================================================================================ 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. ================================================================================
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
Exhibit 31 CERTIFICATIONS I, Stuart A. Rose, certify that: 1. I have reviewed this quarterly report on Form 10-Q of REX Stores Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: June 6, 2005 STUART A. ROSE Stuart A. Rose Chairman of the Board, President and Chief Executive Officer
CERTIFICATIONS I, Douglas L. Bruggeman, certify that: 1. I have reviewed this quarterly report on Form 10-Q of REX Stores Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: June 6, 2005 DOUGLAS L. BRUGGEMAN Douglas L. Bruggeman Vice President, Finance, Treasurer and Chief Financial Officer
Exhibit 32 REX Stores Corporation CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The undersigned officers of REX Stores Corporation (the "Company") hereby certify, to their knowledge, that the Company's Quarterly Report on Form 10-Q for the period ended April 30, 2005, which this certificate accompanies, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained therein fairly presents, in all material respects, the financial condition and results of operations of the Company. A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. STUART A. ROSE Stuart A. Rose DOUGLAS L. BRUGGEMAN Douglas L. Bruggeman Dated: June 6, 2005