliers accounted for approximately 89% of the Company's purchases
in fiscal 2003. Two vendors represented approximately 34% and 29% of our
inventory purchases in fiscals 2004 and 2003, respectively.
Property and Equipment - Property and equipment is recorded at cost.
Depreciation is computed using the straight-line method. Estimated useful
lives are 15 to 40 years for buildings and improvements, and 3 to 12 years
for fixtures and equipment. Leasehold improvements are depreciated over the
initial lease term and one renewal term when exercise of the renewal term
is reasonably assured.
30
The components of property and equipment at January 31, 2005 and 2004 are
as follows (amounts in thousands):
2005 2004
-------- --------
Land $ 38,598 $ 38,519
Buildings and improvements 102,210 101,448
Fixtures and equipment 17,979 18,567
Leasehold improvements 8,886 9,797
Construction in progress 1,073 --
-------- --------
168,746 168,331
Less: accumulated depreciation (39,023) (36,922)
-------- --------
$129,723 $131,409
======== ========
In accordance with FASB Statement No. 144 Accounting for the Impairment or
Disposal of Long-Lived Assets, the carrying value of long-lived assets is
assessed for recoverability by management when changes in circumstances
indicate that the carrying amount may not be recoverable, based on an
analysis of undiscounted future expected cash flows from the use and
ultimate disposition of the asset. The Company recorded an impairment
charge included in selling, general and administrative expenses in the
accompanying consolidated statements of income of $875,000 in the fiscal
year ended January 31, 2005. There were no material impairment losses
incurred in the fiscal years ended January 31, 2004, and 2003.
Restricted Investments - Restricted investments, which are principally
marketable debt securities, are stated at cost plus accrued interest, which
approximates market. Restricted investments at January 31, 2005 and 2004
are required by two states to cover possible future claims under product
service contracts.
Revenue Recognition - The Company recognizes sales of products upon receipt
by the customer. The Company will honor returns from customers within seven
days from the date of sale. The Company establishes liabilities for
estimated returns at the point of sale.
The Company also sells product service contracts covering periods beyond
the normal manufacturers' warranty periods, usually with terms of coverage
(including manufacturers' warranty periods) of between 12 to 60 months.
Contract revenues, net of sales commissions, are deferred and amortized on
a straight-line basis over the life of the contracts after the expiration
of applicable manufacturers' warranty periods. The Company retains the
obligation to perform warranty service and such costs are charged to
operations as incurred.
The Company recognizes amounts billed to a customer for shipping and
handling as revenue and actual costs incurred for shipping as selling,
general and administrative expense in the income statement. Amounts
classified as selling, general and administrative expense was $3,603,000,
$3,743,000 and $3,222,000 in fiscal 2004, 2003 and 2002, respectively.
Merchandise sold under interest-free financing arrangements is recorded as
a sale when the customer receives the merchandise. In general, the Company
receives payment within 3 to 10 business days from the third-party lender.
The amount the Company receives from the third-party lender is generally
discounted for the interest free financing option, which is recorded as a
marketing expense in selling, general and administrative expense. The net
expense for third party financing was approximately
31
$1,638,000, $1,068,000, and $915,000 for the years ended January 31, 2005,
2004 and 2003, respectively.
Costs of Merchandise Sold - Cost of sales includes the cost of merchandise,
markdowns and inventory shortage, receiving, warehousing and freight
charges to get merchandise to retail stores, service repair bills as well
as cash discounts and rebates. The Company classifies purchasing costs as
selling and administrative expenses. Due to this classification, the
Company's gross margins may not be comparable to those of other retailers
that include costs related to their distribution network in selling and
administrative expense.
Selling and Administrative Expenses - The Company includes store expenses
(such as payroll and occupancy costs), advertising, buying, depreciation,
insurance and overhead costs in selling and administrative expenses.
Vendor Allowances and Advertising Costs - Vendors often fund, up front,
certain advertising costs, display allowances and exposure to general
changes in pricing to customers due to technological change. Allowances are
deferred as received from vendors and recognized into income as an offset
to the cost of merchandise sold when the related product is sold.
Advertising costs are expensed as incurred. Advertising expense was
approximately $28,299,000, $30,437,000 and $30,894,000 for the years ended
January 31, 2005, 2004 and 2003, respectively and was not offset by vendor
allowances.
Interest Cost - Interest expense of $3,130,000, $4,751,000 and $5,250,000
for the years ended January 31, 2005, 2004 and 2003, respectively, is net
of approximately $37,000, $79,000 and $5,000 of interest capitalized
related to store or warehouse construction. Cash paid for interest in
fiscals 2004, 2003 and 2002 was approximately $3,392,000, $4,767,000 and
$5,199,000, respectively; such amounts include $394,000, $0 and $107,000 of
prepayment penalties recorded as loss on early termination of debt for
fiscal 2004, 2003 and 2002, respectively.
Loss on Early Termination of Debt - Unamortized deferred financing costs
and associated prepayment penalties related to the early payoff of loans
are charged to loss on early termination of debt.
Deferred Financing Costs - Direct expense and fees associated with
obtaining notes payable or long-term mortgage debt are capitalized and
amortized to interest expense over the life of the loan.
Store Opening and Closing Costs - Store opening costs are expensed as
incurred. Store opening costs incurred in the fiscal years ended January
31, 2005, 2004 and 2003 were not material. The costs associated with
closing stores are accrued when the decision is made to close a location.
Store closing costs incurred in the fiscal years ended January 31, 2005,
2004 and 2003 were not material.
Stock Compensation - The Company accounts for its stock-based compensation
plans under Accounting Principles Board Opinion ("APB Opinion") No. 25,
Accounting for Stock Issued to Employees, under which no compensation cost
has been recognized.
Had compensation cost for these plans been determined at fair value
consistent with FASB Statement No. 123, Accounting for Stock-Based
Compensation, the Company's net income and net income per
32
share would have been reduced to the following pro forma amounts for the
years ended January 31, 2005, 2004 and 2003 (amounts in thousands, except
per-share amounts):
2005 2004 2003
------- ------- -------
Net income As reported $27,549 $27,440 $22,932
Compensation Cost, net of tax 3,370 2,901 3,621
------- ------- -------
Pro forma 24,179 24,539 19,311
Basic net income per share As reported $ 2.49 $ 2.53 $ 1.89
Compensation Cost, net of tax 0.31 0.27 0.30
------- ------- -------
Pro forma 2.18 2.26 1.59
Diluted net income per share As reported $ 2.17 $ 2.17 $ 1.61
Compensation Cost, net of tax 0.27 0.23 0.25
------- ------- -------
Pro forma 1.90 1.94 1.36
The fair values of options granted were estimated as of the date of grant
using a Black-Scholes option pricing model with the following weighted
average assumptions used for grants in fiscal years ended January 31, 2005,
2004 and 2003, respectively: risk-free interest rate of 4.7%, 4.3% and
5.2%, expected volatility of 65.4%, 65.9% and 65.4% and a weighted average
stock option life of nine years for all years. In accordance with the
provisions of FASB Statement No. 123, the fair value method of accounting
was not applied to options granted prior to February 1, 1995 in estimating
the pro forma amounts. Therefore, the pro forma effect on net income and
net income per share may not be representative of that to be expected in
future years.
See New Accounting Pronouncements section of Note 1 for a discussion of
FASB Statement No. 123(R), which was issued by the Financial Accounting
Standards Board in December 2004.
Extended Service Contracts - Extended service contract revenues, net of
sales commissions, are deferred and amortized on a straight-line basis over
the life of the contracts after the expiration of applicable manufacturers'
warranty periods. Terms of coverage, including the manufacturers' warranty
periods, are usually for periods of 12 to 60 months. Extended service
contract revenues represented 3.3% of net sales for fiscal 2004, 3.5% of
net sales for fiscal 2003 and 3.6% of net sales for fiscal 2002. Service
contract costs are charged to operations as incurred. Gross profit realized
from extended service contract revenues was $9.4 million, $10.5 million and
$11.1 million in fiscal 2004, 2003 and 2002, respectively.
Income Taxes - The Company provides for deferred tax liabilities and assets
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carryforwards.
The Company provides for a valuation allowance if, based on the weight of
available evidence, it is more likely than not that some or all of the
deferred tax assets will not be realized.
Discontinued Operations - The Company classifies closed or sold stores in
discontinued operations when the operations and cash flows of the store
have been eliminated from ongoing operations and when the Company will not
have any significant continuing involvement in the operation of the store
after disposal. In making this determination, the Company considers, among
other factors, geographic proximity and customer crossover to other area
stores, continuing lease obligations and other contractual obligations.
33
New Accounting Pronouncements - In December 2004, the Financial Accounting
Standards Board ("FASB") issued FASB Statement No. 123(R), Share-Based
Payment. Among other items, the standard requires the Company to recognize
compensation cost for all share-based payments, including stock options, in
our consolidated statements of income. Note 1 of the Notes to Consolidated
Financial Statements contains pro forma disclosures regarding the effect on
net earnings and earnings per share as if we had applied the fair value
method of accounting for stock-based compensation. The new standard is
effective for the first period that begins after June 15, 2005, and allows
two different methods of transition. We expect to implement the new
standard during the third quarter of fiscal 2005, which begins August 1,
2005. The Company has not determined the impact of the adoption of FASB
Statement No. 123(R) on its results of operations.
In December 2004, FASB issued FASB Statement No. 151, Inventory Costs, an
amendment of ARB No. 43, Chapter 4. The standard clarifies the accounting
for inventory when there are abnormal amounts of idle facility expense,
freight, handling costs, and wasted materials. Under existing GAAP, items
such as idle facility expense, excessive spoilage, double freight, and
re-handling costs may be "so abnormal" as to require treatment as current
period charges rather than recorded as adjustments to the value of the
inventory. FASB Statement No. 151 requires that those items be recognized
as current-period charges regardless of whether they meet the criterion of
"so abnormal." The provisions of this standard shall be effective for
inventory costs incurred during fiscal years beginning after June 15, 2005.
The Company was in compliance with this standard for the periods ended
January 31, 2005, 2004 and 2003; therefore, there will be no impact on the
Company's financial position or results of operations by adopting this
standard.
2. INVESTMENTS IN LIMITED PARTNERSHIPS
During fiscal 1998, the Company invested in two limited partnerships that
produce synthetic fuels. The limited partnerships earned Federal income tax
credits under Section 29 of the Internal Revenue Code based upon the
quantity and content of synthetic fuel production and sales. Under current
law, credits under Section 29 are available for qualified fuels sold before
January 1, 2008 (see Note 12). The Company accounts for its share of the
income tax credits as a reduction of the income tax provision in the period
earned and such credits totaled approximately $8,000,000, $7,300,000 and
$3,100,000 in fiscal 2004, 2003 and 2002, respectively (see Note 10).
Effective February 1, 1999, the Company sold a 13% interest in Colona
Synfuel Limited Partnership, L.L.L.P (Colona) reducing its initial 30%
ownership interest to 17%. The Company expects to receive cash payments
from the sale on a quarterly basis through December 31, 2007. These
payments are contingent upon and equal to 75% of the federal income tax
credits attributable to the 13% interest sold and are subject to certain
annual limitations, as specified in the sale agreement. The maximum amount
that could be received for calendar years 2004, 2003 and 2002 was
approximately $8,100,000, $7,700,000 and $7,400,000, respectively. The
Company earned and reported as income approximately $7,200,000, $6,400,000
and $5,900,000 for fiscal years 2004, 2003 and 2002, respectively. The
maximum that can be received for calendar 2005 is approximately $8,600,000.
Effective July 31, 2000, the Company sold an additional portion of its
interest in the Colona partnership, reducing its ownership percentage from
17% to 8%. The Company expects to receive payments from the sale on a
quarterly basis through December 31, 2007. These payments are contingent
upon and equal to the greater of 82.5% of the federal income tax credits
attributable to the 9% interest sold subject to annual limitations or
74.25% of the federal income tax credits attributable to the 9% interest
sold with no annual limitations. Quarterly payments from this sale were
held in escrow beginning in fiscal 2002 pending the results of an Internal
Revenue Service (IRS) audit of the partnership. The amount earned and
reported as income was approximately $5.8 million for fiscal 2004; none of
which was held in escrow. The amount earned and reported as income was
approximately $5.0 million for fiscal 2003, all
34
of which was put into escrow. The amount earned and reported as income was
approximately $4.7 million for fiscal 2002; the Company received
approximately $1.4 million of these proceeds with the remaining $3.3
million held in escrow. During fiscal 2003, we took $6.5 million from
escrow and delivered a letter of credit for the same amount. The letter of
credit guaranteed our own performance. In February 2004, the audit was
finalized and we received our remaining money from escrow and the letter of
credit was cancelled.
Effective May 31, 2001, the Company sold its remaining 8% ownership in the
Colona partnership. The Company expects to receive payments from the sale
on a quarterly basis through December 31, 2007. These payments are
contingent upon and equal to the greater of 82.5% of the federal income tax
credits attributable to the 8% interest sold, subject to annual limitations
or 74.25% of the federal income tax credits attributable to the 8% interest
sold with no annual limitations. Quarterly payments from this sale were
being held in escrow beginning in fiscal 2002 pending the results of the
IRS audit. The amount earned and reported as income was approximately $5.1
million for fiscal 2004; none of which was held in escrow. The amount
earned and reported as income was approximately $4.6 million for fiscal
2003, all of which was put into escrow. The amount earned and reported as
income was approximately $4.1 million for fiscal 2002; the Company received
approximately $1.1 million of the proceeds with the remaining $3.0 million
held in escrow. During fiscal 2003, we received $6.9 million from escrow
and delivered a letter of credit for the same amount. The letters of credit
guaranteed our own performance. In February 2004, the audit was finalized
and we received our remaining money from escrow and the letters of credit
were cancelled.
The Company remains a limited partner in Somerset Synfuel, L.P. This
partnership is operational and producing synthetic fuel. Net income for
fiscal 2002 reflects pre-tax income, net of litigation expenses, of
approximately $400,000 from the settlement of a previously filed lawsuit
relating to our participation in this partnership. As part of the
settlement, which was effected without the admission of liability by any
party, we entered into an Amended and Restated Agreement of Limited
Partnership which facilitates increased participation in future production
of synthetic fuel.
The IRS has completed an audit on the Colona partnership. The audit was
finalized in February 2004 and a closing agreement was signed with the IRS
with no impact on tax credits generated. In June 2004, the IRS concluded
its examination of the Somerset partnership's Section 29 federal income tax
credits for calendar year 2001 reporting no changes in the credits. In
January 2005, the IRS concluded its examination of the Company's federal
tax return for the year ended January 31, 2002 with no changes in taxable
income for that year.
Income for fiscal 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 owned 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 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.
3. INVESTMENTS AVAILABLE FOR SALE
The Company had short-term investments of $0 and $7 million at January 31,
2005 and 2004, respectively. The short-term investments consisted of
auction rate securities in corporate debt obligations representing funds
available for current operations. The corporate debt obligation
35
underlying the auction rate security matures on June 10, 2029. In
accordance with FASB Statement No. 115, Accounting for Certain Investments
in Debt and Equity Securities, the Company classified the short-term
investments as available-for-sale. These securities were carried at
estimated fair market value, which approximated cost. As such, there was no
aggregate unrealized gains or losses related to these investments that were
reflected as a part of other comprehensive income within shareholders
equity at January 31, 2005 and 2004.
For all periods presented, the investments in auction rate securities have
been reclassified from cash and cash equivalents to investments available
for sale on the consolidated balance sheet. The reclassification was
effected because the securities had stated maturities beyond three months.
The amount of auction rate securities was $7 million at January 31, 2004.
There were no auction rate securities at January 31, 2005. The auction rate
securities reclassification resulted in an increase of purchases of
investments and a decrease in cash provided by investing activities of $7
million in the fiscal year 2003 Consolidated Statement of Cash Flows. The
auction rate securities reclassification resulted in an increase in the
sale of investments and an increase in cash provided by investing
activities of $7 million in the fiscal year 2004 Consolidated Statement of
Cash Flows.
4. NET INCOME PER SHARE FROM CONTINUING OPERATIONS
The Company reports net income per share in accordance with FASB Statement
No. 128 Earnings per Share.
Basic net income per share is computed by dividing net income available to
common shareholders by the weighted average number of common shares
outstanding during the year. Diluted net income per share is computed by
dividing net income available to common shareholders by the weighted
average number of shares outstanding and dilutive common share equivalents
during the year. Common share equivalents for each year include the number
of shares issuable upon the exercise of outstanding options, less the
shares that could be purchased with the proceeds from the exercise of the
options, based on the average trading price of the Company's common stock
for fiscal 2004, 2003 and 2002.
36
The following table reconciles the basic and diluted net income per share
from continuing operations computations for each year presented for the
years ended January 31, 2005, 2004, and 2003 (amounts in thousands, except
per-share amounts):
2005
----------------------------
Income Shares Per Share
------- ------ ---------
Basic net income per share from continuing operations $27,886 11,081 $2.52
Effect of stock options 1,633
------- ------
Diluted net income per share from continuing operations $27,886 12,714 $2.19
======= ====== =====
2004
----------------------------
Income Shares Per Share
------- ------ ---------
Basic net income per share from continuing operations $27,773 10,863 $2.56
Effect of stock options 1,785
------- ------
Diluted net income per share from continuing operations $27,773 12,648 $2.20
======= ====== =====
2003
----------------------------
Income Shares Per Share
------- ------ ---------
Basic net income per share from continuing operations $23,068 12,142 $1.90
Effect of stock options 2,050
------- ------
Diluted net income per share from continuing operations $23,068 14,192 $1.62
======= ====== =====
For the years ended January 31, 2005, 2004 and 2003, a total of 325,136,
666,336 and 346,937 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 those periods.
5. COMMON STOCK
During the years ended January 31, 2005, 2004, and 2003, the Company
purchased 901,529, 711,153 and 1,549,000 shares of its common stock for
$12,174,000, $8,214,000 and $16,762,000, respectively. Included in these
amounts are shares the Company received totaling 184,094, 151,483 and
121,230 for the years ended January 31, 2005, 2004 and 2003, respectively,
as tenders of the exercise price of stock options exercised by the
Company's Chief Executive Officer, all pursuant to the Stock-for-Stock
and Cashless Option Exercise Rules and Procedures adopted by the Company
on June 4, 2001. The cost of these shares, determined as the fair market
value on the date they were tendered, was approximately $2,799,000,
$2,154,000 and $2,031,000 for the years ended January 31, 2005, 2004
and 2003, respectively. At January 31, 2005, the Company was authorized by
its Board of Directors to purchase, in open market transactions, an
additional 453,045 shares of its common stock.
37
6. 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. The Company was
in compliance with all covenants as of January 31, 2005.
There were no borrowings outstanding on the line of credit at January 31,
2005 or January 31, 2004. A total of approximately $72.9 million was
available at January 31, 2005, net of letters of credit outstanding of
$943,000 at that time. We currently have only one letter of credit
outstanding for $943,000.
Borrowing levels vary during the course of a year based upon our seasonal
working capital needs. The maximum direct borrowings outstanding during
fiscal 2004 were approximately $22.2 million. The weighted average interest
rate was 4.2% (7.8% including commitment fees) for fiscal 2004.
7. LONG-TERM MORTGAGE DEBT
Long-term mortgage debt consists of notes payable secured by certain land,
buildings and leasehold improvements. During fiscal 2004 and 2003, the
Company switched certain of its fixed rate debt to variable rate debt.
Interest rates ranged from 3.7% to 8.5% in fiscal 2004 and 2.975% to 8.5%
in fiscal 2003. Principal and interest are payable monthly over terms that
generally range from 5 to 15 years. Substantially all of the notes payable
require balloon payments at the end of the scheduled term. The following
provides information on rates segregated as fixed or variable and by term
for fiscal 2004 and fiscal 2003:
Fiscal 2004
Balance
Interest Rates Maturity (in thousands)
-------------- -------------------- --------------
Variable
4.47% - 6.00% Within five years $ 6,161
4.59% - 6.00% Five to ten years 9,179
5.50% - 6.00% Ten to fifteen years 5,094
-------
Total variable $20,434
=======
Fixed
7% Within five years $ 3
3.70% - 8.50% Five to ten years 3,482
6.49% - 8.40% Ten to fifteen years 9,479
-------
Total fixed $12,964
=======
38
Fiscal 2003
Balance
Interest Rates Maturity (in thousands)
-------------- -------------------- --------------
Variable
2.98% - 6.00% Within five years $17,119
4.00% - 5.00% Five to ten years 5,755
4.00% - 4.50% Ten to fifteen years 11,650
-------
Total variable $34,524
=======
Fixed
6.49% - 8.00% Within five years $ 2,890
3.70% - 8.50% Five to ten years 5,928
6.49% - 8.40% Ten to fifteen years 15,464
-------
Total fixed $24,282
=======
Maturities of long-term debt are as follows (amounts in thousands):
Year Ending
January 31
-----------
2006 $ 2,897
2007 3,053
2008 4,897
2009 3,843
2010 4,942
Thereafter 13,766
-------
$33,398
=======
In fiscal 2004, the Company paid off approximately $22.0 million in
mortgage debt prior to maturity. As a result, the Company expensed
unamortized financing cost and prepayment penalty of approximately $679,000
as loss on early termination of debt.
In fiscal 2003, the Company paid off approximately $4.8 million in mortgage
debt prior to maturity. As a result, the Company expensed unamortized
financing cost of approximately $18,000 as loss on early termination of
debt.
In fiscal 2002, the Company paid off approximately $7.0 million in mortgage
debt prior to maturity. As a result, the Company expensed unamortized
financing cost and prepayment penalty of approximately $248,000 as loss on
early termination of debt.
The fair value of the Company's long-term debt at January 31, 2005 and 2004
was approximately $34.3 million and $60.7 million, respectively. At January
31, 2005, the Company had approximately $13.0 million of fixed rate
mortgage debt and approximately $20.4 million of variable rate mortgage
debt.
39
8. EMPLOYEE BENEFITS
Stock Option Plans - The Company maintains the REX Stores Corporation 1995
Omnibus Stock Incentive Plan and the REX Stores Corporation 1999 Omnibus
Stock Incentive Plan (the Omnibus Plans). Under the Omnibus Plans, the
Company may grant to officers and key employees awards in the form of
incentive stock options (1995 Plan only), non-qualified stock options,
stock appreciation rights, restricted stock, other stock-based awards and
cash incentive awards. The Omnibus Plans also provide for yearly grants of
non-qualified stock options to directors who are not employees of the
Company. The exercise price of each option must be at least 100% of the
fair market value of the Company's common stock on the date of grant. A
maximum of 4,500,000 shares of common stock are authorized for issuance
under each of the Omnibus Plans. On January 31, 2005, 108,011 and 1,962,803
shares remain available for issuance under the 1995 and 1999 Plans,
respectively.
On October 14, 1998, the Company's Board of Directors approved a grant of
non-qualified stock options to two key executives for 1,462,500 shares at
an exercise price of $4.42, which represented the market price on the date
of grant. These options are fully vested as of December 31, 2003. All of
these options remained outstanding at January 31, 2005.
On April 17, 2001, the Company's Board of Directors approved a grant of
non-qualified stock options to two key executives for 1,462,500 shares at
an exercise price of $8.01, which represented the market price on the date
of grant. These options vest over a three-year period with the first
one-third vesting as of December 31, 2003, the second one-third vesting as
of December 31, 2004 and the third one-third vesting as of December 31,
2005. All of these options remained outstanding at January 31, 2005.
40
The following summarizes stock option activity for the years ended January 31,
2005, 2004 and 2003 (amounts in thousands, except per-share amounts):
2005 2004 2003
------------------ ------------------ ------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
(000's) Price (000's) Price (000's) Price
------- -------- ------- -------- ------- --------
Outstanding--Beginning of year 6,391 $ 7.24 6,736 $ 6.83 6,882 $ 6.40
Granted 369 12.42 363 12.92 354 14.84
Exercised (981) 6.37 (667) 6.06 (443) 6.34
Canceled or expired (28) 12.36 (41) 9.84 (57) 8.68
------ ------ ------ ------ ------ ------
Outstanding--End of year 5,751 $ 7.70 6,391 $ 7.24 6,736 $ 6.83
====== ====== ====== ====== ====== ======
Exercisable--End of year 4,183 $ 6.52 4,238 $ 5.94 3,958 $ 5.42
====== ====== ====== ====== ====== ======
Weighted average fair value of
options granted $ 9.51 $ 9.50 $11.06
====== ====== ======
Price ranges and other information for stock options outstanding as of January
31, 2005 were as follows (amounts in thousands, except per share amounts):
Outstanding Exercisable
------------------------------ ------------------
Weighted Weighted Weighted
Range of Average Average Average
Exercise Shares Exercise Remaining Shares Exercise
Prices (000's) Price Life (000's) Price
------ ------- -------- --------- ------- --------
$3.61 to $5.42 2,272 $ 4.58 3.48 2,272 $ 4.58
$5.56 to $8.34 2,068 7.86 5.78 1,410 7.79
$9.51 to $14.265 1,086 11.77 7.67 371 10.62
$14.745 to $16.04 325 14.84 7.25 130 14.84
----- ------ ---- ----- ------
5,751 $ 7.70 5.31 4,183 $ 6.52
===== ====== ==== ===== ======
Profit Sharing Plan - The Company has a qualified, noncontributory profit
sharing plan (the "Plan") covering full-time employees who meet certain
eligibility requirements. The Plan also allows for additional 401(k) saving
contributions by participants, along with certain company matching
contributions. Aggregate contributions to the Plan are determined annually
by the Board of Directors and are not to exceed 15% of total compensation
paid to all participants during such year. The Company contributed
approximately $30,000, $29,000 and $36,000 for the years ended January 31,
2005, 2004 and 2003, respectively, under the Plan.
9. LEASES AND COMMITMENTS
The Company is committed under operating leases for certain warehouse and
retail store locations. The lease agreements are for varying terms through
2011 and contain renewal options for additional periods. Real estate taxes,
insurance and maintenance costs are generally paid by the Company.
Contingent rentals based on sales volume are not significant. Certain
leases contain scheduled rent increases and rent expense is recognized on a
straight-line basis over the term of the leases.
41
On August 30, 1989, the Company completed a transaction for the sale and
leaseback of the corporate office, distribution center and certain stores
under an initial 15-year lease term. This transaction resulted in a pre-tax
financial statement gain of $15,600,000, which was deferred and amortized
as a reduction to lease expense over the initial term of the leases, which
ended August 31, 2004.
During the year ended January 31, 2002, the Company repurchased the
building, which contains the corporate office, distribution center and
retail store in Dayton, Ohio for approximately $6.0 million. For financial
statement purposes, the purchase of this facility resulted in approximately
$600,000 of the deferred gain associated with the sale/leaseback being
recorded as a reduction in the carrying value of the property.
The following is a summary of rent expense under operating leases (amounts
in thousands):
Years Ended Minimum Gain Lease and Sublease
January 31 Rentals Amortization Income Total
---------- ------- ------------ ------------------ ------
2005 $7,206 $(300) $(1,090) $5,816
2004 8,182 (645) (1,219) 6,318
2003 8,353 (597) (1,357) 6,399
The Company is secondarily liable under certain lease arrangements when
there is a sublessee. These arrangements arise out of the normal course of
business when the Company decides to close stores prior to lease expiration
or on owned locations. As of January 31,2005, future minimum annual rentals
on all leased locations and lease and sublease income are as follows
(amounts in thousands):
Lease and
Years Ended Minimum Sublease
January 31 Rentals Income
---------- ------- ---------
2006 $ 5,574 $ 877
2007 3,972 781
2008 2,241 642
2009 1,765 548
2010 1,016 421
Thereafter 121 801
------- ------
$14,689 $4,070
======= ======
42
10. INCOME TAXES
The provision for income taxes for the years ended January 31, 2005, 2004
and 2003 consists of the following (amounts in thousands):
2005 2004 2003
-------- ------- ------
Federal: $ 8,230 $ 4,744 $3,244
Current (15,239) (6,948) 2,719
-------- ------- ------
Deferred (7,009) (2,204) 5,963
-------- ------- ------
State and Local:
Current 488 459 607
Deferred (319) 20 795
-------- ------- ------
169 479 1,402
-------- ------- ------
$ (6,840) $(1,725) $7,365
======== ======= ======
The tax effects of significant temporary differences representing deferred
tax assets and liabilities are as follows as of January 31, 2005 and 2004
(amounts in thousands):
2005 2004
------- -------
Assets:
Deferral of service contract income $ 8,155 $ 8,857
Accrued liabilities 2,509 2,191
Inventory accounting 4,722 3,835
Income from limited partnerships 3,534 (856)
AMT credit carryforward 19,022 15,458
Valuation allowance (352) (6,651)
Other items 1,317 514
------- -------
Total net future income tax benefits $38,907 $23,348
======= =======
For the fiscal years ended January 31, 2005 and 2004, the Company was
subject to the alternative minimum tax ("AMT") rules due to the Section 29
tax credits generated from the limited partnerships (see Note 2). The
Company's AMT liability was approximately $4,875,000 and $3,582,000 for the
years ended January 31, 2005 and 2004, respectively. The AMT liability in
excess of the regular tax liability results in an AMT credit carryforward,
which can be used to offset future regular income tax liabilities subject
to certain limitations. Therefore, for financial statement purposes, the
required AMT payment has been recorded as an AMT credit carryforward. The
AMT credit carryforwards have no expiration date.
The Company has a state net operating loss carryforward of approximately
$11.5 million, which will begin to expire in fiscal 2008.
The Company established an additional valuation allowance of $352,000 in
fiscal 2004 as a result of the uncertainty of realizing certain future
state tax benefits. The Company believes it is more likely than not that
the results of future operations will generate sufficient taxable income to
allow for the utilization of
43
the remaining deferred tax assets. If the Company is not able to generate
sufficient taxable income in subsequent years to allow for the utilization
of the deferred tax assets, the Company would need to provide a valuation
allowance for such deferred tax assets, thus increasing income tax expense.
The Company reduced its 2004 beginning of the year valuation allowance by
$6.7 million as a result of the favorable resolution of certain IRS
examinations.
The Company has been allocated in aggregate approximately $41.2 million in
Section 29 tax credits from its investment in two partnerships (see Notes 2
and 12). The Internal Revenue Service (IRS) has completed an audit of the
Colona partnership and a closing agreement was signed with the IRS with no
impact on tax credits generated. The IRS has also audited the Somerset
partnership for a certain year reporting no changes on tax credits
generated for that year.
The Company paid income taxes of $4,809,000, $2,710,000 and $3,817,000 in
the years ended January 31, 2005, 2004 and 2003, respectively.
The effective income tax rate on consolidated pre-tax income differs from
the federal income tax statutory rate for the years ended January 31, 2005,
2004 and 2003 as follows:
2005 2004 2003
----- ----- -----
Federal income tax at statutory rate 35.0% 35.0% 35.0%
Tax credits from investment in limited partnership (38.1) (28.1) (10.1)
State and local taxes, net of federal tax benefit (0.5) 0.9 2.7
Net reduction in alternative minimum tax credit valuation allowance (29.9) (13.8) --
Other 1.0 (0.6) (3.4)
----- ----- -----
(32.5)% (6.6)% 24.2%
===== ===== =====
11. DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE
During fiscal 2004, the Company closed ten stores in which the Company
vacated the market. Accordingly, those stores were classified as
discontinued operations for all periods presented. Three of the closed
stores are classified as assets held for sale. The net assets of those
stores at January 31, 2005 were approximately $1,986,000. 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. Below is a table reflecting certain items of the income statement
that were reclassified as discontinued operations for the years ended
January 31, 2005, 2004 and 2003 (amounts in thousands):
2005 2004 2003
------ ------- -------
Net sales $7,863 $11,989 $12,855
Cost of merchandise sold 6,389 8,883 9,326
Loss before benefit for income taxes 900 546 223
Benefit for income taxes 351 213 87
Gain on disposal 348 -- --
Provision for income taxes 136 -- --
Net loss $ 337 $ 333 $ 136
44
12. CONTINGENCIES
The Company, through a subsidiary, is a minority owner in an entity
(Somerset) that owns facilities that produce synthetic fuel as defined
under the Internal Revenue Code (Code). In addition, the Company owned a
minority interest in an entity (Colona) that also provided Section 29
credits to the Company in prior years. The production and sale of the
synthetic fuel from these facilities qualify for tax credits under Code
Section 29 if certain requirements are satisfied, including a requirement
that the synthetic fuel differs significantly in chemical composition from
the coal used to produce such synthetic fuel and that the fuel was produced
from a facility that was placed in service before July 1, 1998. The amount
of Section 29 credits that the Company is allowed to claim in any year is
limited by the amount of the Company's regular income tax liability. Excess
credits cannot be carried back or carried forward to offset the Company's
regular tax liability in any other tax year. In addition, synthetic fuel
tax credits may not be utilized to offset the Company's alternative minimum
tax liability. Consequently, the Company may pay significant alterative
minimum tax when utilizing synthetic fuel tax credits. To the extent the
Company pays alternative minimum tax, the Company generates alternative
minimum tax credits which are carried forward indefinitely. The Company has
been allocated in the aggregate approximately $41 million, including $8
million for fiscal 2004, in Section 29 credits. Should the tax credits be
denied on any future audit and the Company fails to prevail through the IRS
or the legal process, there could be a significant tax liability owed for
previously taken tax credits with a significant impact on earnings and cash
flows. In the Company's opinion, the Somerset partnership is complying with
all the necessary requirements to be allowed such credits and believes it
is likely, although not certain, that the Partnership will prevail if
challenged by the IRS on any credits taken. In addition, the Somerset
partnership recently finalized an IRS audit, resulting in no change, for
calendar year 2001. The current Section 29 tax credit program expires on
December 31, 2007. Future tax credits could also be reduced or eliminated
as a result of the price of oil (see discussion below).
As provided by the current Internal Revenue Code, the Code Section 29 tax
credit program is expected to continue through December 31, 2007. Recent
increases in the price of oil could limit the amount of those credits or
eliminate them altogether for one or more of the years following fiscal
2004. This possibility is due to a provision of Section 29 that provides
that if the average wellhead price per barrel for unregulated domestic
crude oil for the year (the "Annual Average Price") exceeds a certain
threshold value (the "Threshold Price"), the Section 29 tax credits are
subject to phase out. For calendar year 2004, the Threshold Price was
$51.34 per barrel and the Phase Out Price was $64.47 per barrel. The
Threshold Price and the Phase Out Price are adjusted annually as a result
of inflation.
The Company cannot predict with any certainty the Annual Average Price for
2005 or beyond. Therefore, it cannot predict whether the price of oil will
have a material effect on its synthetic fuel business after 2004. However,
if during 2005 through 2007, oil prices remain at historically high levels
or increase, the Company's synthetic fuel business may be adversely
affected for those years, and, depending on the magnitude of such increases
in oil prices, the adverse affect for those years could be material and
could have an impact on the Company's synthetic fuel results of operations
and related income tax benefits.
The Permanent Subcommittee on Investigations of the U.S. Senate's Committee
on Government Affairs initiated an investigation on the subject of these
income tax credits in October 2003. The Company cannot predict the outcome
of this matter.
45
The Company sold its entire interest, through a series of transactions, in
two partnerships (Colona and Gillette) that owned synthetic fuel
facilities. In connection with the sales of the Colona partnership, the
Company receives contingent payments based upon percentages of qualified
Section 29 credits generated. In connection with the sale of the Gillette
partnership, the Company is eligible to receive contingent payments based
upon the amount of "qualified production." The Company recognized $18.6
million in fiscal 2004 from these sales and expects to continue receiving
payments through fiscal 2007. In the event that the synthetic fuel tax
credits from the Colona or Gillette facility are reduced, including an
increase in the price of oil that could limit or eliminate synthetic fuel
tax credits, the amount of proceeds realized from the sales could be
significantly impacted.
The Company is involved in various legal actions arising in the normal
course of business. After taking into consideration legal counsels'
evaluation of such actions, management is of the opinion that their outcome
will not have a material effect on the Company's consolidated financial
statements.
13. SUBSEQUENT EVENT
On March 8, 2005, the Company entered into a subscription and escrow
agreement with respect to a proposed investment in a limited liability
company that will operate an ethanol producing facility. The Company
anticipates completing its due diligence during the second quarter of
fiscal 2005. The Company has deposited $9 million in an escrow account as
required by the agreements. Should the Company decide not to pursue this
investment within its due diligence period, the escrow deposit is fully
refundable to the Company. The proposed minimum $9 million investment would
relate to an approximate 40% interest in the entity, and is subject to
finalization of long term financing for the facility and favorable
completion of our due diligence.
* * * * * *
46
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
REX Stores Corporation
We have audited the accompanying consolidated balance sheets of REX Stores
Corporation (the "Company") (a Delaware corporation) and subsidiaries as of
January 31, 2005 and 2004, and the related consolidated statements of income,
shareholders' equity, and cash flows for each of the three years in the period
ended January 31, 2005. Our audits also included the financial statement
schedule II listed in the Index at Item 15. These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on the financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of REX Stores Corporation and
subsidiaries as of January 31, 2005 and 2004, and the results of their
operations and their cash flows for each of the three years in the period ended
January 31, 2005, in conformity with accounting principles generally accepted in
the United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of January 31, 2005, based on the
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated April 13, 2005 expressed an unqualified opinion on management's assessment
of the effectiveness of the Company's internal control over financial reporting
and an unqualified opinion on the effectiveness of the Company's internal
control over financial reporting.
DELOITTE & TOUCHE LLP
Cincinnati, Ohio
April 13, 2005
47
REX STORES CORPORATION AND SUBSIDIARIES
Schedule II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JANUARY 31, 2005, 2004 AND 2003
(Amounts in thousands)
- --------------------------------------------------------------------------------
Additions Deductions
Balance Charged to Charges for Balance
Beginning Cost and Which Reserves End
of Year Expenses Were Created of Year
--------- ---------- -------------- -------
2005:
Allowance for doubtful accounts $ 235 $ 346 $ 424 $ 157
====== ====== ====== ======
2004:
Allowance for doubtful accounts $ 200 $ 556 $ 521 $ 235
====== ====== ====== ======
2003:
Allowance for doubtful accounts $ 852 $ 276 $ 928 $ 200
====== ====== ====== ======
2005:
Inventory reserve $5,386 $ 984 $ 894 $5,476
====== ====== ====== ======
2004:
Inventory reserve $5,726 $ 956 $1,296 $5,386
====== ====== ====== ======
2003:
Inventory reserve $5,194 $1,362 $ 830 $5,726
====== ====== ====== ======
48
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
Item 9A. Controls and Procedures
Evaluation of Disclosure 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.
Management's Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting, as defined in Exchange Act Rule
13a-15(f). The Company's internal control over financial reporting is
designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements in
accordance with accounting principles generally accepted in the United
States of America.
All internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems deemed to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation.
Under the supervision and with the participation of our senior management,
including our Chief Executive Officer and Chief Financial Officer, we
assessed the effectiveness of our internal control over financial reporting
as of January 29, 2005 based on the Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway
Commission ("COSO"). Based upon this assessment, our management concluded
that our internal control over financial reporting was effective as of
January 31, 2005 based on those criteria.
Our management's assessment of the effectiveness of our internal control
over financial reporting as of January 31, 2005 has been audited by
Deloitte & Touche LLP, an independent registered public accounting firm, as
stated in their report which is included herein.
Item 9B. Other Information
None
49
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
REX Stores Corporation
We have audited management's assessment, included in the accompanying
Management's Annual Report on Internal Control over Financial Reporting, that
REX Stores Corporation (the "Company") maintained effective internal control
over financial reporting as of January 31, 2005, based on the Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). The Company's management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the Company's internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed by,
or under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, management's assessment that the Company maintained effective
internal control over financial reporting as of January 31, 2005, is fairly
stated, in all material respects, based on the criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial
reporting as of January 31, 2005, based on the criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
50
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated financial
statements and financial statement schedule as of and for the year ended January
31, 2005 of the Company and our report dated April 13, 2005 expressed an
unqualified opinion on those financial statements and financial statement
schedule.
DELOITTE & TOUCHE LLP
Cincinnati, Ohio
April 13, 2005
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this Item 10 is incorporated herein by reference to
the Proxy Statement for our Annual Meeting of Shareholders on May 26, 2005,
except for certain information concerning our executive officers which is set
forth in Part I of this report.
Item 11. Executive Compensation
The information required by this Item 11 is set forth in the Proxy Statement for
our Annual Meeting of Shareholders on May 26, 2005 and is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The information required by this Item 12 is set forth in the Proxy Statement for
our Annual Meeting of Shareholders on May 26, 2005 and is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions
The information required by this Item 13 is set forth in the Proxy Statement for
our Annual Meeting of Shareholders on May 26, 2005 and is incorporated herein by
reference.
Item 14. Principal Accountant Fees and Services
The information required by this Item 14 is set forth in the Proxy Statement for
our Annual Meeting of Shareholders on May 26, 2005 and is incorporated herein by
reference.
51
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)(1) Financial Statements
The following consolidated financial statements of REX Stores Corporation and
subsidiaries are filed as a part of this report at Item 8 hereof.
Consolidated Balance Sheets as of January 31, 2005 and 2004
Consolidated Statements of Income for the years ended January 31, 2005,
2004 and 2003
Consolidated Statements of Cash Flows for the years ended January 31, 2005,
2004 and 2003
Consolidated Statements of Shareholders' Equity for the years ended January
31, 2005, 2004 and 2003
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
(a)(2) Financial Statement Schedules
The following financial statement schedule is filed as a part of this
report at Item 8 hereof.
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or not required,
or because the required information is included in the consolidated financial
statements or notes thereto.
(a)(3) Exhibits
See Exhibit Index at page 54 of this report.
Management contracts and compensatory plans and arrangements filed as
exhibits to this report are identified by an asterisk in the exhibit index.
52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
REX STORES CORPORATION
By /s/ Stuart A. Rose
------------------------------------
Stuart A. Rose
Chairman of the Board, President and
Chief Executive Officer
Date: April 14, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Capacity Date
- --------- -------- ----
)
/s/ STUART A. ROSE Chairman of the Board, President )
- --------------------------------------- and Chief Executive Officer )
Stuart A. Rose (principal executive officer) )
)
)
)
/s/ DOUGLAS L. BRUGGEMAN Vice President-Finance, Chief Financial Office )
- --------------------------------------- and Treasurer (principal financial )
Douglas L. Bruggeman and accounting officer) )
)
)
)
LAWRENCE TOMCHIN* Director )
- --------------------------------------- )April 14, 2005
Lawrence Tomchin )
)
)
/s/ EDWARD M. KRESS )
- --------------------------------------- Secretary and Director )
Edward M. Kress )
)
)
)
)
ROBERT DAVIDOFF* Director )
- --------------------------------------- )
Robert Davidoff )
)
)
)
LEE FISHER* Director )
- --------------------------------------- )
Lee Fisher )
)
)
)
CHARLES A. ELCAN* Director )
- --------------------------------------- )
Charles A. Elcan )
)
)
DAVID S. HARRIS* Director )
- --------------------------------------- )
David S. Harris
*By /s/ STUART A. ROSE
- ---------------------------------------
(Stuart A. Rose, Attorney-in-Fact)
53
EXHIBIT INDEX
Page
----
(3) Articles of incorporation and by-laws:
3(a) Certificate of Incorporation, as amended
(incorporated by reference to Exhibit 3(a) to Form
10-K for fiscal year ended January 31, 1994, File
No. 0-13283)
3(b)(1) By-Laws, as amended (incorporated by reference to
Registration Statement No. 2-95738, Exhibit 3(b),
filed February 8, 1985)
3(b)(2) Amendment to By-Laws adopted June 29, 1987
(incorporated by reference to Exhibit 4.5 to Form
10-Q for quarter ended July 31, 1987, File No.
0-13283)
(4) Instruments defining the rights of security holders, including indentures:
4(a) Amended and Restated Loan Agreement dated as of
September 14, 2004 among Rex Radio and Television,
Inc., as lead borrower, Kelly & Cohen Appliances,
Inc., Rex Alabama, Inc., Rex Kansas, Inc.,
rexstores.com, Inc. and Stereo Town, Inc. (the
"Borrowers"), the Lenders named therein, Fleet
Retail Group, Inc. as agent for the Lenders and
KeyBank National Association as syndication agent
(incorporated by reference to Exhibit 4(a) to Form
8-K filed September 17, 2004, File No. 001-09097)
Pursuant to Item 601(b)(4)(iii)(A) of Regulation
S-K, the registrant has not filed as an exhibit to
this Form 10-K certain instruments with respect to
long-term debt where the total amount of securities
authorized thereunder does not exceed 10% of the
total assets of the registrant and its subsidiaries
on a consolidated basis. The registrant agrees to
furnish a copy of such instruments to the Commission
upon request.
(10) Material contracts:
10(a)* Employment Agreement dated April 17, 2001 between
Rex Radio and Television, Inc. and Stuart Rose
(incorporated by reference to Exhibit 10(c) to Form
10-K for fiscal year ended January 31, 2002, File
No. 001-09097)
10(b)* Employment Agreement dated January 31, 2004 between
Rex Radio and Television, Inc. and Lawrence Tomchin
(incorporated by reference to Exhibit 10(b) to Form
10-K for fiscal year ended January 31, 2004, File
No. 001-09097)
10(c)* Executive Stock Option dated October 14, 1998
granting Stuart Rose an option to purchase 500,000
shares of registrant's Common Stock (incorporated by
reference to Exhibit 10.3 to Form 10-Q for quarter
ended October 31, 1998, File No. 001-09097)
54
10(d)* Executive Stock Option dated October 14, 1998
granting Lawrence Tomchin an option to purchase
150,000 shares of registrant's Common Stock
(incorporated by reference to Exhibit 10.4 to Form
10-Q for quarter ended October 31, 1998, File No.
001-09097)
10(e)* Executive Stock Option dated April 17, 2001 granting
Stuart Rose an option to purchase 500,000 shares of
registrant's Common Stock (incorporated by reference
to Exhibit 10(g) to Form 10-K for fiscal year ended
January 31, 2002, File No. 001-09097)
10(f)* Executive Stock Option dated April 17, 2001 granting
Lawrence Tomchin an option to purchase 150,000
shares of registrant's Common Stock (incorporated by
reference to Exhibit 10(h) to Form 10-K for fiscal
year ended January 31, 2002, File No. 001-09097)
10(g)* Subscription Agreement dated December 1, 1989 from
Stuart Rose to purchase 300,000 shares of
registrant's Common Stock (incorporated by reference
to Exhibit 6.5 to Form 10-Q for quarter ended
October 31, 1989, File No. 0-13283)
10(h)* Subscription Agreement dated December 1, 1989 from
Lawrence Tomchin to purchase 140,308 shares of
registrant's Common Stock (incorporated by reference
to Exhibit 6.6 to Form 10-Q for quarter ended
October 31, 1989, File No. 0-13283)
10(i)* 1995 Omnibus Stock Incentive Plan, as amended and
restated effective June 2, 1995 (incorporated by
reference to Exhibit 4(c) to Post-Effective
Amendment No. 1 to Form S-8 Registration Statement
No. 33-81706)
10(j)* 1999 Omnibus Stock Incentive Plan (incorporated by reference
to Exhibit 10(a) to Form 10-Q for quarter ended April 30,
2000, File No. 001-09097)
10(k)* Form of Stock Option Agreement under 1999 Omnibus Stock
Incentive Plan (Nonqualified Stock Option)(incorporated by
reference to Exhibit 10(a) to Form 10-Q for quarter ended
October 31, 2004, File No. 001-09097)
10(l)* Form of Stock Option Agreement under 1999 Omnibus Stock
Incentive Plan (Nonemployee Director Stock
Option)(incorporated by reference to Exhibit 10(b) to Form
10-Q for quarter ended October 31, 2004, File No. 001-09097)
10(m) Real Estate Purchase and Sale Agreement (the
"Agreement") dated March 8, 1989 between registrant
as Guarantor, four of its subsidiaries (Rex Radio
and Television, Inc., Stereo Town, Inc., Kelly &
Cohen Appliances, Inc., and Rex Radio Warehouse
Corporation) as Sellers and Holman/Shidler
Investment Corporation as Buyer (incorporated by
reference to Exhibit (b)(5)(1) to Amendment No. 1 to
Schedule 13E-4 filed March 15, 1989, File No. 5-35828)
The Table of Contents to the Agreement lists
Exhibits A through P to the Agreement. Each of the
following listed Exhibits to the Agreement is
incorporated herein by reference as indicated below.
The registrant will, upon request of the Commission,
provide any of the additional Exhibits to the
Agreement.
10(n) Form of Full Term Lease (incorporated by reference
to Exhibit (b)(5)(2) to Amendment No. 1 to Schedule
13E-4 filed March 15, 1989, File No. 5-35828)
55
10(o) Form of Divisible Lease (incorporated by reference
to Exhibit (b)(5)(3) to Amendment No. 1 to Schedule
13E-4 filed March 15, 1989, File No. 5-35828)
10(p) Form of Terminable Lease (incorporated by reference
to Exhibit (b)(5)(4) to Amendment No. 1 to Schedule
13E-4 filed March 15, 1989, File No. 5-35828)
10(q) Continuing Lease Guaranty (incorporated by reference
to Exhibit (b)(5)(5) to Amendment No. 1 to Schedule
13E-4 filed March 15, 1989, File No. 5-35828)
10(r) Agreement Regarding Leases and Amending Amended and
Restated Real Property Purchase and Sale Agreement
dated May 17, 1990 among Shidler/West Finance
Partners I (Limited Partnership); Rex Radio and
Television, Inc., Stereo Town, Inc., Kelly & Cohen
Appliances, Inc. and Rex Radio Warehouse
Corporation; and registrant (incorporated by
reference to Exhibit (a)(10) to Form 10-Q for
quarter ended April 30, 1990, File No. 0-13283)
10(s) Lease dated December 12, 1994 between Stuart
Rose/Beavercreek, Inc. and Rex Radio and Television,
Inc. (incorporated by reference to Exhibit 10(q) to
Form 10-K for fiscal year ended January 31, 1995,
File No. 0-13283)
(14) Code of Ethics:
14(a) Code of Business Conduct and Ethics (incorporated by reference
to Exhibit 14 (a) to Form 10-K for fiscal year ended January
31, 2004, File No. 001-09097)
(21) Subsidiaries of the registrant:
21(a) Subsidiaries of registrant.....................................
(23) Consents of experts and counsel:
23 Consent of Deloitte & Touche LLP to use its report dated April
13, 2005 included in this annual report on Form 10-K into
registrant's Registration Statements on Form S-8 (Registration
Nos. 33-3836, 33-81706, 33-62645, 333-69081, 333-69089,
333-35118 and 333-69690).......................................
(24) Power of attorney:
Powers of attorney of each person whose name is signed to this
report on Form 10-K pursuant to a power of attorney............
(31) Rule 13a-14(a)/15d-14(a) Certifications:
31 Certifications.................................................
56
(32) Section 1350 Certifications:
32 Certifications.................................................
99(a) Risk Factors (incorporated by reference to Exhibit
99(a) to Form 10-K for fiscal year ended January 31,
2002, File No. 001-09097)
Copies of the Exhibits not contained herein may be obtained by
writing to Edward M. Kress, Secretary, REX Stores Corporation,
2875 Needmore Road, Dayton, Ohio 45414.
- ----------
Those exhibits marked with an asterisk (*) above are
management contracts or compensatory plans or arrangements for
directors or executive officers of the registrant.
57