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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number 001-09097
--------------------------
REX STORES CORPORATION
(Exact name of registrant as specified in its charter)
--------------------------
Delaware 31-1095548
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2875 Needmore Road, Dayton, Ohio 45414
(Address of principal executive offices) (Zip Code)
(937) 276-3931
(Registrant's telephone number, including area code)
--------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes (X) No ( )
At the close of business on June 3, 2005 the registrant had 11,017,161 shares
of Common Stock, par value $.01 per share, outstanding.
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REX STORES CORPORATION AND SUBSIDIARIES
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Condensed Balance Sheets ...................................... 3
Consolidated Condensed Statements of Income ................................ 4
Consolidated Condensed Statements of Shareholders' Equity .................. 5
Consolidated Condensed Statements of Cash Flows ............................ 6
Notes to Consolidated Condensed Financial Statements ....................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................................. 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk ................ 17
Item 4. Controls and Procedures ................................................... 17
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ............... 18
Item 4. Submission of Matters to a Vote of Security Holders........................ 18
Item 6. Exhibits ...................................................................19
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
REX STORES CORPORATION AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
April 30 January 31 April 30
2005 2005 2004
---- ---- ----
(In Thousands)
Unaudited Unaudited
CURRENT ASSETS:
Cash and cash equivalents $ 6,221 $ 4,671 $ 17,092
Escrow deposit 9,000 - -
Accounts receivable, net 3,984 5,460 3,049
Synthetic fuel receivable 964 1,675 893
Investments available for sale - - 7,000
Merchandise inventory 131,547 124,188 136,823
Prepaid expenses and other 672 1,230 863
Future income tax benefits 10,929 10,929 8,703
---------- ---------- ----------
Total current assets 163,317 148,153 174,423
PROPERTY AND EQUIPMENT, NET 129,330 129,723 131,513
ASSETS HELD FOR SALE 1,669 1,986 -
OTHER ASSETS 953 841 915
FUTURE INCOME TAX BENEFITS 27,978 27,978 14,645
RESTRICTED INVESTMENTS 2,277 2,270 2,259
---------- ---------- ----------
Total assets $ 325,524 $ 310,951 $ 323,755
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 2,881 $ 2,897 $ 5,044
Current portion of deferred income
and deferred gain on sale and leaseback 9,886 10,432 10,347
Accounts payable, trade 47,064 32,842 47,616
Accrued income taxes 624 1,567 1,119
Accrued payroll and related items 4,264 6,303 3,828
Other current liabilities 5,974 6,152 7,206
---------- ---------- ----------
Total current liabilities 70,693 60,193 75,160
---------- ---------- ----------
LONG-TERM LIABILITIES:
Long-term mortgage debt 29,213 30,501 47,573
Deferred income 11,582 11,703 12,269
---------- ---------- ----------
Total long-term liabilities 40,795 42,204 59,842
---------- ---------- ----------
SHAREHOLDERS' EQUITY:
Common stock 291 290 286
Paid-in capital 134,338 133,474 127,724
Retained earnings 218,729 212,629 189,165
Treasury stock (139,322) (137,839) (128,422)
---------- ---------- ----------
Total shareholders' equity 214,036 208,554 188,753
---------- ---------- ----------
Total liabilities and shareholders' equity $ 325,524 $ 310,951 $ 323,755
========== ========== ==========
The accompanying notes are an integral part of these unaudited consolidated
condensed financial statements.
3
REX STORES CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements Of Income
Unaudited
Three Months Ended
April 30
2005 2004
---- ----
(In Thousands, Except Per Share Amounts)
NET SALES $ 89,742 $ 84,629
Cost of merchandise sold 65,177 59,841
-------- --------
Gross profit 24,565 24,788
Selling, general and administrative expenses 22,869 23,542
-------- --------
OPERATING INCOME 1,696 1,246
INVESTMENT INCOME 74 87
INTEREST EXPENSE (616) (934)
LOSS ON EARLY TERMINATION OF DEBT - (22)
INCOME FROM LIMITED PARTNERSHIPS 5,983 5,236
-------- --------
Income from continuing operations before provision
for income taxes and discontinued operations 7,137 5,613
PROVISION FOR INCOME TAXES 1,059 1,426
-------- --------
Income from continuing operations 6,078 4,187
Loss from discontinued operations, net of tax (94) (102)
Gain on disposal of discontinued operations, net of tax 116 -
-------- --------
Net Income $6,100 $4,085
======== ========
WEIGHTED AVERAGE SHARES
OUTSTANDING - BASIC 11,156 11,155
======== ========
Basic income per share from continuing operations $0.55 $0.38
Basic loss per share from discontinued operations (0.01) (0.01)
Basic income per share on disposal of discontinued operations .01 -
-------- --------
BASIC NET INCOME PER SHARE $0.55 $0.37
======== ========
WEIGHTED AVERAGE SHARES
OUTSTANDING - DILUTED 12,771 12,965
======== ========
Diluted income per share from continuing operations $0.48 $0.32
Diluted loss per share from discontinued operations (0.01) -
Diluted income per share on disposal of discontinued operations 0.01 -
-------- --------
DILUTED NET INCOME PER SHARE $0.48 $0.32
======== ========
The accompanying notes are an integral part of these unaudited consolidated
condensed financial statements.
4
REX STORES CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements Of Shareholders' Equity
Unaudited
Common Shares
Issued Treasury Total
------ -------- Paid-in Retained Shareholders'
Shares Amount Shares Amount Capital Earnings Equity
------ ------ ------ ------ ------- -------- ------
(In Thousands)
Balance at January 31, 2005 29,038 $290 17,865 ($137,839) $133,474 $212,629 $208,554
Net income 6,100 6,100
Treasury stock acquired 120 (1,676) (1,676)
Stock options exercised
and related tax effects 36 1 (25) 193 864 1,058
------ ----- ------ --------- -------- -------- --------
Balance at April 30, 2005 29,074 $291 17,960 ($139,322) $134,338 $218,729 $214,036
====== ===== ====== ========= ======== ======== ========
The accompanying notes are an integral part of these unaudited consolidated
condensed financial statements.
5
REX STORES CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements Of Cash Flows
Unaudited
Three Months Ended
April 30
--------
2005 2004
---- ----
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,100 $ 4,085
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization, net 1,082 1,000
Income from limited partnerships (5,983) (5,236)
Loss on disposal of fixed assets 80 89
Deferred income (667) (561)
Changes in assets and liabilities:
Accounts receivable 1,476 1,757
Merchandise inventory (7,359) (20,068)
Prepaid expenses and other 558 618
Other long term assets (112) 2,563
Accounts payable, trade 14,222 14,871
Other current liabilities (3,160) (2,470)
-------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 6,237 (3,352)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,563) (1,321)
Proceeds from sale of partnership interest 6,694 7,440
Proceeds from sale of real estate and fixed assets 1,111 -
Escrow deposit (9,000) -
Restricted investments (7) (2)
-------- --------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (2,765) 6,117
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt (1,304) (6,189)
Stock options exercised 865 545
Treasury stock issued 193 901
Treasury stock acquired (1,676) (710)
-------- --------
NET CASH USED IN FINANCING ACTIVITIES (1,922) (5,453)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,550 (2,688)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 4,671 19,780
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,221 $ 17,092
======== ========
The accompanying notes are an integral part of these unaudited consolidated
condensed financial statements.
6
REX STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
April 30, 2005
Note 1. Consolidated Condensed Financial Statements
The consolidated condensed financial statements included in this report
have been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission and include, in the
opinion of management, all adjustments necessary to state fairly the information
set forth therein. Any such adjustments were of a normal recurring nature.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information presented not misleading. It is suggested that these
unaudited consolidated condensed financial statements be read in conjunction
with the consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the year ended January 31, 2005 (fiscal
2004). The results of operations for the interim periods are not necessarily
indicative of the results to be expected for the year.
Note 2. Reclassifications
Investments in auction rate securities have been reclassified from cash
and cash equivalents to investments available for sale on the Consolidated
Condensed 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 April 30, 2004. There were no auction rate
securities at April 30, 2005. The Company reclassified $960,000 of in transit
credit card and finance contract settlements from cash to accounts receivable as
of April 30, 2004.
Note 3. Accounting Policies
The interim consolidated condensed financial statements have been
prepared in accordance with the accounting policies described in the notes to
the consolidated financial statements included in the Company's 2004 Annual
Report on Form 10-K. While management believes that the procedures followed in
the preparation of interim financial information are reasonable, the accuracy of
some estimated amounts is dependent upon facts that will exist or calculations
that will be accomplished at fiscal year end. Examples of such estimates include
changes in the LIFO reserve (based upon the Company's best estimate of inflation
to date), management bonuses and the provision for income taxes. Any adjustments
pursuant to such estimates during the quarter were of a normal recurring nature.
The provision for income taxes could vary based upon full year synthetic fuel
production levels, federal income tax law changes, and the price of certain fuel
products adjusted for inflation and Internal Revenue Service audits.
7
The following table reflects the approximate percent of net sales for
each major product group for the periods presented.
Three Months Ended
April 30
--------
Product Category 2005 2004
- ---------------- ---- ----
Televisions............................................... 55.1% 51.7%
Appliances................................................ 20.3 18.0
Audio..................................................... 11.3 15.0
Video..................................................... 5.2 6.8
Other..................................................... 8.1 8.5
----- -----
100.0% 100.0%
===== =====
The Company accounts for vendor allowances in accordance with Emerging
Issues Task Force (EITF) 02-16 "Accounting by a Customer for Certain
Consideration Received from a Vendor," which addresses how and when to reflect
consideration received from vendors in the consolidated financial statements.
Vendors often fund, up front, certain advertising costs and exposure to general
changes in pricing to customers due to technological change. Allowances are
deferred as received from vendors and recognized into income as an offset to the
cost of merchandise sold when the related product is sold or expense incurred.
Advertising costs are expensed as incurred.
Cost of merchandise sold includes the cost of merchandise, markdowns
and inventory shortage, receiving, warehousing and freight charges to deliver
merchandise to retail stores, service repair bills as well as cash discounts and
rebates. The Company classifies purchasing costs as selling, general and
administrative expenses. As a result of this classification, the Company's gross
margins may not be comparable to those of other retailers that include costs
related to their distribution network in selling, general and administrative
expense.
The Company includes stores expenses (such as payroll and occupancy
costs), advertising, purchasing, depreciation, insurance and overhead costs in
selling, general and administrative expenses.
Interest expense of $616,000 for the three months ended April 30, 2005
is net of approximately $8,000 of interest capitalized. There was no interest
capitalized in the first quarter of fiscal 2004. Cash paid for interest for the
quarter ended April 30, 2005 and 2004 was approximately $589,000 and $891,000,
respectively.
The Company applies an effective tax rate to interim periods that is
consistent with the Company's estimated annual tax rate. The tax credits
generated from synthetic fuel operations reduce the Company's overall effective
tax rate. Estimates of the effective tax rate may change based upon synthetic
fuel production and the Company's projected income. 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
8
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.
The Company paid income taxes of approximately $1,307,000 and
$1,083,000 for the three months ended April 30, 2005 and 2004, respectively.
In December 2004, The Financial Accounting Standards Board ("FASB")
issued a revision to Statement of Financial Accounting Standards 123,
"Share-Based Payment ("SFAS 123(R)"). The revision requires all entities to
recognize compensation expense in an amount equal to the fair value of
share-based payments granted to employees. SFAS 123(R) eliminates the
alternative method of accounting for employee share-based payments previously
available under Accounting Principles Board Opinion No. 25 ("APB 25"). In April
2005, the Securities and Exchange Commission delayed the effective date of SFAS
123(R) to fiscal years beginning after June 15, 2005. As a result, SFAS 123(R)
will be effective for the Company beginning in the first quarter of fiscal 2006.
The Company has not completed its evaluation of the impact that adopting SFAS
123(R) will have on the financial statements.
Note 4. Stock Option Plans
The Company has stock-based compensation plans under which stock
options are granted to directors, officers and key employees at the market price
on the date of the grant.
The following summarizes options granted, exercised and canceled or
expired during the three months ended April 30, 2005:
Outstanding at January 31, 2005 ($3.61 to $16.04 per share)............... 5,751,308
Exercised ($3.61 to $13.01 per share)..................................... (61,073)
Canceled or expired ($8.01 to $14.745 per share).......................... (22,950)
--------
Outstanding at April 30, 2005 ($3.61 to $16.04 per share)................. 5,667,285
=========
Pursuant to SFAS No. 123, "Accounting for Stock-Based Compensation,"
the Company has elected to account for its employee stock option plans under APB
Opinion No. 25, "Accounting for Stock Issued to Employees," which recognizes
expense based on the intrinsic value at date of grant. As stock options have
been issued with exercise prices equal to grant date fair value, no compensation
cost has resulted.
9
Had compensation cost for all options granted been determined based on
the fair value at grant date consistent with SFAS No. 123, the Company's net
earnings and earnings per share would have been as follows (in thousands, except
per share amounts):
Three Months Ended
April 30
--------
2005 2004
---- ----
Net Income As Reported $6,100 $4,085
Compensation Cost, net of tax 838 753
Pro forma 5,262 3,332
Basic net income per share As Reported $ 0.55 $ 0.37
Compensation Cost, net of tax 0.08 0.07
Pro forma $ 0.47 $ 0.30
Diluted net income per share As Reported $ 0.48 $ 0.32
Compensation Cost, net of tax .07 .06
Pro forma $ 0.41 $ 0.26
The assumptions used to calculate the fair value of options granted are
evaluated and revised, as necessary, to reflect market conditions and
experience.
Note 5. Income Per Share from Continuing Operations
The following table reconciles the basic and diluted net income per
share from continuing operations computation for each period presented (in
thousands, except per share amounts):
Three Months Ended Three Months Ended
April 30, 2005 April 30, 2004
-------------- --------------
Per Per
Income Shares Share Income Shares Share
------ ------ ----- ------ ------ -----
Basic income per share from continuing
operations $6,078 11,156 $0.55 $4,187 11,155 $0.38
===== =====
Effect of stock options 1,615 1,810
------ ------ ------ ------
Diluted income per share from continuing
operations $6,078 12,771 $0.48 $4,187 12,965 $0.32
====== ====== ===== ====== ====== =====
For the three months ended April 30, 2005 and 2004, a total of 320,136
shares and 335,936 shares, respectively, subject to outstanding options were not
included in the common equivalent shares outstanding calculation as the exercise
prices were above the average trading price of the Company's common stock for
that period.
10
Note 6. Synthetic Fuel
Net income for the first quarter of fiscal 2005 includes approximately
$6.0 million of pre-tax investment income from the sales of the Company's entire
Partnership interest in Colona SynFuel Limited Partnership, L.L.L.P., a
synthetic fuel limited partnership. Of this amount, approximately $448,000
relates to a payment received for 2004 production. The 2004 production payments
made to the Company were based upon estimated income tax credits per ton of coal
produced. The $448,000 payment was made to the Company after the Internal
Revenue Service published the 2004 income tax credit per ton amount in April of
2005.
The Company also sold its entire membership interest in a 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. The facility resumed commercial operations during the second
quarter of fiscal 2005 and as such the Company received an additional $3.5
million which it expects to recognize as income in the second quarter of fiscal
2005. In addition, the Company is eligible to receive $1.50 per ton of
"qualified production" produced by the facility and sold through 2007.
The Company remains a limited partner in Somerset SynFuel, L.P. This
partnership is operational and producing synthetic fuel. We are receiving
Section 29 federal income tax credits in connection with production and sales of
synthetic fuel from the Somerset facility.
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, or in subsequent years, 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.
Note 7. Discontinued Operations and Assets Held for Sale
During the first quarter of fiscal 2005 the Company closed four stores
in which the Company vacated the market. Those stores and certain stores closed
in previous periods were classified as discontinued operations for all periods
presented. Two of the closed stores are classified as held for sale. The net
assets of those stores at April 30, 2005 were approximately $1,670,000. 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.
11
Below is a table reflecting certain items of the income statement that
were reclassified as discontinued operations for the period indicated:
Three Months Ended
April 30
--------
2005 2004
---- ----
(In Thousands)
Net sales............................................ $1,318 $3,571
Cost of merchandise sold............................. 1,159 2,591
Loss before benefit for income taxes ................ 155 167
Benefit for income taxes............................. 61 65
Gain on disposal..................................... 192 -
Provision for income taxes........................... 76 -
Net gain (loss)...................................... $22 ($102)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
We are a specialty retailer in the consumer electronics/appliance
industry. As of April 30, 2005 we operated 229 stores in 37 states,
predominantly in small to medium-sized markets under the trade name "REX".
Fiscal Year
All references in this report to a particular fiscal year are to REX's
fiscal year ended January 31. For example, "fiscal 2005" means the period
February 1, 2005 to January 31, 2006.
12
Results of Operations
The following table sets forth, for the periods indicated, the relative
percentages that certain income and expense items bear to net sales:
Three Months Ended
April 30
--------
2005 2004
---- ----
Net sales..................................................... 100.0% 100.0%
Cost of merchandise sold...................................... 72.7 70.7
----- -----
Gross profit............................................... 27.3 29.3
Selling, general and administrative expenses.................. 25.4 27.8
----- -----
Operating income.............................................. 1.9 1.5
Investment income............................................. 0.1 0.1
Interest expense.............................................. (0.7) (1.1)
Income from limited partnerships.............................. 6.7 6.1
----- -----
Income from continuing operations before provision for
income taxes and discontinued operations, net of tax..... 8.0 6.6
Provision for income taxes.................................... (1.2) (1.7)
----- -----
Income from continuing operations............................. 6.8 4.9
Loss from discontinued operations, net of tax................. (0.1) (0.1)
Gain on disposal of discontinued operations, net of tax....... 0.1 -
----- -----
Net income.................................................... 6.8% 4.8%
===== =====
Comparison of Three Months Ended April 30, 2005 and 2004
Net sales in the quarter ended April 30, 2005 were $89.7 million
compared to $84.6 million in the prior year's first quarter, representing an
increase of $5.1 million or 6.0%. This increase was primarily caused by an
increase in comparable store sales of 7% for the first quarter of fiscal 2005.
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 had a net reduction of sixteen stores (thirteen of which
were classified as discontinued operations) since the end of the first quarter
of fiscal 2004.
Our strongest product category for the first quarter of fiscal 2005 was
the television category which positively impacted comparable store sales by
7.9%. This increase is primarily due to higher demand for the LCD, DLP and
plasma televisions. The appliance category positively impacted comparable store
sales by 2.0%. This increase is primarily due to the Company stocking and
displaying more products in stores. The video category negatively impacted
comparable store sales by 1.9%. The audio category negatively impacted
comparable store sales by 1.6%. Both the audio and video categories have been
impacted by lower price points of their respective products and these products
becoming more of a commodity item with very high levels of competition.
13
The following table reflects the approximate percent of net sales for
each major product group for the periods presented.
Three Months Ended
April 30
--------
Product Category 2005 2004
- ---------------- ---- ----
Televisions.................................... 55.1% 51.7%
Appliances..................................... 20.3 18.0
Audio.......................................... 11.3 15.0
Video.......................................... 5.2 6.8
Other.......................................... 8.1 8.5
----- -----
100.0% 100.0%
===== =====
As of April 30, 2005, we had 229 stores compared to 245 stores one year
earlier. We did not open any stores and closed five stores during the first
three months of fiscal 2005. We did not open any stores and closed three stores
during the first three months of fiscal 2004.
Gross profit of $24.6 million (27.3% of net sales) in the first quarter
of fiscal 2005 was approximately $0.2 million lower than the $24.8 million
(29.3% of net sales) recorded in the first quarter of fiscal 2004. Gross profit
margin has been reduced both due to more aggressive promotional activity and
recognizing a lower amount of extended service contract sales which generally
have higher gross profit margin associated with it.
Selling, general and administrative expenses for the first quarter of
fiscal 2005 were $22.9 million (25.4% of net sales), a decrease of $0.7 million
or 2.9% from $23.5 million (27.8% of net sales) for the first quarter of fiscal
2004. The decrease in expenditures was primarily a result of lower advertising
costs, largely due to fewer newspaper inserts used and a shift in the calendar.
Operating income in the first quarter of fiscal 2005 was $1.7 million
(1.9% of net sales), an increase of $0.5 million (36.1%) over the $1.2 million
(1.5% of net sales) for the first quarter of fiscal 2004.
Investment income for the first quarter of fiscal 2005 was $0.1 million
(0.1% of net sales), unchanged from the first quarter of fiscal 2004.
Interest expense was $0.6 million (0.7% of net sales) for the first
quarter of fiscal 2005 compared to $0.9 million (1.1% of net sales) for the
first quarter of fiscal 2004. Interest expense for the current year has been
lowered due to lower average borrowings on the line of credit and the pay off of
approximately $25.4 million in mortgage debt in the prior year.
Results for the first quarter of fiscals 2005 and 2004 also reflect the
impact of our equity investment in two limited partnerships, Colona SynFuel
Limited Partnership, L.L.L.P., and Somerset SynFuel, L.P., which produce
synthetic fuels. We remain a limited partner in the Somerset limited partnership
but have sold our ownership interest in the Colona limited partnership through a
series of three sales. We expect to receive payments from the sales on a
quarterly basis, subject to annual limitations, through 2007, which will range
from 74.25% to 82.5% of the federal income tax credits attributable to the
interest sold.
14
Below is a table summarizing the income from the sales, net of certain
expenses. The higher income for the current year generally reflects higher
production levels compared to the previous year.
Three Months Ended
April 30
--------
2005 2004
---- ----
(In Thousands)
February 1, 1999 sale.......................... $2,375 $1,846
July 31, 2000 sale............................. 1,914 1,560
May 31, 2001 sale.............................. 1,701 1,352
------ ------
$5,990 $4,758
====== ======
The income for the first quarters of 2005 and 2004 from the Colona
partnership sale includes approximately $448,000 and $118,000, respectively,
related to previous year production. The previous year production payments made
to the Company were based upon estimated income tax credits per ton of coal
produced. A final calculation is made after the Internal Revenue Service
publishes a final income tax credit per ton amount. This is normally done in
April for the preceding calendar year.
Income from synfuel investment for the first quarter of fiscal 2005
also includes expense of approximately $7,000 related to our sale of our
membership interest in the limited liability company that owns a synthetic fuel
facility in Gillette, Wyoming. We 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 us. The facility resumed commercial operations
during the second quarter of fiscal 2005. We received an additional $3.5 million
which we expect to recognize as income in the second quarter of fiscal 2005. In
addition, we are eligible to receive $1.50 per ton of "qualified production"
produced by the facility and sold through 2007.
Our effective tax rate was 14.8% and 25.4% for the first quarter of
fiscals 2005 and 2004, respectively, after reflecting our share of federal
income tax credits earned by the limited partnerships under Section 29 of the
Internal Revenue Code. Our effective tax rate for fiscal 2005 will be affected
by the level of federal income tax credits generated by the limited
partnerships, which we do not control, and any limitations on those credits
under the Internal Revenue Code.
During the first quarter of fiscal 2005, we closed five stores, four of
which were classified as discontinued operations. As a result, we had a loss
from discontinued operations, net of tax benefit, of $94,000 for the first
quarter of fiscal 2005, compared to a loss of $102,000 for the first quarter of
fiscal 2004.
We sold one property during the first quarter of fiscal 2005 that had
been previously closed. As a result, we had a gain, net of tax expense, of
$116,000.
As a result of the foregoing, net income for the first quarter of
fiscal 2005 was $6.1 million, a 49.3% increase from $4.1 million for the first
quarter of fiscal 2004.
15
Liquidity and Capital Resources
Net cash provided by operating activities was approximately $6.2
million for the first quarter of fiscal 2005, compared to $3.4 million used in
operating activities for the first quarter of fiscal 2004. For the first quarter
of fiscal 2005, cash was provided by net income of $6.1 million, adjusted for
the impact of $6.0 million for gains on our installment sales of the limited
partnership interest, non-cash items of $0.5 million, which consisted of
depreciation and amortization, deferred income and loss on disposal of fixed
assets. In addition, accounts payable provided cash of $14.2 million, primarily
as a result of changes in inventory levels and the timing of payments to
vendors. Cash was also provided by a decrease in accounts receivable and other
assets of $1.9 million. The primary use of cash was an increase in inventory of
$7.4 million primarily due to seasonal fluctuations. The other use of cash was a
decrease in other current liabilities of $3.2 million.
At April 30, 2005, working capital was $92.6 million compared to $88.0
million at January 31, 2005. This increase is primarily a result of strong cash
flows during the quarter, both from our retail operations and our synthetic fuel
investments. The ratio of current assets to current liabilities was 2.3 to 1 at
April 30, 2005 and 2.5 to 1 at January 31, 2005.
During the first quarter of fiscal 2005, we received proceeds of $6.7
million from installment sales of our ownership interest in the Colona synfuel
limited partnership. We had capital expenditures of approximately $1.6 million
during the first quarter of fiscal 2005, primarily related to the relocation of
one store and the purchase of a store that was previously leased. We used $9
million of cash as we deposited funds into escrow for a possible investment in
an ethanol producing facility.
Cash used in financing activities totaled approximately $1.9 million
for the first three months of fiscal 2005. Cash was provided by stock option
activity of $1.1 million. We also recorded a tax benefit of approximately $0.7
million during the first quarter of fiscal 2005 from the exercise of
non-qualified stock options as an increase in additional paid-in capital. Cash
of $1.3 million was used for scheduled payments of mortgage debt. Cash of
approximately $1.7 million was also used to acquire 120,000 shares of our common
stock. At April 30, 2005, we had approximately 333,245 authorized shares
remaining available for purchase under the stock buy-back program. On June 2,
2005, the Company announced it had increased its share repurchase authorization
by an additional 1,000,000 shares.
Forward-Looking Statements
This Form 10-Q contains or may contain forward-looking statements as
defined in the Private Securities Litigation Reform Act of 1995. The words
"believes", "estimates", "plans", "expects", "intends", "anticipates" and
similar expressions as they relate to the Company or its management are intended
to identify such forward-looking statements. Forward-looking statements are
inherently subject to risks and uncertainties. These risks and uncertainties
include among other things: the highly competitive nature of the consumer
electronics retailing industry, changes in the national or regional economies,
weather, the effects of terrorism or acts of war on consumer spending patterns,
the availability of certain products, technological changes, new regulatory
restrictions or tax law
16
changes relating to the Company's synthetic fuel investments, the fluctuating
amount of quarterly payments received by the Company with respect to sales of
its partnership interests in synthetic fuel investments, the uncertain amount of
synthetic fuel production and tax credits received from time to time from the
Company's synthetic fuel investments, and the potential for Section 29 tax
credits to phase out based on the price of crude oil adjusted for inflation.
Other factors that could cause actual results to differ materially from those in
the forward-looking statements are set forth in Exhibit 99(a) to the Company's
Annual Report on Form 10-K for the fiscal year ended January 31, 2005 (File No.
001-09097).
Item 3. Quantitative and Qualitative Disclosures About Market Risk
No material changes since January 31, 2005.
Item 4. Controls and Procedures
The Company's management evaluated, with the participation of the
Company's Chief Executive Officer and Chief Financial Officer, the effectiveness
of the Company's disclosure controls and procedures, as of the end of the period
covered by this report. Based on that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective to ensure that information required to be disclosed by
the Company in the reports that it files or submits under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission's rules and
forms.
There were no changes in the Company's internal control over financial
reporting that occurred during the Company's last fiscal quarter that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
17
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
Total Number of Shares Maximum Number
Purchased of Shares that May Yet
Total Number Average Price as Part of Publicly Be Purchased Under
of Shares Paid per Announced Plans the Plans or
Period Purchased Share or Programs(1) or Programs(1)(2)
- ------ ---------- -------------- -----------------
February 1-28, 2005 22,300 $14.66 22,300 430,745
March 1-31, 2005 - - - 430,745
April 1-30, 2005 97,500 $13.84 97,500 333,245
------ ------ ------- -------
Total 119,800 $13.99 119,800 333,245
======= ====== ======= =======
- ------------------------
(1) On February 26, 2004, the Company announced it had authorized the
purchase of up to an additional 1,000,000 shares of its common stock
from time to time in private or market transactions at prevailing
market prices. At April 30, 2005, a total of 333,245 shares remained
available to purchase under this plan.
(2) On June 2, 2005, the Company announced it had increased its share
repurchase Authorization by an additional 1,000,000 shares.
Item 4. Submission of Matters to a Vote of Security Holders.
The annual meeting of shareholders of REX Stores Corporation was held
on May 26, 2005, at which the following matter was submitted to a vote of
shareholders:
1. Election of seven directors.
----------------------------------------------------------------
Nominee For Withheld
----------------------------------------------------------------
Stuart A. Rose 6,909,642 3,371,737
----------------------------------------------------------------
Lawrence Tomchin 6,806,324 3,475,055
----------------------------------------------------------------
Robert Davidoff 9,908,929 372,450
----------------------------------------------------------------
Edward M. Kress 6,868,272 3,413,107
----------------------------------------------------------------
Lee Fisher 9,880,903 400,476
----------------------------------------------------------------
Charles A. Elcan 6,558,585 3,722,794
----------------------------------------------------------------
David S. Harris 9,909,203 372,176
----------------------------------------------------------------
18
Item 6. Exhibits.
The following exhibits are filed with this report:
31 Rule 13a-14(a)/15d-14(a) Certifications
32 Section 1350 Certifications
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
REX STORES CORPORATION
Registrant
Signature Title Date
--------- ----- ----
STUART A. ROSE Chairman of the Board June 6, 2005
-------------- (Chief Executive Officer)
(Stuart A. Rose)
DOUGLAS L. BRUGGEMAN Vice President, Finance and Treasurer June 6, 2005
- ---------------------- (Chief Financial Officer)
(Douglas L. Bruggeman)
20