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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 31, 2001 COMMISSION FILE NO. 0-13283
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REX STORES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 31-1095548
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2875 Needmore Road, Dayton, Ohio 45414
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code (937) 276-3931
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, $.01 par value New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes 'ch' No
________ ________
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. 'ch'
At the close of business on April 16, 2001 the aggregate market value
of the registrant's outstanding Common Stock held by non-affiliates of the
registrant (for purposes of this calculation, 1,209,296 shares beneficially
owned by directors and executive officers of the registrant were treated as
being held by affiliates of the registrant), was $70,349,822.
There were 5,100,372 shares of the registrant's Common Stock
outstanding as of April 16, 2001.
Documents Incorporated by Reference
Portions of REX Stores Corporation's definitive Proxy Statement for its
Annual Meeting of Shareholders on June 4, 2001 are incorporated by reference
into Part III of this Form 10-K.
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PART I
Item 1. Business
Overview
We are a leading specialty retailer in the consumer electronics/
appliance industry, serving over 200 small to medium-sized towns and
communities. Since 1980, when our first four stores were acquired, we have
expanded into a national chain operating 262 stores in 37 states under the "REX"
trade name. Our stores average approximately 11,000 square feet and offer a
broad selection of brand name products within selected major product categories,
including big screen and standard-sized televisions, video and audio equipment,
camcorders and major household appliances.
Our business strategy emphasizes depth of selection within key product
categories. Brand name products are offered at everyday low prices combined with
frequent special sales and promotions. We concentrate our stores in small and
medium sized markets where we believe that by introducing a high volume, low
price merchandising concept, we can become a dominant retailer. We support our
merchandising strategy with extensive newspaper advertising in each of our local
markets and maintain a knowledgeable sales force which focuses on customer
service. We believe our low price policy, attention to customer satisfaction and
deep product selection provide customers with superior value.
Our strategy is to continue to open stores in small to medium sized
markets. We will focus on markets with a newspaper circulation which can
efficiently and cost-effectively utilize our print advertising materials and
where we believe we can become a dominant retailer.
REX was incorporated in Delaware in 1984 as a holding company to
succeed to the entire ownership of three affiliated corporations, Rex Radio and
Television, Inc., Stereo Town, Inc. and Kelly & Cohen Appliances, Inc., which
were formed in 1980, 1981 and 1983, respectively. Our principal offices are
located at 2875 Needmore Road, Dayton, Ohio 45414. Our telephone number is (937)
276-3931.
Fiscal Year
All references in this report to a particular fiscal year are to REX's
fiscal year ended January 31. For example, "fiscal 2000" means the period
February 1, 2000 to January 31, 2001. We refer to our fiscal year by reference
to the year immediately preceding the January 31 fiscal year end date.
Business Strategy
Our objective is to be the leading consumer electronics/appliance
retailer in each of our markets. The key elements of our business strategy
include:
Focusing on Small Markets
We traditionally have concentrated our stores in markets with
populations of 20,000 to 300,000. We are currently focusing most of our new
store openings in markets with populations under 85,000, which generally are
underserved by our competitors. We believe our low-overhead store format and our
ability to operate in free-standing as well as strip shopping centers and
regional mall locations makes us well suited to these small markets.
2
Maintaining Guaranteed Lowest Prices
We actively monitor prices at competing stores and adjust our prices as
necessary to meet or beat the competition. We guarantee the lowest price on our
products through a policy of refunding 125% of the difference between our price
and a competitor's price on the same item.
Offering a Broad Selection of Brand Name Products
We offer a broad selection of brand name products within key product
categories. We carry most major brands of consumer electronics and appliances.
We offer merchandise in each of our product categories at a range of price
points and generally maintain sufficient product stock for immediate delivery to
customers.
Capitalizing on Our Opportunistic Buying
We frequently purchase large quantities of products directly from
manufacturers on an opportunistic basis at favorable prices. We believe this
buying strategy makes us a unique and attractive customer for manufacturers
seeking to sell cancelled orders and excess inventory and enables us to develop
strong relationships and extended trade credit support with vendors.
Striving to be the Low Cost Operator in Our Markets
Our current prototype store is approximately 12,000 square feet and
provides us with cost and space efficiencies. Our market selection criteria and
operating philosophy allow us to minimize both occupancy and labor costs.
Generally, all of our store employees, including our store managers, sell
products, unload trucks, stock merchandise and process sales, which helps
minimize employee count and overhead within each store. Most stores are staffed
with between three and six employees.
Leveraging Our Strong Operational Controls
Our information systems and point-of-sale computer systems, which are
installed in every store, allow management to monitor our merchandising
programs, sales, employee productivity and in-store inventory levels on a daily
basis. Our operational controls provide us with cost efficiencies which reduce
overhead while allowing us to maintain high levels of in-stock merchandise. Our
three distribution centers, strategically located in Dayton, Ohio, Pensacola,
Florida and Cheyenne, Wyoming, reduce inventory requirements at individual
stores and facilitate centralized inventory and accounting controls.
Growth Strategy
We plan to open approximately 10 to 15 new stores in fiscal 2001.
Site Selection. We select locations for future stores based on our
evaluation of individual site economics and market conditions. When deciding
whether to enter a new market or open another store in an existing market, we
evaluate a number of criteria, including:
o sales volume potential;
o competition within the market area, including size, strength and
merchandising philosophy of former, existing and potential
competitors;
o cost of advertising;
o newspaper circulation; and
o size and growth pattern of the population.
3
In choosing specific sites, we apply standardized site selection
criteria taking into account numerous factors, including:
o local demographics;
o real estate occupancy expense based upon ownership and/or leasing;
o traffic patterns; and
o overall retail activity.
Stores typically are located on high traffic arteries, adjacent to or
in major shopping malls, with adequate parking to support high sales volume.
We either lease or purchase new store sites depending upon
opportunities available to us and relative costs. Of the 30 new stores opened in
fiscal 2000, 23 were purchased sites and seven were leased sites.
Store Economics. For leased stores, we anticipate per store capital
expenditures of $100,000 to $250,000. This amount may increase to the extent we
are responsible for the remodeling or renovation of the new leased site. We
anticipate expenditures of approximately $950,000 to $1,400,000 when we purchase
real estate, which include the cost of the land purchased, building construction
and fixtures. The purchase amount varies depending upon the size and location of
the store. The purchase amount may be higher if we build or purchase a location
larger than our needs and attempt to lease a portion of the store. Historically,
we have obtained long-term mortgage financing of approximately 75% of the land
and building cost of opening owned stores. Mortgage financing is generally
obtained after a store is opened, either on a site by site or multiple store
basis. The extent to which we seek mortgage financing for owned stores is
dependent upon mortgage rates, terms and availability.
The gross inventory requirements for new stores are estimated at
$300,000 to $500,000 per store depending upon the season and store size.
Store Operations
Stores. We locate our stores in the general vicinity of major retail
shopping districts and design our stores to generate their own traffic.
Currently, 180 stores are located in free-standing buildings, with the balance
situated in strip shopping centers and regional malls. Stores located in malls
have exterior access and signage rights.
Our stores are designed with minimal interior fixtures to provide an
open feeling and a view of all product categories upon entering the store. The
stores are generally equipped with neon signage above each product category to
further direct the customer to particular products. We believe the interior
layout of our stores provides an inviting and pleasant shopping environment for
the customer.
Our existing stores average approximately 11,000 square feet, including
approximately 7,700 square feet of selling space and approximately 3,300 square
feet of storage. New stores are planned to be approximately 12,000 square feet.
Stores are open seven days and six nights per week, except for certain holidays.
Hours of operation are 10:00 a.m. to 9:00 p.m. Monday through Saturday and 12:00
p.m. to 6:00 p.m., or 1:00 p.m. to 5:00 p.m. in some states, on Sunday.
Our operations are divided into regional districts, containing from two
to 12 stores whose managers report to a district manager. Our 40 district
managers report to one of four regional vice presidents. Each store is staffed
with a full-time manager and one or two assistant managers, commissioned sales
personnel and, in higher-traffic stores, seasonal support personnel. Store
managers are paid on a commission basis and have the
4
opportunity to earn bonuses based upon their store's sales and gross margins.
Sales personnel work on a commission basis.
We evaluate the performance of our stores on a continuous basis and,
based on an assessment of overall profitability, future cash flows and other
factors we deem relevant, will close any store which is not adequately
contributing to our profitability. We closed 6, 4 and 6 stores during fiscal
2000, 1999 and 1998, respectively. Subsequent to January 31, 2001, we closed one
additional store. In fiscal 2000, we opened 30 new stores: three stores each in
Michigan, North Carolina, Ohio and Tennessee, two stores each in Montana,
Oklahoma and Pennsylvania and one store each in Florida, Georgia, Illinois,
Iowa, Louisiana, Mississippi, New Mexico, New York, Texas, Vermont, Washington
and West Virginia.
Store Locations. The following table shows the states in which we
operated stores and the number of stores in each state as of January 31, 2001:
State Number of Stores State Number of Stores
----- ---------------- ----- ----------------
Alabama 14 Nebraska 2
Arkansas 1 New Mexico 1
Colorado 3 New York 23
Florida 26 North Carolina 9
Georgia 8 North Dakota 3
Idaho 5 Ohio 23
Illinois 11 Oklahoma 4
Indiana 3 Pennsylvania 19
Iowa 10 South Carolina 10
Kansas 2 South Dakota 3
Kentucky 3 Tennessee 9
Louisiana 8 Texas 11
Maryland 2 Vermont 1
Massachusetts 2 Virginia 2
Michigan 7 Washington 3
Minnesota 1 West Virginia 6
Mississippi 13 Wisconsin 4
Missouri 3 Wyoming 2
Montana 5
Personnel. We train our employees to explain and demonstrate to
customers the use and operation of our merchandise and to develop good sales
practices. Our in-house training program for new employees combines on-the-job
training with use of a detailed company-developed manual entitled "The REX Way."
Sales personnel attend in-house training sessions conducted by experienced
salespeople or manufacturers' representatives and receive sales, product and
other information in meetings with managers. Management and sales personnel are
compensated on a commission basis.
We also have a manager-in-training program that consists of on-the-job
training of the assistant manager at the store. Our policy is to staff store
management positions with personnel promoted from within REX and to staff new
store management positions with existing managers or assistant managers.
5
Services. Virtually all of the products we sell carry manufacturers'
warranties. Except for our least expensive items, we offer extended service
contracts to customers, usually for an additional charge, which typically
provide one to five years of extended warranty coverage. We offer maintenance
and repair services for most of the products we sell. These services are
generally subcontracted to independent repair firms.
Our return policy provides that any merchandise may be returned for
exchange or refund within seven days of purchase if accompanied by original
packaging material and verification of sale.
We accept MasterCard, Visa and Discover. We estimate that, during
fiscal 2000, approximately 36.7% of our total sales were made on these credit
cards, and approximately 8.3% were made on installment credit contracts arranged
through banks or independent finance companies which bear the credit risk of
these contracts. We work with local consumer finance companies in each of our
markets in implementing these credit arrangements and are able to offer
competitive credit packages, generally including interest-free financing
options.
Merchandising
Products. We offer a broad selection of brand name consumer electronics
and home appliance products at a range of price points. We emphasize depth of
product selection within selected key product categories. We sell approximately
1,000 products produced by approximately 50 manufacturers. Our product
categories include:
Televisions Video Audio Appliances Other
----------- ----- ----- ---------- -----
TVs VCRs Stereo Systems Air Conditioners Extended Service
Big Screen Camcorders Receivers Microwave Ovens Contracts
TVs Digital Satellite Compact Washers Ready to Assemble
TV/VCR Systems Disc Players Dryers Furniture
Combos DVD Players Tape Decks Ranges Recordable Tapes
Speakers Dishwashers Telephones
Car Stereos Refrigerators Audio/Video
Portable Radios Freezers Accessories
Turntables Vacuum Cleaners Radar Detectors
Dehumidifiers CB Radios
Garbage Disposals Cellular Phones
Among the leading brands sold by us during fiscal 2000, in alphabetical
order, were General Electric, Hitachi, Hotpoint, JVC, Panasonic, Phillips
Magnavox, Pioneer, RCA, Sharp, Sony, Toshiba and Whirlpool.
All our stores carry a broad range of televisions, video and audio
products, microwave ovens and air conditioners. In addition, 257 stores carry
major appliances. We began selling cellular phones on a trial basis in 41 of our
stores during fiscal 1999. We felt the results were not encouraging and
subsequent to year end decided to discontinue selling cellular phones. We do not
carry computers, computer software or pre-recorded music.
6
The following table shows the approximate percent of net sales for each
major product group for the last three fiscal years.
Fiscal Year
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Product Category 2000 1999 1998
---------------- ---- ---- ----
Televisions ............................................. 45% 38% 36%
Video ................................................... 13 16 17
Audio ................................................... 16 17 18
Appliances .............................................. 18 22 21
Other ................................................... 8 7 8
--- --- ---
100% 100% 100%
=== === ===
Pricing. Our policy is to offer our products at guaranteed lowest
prices combined with frequent special sales and promotions. Our retail prices
are established by our merchandising department, but each district manager is
responsible for monitoring the prices offered by competitors and has authority
to adjust prices to meet local market conditions. Our commitment to offer the
lowest prices is supported by our guarantee to refund 125% of the difference in
price if, within 30 days of purchase, a customer can locate the same item
offered by a local competitor at a lower price.
Advertising. We use a "price and item" approach in our advertising,
stressing the offering of nationally recognized brands at significant savings.
The emphasis of our advertising is our Guaranteed Lowest Price. Our guarantee
states:
"Our prices are guaranteed in writing. If you find any other local
store stocking and offering to sell for less the identical item in a
factory sealed box within 30 days after your REX purchase, we'll refund
the difference plus an additional 25% of the difference."
Advertisements are concentrated principally in newspapers and
preprinted newspaper inserts, which are produced for us by an outside
advertising agency. We supplement our newspaper advertising with television and
radio advertisements in certain markets. Advertisements are also complemented by
in-store signage highlighting special values, including "Value Every Day," "Best
Value," and "Top of the Line." Our advertising strategy includes preferred
customer private mailers, special events such as "Midnight Madness Sales" and
coupon sales to provide shopping excitement and generate traffic.
Purchasing. Our merchandise purchasing and opportunistic buying are
performed predominantly by three members of senior management. Each individual
has responsibility for a specific product category, and two share appliance
buying responsibility. By purchasing merchandise in large volume, we are able to
obtain quality products at competitive prices and advertising subsidies from
vendors to promote the sale of their products. For fiscal 2000, nine vendors
accounted for approximately 72% of our purchases. We typically do not maintain
long-term purchase contracts with vendors and operate principally on an
order-by-order basis.
e-Commerce
In April 1999, we began selling selected televisions, audio and video
products and small appliances on our Web site at www.rexstores.com. We are an
Amazon.com Auctions Charter Merchant and also offer selected products on the
eBay and Yahoo! auction Web sites. In January 2000 we entered into a one year
agreement with Zengine, Inc. to develop our Web site and recently signed a two
year extension of the agreement.
7
Distribution
Our stores are supplied by three regional distribution centers. The
distribution centers consist of:
o a 315,000 square foot leased facility in Dayton, Ohio;
o a 180,000 square foot owned facility in Pensacola, Florida, of which
we lease 90,000 square feet to an outside company; and
o a 145,000 square foot owned facility in Cheyenne, Wyoming.
We also lease a 67,000 square foot auxiliary warehouse in Pensacola,
Florida. In addition, we lease overflow warehouse space as needed to accommodate
seasonal inventory requirements and opportunistic purchases.
Inventory Management
The regional distribution centers reduce inventory requirements at
individual stores, while preserving the benefits of volume purchasing and
facilitating centralized inventory and accounting controls. Virtually all of our
merchandise is distributed through our distribution centers, with the exception
of major appliances which are generally shipped directly by the vendor to the
retail location. All deliveries to stores are made by independent contract
carriers.
Management Information Systems
We have developed a computerized management information system which
operates an internally developed software package. Our computer system provides
management with the information necessary to manage inventory by stock keeping
unit (SKU), monitor sales and store activity on a daily basis, capture marketing
and customer information, track productivity by salesperson and control our
accounting operations.
Our mainframe computer is an IBM A/S 400 model 720. The host computer
is integrated with our point-of-sale system which serves as the collection
mechanism for all sales activity. The combined system provides for next-day
review of inventory levels, sales by store and by SKU and commissions earned,
assists in cash management and enables management to track merchandise from
receipt at the distribution center until time of sale.
Competition
Our business is characterized by substantial competition. Our
competitors include national and regional large format merchandisers and
superstores such as Best Buy Co., Inc. and Circuit City Stores, Inc., other
specialty electronics retailers including RadioShack Corporation, department and
discount stores such as Sears, Roebuck and Co. and Wal-Mart Stores, Inc.,
furniture stores, warehouse clubs, home improvement retailers and Internet and
store-based retailers who sell competitive products online. We also compete with
small chains and specialty single-store operators in some markets, as well as
Sears' dealer-operated units. Some of our competitors have greater financial and
other resources than us, which may increase their ability to purchase inventory
at a lower cost, better withstand economic downturns or engage in aggressive
price competition. Competition within the consumer electronics/appliance
retailing industry is based upon price, breadth of product selection, product
quality and customer service. We expect competition within the industry to
increase.
8
Facilities
We own 149 of our stores. The remaining 113 stores operate on leased
premises, with the unexpired terms of the leases ranging from less than one year
to 24 years, inclusive of options to renew. For fiscal 2000, the total net rent
expense for our leased facilities was approximately $7,792,000.
To date, we have not experienced difficulty in securing leases or
purchasing sites for suitable store locations. We continue to remodel and
upgrade existing stores as appropriate. In addition, to minimize construction
costs, we have developed prototype formats for new store construction.
Employees
At January 31, 2001, we had 161 hourly and salaried employees and 982
commission-based sales employees. We also employ additional personnel during
peak selling seasons. None of our employees are represented by a labor union. We
consider our relationship with our employees to be good.
Service Marks
We have registered our rights in our service mark "REX" with the United
States Patent and Trademark Office. We are not aware of any adverse claims
concerning our service mark.
Item 2. Properties
The information required by this Item 2 is set forth in Item 1 of this
report under "Store Operations--Stores," "Distribution" and "Facilities" and is
incorporated herein by reference.
Item 3. Legal Proceedings
We are involved in various legal proceedings incidental to the conduct
of our business. We believe that these proceedings will not have a material
adverse effect on our financial condition or operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
9
Executive Officers of the Company
Set forth below is certain information about each of our executive
officers.
Name Age Position
---- --- --------
Stuart Rose........................... 46 Chairman of the Board and Chief Executive Officer*
Lawrence Tomchin...................... 73 President and Chief Operating Officer*
Douglas Bruggeman..................... 40 Vice President-Finance and Treasurer
Edward Kress.......................... 51 Secretary*
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*Also serves as a director.
Stuart Rose has been our Chairman of the Board and Chief Executive
Officer since our incorporation in 1984 as a holding company to succeed to the
ownership of Rex Radio and Television, Inc., Kelly & Cohen Appliances, Inc. and
Stereo Town, Inc. Prior to 1984, Mr. Rose was Chairman of the Board and Chief
Executive Officer of Rex Radio and Television, Inc., which he founded in 1980 to
acquire the stock of a corporation which operated four retail stores.
Lawrence Tomchin has been our President and Chief Operating Officer
since 1990. From 1984 to 1990, he was our Executive Vice President and Chief
Operating Officer. Mr. Tomchin has been a director since 1984. Mr. Tomchin was
Vice President and General Manager of the corporation which was acquired by Rex
Radio and Television, Inc. in 1980 and served as Executive Vice President of Rex
Radio and Television, Inc. after the acquisition.
Douglas Bruggeman has been our Vice President - Finance and Treasurer
since 1989. From 1987 to 1989, Mr. Bruggeman was our Manager of Corporate
Accounting. Mr. Bruggeman was employed with the accounting firm of Ernst & Young
prior to joining us in 1986.
Edward Kress has been our Secretary since 1984 and a director since
1985. Mr. Kress has been a partner of the law firm of Chernesky, Heyman & Kress
P.L.L., our legal counsel, since 1988. From 1985 to 1988, Mr. Kress was a member
of the law firm of Smith & Schnacke. Mr. Kress has practiced law in Dayton, Ohio
since 1974.
10
PART II
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Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
SHAREHOLDER INFORMATION
Common Share Information and Quarterly Share Prices
Our common stock is traded on the New York Stock Exchange under the symbol RSC.
Fiscal Quarter Ended High Low
------------------------------- ---------- ----------
April 30, 1999 $16.94 $11.13
July 31, 1999 39.06 15.75
October 31, 1999 42.38 24.88
January 31, 2000 39.81 13.31
April 30, 2000 $27.75 $15.38
July 31, 2000 26.75 17.13
October 31, 2000 23.25 16.63
January 31, 2001 20.38 14.88
As of April 12, 2001, there were 193 holders of record of our common stock,
including shares held in nominee or street name by brokers.
Dividend Policy
Our revolving credit agreement places restrictions on the payment of dividends.
We did not pay dividends in the current or prior years.
11
Item 6. Selected Financial Data
Five Year Financial Summary
January 31,
--------------------------------------------------------
(In Thousands, Except
Per Share Amounts) 2001 2000 1999 1998 1997
----------------------------------------- -------- -------- -------- -------- --------
Net sales $473,020 $464,300 $416,673 $411,005 $427,378
Net income $ 18,736 $ 18,293 $ 11,195 $ 7,412 $ 7,362
Basic net income per share $ 2.98 $ 2.28 $ 1.51 $ 0.94 $ 0.82
Diluted net income per share $ 2.72 $ 2.06 $ 1.43 $ 0.91 $ 0.80
Total assets $310,885 $304,036 $268,282 $260,530 $248,034
Long-term debt, net of current maturities $ 81,262 $ 46,200 $ 55,478 $ 52,661 $ 51,102
12
Quarterly Financial Data (Unaudited)
Quarters Ended
------------------------------------------------------
(In Thousands Except Per Share Amounts)
April 30, July 31, October 31, January 31,
2000 2000 2000 2001
--------- -------- ----------- -----------
Net sales $107,183 $101,609 $105,144 $159,084
Cost of merchandise sold 78,449 72,822 76,611 117,145
Net income 3,246 3,980 2,861 8,649
Basic net income per share (a) $ 0.46 $ 0.61 $ 0.48 $ 1.55
Diluted net income per share (a) $ 0.42 $ 0.55 $ 0.44 $ 1.44
Quarters Ended
------------------------------------------------------
(In Thousands Except Per Share Amounts)
April 30, July 31, October 31, January 31,
1999 1999 1999 2000
--------- -------- ----------- -----------
Net sales $99,056 $107,739 $102,432 $155,073
Cost of merchandise sold 72,613 76,870 74,651 113,284
Net income 2,087 4,098 2,464 9,644
Basic net income per share (b) $ 0.28 $ 0.54 $ 0.30 $ 1.07
Diluted net income per share (b) $ 0.27 $ 0.48 $ 0.27 $ 0.97
(a) The total of the quarterly net income per share amounts is more than the
annual net income per share amounts due to 46% of our net income occurring
in the fourth quarter of fiscal 2000. In addition, the fourth quarter per
share amounts reflect a disproportionate impact from the 2,653,000 shares
repurchased, rather than the annual per share amounts based upon the
average time held in treasury.
(b) The total of the quarterly net income per share amounts is less than the
annual net income per share amounts due to 53% of the net income occurring
in the fourth quarter of fiscal 1999, whose per share amounts reflect, for
the entire quarter, our 1.5 million share offering in October 1999, while
the annual per share amounts only reflect the increased outstanding shares
for the four months since the issuance of the shares in October 1999.
13
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
We are a leading specialty retailer in the consumer
electronics/appliance industry. Since acquiring our first four stores in 1980,
we have expanded into a national chain operating 262 stores in 37 states under
the "REX" trade name. By offering a broad selection of brand name products at
guaranteed lowest prices, we believe we have become a leading consumer
electronics/appliance retailer in our markets.
Our comparable store sales declined 5.6% in fiscal 2000 after an
increase of 8.2% in fiscal 1999. Comparable store sales had decreased 0.1% in
fiscal 1998. The decline in comparable store sales for fiscal 2000 was largely
caused by slower appliance sales due to an unseasonably cool summer and an
increasingly competitive environment. The increase in comparable store sales for
fiscal 1999 was primarily driven by large screen television sales throughout the
year and strong air conditioner sales in the second quarter of fiscal 1999 due
to warm weather conditions. 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.
Extended Service Contracts.
Our extended service contract revenues, net of sales commissions, are
deferred and amortized on a straight-line basis over the life of the contracts
after the expiration of applicable manufacturers' warranty periods. Terms of
coverage, including the manufacturers' warranty periods, are usually for periods
of 12 to 60 months. Extended service contract revenues represented 3.3%, 3.3%
and 3.7% of net sales for fiscal 2000, 1999 and 1998, respectively. Service
contract costs are charged to operations as incurred. Gross profit realized from
extended service contract revenues was $10.9 million, $10.9 million and $10.3
million in fiscal 2000, 1999 and 1998, respectively.
Investment in Limited Partnerships.
In fiscal 1998, we invested $3.2 million in two limited partnerships
which own four facilities producing synthetic fuel from coal fines. The
partnerships earn federal income tax credits under Section 29 of the Internal
Revenue Code based on the tonnage and content of solid synthetic fuel sold to
unrelated parties. Our share of the credits generated may be used to reduce our
federal income tax liability down to the alternative minimum tax (AMT) rate.
Under current law, credits under Section 29 are available for qualified fuels
sold before January 1, 2008. The tax credits begin to phase out if the price of
a barrel of oil exceeds certain levels adjusted annually for inflation. The 2000
phase-out started at $48.07 per barrel.
We initially held a 30% interest in one partnership and an 18.75%
interest in the other. Effective February 1, 1999, we sold a portion of our
interest in one partnership, reducing our ownership percentage from 30% to 17%.
We 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 and are subject to certain annual
limitations. The maximum amount of cash that can be received varies by year. The
maximum that could be received for calendar 2000 was approximately $6.8 million,
which we did reach. The maximum that can be received for calendar 2001 is
approximately $7.1 million.
Effective July 31, 2000, we sold an additional portion of our interest
in the one partnership, reducing our ownership percentage from 17% to 8%. We
will receive cash payments from the sale on a quarterly basis through 2007.
These payments are contingent upon and equal to the greater of 82.5% of the
federal income tax credits attributable to the 9% interest sold subject to
annual limitations or 74.25% of the federal income tax credits amounts
attributable to the interest sold with no annual limitations. The amount earned
and received for calendar 2000 was approximately $4.2 million, including a down
payment of $1.6 million.
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We are a limited partner in each partnership. We account for our
ownership interest in the partnerships under the equity method.
The limited partnerships have received favorable private letter rulings
from the IRS that the synthetic fuel produced by their facilities and sold to
unrelated parties qualify for the tax credits under Section 29 of the Internal
Revenue Code.
Results of Operations
The following table sets forth, for the periods indicated, the relative
percentages that certain income and expense items bear to net sales:
Fiscal Year Ended January 31,
-----------------------------------
2001 2000 1999
------ ------ -----
Net sales............................. 100.0% 100.0% 100.0%
Cost of merchandise sold.............. 72.9 72.7 72.7
------ ------ ------
Gross profit...................... 27.1 27.3 27.3
Selling, general and administrative
expenses.......................... 22.5 21.6 22.4
------ ------ ------
Income from operations............ 4.6 5.7 4.9
Investment income..................... 0.2 0.1 0.1
Interest expense...................... (1.7) (1.1) (1.6)
Gain on sale of real estate........... - 0.2 0.6
Income (equity in losses) from
limited partnerships.................. 2.2 0.6 (0.3)
------ ------ ------
Income before provision for
income taxes and
extraordinary item.............. 5.3 5.5 3.7
Provision for income taxes............ 1.3 1.4 1.0
------ ------ ------
Income before extraordinary
item............................ 4.0 4.1 2.7
Extraordinary loss from early
extinguishment of debt............ - 0.2 -
------ ------ ------
Net Income............................ 4.0% 3.9% 2.7%
====== ====== ======
Comparison of Fiscal Years Ended January 31, 2001 and 2000
Net sales. Net sales in fiscal 2000 were $473.0 million, a 1.9%
increase from $464.3 million for fiscal 1999. This increase was primarily due to
the addition of 30 new stores in fiscal 2000 and the first full year of sales
for 14 stores opened in fiscal 1999. During fiscal 2000, we opened 30 stores and
closed six stores, while during fiscal 1999 we opened 14 stores and closed four.
We had 262 and 238 stores open at January 31, 2001 and 2000, respectively. Sales
were negatively impacted by a decline of 5.6% in comparable store sales for
fiscal 2000.
The decline in comparable store sales was primarily caused by the
appliance category, which negatively impacted comparable store sales by 5.3%.
The decline in appliance sales was caused by unseasonably cool weather during
the summer months in the northeastern and midwestern parts of the United States
which depressed air conditioner sales and an increasingly competitive
environment for appliances. Other categories which negatively impacted
comparable store sales were video by 2.6%, smaller screen televisions (27 inch
and smaller) by 2.3% and audio by 1.7%. These categories have been impacted by
declining average selling prices and
15
increased competition. Our strongest product category was larger screen
televisions (30 inch and larger), which positively impacted comparable store
sales by 6.4%.
Gross Profit. Gross profit was $128.0 million in fiscal 2000, or 27.1%
of net sales, versus $126.9 million for fiscal 1999, or 27.3% of net sales. The
decline in gross profit as a percentage of sales was primarily caused by the
increasingly competitive retail and promotional environment.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for fiscal 2000 were $106.3 million, or 22.5% of net
sales, a 5.6% increase from $100.6 million, or 21.6% of net sales, in fiscal
1999. The increase in expense was primarily caused by an increase of $3.4
million in advertising expenditures associated with the 30 new stores opened and
increased usage of radio and television advertising. The remaining increase was
primarily caused by increased occupancy and utility costs of approximately $1.5
million associated with the 30 new stores and higher utility costs.
Income from Operations. Income from operations was $21.7 million, or
4.6% of net sales, for fiscal 2000, a 17.3% decline from $26.3 million, or 5.7%
of net sales for fiscal 1999. The decrease was primarily caused by the decline
in comparable store sales, the increased advertising expenditures in new and
existing markets and higher occupancy costs associated with the additional
number of stores.
Investment Income. Investment income increased to $933,000 in fiscal
2000 from $420,000 in fiscal 1999. In fiscal 2000 we recorded a $640,000 gain on
the sale of stock warrants held in an outside company.
Interest Expense. Interest expense increased to $8.1 million for fiscal
2000 from $5.1 million for fiscal 1999. The increase in interest expense was
primarily caused by increased borrowings on the line of credit. Average
outstanding borrowings on the line of credit were approximately $40.0 million in
fiscal 2000 versus approximately $3.2 million in fiscal 1999.
Income (Equity in Losses) from Limited Partnerships. Results for the
fiscal year ended January 31, 2001 also reflect the impact of our investment in
two synthetic fuel limited partnerships. We reported income from the limited
partnerships of approximately $10.4 million for fiscal 2000. This consisted of
approximately $6.5 million from the 1999 sale of a portion of our interest in
one partnership and approximately $4.2 million from the 2000 sale of an
additional portion of the interest, partially offset by a charge of $300,000 to
reflect our equity share of the partnerships' losses.
Income Taxes. Our effective tax rate was 25% in fiscal 2000 and 1999,
after reflecting our share of federal tax credits earned by the limited
partnerships.
Extraordinary Loss from Early Extinguishment of Debt. In fiscal 1999,
we recorded an extraordinary loss from the early extinguishment of debt of
$717,000, net of the income tax effect of $239,000, as a result of paying off
approximately $18.9 million of mortgage debt.
Net Income. As a result of the foregoing, net income was $18.7 million
in fiscal 2000 versus $18.3 million, after extraordinary item, in fiscal 1999.
Comparison of Fiscal Years Ended January 31, 2000 and 1999
Net Sales. Net sales in fiscal 1999 were $464.3 million, an 11.4%
increase from the $416.7 million achieved in fiscal 1998. This increase was
primarily the result of an increase in comparable store sales of 8.2% for the
fiscal year. Sales also increased due to the opening of 14 new stores in fiscal
1999 and the first full year of sales from 12 stores opened in fiscal 1998.
During fiscal 1999, we opened 14 stores and closed four, while during fiscal
1998 we opened 12 stores and closed six. We had 238 and 228 stores open at
January 31, 2000 and 1999, respectively.
16
The largest contributor to the increased comparable store sales were
larger screen television sales which accounted for 6.5% of the increase.
Comparable store sales were also positively impacted by approximately 2.2% from
strong air conditioner sales during the second quarter and approximately 1.3%
and 1.1% from DVD players and appliances other than air conditioners,
respectively. DVD players were a relatively new product in fiscal 1999 and we
believe that sales of DVD players serve to replace certain VCR sales. The
increase in sales of appliances was a result of expanded product offerings.
Comparable store sales were negatively impacted by approximately 1.5%
and 1.4% from smaller screen televisions and VCRs, respectively. The decline in
smaller screen televisions was primarily due to increased demand for larger
screen televisions and a reduction in average selling prices. The reduction in
VCR sales was also due to a decline in average selling prices and a shift in
demand toward DVD players.
Gross Profit. Gross profit was $126.9 million in fiscal 1999 versus
$113.8 million for fiscal 1998. The gross profit margin was 27.3% for each year.
The gross profit margin was positively impacted by the improved sales of larger
screen televisions and air conditioners which have higher than average gross
profit margins. These improvements were offset by the recognition of a lower
percentage of extended service contract revenues relative to merchandise sales.
Sales of extended service contracts generally have a higher gross profit margin
in comparison to other product categories.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for fiscal 1999 were $100.6 million, or 21.6% of net
sales, a 7.5% increase from $93.6 million, or 22.4% of net sales, in fiscal
1998. The increase in expenses was 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 was primarily the result of the leveraging of store operating costs,
such as advertising and occupancy expenses, as a result of the increase in
comparable stores sales of 8.2%.
Income from Operations. Income from operations was $26.3 million, or
5.7% of net sales, for fiscal 1999, a 30.2% increase from $20.2 million, or 4.9%
of net sales, in fiscal 1998. The increase was primarily due to increased
comparable store sales and the leveraging of store operating costs, such as
advertising and occupancy expenses.
Interest Expense. Interest expense decreased to $5.1 million in fiscal
1999 from $6.4 million in fiscal 1998. The decrease in interest expense was
primarily attributable to lower borrowings under the line of credit. Average
outstanding borrowings under the line of credit were approximately $3.2 million
in fiscal 1999 versus approximately $15.8 million in fiscal 1998. We also had a
net reduction in mortgage debt of $9.1 million, due to paying off certain higher
rate mortgage debt with proceeds from our stock offering in October 1999.
Gain on Sale of Real Estate. During fiscal 1999, we sold a shopping
center in which we had previously operated a retail store. We recorded a gain of
approximately $787,000 from the sale of this real estate.
Income (Equity in Losses) from Limited Partnerships. Results for the
fiscal year ended January 31, 2000 also reflect the impact of our investment in
two synthetic fuel limited partnerships. We reported income from the limited
partnerships of approximately $3.0 million for fiscal 1999, which consisted of
$5.1 million generated by the sale of a portion of the interest in one of the
partnerships, partially offset by a charge of $2.1 million to reflect our equity
share of the partnerships' losses.
Income Taxes. Our effective tax rate was reduced to 25.0% in fiscal
1999 from 26.3% in fiscal 1998 as a result of our share of federal tax credits
earned by the limited partnerships.
Extraordinary Loss from Early Extinguishment of Debt. We recorded an
extraordinary loss from the early extinguishment of debt of $717,000, net of the
income tax effect of $239,000, as a result of paying off approximately $18.9
million of mortgage debt with a portion of the proceeds from our stock offering
in October 1999.
17
Net Income. As a result of the foregoing, net income was $18.3 million
and $11.2 million for fiscal 1999 and 1998, respectively.
Liquidity and Capital Resources
Our primary sources of financing have been cash flow provided by
operations, supplemented by mortgages on owned properties. We also use
borrowings under our revolving line of credit to fund our seasonal working
capital needs. In addition, during fiscal 1999 we received approximately $44.7
million after expenses from the sale of 1,500,000 shares of common stock.
Operating Activities. Net cash provided by operating activities was
$1.1 million and $5.2 million for fiscal 2000 and 1999, respectively. For
fiscal 2000, operating cash flow was provided by net income of $18.7 million
adjusted for the impact of a $10.7 million gain on sale of partnership
interest and non-cash items of $3.4 million, which consist of
deferred income, the deferred income tax provision and depreciation and
amortization. Cash was used by an increase in inventory of $4.9 million,
primarily due to the net increase of 24 additional stores. Other uses of cash
were a decrease in other liabilities of $2.7 million, an increase in other
assets of $2.1 million and an increase in receivables of $2.1 million. The
change in other assets and liabilities was primarily caused by the timing of
income tax payments, a decrease in accrued wages and related taxes and an
increase in prepaid bank fees related to mortgage debt acquired in fiscal 2000.
The increase in receivables was primarily due to an increase in the vendor
receivable on digital satellite systems. Cash was provided by an increase in
accounts payable of $1.4 million due to the timing of inventory purchases and
payments to vendors.
For fiscal 1999, operating cash flow was provided by net income of
$18.3 million adjusted for the net impact of a $5.1 million gain on sale of
partnership interest and non-cash items of $3.5 million, which consist of
deferred income, the gain on the sale of real estate, depreciation and
amortization, the deferred income tax provision and our equity interest in
the losses of the synthetic fuel limited partnerships. Cash of $3.0
million was also provided by an increase in other liabilities primarily
resulting from the timing of tax payments and increased accrued wages resulting
from higher sales levels. The primary use of cash was an increase in inventory
of $7.3 million and a decrease in accounts payable of $6.4 million primarily due
to the timing of purchases and terms of payments with the vendors.
Investing Activities. Capital expenditures in fiscal 2000 totaled $27.7
million. Expenditures included approximately $22.5 million to open 30 new
stores, approximately $3.8 million for four stores to open in fiscal 2001 and
approximately $1.4 million for equipment and improvements to existing stores. We
plan to open 10 to 15 new stores in fiscal 2001, with anticipated capital
expenditures of approximately $3.0 to $6.0 million. We are also considering the
building of a new distribution center with anticipated expenditures of
approximately $5.0 to $7.0 million. We plan to fund the new store openings and
distribution center with cash generated from operations and from additional
mortgage debt.
Capital expenditures in fiscal 1999 totaled $20.2 million. Expenditures
included approximately $15.3 million to open 14 stores, approximately $1.2
million to purchase two previously leased stores and approximately $2.6 million
for stores opened in fiscal 2000. We received proceeds of $10.7 million and
$5.1 million for fiscal 2000 and 1999, respectively, from installment sales of
a portion of our ownership interest in a limited partnership.
Financing Activities. Cash used in financing activities was $10.0
million for fiscal 2000. During fiscal 2000, we purchased 2,652,900 shares of
our common stock for $48.5 million. During fiscal 1999, we purchased 1,351,325
shares of our common stock for $20.1 million. At January 31, 2001 we had
authorization from the Board of Directors to purchase an additional 705,000
shares of our common stock. These shares will be held in treasury for possible
future use.
At January 31, 2001, we had approximately $86.2 million of mortgage
debt outstanding at a weighted average interest rate of 7.99%, with maturities
from January 1, 2002 to October 1, 2019. We have balloon payments due totaling
approximately $1.6 million over the next two fiscal years, which we plan to
either refinance with long-term mortgage debt or satisfy through borrowings on
our revolving credit agreement. During fiscal 2000 we obtained mortgage
financing of approximately $41.5 million to finance 51 retail store locations.
18
We also paid off $4.8 million of long-term mortgage debt from scheduled
repayments and extinguishment of debt upon the sale of two retail locations.
We received proceeds of approximately $777,000 and $4.0 million for
fiscal 2000 and 1999, respectively, from the exercise of stock options by
employees and directors. The exercise of non-qualified stock options resulted in
a tax benefit of approximately $355,000 and $2.7 million for fiscal 2000 and
1999, respectively, which was reflected as an increase in additional paid-in
capital. In October 1999, we completed the sale of 1,500,000 shares of common
stock with net proceeds to the Company of approximately $44.7 million after
expenses.
During fiscal 1999 we renewed our revolving credit agreement. The
revolving credit agreement is with six banks through July 31, 2005 with interest
at prime or LIBOR plus 1.875% and commitment fees of 1/4% payable on the unused
portion. Amounts available for borrowing are equal to the lesser of (1) $100
million for the months of January through June and $130 million for the months
of July through December or (2) the sum of specific percentages of eligible
accounts receivable and eligible inventories, as defined. Amounts available for
borrowing are reduced by any letter of credit commitments outstanding.
Borrowings on the revolving credit agreement are secured by certain fixed
assets, accounts receivable, inventories and the capital stock of our
subsidiaries.
At January 31, 2001, we had borrowings outstanding of $742,000 on the
revolving credit agreement. We had no borrowings outstanding on the revolving
credit agreement at January 31, 2000. A total of approximately $91.2 million was
available at January 31, 2001. Borrowing levels vary during the course of a year
based upon our seasonal working capital needs. The maximum direct borrowings
outstanding during fiscal 2000 were approximately $83.9 million, which existed
immediately prior to the Christmas selling season due to the build-up of
seasonal inventory requirements. The weighted average interest rate was 8.9%
(9.4% including commitment fees) for fiscal 2000. The revolving credit agreement
contains restrictive covenants which require us to maintain specified levels of
consolidated tangible net worth and limit capital expenditures and the
incurrence of additional indebtedness. The revolving credit agreement also
places restrictions on common stock repurchases and the payment of dividends.
Seasonality and Quarterly Fluctuations
Our business is seasonal. As is the case with many other retailers, our
net sales and net income are greatest in our fourth fiscal quarter, which
includes the Christmas selling season. The fourth fiscal quarter accounted for
33.6% and 33.4% of net sales and 46.1% and 47.9% of income from operations in
fiscal 2000 and 1999, respectively. Year to year comparisons of quarterly
results of operations and comparable store sales can be affected by a variety of
factors, including the duration of the holiday selling season, weather
conditions and the timing of new store openings.
Impact of Inflation
The impact of inflation has not been material to our results of
operations for the past three fiscal years.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which requires companies to
recognize all derivative contracts at their fair values, as either assets or
liabilities on the balance sheet. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designed as part of a hedge transaction
and, if it is, the type of hedge transaction. In June 1999, the FASB issued
Statement No. 137, which amended SFAS No. 133 such that the effective date of
adoption will be for fiscal quarters beginning after June 15, 2000. The adoption
of SFAS No. 133 did not have a material impact on the consolidated financial
statements because we do not currently hold any derivative instruments.
19
Forward-Looking Statements
This Form 10-K 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 REX 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 this report.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
As of January 31, 2001, we had financial instruments which were
sensitive to changes in interest rates. These financial instruments consist of a
revolving credit agreement and various mortgage notes payable secured by certain
land, buildings and leasehold improvements.
The revolving credit agreement is with six banks through July 31,
2005, with interest at prime or LIBOR plus 1.875% and commitment fees of 1/4%
payable on the unused portion. Amounts available for borrowing are equal to the
lesser of (1) $100 million for the months of January through June and $130
million for the months of July through December or (2) the sum of specific
percentages of eligible accounts receivable and eligible inventories, as
defined. Amounts available for borrowing are reduced by any letter of credit
commitments outstanding. Borrowings on the revolving credit agreement are
secured by certain fixed assets, accounts receivable, inventories and the
capital stock of our subsidiaries. At January 31, 2001, a total of approximately
$91.2 million was available for borrowings under the revolving credit agreement.
We had outstanding borrowings of $742,000 under the revolving credit agreement
at January 31, 2001.
Substantially all of the mortgage notes payable consist of fixed rate
debt. The interest rates range from 6.89% to 9.25%. Principal and interest are
payable monthly over terms which generally range from 10 to 15 years.
Substantially all of the notes payable require balloon payments at the end of
the scheduled term. The fair value of our long-term mortgage debt at January 31,
2001 was approximately $83.1 million. The fair value was estimated based on
rates available to us for debt with similar terms and maturities.
Maturities of long-term debt are as follows (in thousands):
Year Ending January 31, Amount
-------------------------- ---------
2002 $ 4,923
2003 5,312
2004 6,454
2005 9,622
2006 10,060
Thereafter 49,814
-------
$86,185
=======
20
Item 8. Financial Statements and Supplementary Data
REX Stores Corporation and Subsidiaries
Consolidated Balance Sheets
January 31, 2001 and 2000
--------------------------------------------------------------------------------
2001 2000
--------- ---------
(In Thousands)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 1) $ 687 $ 25,609
Accounts receivable, net of allowance for doubtful
accounts of $410 and $483 in 2001 and 2000, respectively
(Note 5) 4,707 2,569
Merchandise inventory (Notes 1 and 5) 144,150 139,267
Prepaid expenses and other 4,173 2,097
Future income tax benefits 9,837 9,837
--------- ---------
Total current assets 163,554 179,379
PROPERTY AND EQUIPMENT, NET (Notes 1, 5 and 6) 135,643 113,802
FUTURE INCOME TAX BENEFITS 9,523 8,835
RESTRICTED INVESTMENTS (Note 1) 2,165 2,020
--------- ---------
Total assets $310,885 $304,036
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable (Note 5) $ 742 $ --
Current portion of long-term debt (Note 6) 4,923 3,303
Accounts payable, trade 47,680 46,252
Accrued income taxes -- 1,572
Current portion of deferred income and deferred gain
on sale and leaseback (Notes 1 and 8) 11,355 11,219
Accrued payroll 6,369 6,947
Other current liabilities 8,737 9,330
--------- ---------
Total current liabilities 79,806 78,623
LONG-TERM LIABILITIES:
Long-term mortgage debt (Note 6) 81,262 46,200
Deferred income (Note 1) 16,494 16,423
Deferred gain on sale and leaseback (Note 8) 2,129 2,953
--------- ---------
Total long-term liabilities 99,885 65,576
COMMITMENTS AND CONTINGENCIES (Notes 8 and 10)
SHAREHOLDERS' EQUITY (Notes 4 and 7):
Common stock, 45,000 shares authorized, 11,556 and 11,495
shares issued, at par 116 115
Paid-in capital 106,305 105,303
Retained earnings 112,399 93,663
Treasury stock, 6,068 and 3,426 shares (87,626) (39,244)
--------- ---------
Total shareholders' equity 131,194 159,837
--------- ---------
Total liabilities and shareholders' equity $310,885 $304,036
========= =========
The accompanying notes to consolidated financial statements are an integral part
of these consolidated balance sheets.
21
REX Stores Corporation and Subsidiaries
Consolidated Statements of Income
For the Years Ended January 31, 2001, 2000 and 1999
--------------------------------------------------------------------------------
2001 2000 1999
--------- --------- --------
(In Thousands,
Except Per Share Amounts)
NET SALES $473,020 $464,300 $416,673
--------- --------- ---------
COSTS AND EXPENSES:
Cost of merchandise sold 345,026 337,418 302,894
Selling, general and administrative expenses 106,262 100,589 93,578
--------- --------- ---------
Total costs and expenses 451,288 438,007 396,472
--------- --------- ---------
INCOME FROM OPERATIONS 21,732 26,293 20,201
INVESTMENT INCOME 933 420 347
INTEREST EXPENSE (8,121) (5,136) (6,448)
GAIN ON SALE OF REAL ESTATE -- 787 2,410
INCOME (EQUITY IN LOSSES) OF LIMITED PARTNERSHIPS 10,437 2,996 (1,312)
--------- --------- ---------
INCOME BEFORE PROVISION FOR INCOME TAXES 24,981 25,360 15,198
PROVISION FOR INCOME TAXES 6,245 6,350 4,003
--------- --------- ---------
INCOME BEFORE EXTRAORDINARY ITEM 18,736 19,010 11,195
EXTRAORDINARY LOSS FROM EARLY EXTINGUISHMENT OF DEBT,
NET OF TAX -- (717) --
--------- --------- ---------
NET INCOME $ 18,736 $ 18,293 $ 11,195
========= ========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 6,285 8,022 7,427
========= ========= =========
BASIC NET INCOME PER SHARE BEFORE EXTRAORDINARY ITEM 2.98 2.37 1.51
EXTRAORDINARY ITEM -- (0.09) --
--------- --------- ---------
BASIC NET INCOME PER SHARE $ 2.98 $ 2.28 $ 1.51
========= ========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 6,884 8,897 7,833
========= ========= =========
DILUTED NET INCOME PER SHARE BEFORE EXTRAORDINARY ITEM 2.72 $ 2.14 $ 1.43
EXTRAORDINARY ITEM -- (0.08) --
--------- --------- ---------
DILUTED NET INCOME PER SHARE $ 2.72 $ 2.06 $ 1.43
========= ========= =========
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
22
REX Stores Corporation and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended January 31, 2001, 2000 and 1999
--------------------------------------------------------------------------------
2001 2000 1999
-------- -------- ---------
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 18,736 $ 18,293 $ 11,195
Adjustments to reconcile net income to net cash provided
by operating activities-
Depreciation and amortization, net 3,917 3,469 3,194
Gain on sale of partnership interest (10,700) (5,100) --
Gain on sale of real estate -- (787) (2,410)
Equity in losses of limited partnerships -- 2,100 1,312
Deferred income 207 (534) (993)
Deferred income tax provision (688) (770) (137)
Changes in assets and liabilities--
Accounts receivable (2,138) (272) 478
Merchandise inventory (4,883) (7,265) (5,504)
Other current assets (2,083) (485) 131
Accounts payable, trade 1,428 (6,422) 2,842
Other current liabilities (2,743) 2,996 109
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,053 5,223 10,217
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (27,696) (20,213) (12,736)
Proceeds from sale of partnership interest 10,700 5,100 --
Proceeds from sale of real estate and capital disposals 1,121 1,796 4,630
Equity investment in limited partnerships -- (262) (3,150)
Restricted investments (145) (192) (191)
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES (16,020) (13,771) (11,447)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in note payable 742 -- --
Proceeds from long-term debt 41,505 13,192 7,003
Payments of long-term debt (4,823) (22,281) (4,031)
Common stock issued 1,003 49,717 701
Treasury stock issued 130 1,728 --
Treasury stock acquired (48,512) (20,111) (7,468)
-------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (9,955) 22,245 (3,795)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (24,922) 13,697 (5,025)
CASH AND CASH EQUIVALENTS, beginning of year 25,609 11,912 16,937
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of year $ 687 $ 25,609 $ 11,912
======== ======== ========
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
23
REX Stores Corporation and Subsidiaries
Consolidated Statements of Shareholders' Equity
For the Years Ended January 31, 2001, 2000 and 1999
-------------------------------------------------------------------------------
Common Stock
---------------------------------------
Issued Treasury
------------------ ----------------- Paid-In Retained
Shares Amount Shares Amount Capital Earnings
------ -------- ------ -------- ------- --------
(In Thousands)
BALANCE, January 31, 1998 9,688 $ 97 1,955 $16,386 $ 57,896 $ 64,175
Net income -- -- -- -- -- 11,195
Treasury stock acquired -- -- 632 7,468 -- --
Common stock issued 79 1 -- -- 700 --
---------------------------------------------------------------
BALANCE, January 31, 1999 9,767 98 2,587 23,854 58,596 75,370
Net income -- -- -- -- -- 18,293
Treasury stock acquired -- -- 1,351 20,111 -- --
Common stock issued 1,728 17 (512) (4,721) 46,707 --
---------------------------------------------------------------
BALANCE, January 31, 2000 11,495 115 3,426 39,244 105,303 93,663
Net income -- -- -- -- -- 18,736
Treasury stock acquired -- -- 2,653 48,512 -- --
Common stock issued 61 1 (11) (130) 1,002 --
---------------------------------------------------------------
BALANCE, January 31, 2001 11,556 $116 6,068 $87,626 $106,305 $112,399
================================================================
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
24
REX Stores Corporation and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2001 and 2000
--------------------------------------------------------------------------------
(1) Summary Of Significant Accounting Policies-
(a) Principles of Consolidation--The accompanying financial
statements consolidate the operating results and financial
position of REX Stores Corporation and its wholly-owned
subsidiaries (the Company). All significant intercompany balances
and transactions have been eliminated. The Company operates 262
retail consumer electronics and appliance stores under the REX
name in 37 states.
(b) Fiscal Year--All references in these financial statements to
a particular fiscal year are to the Company's fiscal year ended
January 31. For example, "fiscal 2000" means the period February
1, 2000 to January 31, 2001.
(c) Use of Estimates--The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
(d) Cash Equivalents--Cash equivalents are principally short-term
investments with original maturities of less than three months.
The carrying amount of cash equivalents is a reasonable estimate
of fair value.
(e) Merchandise Inventory--Substantially all inventory is valued at
the lower of average cost or market, which approximates cost on a
first-in, first-out (FIFO) basis, including certain costs
associated with purchasing, warehousing and transporting
merchandise. The inventory of an acquired subsidiary, Kelly &
Cohen Appliances, Inc. (K&C), is valued at the lower of cost or
market using the last-in, first-out (LIFO) method. Following the
lower of cost or market principle, the K&C inventory value using
the LIFO method ($39,018,000 and $34,096,000 at January 31, 2001
and 2000, respectively) is equivalent to the FIFO value in all
years presented. Nine suppliers accounted for approximately 72% of
the Company's purchases in fiscal 2000.
(f) Property and Equipment--Property and equipment is recorded at
cost. Depreciation is computed using the straight-line method.
Estimated useful lives are 15 to 40 years for buildings and
improvements, and 3 to 12 years for fixtures and equipment.
Leasehold improvements are depreciated over 10 to 12 years. The
components of property and equipment at January 31, 2001 and 2000
are as follows:
2001 2000
-------- --------
(In thousands)
Land $ 36,866 $ 30,588
Buildings and improvements 93,582 77,645
Fixtures and equipment 19,716 17,213
Leasehold improvements 11,362 10,378
-------- -------
161,526 135,824
Less: accumulated depreciation (25,883) (22,022)
-------- -------
$135,643 $113,802
======== ========
25
REX Stores Corporation and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2001 and 2000
--------------------------------------------------------------------------------
In accordance with SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of",
the carrying value of long-lived assets is assessed for
recoverability by management when changes in circumstances
indicate that the carrying amount may not be recoverable, based on
an analysis of undiscounted future expected cash flows from the
use and ultimate disposition of the asset. There were no material
impairment losses incurred in the fiscal years ended January 31,
2001, 2000 and 1999.
(g) Restricted Investments-- Restricted investments, which are
principally marketable securities, are stated at cost plus accrued
interest, which approximates market. The carrying amount of
restricted investments approximates fair value. Restricted
investments at January 31, 2001 and 2000 are restricted by two
states to cover possible future claims under product service
contracts.
(h) Revenue Recognition--The Company recognizes sales of products upon
receipt by the customer. The Company will honor returns from
customers within seven days from the date of sale. The Company
establishes liabilities for estimated returns at the point of
sale.
The Company also sells product service contracts covering periods
beyond the normal manufacturers' warranty periods, usually with
terms of coverage (including manufacturers' warranty periods) of
between 12 to 60 months. Contract revenues, net of sales
commissions, are deferred and amortized on a straight-line basis
over the life of the contracts after the expiration of applicable
manufacturers' warranty periods. The Company retains the
obligation to perform warranty services and such costs are charged
to operations as incurred.
(i) Interest Cost--Interest expense of $8,121,000, $5,136,000 and
$6,448,000 for the years ended January 31, 2001, 2000 and 1999,
respectively, is net of approximately $469,000, $310,000 and
$238,000 of interest capitalized related to store construction.
Total interest expense approximates interest paid for all years
presented.
(j) Deferred Financing Costs--Direct expenses and fees associated
with obtaining notes payable or long-term mortgage debt are
capitalized and amortized to interest expense over the life of the
loan.
(k) Advertising Costs--Advertising costs are expensed as
incurred. Advertising expense was approximately $35,281,600,
$31,914,000 and $30,468,000 for the years ended January 31, 2001,
2000 and 1999, respectively.
(l) Store Opening and Closing Costs--Store opening costs are
expensed as incurred. The costs associated with closing stores are
accrued when the decision is made to close a location. Store
closing costs incurred in the fiscal years ended January 31, 2001,
2000 and 1999 were not material.
26
REX Stores Corporation and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2001 and 2000
--------------------------------------------------------------------------------
(2) Investments In Limited Partnerships-
During fiscal 1998, the Company invested $3,150,000 in two limited
partnerships which produce synthetic fuels. The Company currently holds
an 8% ownership in one partnership and an 18.75% ownership in the other,
which are accounted for under the equity method. The limited partnerships
also earn Federal income tax credits under Section 29 of the Internal
Revenue Code based upon the quantity and content of synthetic fuel
production. The Company accounts for its share of the income tax credits
as a reduction of the income tax provision in the period earned and such
credits totaled approximately $9,900,000 and $3,800,000 in fiscal 2000
and 1999, respectively (see Note 9).
Effective February 1, 1999, the Company sold a 13% interest in one of the
limited partnerships reducing its initial 30% ownership interest to 17%.
The Company expects to receive cash payments from the sale on a quarterly
basis through December 31, 2007. These payments are contingent upon and
equal to 75% of the Federal income tax credits attributable to the 13%
interest sold and are subject to certain annual limitations, as specified
in the sale agreement. The maximum amount that could be received for
calendar years 2000 and 1999 was approximately $6,800,000 and $6,700,000,
respectively, of which the Company earned and received approximately
$6,800,000 and $5,100,000, respectively. The maximum that can be received
for calendar 2001 is approximately $7,100,000.
Effective July 31, 2000, the Company sold an additional portion of its
interest in the one partnership, reducing its ownership percentage from
17% to 8%. The Company expects to receive cash payments from the sale on
a quarterly basis through December 31, 2007. These payments are
contingent upon and equal to the greater of 82.5% of the federal income
tax credits attributable to the 9% interest sold, subject to annual
limitations or 74.25% of the federal income tax credits attributable to
the 9% interest sold with no annual limitations. For fiscal 2000 the
Company recorded income of $1,600,000 for the down payment on the sale
and $2,700,000 for the quarterly installment payments as income of
limited partnerships.
The Company recorded a charge of approximately $300,000, $2,100,000 and
$1,300,000 in fiscal 2000, 1999 and 1998 to reflect the Company's share
of the partnerships' losses.
We are a limited partner in each partnership. We account for our
ownership interest in the partnerships under the equity method.
The limited partnerships have received favorable private letter rulings
from the IRS that the synthetic fuel produced by their facilities and
sold to unrelated parties qualify for the tax credits under Section 29 of
the Internal Revenue Code.
(3) Net Income Per Share-
The Company reports net income per share in accordance with Statement of
Financial Accounting Standards (SFAS) No. 128 "Earnings per Share."
Basic net income per share is computed by dividing net income available
to common shareholders by the weighted average number of common shares
outstanding during the year. Diluted net income per share is computed by
dividing net income available to common shareholders by the weighted
average number of
27
REX Stores Corporation and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2001 and 2000
--------------------------------------------------------------------------------
shares outstanding during the year. Common share equivalents for each
year include the number of shares issuable upon the exercise of
outstanding options, less the shares that could be purchased with the
proceeds from the exercise of the options, based on the average trading
price of the Company's common stock for fiscal 2000, 1999 and 1998.
The following table reconciles the basic and diluted net income per share
computations for each year presented:
January 31, 2001
-------------------------------------
Income Shares Per Share
----------- --------- ---------
Basic net income per share $18,736 6,285 $2.98
Effect of stock options -- 599 =========
----------- ---------
Diluted net income per share $18,736 6,884 $2.72
=========== ========= =========
January 31, 2000
-------------------------------------
Income Shares Per Share
----------- --------- ---------
Basic net income per share $18,293 8,022 $2.28
Effect of stock options -- 875 =========
----------- ---------
Diluted net income per share $18,293 8,897 $2.06
=========== ========= =========
January 31, 1999
-------------------------------------
Income Shares Per Share
----------- --------- ---------
Basic net income per share $11,195 7,427 $1.51
Effect of stock options -- 406 =========
----------- ---------
Diluted net income per share $11,195 7,833 $1.43
=========== ========= =========
For the years ended January 31, 2001, 2000 and 1999, a total of 220,000,
0 and 1,164,000 shares, respectively, subject to outstanding options were
not included in the common equivalent shares outstanding calculation as
the exercise prices were above the average trading price of the Company's
common stock for those periods.
(4) Common Stock Transactions-
In October 1999, the Company completed the sale of 1,500,000 shares of
common stock and received net proceeds of approximately $44.7 million,
net of expenses.
During the years ended January 31, 2001, 2000 and 1999, the Company
purchased 2,653,000, 1,351,000 and 632,000 shares of its common stock for
$48,512,000, $20,111,000 and $7,468,000, respectively. At January 31,
2001, the Company was authorized by its Board of Directors to purchase an
additional 705,000 shares of its common stock. Subsequent to January 31,
2001, the Company purchased an additional 389,900 shares for $7.2
million.
28
REX Stores Corporation and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2001 and 2000
--------------------------------------------------------------------------------
(5) Revolving Line Of Credit-
The revolving credit agreement is with six banks which expires on July
31, 2005. Under the terms of the agreement, available revolving credit
borrowings are equal to the lesser of: (i) $100 million for the months of
January through June and $130 million for the months of July through
December or (ii) the sum of specific percentages of eligible accounts
receivable and eligible inventories, as defined. Borrowings available are
reduced by any letter of credit commitments outstanding. The Company had
outstanding borrowings under the revolving credit agreement of $742,000
at January 31, 2001. The Company had no outstanding borrowings under the
revolving credit agreement at January 31, 2000. At January 31, 2001, a
total of approximately $91.2 million was available for borrowings under
the revolving credit agreement.
The interest rate charged on borrowings is prime or LIBOR plus 1.875% and
commitment fees of 1/4% are payable on the unused portion. Borrowings are
secured by certain fixed assets, accounts receivable and inventories.
The revolving credit agreement contains restrictive covenants which
require the Company to maintain specified levels of consolidated tangible
net worth and limit capital expenditures and the incurrence of additional
indebtedness. The revolving credit agreement also places restrictions on
the amount of common stock repurchases and the payment of dividends. The
Company was in compliance with all covenants as of January 31, 2001.
(6) Long-Term Mortgage Debt-
Long-term mortgage debt consists of notes payable secured by certain
land, buildings and leasehold improvements. Interest rates range from
6.89% to 9.25%. Principal and interest are payable monthly over terms
which generally range from 10 to 15 years. Substantially all of the notes
payable require balloon payments at the end of the scheduled term.
Maturities of long-term debt are as follows (in thousands):
Year Ending
January 31, Amount
------------ ----------
2002 $ 4,923
2003 5,312
2004 6,454
2005 9,622
2006 10,060
Thereafter 49,814
----------
$86,185
==========
A portion of the proceeds from the October 1999 stock offering were used
to extinguish approximately $18,900,000 of higher interest rate mortgage
debt (see Note 4). As a result of the early extinguishment of mortgage
debt, the Company paid prepayment penalties of approximately $643,000 and
expensed
29
REX Stores Corporation and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2001 and 2000
--------------------------------------------------------------------------------
unamortized financing costs of approximately $313,000. The Company
recorded an extraordinary loss of $717,000, net of an income tax effect
of $239,000 for fiscal 1999.
The fair value of the Company's long-term debt at January 31, 2001 and
2000 was approximately $83.1 and $48.5 million, respectively. The fair
value was estimated based on rates available to the Company for debt with
similar terms and maturities.
(7) Employee Benefits-
Stock Option Plans--The Company maintains the REX Stores Corporation 1995
Omnibus Stock Incentive Plan and the REX Stores Corporation 1999 Omnibus
Stock Incentive Plan (the Omnibus Plans). Under the Omnibus Plans, the
Company may grant to officers and key employees awards in the form of
incentive stock options (1995 Plan only), non-qualified stock options,
stock appreciation rights, restricted stock, other stock-based awards and
cash incentive awards. The Omnibus Plans also provides for yearly grants
of non-qualified stock options to directors who are not employees of the
Company. The exercise price of each option must be at least 100% of the
fair market value of the Company's common stock on the date of grant. A
maximum of 2,000,000 shares of common stock are authorized for issuance
under each of the Omnibus Plans. On January 31, 2001, 42,205 and
1,589,166 shares remain available for issuance under the 1995 and 1999
Plans, respectively.
On October 14, 1998, the Company's Board of Directors approved a grant of
non-qualified stock options to two key executives for 650,000 shares at
an exercise price of $9.94, which represented the market price on the
date of grant. These options vest over a three-year period with the first
one-third vested as of December 31, 2000. All of these options remained
outstanding at January 31, 2001.
The Company accounts for its stock-based compensation plans under APB
Opinion No. 25, "Accounting for Stock Issued to Employees", under which
no compensation cost has been recognized. Had compensation cost for these
plans been determined at fair value consistent with SFAS No. 123,
"Accounting for Stock-Based Compensation", the Company's net income and
net income per share would have been reduced to the following pro forma
amounts for the years ended January 31, 2001, 2000 and 1999:
2001 2000 1999
------- ------- --------
Net income (000's): As reported $18,736 $18,293 $ 11,195
Pro forma 16,627 16,428 9,370
Basic net income per share: As reported $ 2.98 $ 2.28 $ 1.51
Pro forma 2.65 2.05 1.26
Diluted net income per share: As reported $ 2.72 $ 2.06 $ 1.43
Pro forma 2.42 $ 1.99 1.25
The fair values of options granted were estimated as of the date of grant
using a Black-Scholes option pricing model with the following weighted
average assumptions used for grants in fiscal years ended January 31,
2001, 2000 and 1999, respectively: risk-free interest rate of 6.2%, 5.4%
and 5.7%; expected
30
REX Stores Corporation and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2001 and 2000
--------------------------------------------------------------------------------
volatility of 60.3%, 55.6% and 39.2%, and a weighted average stock option
life of 9 years for all years. In accordance with the provisions of SFAS
No. 123, the fair value method of accounting was not applied to options
granted prior to February 1, 1995 in estimating the pro forma amounts.
Therefore, the pro forma effect on net income and net income per share
may not be representative of that to be expected in future years.
The following summarizes stock option activity for the years ended
January 31, 2001, 2000 and 1999:
2001 2000 1999
--------------------- --------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
(000's) Price (000's) Price (000's) Price
--------- ---------- --------- ---------- --------- ----------
Outstanding at beginning of year 2,650 $12.65 3,195 $10.98 2,288 $11.06
Granted 217 22.72 212 12.20 997 10.54
Exercised (73) 10.65 (740) 5.28 (79) 7.54
Canceled or expired (28) 15.51 (17) 12.88 (11) 13.18
--------- ---------- --------- ---------- --------- ----------
Outstanding at end of year 2,766 $13.47 2,650 $12.65 3,195 $10.98
========= ========== ========= ========== ========= ==========
Exercisable at end of year 1,696 $13.73 1,278 $14.84 1,639 $11.10
========= ========== ========= ========== ========= ==========
Weighted average fair value of
options granted $8.26 $7.30 $6.46
========= ========= =========
Price ranges and other information for stock options outstanding as of
January 31, 2001 were as follows:
Outstanding Exercisable
---------------------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Range of Shares Exercise Remaining Shares Exercise
Exercise Prices (000's) Price Life (000's) Price
---------------- --------- -------- ---------- ---------- ----------
$8.13 to $11.50 1,420 $10.33 6.9 yrs. 588 $ 10.08
$12.50 to $18.13 1,126 15.62 3.6 yrs. 1,105 15.65
$21.41 to $22.81 220 22.72 9.1 yrs. 3 22.69
--------- -------- ---------- ---------- ----------
2,766 $13.47 5.7 yrs. 1,696 $13.73
========= ======== ========== ========== ==========
Profit Sharing Plan--The Company has a qualified, noncontributory profit
sharing plan covering full-time employees who meet certain eligibility
requirements. The Plan also allows for additional 401(k) savings
contributions by participants, along with certain Company matching
contributions. Aggregate contributions to the Plan are determined
annually by the Board of Directors and are not to exceed 15% of total
compensation paid to all participants during such year. The Company
contributed approximately $45,000, $36,000 and $36,000 for the years
ended January 31, 2001, 2000 and 1999, respectively, under the Plan.
31
REX Stores Corporation and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2001 and 2000
--------------------------------------------------------------------------------
(8) Leases And Commitments-
The Company is committed under operating leases for certain warehouse and
retail store locations. The lease agreements are for varying terms
through 2011 and contain renewal options for additional periods. Real
estate taxes, insurance and maintenance costs are generally paid by the
Company. Contingent rentals based on sales volume are not significant.
Certain leases contain scheduled rent increases and rent expense is
recognized on a straight-line basis over the term of the leases.
On August 30, 1989, the Company completed a transaction for the sale and
leaseback of certain stores and warehouse facilities under an initial
15-year lease term. This transaction resulted in a pre-tax financial
statement gain of $15,600,000, which was deferred and is being amortized
as a reduction to lease expense over the term of the leases. The
unamortized deferred gain at January 31, 2001 was $3,000,000.
During the year ended January 31, 1999, the Company purchased three store
locations that were leased pursuant to the sale/leaseback. For financial
statement purposes, the purchase of these three stores resulted in
approximately $660,000 of the deferred gain associated with the
sale/leaseback being recorded as a reduction in the carrying value of
properties purchased.
The following is a summary of rent expense under operating leases (in
thousands):
Years ended Minimum Gain Sublease
January 31, Rentals Amortization Income Total
------------- --------- -------------- ---------- ---------
2001 $11,239 $(824) $(2,623) $7,792
2000 10,679 (824) (2,444) 7,411
1999 9,729 (943) (1,854) 6,932
Future minimum annual rentals and gain amortization on non-cancellable
leases as of January 31, 2001 are as follows (in thousands):
Minimum Gain
Years ended January 31, Rentals Amortization
--------------------------- ----------- ----------------
2002 $ 9,291 $ 824
2003 7,886 824
2004 6,988 824
2005 4,180 480
2006 1,475 -
Thereafter 287 -
----------- ----------------
$30,107 $2,952
=========== ================
32
REX Stores Corporation and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2001 and 2000
--------------------------------------------------------------------------------
(9) Income Taxes-
The provision for income taxes for the years ended January 31, 2001, 2000
and 1999 consists of the following (in thousands):
Years Ended January 31,
------------------------------------
2001 2000 1999
---------- ---------- ----------
Federal:
Current $4,935 $6,114 $3,304
Deferred 45 (887) (217)
---------- ---------- ----------
4,980 5,227 3,087
---------- ---------- ----------
State and Local:
Current 2,189 1,006 836
Deferred (924) 117 80
---------- ---------- ----------
1,265 1,123 916
---------- ---------- ----------
$6,245 $6,350 $4,003
========== ========== ==========
The tax effects of significant temporary differences representing
deferred tax assets and liabilities are as follows:
January 31,
---------------------------
2001 2000
------------ ------------
Assets:
Deferral of service contract income $ 9,739 $ 9,666
Sale and leaseback deferred gain 1,034 1,322
Accrued liabilities 2,087 3,037
Inventory accounting 2,003 1,280
AMT credit carryforward 9,900 3,842
Valuation allowance (6,100) --
Other items 1,504 573
------------ ------------
20,167 19,720
Liabilities:
Depreciation (807) (1,048)
------------ ------------
Total net future income tax benefit $19,360 $18,672
============ ============
For the fiscal years ended January 31, 2001 and 2000, the Company was
subject to the alternative minimum tax (AMT) rules due to the Section 29
tax credits generated from the limited partnerships (see Note 2). The
Company's AMT liability was approximately $6,100,000 for the year ended
January 31, 2001 and $3,800,000 for the year ended January 31, 2000. The
AMT liability in excess of the regular tax liability results in AMT
credit carryforwards which can be used to offset future regular income
tax, subject to certain limitations. Therefore, for financial statements
purposes, the required AMT payment has been recorded as an AMT credit
carryforward with a valuation allowance of $6,100,000. The AMT credit
carryforwards have no expiration date.
33
REX Stores Corporation and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2001 and 2000
--------------------------------------------------------------------------------
The Company paid income taxes of $9,395,000, $3,235,000 and $5,633,000 in
the years ended January 31, 2001, 2000 and 1999, respectively.
The effective income tax rate on consolidated pre-tax income differs from
the Federal income tax statutory rate as follows:
Years Ended January 31,
---------------------------------
2001 2000 1999
-------- -------- --------
Federal income tax at statutory rate 35.0% 35.0% 35.0%
Tax credits from investment in limited partnership (15.0) (15.0) (13.2)
State and local taxes, net of federal tax benefit 3.3 2.9 3.9
Other 1.7 2.1 0.6
-------- -------- --------
25.0% 25.0% 26.3%
======== ======== ========
(10) Contingencies-
The Company is involved in various legal actions arising in the normal
course of business. After taking into consideration legal counsels'
evaluation of such actions, management is of the opinion that their
outcome will not have a material effect on the Company's consolidated
financial statements.
34
Report of Independent Public Accountants
To the Shareholders and Board of Directors
of REX Stores Corporation:
We have audited the accompanying consolidated balance sheets of REX Stores
Corporation (a Delaware corporation) and subsidiaries as of January 31, 2001 and
2000, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the three fiscal years in the period ended January
31, 2001. These consolidated financial statements and the schedule referred to
below are the responsibility of the Company's management. Our responsibility is
to express an opinion on these consolidated financial statements and the
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of REX Stores
Corporation and subsidiaries as of January 31, 2001 and 2000, and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended January 31, 2001, in conformity with accounting principles
generally accepted in the United States.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed under
Part IV, Item 14(a)(2) is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in our audits of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
Cincinnati, Ohio, /s/ Arthur Andersen LLP
March 22, 2001
35
REX Stores Corporation and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
For the Years Ended January 31, 2001, 2000 and 1999
--------------------------------------------------------------------------------
(In Thousands)
Additions Deductions
----------- -----------------
Balance Charges for Which
Beginning Charged Cost Reserves Were Balance End
of Year and Expenses Created of Year
----------- ------------ ---------------- ----------
2001
Allowance for doubtful accounts $483 $404 $477 $410
==== ==== ==== ====
2000
Allowance for doubtful accounts $430 $500 $447 $483
==== ==== ==== ====
1999
Allowance for doubtful accounts $428 $300 $298 $430
==== ==== ==== ====
36
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this Item 10 is incorporated herein by
reference to the Proxy Statement for our Annual Meeting of Shareholders on June
4, 2001, except for certain information concerning our executive officers which
is set forth in Part I of this report.
Item 11. Executive Compensation
The information required by this Item 11 is set forth in the Proxy
Statement for our Annual Meeting of Shareholders on June 4, 2001 and is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item 12 is set forth in the Proxy
Statement for our Annual Meeting of Shareholders on June 4, 2001 and is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information required by this Item 13 is set forth in the Proxy
Statement for our Annual Meeting of Shareholders on June 4, 2001 and is
incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Financial Statements.
The following consolidated financial statements of REX Stores Corporation
and subsidiaries are incorporated by reference as part of this report at Item 8
hereof.
Consolidated Balance Sheets as of January 31, 2001 and 2000
Consolidated Statements of Income for the years ended January 31, 2001,
2000 and 1999
Consolidated Statements of Cash Flows for the years ended January 31, 2001,
2000 and 1999
Consolidated Statements of Shareholders' Equity for the years ended January
31, 2001, 2000 and 1999
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
(a)(2) Financial Statement Schedules
The following financial statement schedule is incorporated by reference as
part of this report at Item 8 hereof.
37
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or not
required, or because the required information is included in the consolidated
financial statements or notes thereto.
(a)(3) Exhibits.
See Exhibit Index at page 40 of this report.
Management contracts and compensatory plans and arrangements filed as
exhibits to this report are identified by an asterisk in the exhibit index.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended January 31,
2001.
38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
REX STORES CORPORATION
By /s/ Stuart Rose
----------------------------
Stuart Rose
Chairman of the Board and
Chief Executive Officer
Date: April 17, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Capacity Date
--------- -------- ----
/s/ Stuart Rose
------------------------------------ Chairman of the Board )
Stuart Rose and Chief Executive )
Officer (principal )
executive officer) )
)
/s/ Douglas Bruggeman )
------------------------------------ Vice President-Finance )
Douglas Bruggeman and Treasurer (principal )
financial and accounting )
officer) )
)
LAWRENCE TOMCHIN* President, Chief Operating )
------------------------------------ Officer and Director )
Lawrence Tomchin ) April 17, 2001
/s/ Edward Kress )
------------------------------------ Secretary and Director )
Edward Kress )
)
ROBERT DAVIDOFF* Director )
------------------------------------ )
Robert Davidoff )
)
LEE FISHER* )
------------------------------------ Director )
Lee Fisher )
)
*By /s/ Stuart Rose )
--------------------------------- )
(Stuart Rose, Attorney-in-Fact) )
39
EXHIBIT INDEX
Page
----
(3) Articles of incorporation and by-laws:
3(a) Certificate of Incorporation, as amended (incorporated by
reference to Exhibit 3(a) to Form 10-K for fiscal year ended
January 31, 1994, File No. 0-13283)
3(b)(1) By-Laws, as amended (incorporated by reference to Registration
Statement No. 2-95738, Exhibit 3(b), filed February 8, 1985)
3(b)(2) Amendment to By-Laws adopted June 29, 1987 (incorporated by
reference to Exhibit 4.5 to Form 10-Q for quarter ended July 31,
1987, File No. 0-13283)
(4) Instruments defining the rights of security holders, including indentures:
4(a) Amended and Restated Loan Agreement dated July 31, 1995 among Rex
Radio and Television, Inc., Kelly & Cohen Appliances, Inc.,
Stereo Town, Inc. and Rex Kansas, Inc. (the "Borrowers"), the
lenders named therein, and NatWest Bank N.A. as agent
(incorporated by reference to Exhibit 4(a) to Form 10-Q for
quarter ended July 31, 1995, File No. 0-13283)
4(b) Form of Amended and Restated Revolving Credit Note (incorporated
by reference to Exhibit 4(b) to Form 10-Q for quarter ended July
31, 1995, File No. 0-13283)
4(c) Guaranty of registrant dated July 31, 1995 (incorporated by
reference to Exhibit 4(c) to Form 10-Q for quarter ended July 31,
1995, File No. 0-13283)
4(d) Borrowers Pledge Agreement as amended and restated through July
31, 1995 (incorporated by reference to Exhibit 4(d) to Form 10-Q
for quarter ended July 31, 1995, File No. 0-13283)
4(e) Borrowers General Security Agreement as amended and restated
through July 31, 1995 (incorporated by reference to Exhibit 4(e)
to Form 10-Q for quarter ended July 31, 1995, File No. 0-13283)
4(f) Parent Pledge Agreement as amended and restated through July 31,
1995 (incorporated by reference to Exhibit 4(f) to Form 10-Q for
quarter ended July 31, 1995, File No. 0-13283)
4(g) Parent General Security Agreement as amended and restated through
July 31, 1995 (incorporated by reference to Exhibit 4(g) to Form
10-Q for quarter ended July 31, 1995, File No. 0-13283)
4(h) Amendment Agreement dated April 1, 1997 to Amended and Restated
Loan Agreement dated July 31, 1995 and to Guaranty of registrant
dated July 31, 1995 among the Borrowers, the registrant, the
lenders named therein and Fleet Bank, N.A. (as successor to
NatWest Bank N.A.) as agent (incorporated by reference to Exhibit
4(h) to Form 10-Q for quarter ended April 30, 1997, File No.
0-13283)
40
4(i) Amendment No. 2 dated October 19, 1999 to Amended and Restated
Loan Agreement dated July 31, 1995 among the Borrowers, the
registrant, the lenders named therein and Fleet Bank, N.A. (as
successor to NatWest Bank N.A.) as agent (incorporated by
reference to Exhibit 4(i) to Form 10-Q for quarter ended October
31, 1999, File No. 0-13283)
4(j) Amendment No. 3 dated January 11, 2000 to Amended and Restated
Loan Agreement dated July 31, 1995 among the Borrowers, the
registrant, the lenders named therein and Fleet Bank, N.A. (as
successor to NatWest Bank N.A.) as agent (incorporated by
reference to Exhibit 4(j) to Form 10-K for fiscal year ended
January 31, 2000, File No. 0-13283)
4(k) Amendment No. 4 dated March 10, 2000 to Amended and Restated Loan
Agreement dated July 31, 1995 among the Borrowers, the
registrant, the lenders named therein and Fleet Bank, N.A. (as
successor to Natwest Bank N.A.) as agent (incorporated by
reference to Exhibit 4(k) to Form 10-K for fiscal year ended
January 31, 2000, File No. 0-13283)
4(l) Amendment No. 5 dated December 31, 2000 to Amended and Restated
Loan Agreement dated July 31, 1995 among the Borrowers, the
registrant, the lenders named therein and Fleet Bank, N.A. (as
successor to NatWest Bank N.A.) as agent.........................
4(m) Amendment No. 6 dated April 16, 2001 to Amended and Restated Loan
Agreement dated July 31, 1995 among the Borrowers, the
registrant, the lenders named therein and Fleet Bank, N.A. (as
successor to NatWest Bank N.A.) as agent.........................
Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, the
registrant has not filed as an exhibit to this Form 10-K certain
instruments with respect to long-term debt where the total amount
of securities authorized thereunder does not exceed 10% of the
total assets of the registrant and its subsidiaries on a
consolidated basis. The registrant agrees to furnish a copy of
such instruments to the Commission upon request.
(10) Material contracts:
10(a)* Employment Agreement dated October 14, 1998 between Rex Radio and
Television, Inc. and Stuart Rose (incorporated by reference to
Exhibit 10.1 to Form 10-Q for quarter ended October 31, 1998,
File No. 0-13283)
10(b)* Employment Agreement dated October 14, 1998 between Rex Radio and
Television, Inc. and Lawrence Tomchin (incorporated by reference
to Exhibit 10.2 to Form 10-Q for quarter ended October 31, 1998,
File No. 0-13283)
10(c)* Executive Stock Option dated October 14, 1998 granting Stuart
Rose an option to purchase 500,000 shares of registrant's Common
Stock (incorporated by reference to Exhibit 10.3 to Form 10-Q for
quarter ended October 31, 1998, File No. 0-13283)
10(d)* Executive Stock Option dated October 14, 1998 granting Lawrence
Tomchin an option to purchase 150,000 shares of registrant's
Common Stock (incorporated by reference to Exhibit 10.4 to Form
10-Q for quarter ended October 31, 1998, File No. 0-13283)
41
10(e)* Subscription Agreement dated December 1, 1989 from Stuart Rose to
purchase 300,000 shares of registrant's Common Stock
(incorporated by reference to Exhibit 6.5 to Form 10-Q for
quarter ended October 31, 1989, File No. 0-13283)
10(f)* Subscription Agreement dated December 1, 1989 from Lawrence
Tomchin to purchase 140,308 shares of registrant's Common Stock
(incorporated by reference to Exhibit 6.6 to Form 10-Q for
quarter ended October 31, 1989, File No. 0-13283)
10(g)* 1984 Incentive Stock Option Plan, as amended effective February
6, 1992 (incorporated by reference to Exhibit 10(a) to Form 10-K
for fiscal year ended January 31, 1992, File No. 0-13283)
10(h)* 1995 Omnibus Stock Incentive Plan, as amended and restated
effective June 2, 1995 (incorporated by reference to Exhibit 4(c)
to Post-Effective Amendment No. 1 to Form S-8 Registration
Statement No. 33-81706)
10(i)* 1999 Omnibus Stock Incentive Plan (incorporated by reference to
Exhibit 10(a) to Form 10-Q for quarter ended April 30, 2000, File
No. 0-13283)
10(j) Real Estate Purchase and Sale Agreement (the "Agreement") dated
March 8, 1989 between registrant as Guarantor, four of its
subsidiaries (Rex Radio and Television, Inc., Stereo Town, Inc.,
Kelly & Cohen Appliances, Inc., and Rex Radio Warehouse
Corporation) as Sellers and Holman/Shidler Investment Corporation
as Buyer (incorporated by reference to Exhibit (b)(5)(1) to
Amendment No. 1 to Schedule 13E-4 filed March 15, 1989, File No.
5-35828)
The Table of Contents to the Agreement lists Exhibits A through P
to the Agreement. Each of the following listed Exhibits to the
Agreement is incorporated herein by reference as indicated below.
The registrant will, upon request of the Commission, provide any
of the additional Exhibits to the Agreement.
10(k) Form of Full Term Lease (incorporated by reference to Exhibit
(b)(5)(2) to Amendment No. 1 to Schedule 13E-4 filed March 15,
1989, File No. 5-35828)
10(l) Form of Divisible Lease (incorporated by reference to Exhibit
(b)(5)(3) to Amendment No. 1 to Schedule 13E-4 filed March 15,
1989, File No. 5-35828)
10(m) Form of Terminable Lease (incorporated by reference to Exhibit
(b)(5)(4) to Amendment No. 1 to Schedule 13E-4 filed March 15,
1989, File No. 5-35828)
10(n) Continuing Lease Guaranty (incorporated by reference to Exhibit
(b)(5)(5) to Amendment No. 1 to Schedule 13E-4 filed March 15,
1989, File No. 5-35828)
10(o) Agreement Regarding Leases and Amending Amended and Restated Real
Property Purchase and Sale Agreement dated May 17, 1990 among
Shidler/West Finance Partners I (Limited Partnership); Rex Radio
and Television, Inc., Stereo Town, Inc., Kelly & Cohen
Appliances, Inc. and Rex Radio Warehouse Corporation; and
registrant (incorporated by reference to Exhibit (a)(10) to Form
10-Q for quarter ended April 30, 1990, File No. 0-13283)
10(p) Lease dated December 12, 1994 between Stuart Rose/Beavercreek,
Inc. and Rex Radio and Television, Inc. (incorporated by
reference to Exhibit 10(q) to Form 10-K for fiscal year ended
January 31, 1995, File No. 0-13283)
42
(21) Subsidiaries of the registrant:
21(a) Subsidiaries of registrant ......................................
(23) Consents of experts and counsel:
23(a) Consent of Arthur Andersen LLP to use its report dated March 22,
2001 included in this annual report on Form 10-K into
registrant's Registration Statements on Form S-8 (Registration
Nos. 33-3836, 33-81706, 33-62645, 333-69081, 333-69089 and
333-35118) ......................................................
(24) Power of attorney:
Powers of attorney of each person whose name is signed to this
report on Form 10-K pursuant to a power of attorney .............
(99) Additional exhibits:
Risk Factors (incorporated by reference to Exhibit 99 to Form
10-K for fiscal year ended January 31, 2000, File No. 0-13283)
Copies of the Exhibits not contained herein may be obtained by
writing to Edward M. Kress, Secretary, REX Stores Corporation,
2875 Needmore Road, Dayton, Ohio 45414.
------------
Those exhibits marked with an asterisk (*) above are management contracts
or compensatory plans or arrangements for directors or executive officers of the
registrant.
43
STATEMENT OF DIFFERENCES
The checkmark shall be expressed as........................................'ch'