FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended October 31, 1998 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to -------- -------- Commission File Number 0-13283 REX Stores Corporation (Exact name of registrant as specified in its charter) Delaware 31-1095548 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 2875 Needmore Road, Dayton, Ohio 45414 (Address of principal executive offices) (Zip Code) (937)276-3931 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (X) No ( ) At the close of business on December 14, 1998, the registrant had 7,176,222 shares of Common Stock, par value $.01 per share, outstanding.
REX STORES CORPORATION AND SUBSIDIARIES INDEX Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Condensed Balance Sheets......... 3 Consolidated Statements of Income............. 5 Consolidated Statements of Shareholders' Equity...................................... 7 Consolidated Statements of Cash Flows......... 8 Notes to Consolidated Financial Statements.... 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 13 Item 3. Quantitative and Qualitative Disclosure About Market Risk................................... 17 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K................ 18
PART I. FINANCIAL INFORMATION Item 1. Financial Statements <TABLE> REX STORES CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS <CAPTION> A S S E T S October 31 January 31 October 31 1998 1998 1997 (In Thousands) <S> <C> <C> <C> ASSETS: Cash and cash equivalents $ 7,362 $ 16,937 $ 1,836 Short-term investments 1,816 1,637 1,627 Accounts receivable, net 1,154 2,775 791 Merchandise inventory 177,207 126,498 169,345 Prepaid expenses and other 3,357 2,078 3,929 Future income tax benefits 7,899 7,899 6,624 --------- --------- -------- Total current assets 198,795 157,824 184,152 PROPERTY AND EQUIPMENT, NET 95,624 93,165 93,676 FUTURE INCOME TAX BENEFITS AND OTHER NON-CURRENT ASSETS 12,500 9,541 10,219 --------- --------- -------- Total assets $ 306,919 $ 260,530 $288,047 ========= ========= ======== </TABLE> <TABLE> <CAPTION> LIABILITIES AND SHAREHOLDERS' EQUITY <S> <C> <C> <C> CURRENT LIABILITIES: Notes payable $ 36,797 $ - $29,861 Current portion of long-term debt 2,998 2,959 3,234 Accounts payable, trade 64,662 49,832 55,598 Accrued income taxes - 1,671 - Current portion, deferred income and deferred gain on sale and leaseback 11,463 11,402 11,350 Accrued payroll 4,407 5,810 4,979 Other liabilities 10,740 7,263 5,868 --------- -------- -------- Total current liabilities 131,067 78,937 110,890 --------- -------- --------
Liabilities and Shareholders' Equity (Continued) LONG-TERM LIABILITIES: Long-term debt 52,634 52,661 51,499 Deferred income 16,452 17,886 17,364 Deferred gain on sale and leaseback 4,557 5,264 5,500 --------- --------- -------- Total long-term liabilities 73,643 75,811 74,363 --------- --------- -------- SHAREHOLDERS' EQUITY: Common stock 97 97 97 Paid-in capital 58,403 57,896 57,836 Retained earnings 67,505 64,175 59,302 Treasury stock (23,796) (16,386) (14,441) --------- --------- -------- Total shareholders' equity 102,209 105,782 102,794 --------- --------- -------- Total liabilities and shareholders' equity $ 306,919 $ 260,530 $288,047 ========= ========= ======== </TABLE> [FN] The accompanying notes are an integral part of these unaudited consolidated statements.
<TABLE> REX STORES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME <CAPTION> Three Months Ended Nine Months Ended October 31 October 31 1998 1997 1998 1997 (In Thousands, Except Per Share Amounts) <S> <C> <C> <C> <C> NET SALES $ 92,634 $87,967 $273,044 $266,130 COSTS AND EXPENSES: Cost of merchandise sold 67,326 63,475 197,710 191,396 Selling, general and administrative expenses 22,152 21,973 65,186 65,205 -------- ------- -------- -------- Total costs and expenses 89,478 85,448 262,896 256,601 -------- ------- -------- -------- INCOME FROM OPERATIONS 3,156 2,519 10,148 9,529 INVESTMENT INCOME 64 23 287 72 INTEREST EXPENSE 1,911 1,911 4,829 5,406 EQUITY IN EARNINGS OF LIMITED PARTNERSHIP (270) - (270) - -------- ------- -------- -------- Income before income taxes 1,039 631 5,336 4,195 PROVISION FOR INCOME TAXES 307 248 2,006 1,656 -------- ------- -------- -------- NET INCOME $ 732 $ 383 $ 3,330 $ 2,539 ======== ======= ======== ======== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 7,202 7,917 7,512 7,933 ======== ======= ======== ======== BASIC NET INCOME PER SHARE $ 0.10 $ 0.05 $ 0.44 $ 0.32 ======== ======= ======== ======== WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVA- LENT SHARES OUTSTANDING 7,509 8,203 7,916 8,185 ======== ======= ======== ========
DILUTED NET INCOME PER SHARE $ 0.10 $ 0.05 $ 0.42 $ 0.31 ======== ======= ======== ======== </TABLE> [FN] The accompanying notes are an integral part of these unaudited consolidated statements.
<TABLE> REX STORES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (In Thousands) <CAPTION> Common Shares ------------------------------- Issued Treasury Paid-in Retained Shares Amount Shares Amount Capital Earnings <S> <C> <C> <C> <C> <C> <C> Balance at October 31, 1997 9,685 $ 97 1,763 $14,441 $57,836 $59,302 Common stock issued 3 - - - 60 - Treasury stock acquired - - 192 1,945 - - Net income - - - - - 4,873 ----- ------ ----- ------- ------- ------- Balance at January 31, 1998 9,688 $ 97 1,955 $16,386 $57,896 $64,175 Common stock issued 68 - - - 507 - Treasury stock acquired - - 627 7,410 - - Net income - - - - - 3,330 ----- ------ ----- ------- ------- ------- Balance at October 31, 1998 9,756 $ 97 2,582 $23,796 $58,403 $67,505 ===== ====== ===== ======= ======= ======= </TABLE> [FN] The accompanying notes are an integral part of these unaudited consolidated statements.
REX STORES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> Nine Months Ended October 31 1998 1997 (In Thousands) <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income $3,330 $2,539 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization, net 2,360 2,228 Deferred income (1,373) (409) Future income tax benefits - (2,780) Accounts receivable 1,621 686 Merchandise inventory (50,709) (34,312) Other current assets (1,284) (1,715) Accounts payable, trade 14,830 24,333 Other liabilities 403 (1,497) -------- -------- NET CASH USED IN OPERATING ACTIVITIES (30,822) (10,927) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Short-term investments and other assets (3,137) 18 Capital expenditures (7,926) (6,975) Capital disposals 2,404 8 -------- -------- NET CASH USED IN INVESTING ACTIVITIES (8,659) (6,949) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase in notes payable 36,797 17,719 Payments of long-term debt (3,277) (2,030) Long-term debt borrowings 3,289 2,530 Common stock issued 507 607 Treasury stock acquired (7,410) (3,073) -------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES 29,906 15,753 -------- -------- NET DECREASE IN CASH AND CASH EQUIVALENTS (9,575) (2,123) CASH AND CASH EQUIVALENTS, beginning of period 16,937 3,959 -------- -------- CASH AND CASH EQUIVALENTS, end of period $7,362 $1,836
</TABLE> ======== ======== [FN] The accompanying notes are an integral part of these unaudited consolidated statements.
REX STORES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS October 31, 1998 Note 1. Consolidated Financial Statements The consolidated financial statements included in this report have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission and include, in the opinion of management, all adjustments necessary to state fairly the information set forth therein. Any such adjustments were of a normal recurring nature. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these unaudited consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended January 31, 1998. Note 2. Accounting Policies The interim consolidated financial statements have been prepared in accordance with the accounting policies described in the notes to the consolidated financial statements included in the Company's 1998 Annual Report on Form 10-K. While management believes that the procedures followed in the preparation of interim financial information are reasonable, the accuracy of some estimated amounts is dependent upon facts that will exist or calculations that will be accomplished at fiscal year end. Examples of such estimates include changes in the LIFO reserve (based upon the Company's best estimate of inflation to date), management bonuses and the provision for income taxes. Any adjustments pursuant to such estimates during the quarter were of a normal recurring nature. Certain reclassifications have been made to prior year amounts to conform with their fiscal 1999 presentation.
Notes to Consolidated Financial Statements (Continued) Note 3. Stock Option Plans The following summarizes options granted, exercised and canceled or expired during the nine months ended October 31, 1998: <TABLE> <CAPTION> Shares Under Stock Option Plans <S> <C> Outstanding at January 31, 1998 ($3.375 to $18.975 per share) 2,287,464 Granted ($9.9375 to $12.50 per share) 996,625 Exercised ($6.875 to $10.375 per share) 68,145 Canceled or expired ($14.30 per share) 6,993 --------- Outstanding at October 31, 1998 ($3.375 to $18.975 per share) 3,208,951 ========= </TABLE> Note 4. Net Income Per Share Effective February 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 128 (SFAS 128) "Earnings per Share," which replaces the calculation of primary and fully diluted earnings per share under previous accounting standards with basic and diluted earnings per share. As a result, the Company's reported net income per share amounts for the three and nine month periods ended October 31, 1997 have been restated as follows: <TABLE> <CAPTION> Per Share Amounts Three Months Nine Months Ended Ended October 31, 1997 October 31, 1997 <S> <C> <C> Primary net income per share, as reported $0.05 $0.31 Effect of SFAS 128 - 0.01 ----- ----- Basic net income per share, as restated $0.05 $0.32 ===== =====
Fully diluted net income per share, as reported $0.05 $0.31 Effect of SFAS 128 - - ----- ----- Diluted net income per share, as restated $0.05 $0.31 ===== ===== </TABLE> <TABLE> <CAPTION> The following table reconciles the basic and diluted net income per share computations for each period presented: Three Months Ended October 31, 1998 October 31, 1997 Per Per Income Shares Share Income Shares Share <S> <C> <C> <C> <C> <C> <C> Basic net income per share $ 732 7,202 $0.10 $ 383 7,917 $0.05 ===== ===== Effect of stock options - 307 - 286 ------ ----- ------ ----- Diluted net income per share $ 732 7,509 $0.10 $ 383 8,203 $0.05 ====== ===== ===== ====== ===== ===== Nine Months Ended October 31, 1998 October 31, 1997 Per Per Income Shares Share Income Shares Share <S> <C> <C> <C> <C> <C> <C> Basic net income per share $3,330 7,512 $0.44 $2,539 7,933 $0.32 ===== ===== Effect of stock options - 404 - 252 ------ ----- ------ ----- Diluted net income per share $3,330 7,916 $0.42 $2,539 8,185 $0.31 ====== ===== ===== ====== ===== ===== For the three and nine months ended October 31, 1998, a total of 1,463,967 and 1,163,967 shares, respectively, subject to
outstanding options at exercise prices ranging from $11.50 to $18.975 per share were not included in the common equivalent shares outstanding calculation as the exercise prices were above the average trading price of the Company's stock for those periods. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. The Company is a leader in the consumer electronics/appliance retailing industry with 223 stores in 35 states, operating predominantly in small to medium sized markets under the trade name "REX". Results of Operations The following table sets forth, for the periods indicated, the relative percentages that certain income and expense items bear to net sales: </TABLE> <TABLE> <CAPTION> Three Months Ended Nine Months Ended October 31 October 31 1998 1997 1998 1997 <S> <C> <C> <C> <C> Net sales 100.0% 100.0% 100.0% 100.0% Cost of merchandise sold 72.7 72.2 72.4 71.9 ----- ----- ----- ----- Gross profit 27.3 27.8 27.6 28.1 Selling, general and administrative expense 23.9 25.0 23.9 24.5 ----- ----- ----- ----- Income from operations 3.4 2.8 3.7 3.6 Interest, net 2.0 2.1 1.7 2.0 Equity in earnings of limited partnership (0.3) - (0.1) - ----- ----- ----- ----- Income before income taxes 1.1 0.7 1.9 1.6 Provision for income taxes 0.3 0.3 0.7 0.6 ----- ----- ----- ----- Net income 0.8% 0.4% 1.2% 1.0% ===== ===== ===== ===== </TABLE>
Comparison of Three and Nine Months Ended October 31, 1998 and 1997 Net sales for the three months ended October 31, 1998 were $92.6 million compared to $88.0 million in the prior year's comparable period, representing an increase of $4.6 million or 5.3%. This increase is primarily a result of an increase in comparable store sales of 4.4% along with increased sales at non-comparable stores. Net sales for the first nine months of fiscal 1999 were $273.0 million compared to $266.1 million in the first nine months of fiscal 1998, representing an increase of $6.9 million or 2.6%. Comparable store sales increased 1.4% for the first nine months of fiscal 1999. The Company considers a store to be comparable after it has been open six fiscal quarters. As of October 31, 1998, the Company has 223 stores compared to 218 stores one year earlier. There were six stores opened and five closed in the first nine months of fiscal 1999. In the prior year's comparable period there were three stores opened and seven closed. The Company evaluates the performance of its stores on a continuous basis and, based on an assessment of factors it deems relevant, will close any store which is not adequately contributing to Company profitability. Gross profit of $25.3 million in the third quarter of fiscal 1999 (27.3% of net sales) was 3.3% higher than the $24.5 million gross profit (27.8% of net sales) recorded in the third quarter of fiscal 1998. In the first nine months of fiscal 1999 gross profit was $75.3 million (27.6% of net sales), a 0.8% increase from $74.7 million (28.1% of net sales) for the first nine months of fiscal 1998. The reduced gross profit margin, as a percent of net sales, is primarily the result of a change in the merchandise mix, partially offset by the recognition of a higher amount of extended service contract revenues, which generally have a higher gross profit margin. Selling, general and administrative expenses for the third quarter of fiscal 1999 were $22.2 million (23.9% of net sales), a 0.8% increase over the $22.0 million (25.0% of net sales) for the third quarter of fiscal 1998. Selling, general and administrative expenses for the first nine months of fiscal 1999 and 1998 were $65.2 million (23.9% and 24.5% of net sales for the first nine months of fiscal 1999 and 1998, respectively). The decrease in expense, as a percent of net sales, is primarily attributable to lower advertising expenditures in certain markets, partially offset by an increase in incentive commissions for sales personnel. Interest expense for the quarters ended October 31, 1998 and 1997 was $1.9 million (2.1% and 2.2% of net sales, respectively). Interest expense for the first nine months of fiscal 1999 decreased
to $4.8 million (1.8% of net sales) from $5.4 million (2.0% of net sales) for the first nine months of fiscal 1998. The decrease in interest expense is a result of lower average borrowings ($14.6 million during the first nine months of fiscal 1999 compared to $22.9 million during the comparable period of fiscal 1998 )on the line of credit primarily due to lower inventory levels during the first half of fiscal 1999 compared to fiscal 1998. Results for the third quarter of fiscal 1999 also reflect the impact of the Company's recent investment in two limited partnerships which produce synthetic fuels which totals approximately $2.9 million at October 31, 1998. The Company recorded a pre-tax charge of $270,000 to record its share of the partnerships' operating results and, as a result of the investment, the Company's effective tax rate was reduced from 39.5% to 29.5% to reflect the Company's estimated share of Federal tax credits earned by the partnerships under Section 29 of the Internal Revenue Code. The Company's effective tax rate for the third quarter of fiscal 1999 is based upon an estimated annual effective tax rate of 33%. As a result of the foregoing, net income for the third quarter of fiscal 1999 was $732,000, a 91.1% increase from $383,000 for the third quarter of fiscal 1998. Net income for the first nine months of fiscal 1999 was $3.3 million, a 31.2% increase from $2.5 million for the first nine months of fiscal 1998. Liquidity and Capital Resources Net cash used in operating activities was $30.8 million for the first nine months of fiscal 1999, compared to $10.9 million for the prior year's first nine months. Cash was provided by net income of $3.3 million, adjusted for non-cash charges of $1.0 million. The primary use of cash was an increase in inventory of $50.7 million primarily due to seasonal fluctuations and opportunistic inventory purchases. This was partially offset by an increase in trade payables of $14.8 million. Changes in other working capital items provided cash of approximately $0.8 million. At October 31, 1998, working capital was $67.7 million compared to $78.9 million at January 31, 1998. The ratio of current assets to current liabilities was 1.5 to 1 at October 31, 1998 and 2.0 to 1 at January 31, 1998. The Company had outstanding borrowings on its revolving line of credit of $36.8 million at October 31, 1998 at an average interest rate of approximately 7.42%. At October 31, 1998, the Company had approximately $75.0 million borrowing availability on the revolving line of credit.
Year 2000 The statements in this section include "Year 2000 readiness disclosure" within the meaning of the Year 2000 Information and Readiness Disclosure Act. Certain software and hardware systems are time sensitive. Older time sensitive systems often use a two digit dating convention ("00" rather than "2000") that could result in system failure and disruption of operations as the Year 2000 approaches. This is referred to as the Year 2000 issue. The Year 2000 issue will impact the Company, its suppliers, customers and other third parties that transact business with the Company. The Company has dedicated a staff of internal resources (the "Year 2000 Team") to address Year 2000 issues. This team believes it has identified substantially all hardware and software systems within the Company and significant suppliers and other third parties that transact business with the Company which may be susceptible to Year 2000 issues. Projects have been established to address all significant Year 2000 issues. The Year 2000 Team reports regularly to senior management on the progress of significant Year 2000 projects. Most Year 2000 activities are to test hardware and software systems, including non-information technology systems such as telephones and store security systems. The Company has determined that it needs to modify some of its software. The Company believes all hardware systems are Year 2000 compliant. The Company is reprogramming all of the systems impacted by Year 2000 issues. The Company is currently working with the outside vendors on the compliance status of the telephones and store security systems. The Company has initiated communications with significant suppliers, customers and other relevant third parties to identify and minimize disruptions to the Company's operations and to assist in resolving Year 2000 issues. However, there can be no certainty that the impacted systems and products of other parties on which the Company relies will be Year 2000 compliant. The Company generally believes that its vendors who supply products to the Company for resale are responsible for Year 2000 functionality of those products. However, should product failures occur, the Company may be required to address the administrative aspects of those failures such as handling product returns or repairs. The estimated cost for resolving Year 2000 issues are approximately $175,000. Most of these costs are labor related to
reprogramming existing software. Estimates of Year 2000 costs are based on numerous assumptions; actual costs could be greater than estimates. Specific factors that might cause such differences include, but are not limited to, the continuing availability of personnel trained in this area and the ability to timely identify and correct all relevant software and hardware systems. While the Company believes it is diligently addressing the Year 2000 issues to ensure Year 2000 readiness, there can be no absolute assurance that the objective will be achieved either internally or as it relates to third parties. The Company anticipates completing substantially all of its Year 2000 projects by the end of the second quarter of 1999. In the event the Company falls short of these milestones, additional internal resources will be focused on completing these projects or implementing contingency plans. Forward-Looking Statements This Form 10-Q contains or may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. The words "believes", "estimates", "plans", "expects", "intends", "anticipates" and similar expressions as they relate to the Company or its management are intended to identify such forward-looking statements. Forward-looking statements are inherently subject to risks and uncertainties. Factors that could cause actual results to differ materially from those in the forward-looking statements are set forth in Exhibit 99 to the Company's Form 10-Q for the quarter ended October 31, 1997 (File No. 0-13283). Item 3. Quantitative and Qualitative Disclosure About Market Risk None.
PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. The following exhibits are filed with this report: 10.1 Employment Agreement dated October 14, 1998 between Rex Radio and Television, Inc. and Stuart Rose............................ 10.2 Employment Agreement dated October 14, 1998 between Rex Radio and Television, Inc. and Lawrence Tomchin....................... 10.3 Executive Stock Option dated October 14, 1998 granting Stuart Rose an option to purchase 500,000 shares of registrant's Common Stock............................... 10.4 Executive Stock Option dated October 14, 1998 granting Lawrence Tomchin an option to purchase 150,000 shares of registrant's Common Stock.................. 27 Financial Data Schedule.................... (b) Reports on Form 8-K. No reports on Form 8-K were filed during the quarter ended October 31, 1998.
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. REX STORES CORPORATION Registrant December 15, 1998 /s/Stuart A. Rose Stuart A. Rose Chairman of the Board (Chief Executive Officer) December 15, 1998 /s/Douglas L. Bruggeman Douglas L. Bruggeman Vice President, Finance and Treasurer (Principal Financial and Chief Accounting Officer)