SEC Filing - REX American Resources Corporation

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 July 31, 1999 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, and (2) has been subject to such filing requirements for at least the past 90 days. Yes (X) No ( ) At the close of business on August 26, 1999, the registrant had 7,652,527 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.................................... 12 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders.............................. 17 Item 6. Exhibits and Reports on Form 8-K................ 17 2

PART I. FINANCIAL INFORMATION Item 1. Financial Statements REX STORES CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS A S S E T S July 31 January 31 July 31 1999 1999 1998 (In Thousands) ASSETS: Cash and cash equivalents $ 9,734 $ 11,912 $ 6,014 Accounts receivable, net 1,414 2,297 518 Merchandise inventory 149,362 132,002 144,523 Prepaid expenses and other 2,177 2,039 2,833 Equity investment in limited partnerships 781 1,838 3,150 Future income tax benefits 9,366 9,366 7,899 --------- --------- --------- Total current assets 172,834 159,454 164,937 PROPERTY AND EQUIPMENT, NET 101,716 98,891 93,624 FUTURE INCOME TAX BENEFITS 8,109 8,109 9,577 RESTRICTED INVESTMENTS 1,949 1,828 1,744 --------- --------- --------- Total assets $ 284,608 $ 268,282 $ 269,882 ========= ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable $ - $ - $ 13,618 Current portion of long-term mortgage debt 3,203 3,114 3,011 Current portion, deferred income and deferred gain on sale and leaseback 11,349 11,453 11,379 Accounts payable, trade 56,908 52,674 49,507 Accrued income taxes 663 147 - Accrued payroll 6,515 5,889 4,388 3

Liabilities and Shareholders' Equity (Continued) Other liabilities 11,342 8,817 10,612 --------- --------- --------- Total current liabilities 89,980 82,094 92,515 --------- --------- --------- LONG-TERM LIABILITIES: Long-term mortgage debt 58,708 55,478 53,093 Deferred income 16,038 16,723 16,928 Deferred gain on sale and leaseback 3,365 3,777 4,793 --------- --------- --------- Total long-term liabilities 78,111 75,978 74,814 --------- --------- --------- SHAREHOLDERS' EQUITY: Common stock 99 98 97 Paid-in capital 57,226 58,596 58,403 Retained earnings 81,555 75,370 66,773 Treasury stock (22,363) (23,854) (22,720) --------- --------- --------- Total shareholders' equity 116,517 110,210 102,553 --------- --------- --------- Total liabilities and shareholders' equity $ 284,608 $ 268,282 $ 269,882 ========= ========= ========= The accompanying notes are an integral part of these unaudited consolidated statements. 4

REX STORES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Three Months Ended Six Months Ended July 31 July 31 1999 1998 1999 1998 (In Thousands, Except Per Share Amounts) NET SALES $ 107,739 $ 92,446 $ 206,795 $ 180,410 COSTS AND EXPENSES: Cost of merchandise sold 76,870 66,402 149,483 130,384 Selling, general and administrative expenses 24,509 21,818 47,294 43,034 --------- --------- --------- --------- Total costs and expenses 101,379 88,220 196,777 173,418 --------- --------- --------- --------- INCOME FROM OPERATIONS 6,360 4,226 10,018 6,992 INVESTMENT INCOME 41 45 190 223 INTEREST EXPENSE (1,453) (1,659) (2,756) (2,918) INCOME FROM LIMITED PARTNERSHIPS 516 -- 796 -- --------- --------- --------- --------- Income before income taxes 5,464 2,612 8,248 4,297 PROVISION FOR INCOME TAXES 1,366 1,033 2,063 1,699 --------- --------- --------- --------- NET INCOME $ 4,098 $ 1,579 $ 6,185 $ 2,598 ========= ========= ========= ========= WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 7,576 7,644 7,480 7,670 ========= ========= ========= ========= BASIC NET INCOME PER SHARE $ 0.54 $ 0.21 $ 0.83 $ 0.34 ========= ========= ========= ========= 5

WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVA- LENT SHARES OUTSTANDING 8,493 8,011 8,122 8,034 ========= ========= ========= ========= DILUTED NET INCOME PER SHARE $ 0.48 $ 0.20 $ 0.76 $ 0.32 ========= ========= ========= ========= The accompanying notes are an integral part of these unaudited consolidated statements. 6

REX STORES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Common Shares ---------------------------------------- Issued Treasury Paid-in Retained Shares Amount Shares Amount Capital Earnings (In Thousands) Balance at July 31, 1998 9,756 $ 97 2,484 $ 22,720 $ 58,403 $ 66,773 Common stock issued 11 1 -- -- 193 -- Treasury stock acquired -- -- 103 1,134 -- -- Net income -- -- -- -- -- 8,597 -------- -------- -------- -------- -------- -------- Balance at January 31, 1999 9,767 98 2,587 23,854 58,596 75,370 Common stock issued 167 1 (512) (4,721) (1,370) -- Treasury stock acquired -- -- 209 3,230 -- -- Net income -- -- -- -- -- 6,185 -------- -------- -------- -------- -------- -------- Balance at July 31, 1999 9,934 $ 99 2,284 $ 22,363 $ 57,226 $ 81,555 ======== ======== ======== ======== ======== ======== The accompanying notes are an integral part of these unaudited consolidated statements. 7

REX STORES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended July 31 1999 1998 (In Thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 6,185 $ 2,598 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization, net 1,693 1,573 Equity in losses of limited partnerships 1,057 -- Deferred income (696) (981) Changes in assets and liabilities: Accounts receivable 883 2,258 Merchandise inventory (17,360) (18,025) Other current assets (141) (758) Accounts payable, trade 4,234 (325) Other liabilities 3,574 256 -------- -------- NET CASH USED IN OPERATING ACTIVITIES (571) (13,404) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (5,869) (4,175) Capital disposals 943 1,675 Equity investment in limited partnerships -- (3,150) Restricted investments (121) (143) -------- -------- NET CASH USED IN INVESTING ACTIVITIES (5,047) (5,793) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase in notes payable -- 13,618 Payments of long-term mortgage debt (2,003) (2,224) Long-term mortgage debt borrowings 5,322 2,707 Common stock issued 1,623 507 Treasury stock issued 1,728 -- Treasury stock acquired (3,230) (6,334) -------- -------- 8

NET CASH PROVIDED BY FINANCING ACTIVITIES 3,440 8,274 -------- -------- NET DECREASE IN CASH AND CASH EQUIVALENTS (2,178) (10,923) CASH AND CASH EQUIVALENTS, beginning of period 11,912 16,937 -------- -------- CASH AND CASH EQUIVALENTS, end of period $ 9,734 $ 6,014 ======== ======== The accompanying notes are an integral part of these unaudited consolidated statements. 9

REX STORES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS July 31, 1999 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, 1999. 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 1999 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) and 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 2000 presentation. 10

Notes to Consolidated Financial Statements (Continued) Note 3. Stock Option Plans The following summarizes options granted, exercised and canceled or expired during the six months ended July 31, 1999: Shares Under Stock Option Plans Outstanding at January 31, 1999 ($3.38 to $18.98 per share) 3,194,951 Granted ($11.50 to $22.69 per share) 212,221 Exercised ($3.38 to $10.38 per share) (680,080) Canceled or expired ($8.13 to $17.25 per share) (17,670) --------- Outstanding at July 31, 1999 ($8.13 to $22.69 per share) 2,709,422 ========= 11

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 226 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: Three Months Ended Six Months Ended July 31 July 31 1999 1998 1999 1998 Net sales 100.0% 100.0% 100.0% 100.0% Cost of merchandise sold 71.3 71.8 72.3 72.3 ----- ----- ----- ----- Gross profit 28.7 28.2 27.7 27.7 Selling, general and administrative expenses 22.8 23.6 22.9 23.8 ----- ----- ----- ----- Income from operations 5.9 4.6 4.8 3.9 Interest expense, net (1.3) (1.8) (1.2) (1.5) Income from limited partnerships 0.5 -- 0.4 -- ----- ----- ----- ----- Income before income taxes 5.1 2.8 4.0 2.4 Provision for income taxes 1.3 1.1 1.0 1.0 ----- ----- ----- ----- Net income 3.8% 1.7% 3.0% 1.4% ===== ===== ===== ===== 12

Comparison of Three and Six Months Ended July 31, 1999 and 1998 Net sales in the second quarter ended July 31, 1999 were $107.7 million compared to $92.4 million in the prior year's comparable period, representing an increase of $15.3 million or 16.6%. This increase is primarily the result of a 14.2% increase in comparable store sales for the quarter. The Company considers a store to be comparable after it has been open six full fiscal quarters. The strongest product for the quarter was air conditioners, which accounted for 10.3% of the 14.2% increase in comparable store sales. This strong performance was due to warm weather throughout our markets, particularly in the Midwest and Northeast. Televisions accounted for 2.3% of the increase in comparable store sales, primarily due to the strength of the big screen TV product lines. In addition, the video, audio and other appliance categories all had positive contributions for the quarter, resulting in a combined 1.6% increase in comparable store sales. Net sales for the first half of fiscal 2000 were $206.8 million compared to $180.4 million for the first half of fiscal 1999, representing an increase of $26.4 million or 14.6%. This increase is primarily the result of an increase of 13.1% in comparable store sales for the first half of fiscal 2000. All major product categories made positive contributions to comparable store sales. The appliance category accounted for 7.2% of the 13.1% increase in comparable store sales, led by strong air conditioner sales. Televisions impacted comparable store sales by 3.0%. In addition, the audio and video categories impacted comparable store sales by 1.9% and 1.0%, respectively. As of July 31, 1999, the Company had 226 stores compared to 220 stores one year earlier. There was one store opened and three closed in the first half of fiscal 2000. In the prior year's first half there were two stores opened and four closed. The Company evaluates the performance of its stores on a continuous basis and, based on an assessment of profitability, future cash flows and other factors it deems relevant, will close any store which is not adequately contributing to Company profitability. Gross profit of $30.9 million in the second quarter of fiscal 2000 (28.7% of net sales) was 18.5% higher than the $26.0 million gross profit (28.2% of net sales) recorded in the second quarter of fiscal 1999. Gross profit in the first half of fiscal 2000 was $57.3 million (27.7% of net sales), a 14.6% increase from $50.0 million (27.7% of net sales) for the first half of fiscal 1999. The increased gross profit, as a percent of sales, for the second quarter of fiscal 2000 was primarily the result of higher margins generated by air conditioner 13

sales and improved margins in the television, video and other appliance categories primarily due to better merchandise buying opportunities. Gross profit realized from sales of extended service contracts was $2.8 million for the second quarter of both fiscal 2000 and fiscal 1999. For the first six months of fiscal 2000, gross profit realized from sales of extended service contracts was $5.4 million compared to $5.6 million for the first six months of fiscal 1999. Sales of extended service contracts generally have a higher gross profit margin in comparison to other product categories and the decline in the amount recognized, as well as its percentage of total gross profit, served to offset the improvements, as a percent to sales, in other product categories on a year to date basis in fiscal 2000. Selling, general and administrative expenses for the second quarter of fiscal 2000 were $24.5 million (22.8% of net sales), a 12.3% increase over the $21.8 million (23.6% of net sales) for the second quarter of fiscal 1999. Selling, general and administrative expenses for the first half of fiscal 2000 were $47.3 million (22.9% of net sales), a 9.9% increase from $43.0 million (23.8% of net sales)for the first half of fiscal 1999. The increase in expenses for both the second quarter and first half of fiscal 2000 is primarily the result of increased incentive commissions and other selling costs associated with the increased sales levels. The reduction in selling, general and administrative expenses as a percent of net sales is primarily the result of the leveraging of store operating costs, such as advertising and occupancy expense, on an increase in comparable store sales of 14.2% for the second quarter and 13.1% for the first half of fiscal 2000. Interest expense decreased to $1.5 million (1.4% of net sales) for the quarter ended July 31, 1999 from $1.7 million (1.8% of net sales) for the second quarter of fiscal 1999. Interest expense for the first half of fiscal 2000 decreased to $2.8 million (1.3% of net sales) from $2.9 million (1.5% of net sales) for the first half of fiscal 1999. The decrease in interest expense was a result of lower borrowings under the line of credit for the first half of fiscal 2000. Results of the first quarter and first half of fiscal 2000 also reflect the impact of the Company's equity investment in two limited partnerships which produce synthetic fuel. Effective February 1, 1999, the Company entered into an agreement to sell a portion of its investment in one of the limited partnerships, which resulted in the reduction in the Company's ownership interest from 30% to 17%. The Company will receive cash payments from the sale on a quarterly basis through 2007. These payments are contingent upon and equal to 75% of the federal income tax credits attributable to the 13% interest sold. 14

The Company reported income from the limited partnerships of $516,000 for the second quarter of fiscal 2000, which consisted of $1,119,000 of income generated by the sale of the partnership interest, partially offset by a charge of $603,000 to reflect the Company's equity share of the partnerships' losses. For the first half of fiscal 2000, the Company reported income from the limited partnerships of $796,000, which consisted of $1,853,000 of income generated by the sale of the partnership interest, partially offset by a charge of $1,057,000 to reflect the Company's equity share of the partnerships' losses. The Company's effective tax rate was reduced to 25.0% for the second quarter and first half of fiscal 2000 from 39.5% for the second quarter and first half of fiscal 1999 as a result of the Company's share of federal income tax credits earned by the limited partnerships under Section 29 of the Internal Revenue Code. As a result of the foregoing, net income for the second quarter of fiscal 2000 was $4.1 million, a 159.5% increase from $1.6 million for the second quarter of fiscal 1999. Net income for the first half of fiscal 2000 was $6.2 million, a 138.1% increase from $2.6 million for the first half of fiscal 1999. Liquidity and Capital Resources Net cash used in operating activities was $0.6 million for the first six months of fiscal 2000, compared to $13.4 million for the first six months of fiscal 1999. For the first six months of fiscal 2000, operating cash flow was provided by net income of $6.2 million adjusted for the net impact of non-cash items of $2.1 million, which consist of deferred income, depreciation and amortization and our equity interest in the losses of the synthetic fuel limited partnerships. Cash was also provided by an increase in accounts payable of $4.2 million, primarily due to an increase in inventory and extended payment terms from certain vendors, and an increase in other liabilities of $3.6 million, primarily due to the timing of payment for wages and taxes. The primary use of cash was an increase in inventory of $17.4 million primarily due to the seasonal timing of inventory purchases. At July 31, 1999, working capital was $82.9 million compared to $77.4 million at January 31, 1999. The ratio of current assets to current liabilities was 1.9 to 1 at July 31, 1999 and at January 31, 1999. Capital expenditures through July 31, 1999 totaled $5.9 million and primarily relate to the acquisition of store sites and other construction expenditures associated with planned fiscal 2000 new 15

store openings and the purchase of a previously leased store. The Company expects to open 10 to 15 new stores in fiscal 2000. Cash provided by financing activities totaled $3.4 million for the first six months of fiscal 2000. The Company received proceeds of $3.3 million from the exercise of stock options by employees. During the first six months of fiscal 2000, the Company also purchased 209,000 shares of its common stock for $3.2 million. The Company is currently authorized by its board of directors to purchase an additional 255,700 shares of common stock. Proceeds from long-term debt totaled $5.3 million and were partially offset by $2.0 million of scheduled repayments. The new long-term borrowings related to mortgage financing for eight existing stores. At July 31, 1999, the Company had no borrowings outstanding under its revolving credit agreement. A total of approximately $94.9 million was available for borrowing at July 31, 1999. 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 us, our suppliers, customers and other third parties that transact business with us. We have a staff of internal resources to address Year 2000 issues. This team believes that it has identified substantially all hardware and software systems within REX 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 infrastructure systems such as telephones and store security systems. We determined that we needed to modify some of our software. We believe all hardware systems are Year 2000 compliant. We believe we have completed reprogramming and testing all of our critical systems impacted by Year 2000 issues. We are currently working with outside vendors on the compliance status of telephones and store security systems. We have initiated communications with our significant suppliers and other third parties that transact business with us to identify and minimize disruptions to our operations and to assist in resolving Year 2000 issues. Information provided by our 15 largest suppliers states that they believe their products are Year 2000 compliant. Most of the companies operating our store security systems believe their systems are either Year 2000 compliant or are not date dependent. However, there can be no certainty that the impacted systems and products of other parties on which we rely will be Year 2000 compliant. We generally believe that our suppliers are responsible for the Year 2000 functionality of the products they supply to us for resale. However, should product failures occur, we may be required to address the administrative aspects of those failures, such as handling product returns or repairs. The estimated costs for resolving Year 2000 issues are approximately $175,000. Most of these costs are internal labor related to reprogramming existing software. Estimates of Year 2000 costs are based on numerous assumptions and 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 we believe we are 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. At this time, we believe the most reasonably likely worst case scenario is that: we could experience significant volumes of product returns due to widespread product failures; we could lose communications links with some stores; some stores could close due to loss of electric power; store security systems may not operate; and individual stores may be unable to process transactions or engage in normal business activity. Our contingency plans include conducting store operations on a manual basis, working to assess and correct system errors and possibly changing suppliers. 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). 16

PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders. The annual meeting of shareholders of REX Stores Corporation was held on June 7, 1999, at which the following matter was submitted to a vote of shareholders: 1. Election of five directors. Nominee For Withheld Stuart Rose 7,043,849 19,720 Lawrence Tomchin 7,043,849 19,720 Robert Davidoff 7,043,849 19,720 Edward Kress 7,043,789 19,780 Lee Fisher 7,043,849 19,720 Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. The following exhibits are filed with this report: 27 Financial Data Schedule (b) Reports on Form 8-K. No reports on Form 8-K were filed during the quarter ended July 31, 1998. 17

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 August 26, 1999 /s/ STUART A. ROSE Stuart A. Rose Chairman of the Board (Chief Executive Officer) August 26, 1999 /s/ DOUGLAS L. BRUGGEMAN Douglas L. Bruggeman Vice President--Finance and Treasurer (Principal Financial and Chief Accounting Officer) 18

5 0000744187 REX STORES CORPORATION 1,000 U.S. DOLLARS 6-MOS JAN-31-2000 FEB-01-1999 JUL-31-1999 1 9,734 0 1,872 458 149,362 172,834 121,674 19,958 284,608 89,980 58,708 99 0 0 116,418 284,608 206,795 206,795 149,483 149,483 0 0 2,756 8,248 2,063 6,185 0 0 0 6,185 .83 .76