REX

Business Context and Reporting Period

Company: REX Stores Corporation (REX American Resources Corp)

Filing Type: Form 10-Q (Quarterly Report)

Period Ended: October 31, 2002 (Third Quarter of Fiscal Year 2002)

Business Overview: A specialty retailer in the consumer electronics and appliance industry operating 255 stores under the "REX" trade name in 37 states as of the reporting date.

Key Financial Metrics

Cash Flow (Nine Months Ended Oct 31, 2002):

• Operating Activities: Net cash used of $50.8 million (driven by a $66.6 million increase in inventory).
• Investing Activities: Net cash provided of $8.9 million (primarily from $9.4 million proceeds from sale of partnership interests).
• Financing Activities: Net cash provided of $4.0 million (borrowings of $21.8 million offset by debt repayments and stock repurchases).

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 10.8% in the quarter and 9.7% for the nine-month period compared to the prior year. This was driven by a 7.8% decline in comparable store sales and a net reduction of nine stores.
• Profitability Increase: Despite lower sales, Net Income increased 21.3% for the nine-month period. This was primarily due to significant non-operating income from the sale of limited partnership interests in synthetic fuel projects ($13.1 million pre-tax for the nine months).
• Margin Expansion: Gross profit margin improved to 30.3% (nine months) from 28.8% in the prior year due to a shift in sales mix toward higher-margin service contracts and favorable vendor pricing.
• Expense Reduction: Selling, general, and administrative (SG&A) expenses decreased 4.7% year-over-year due to store closures and reduced advertising spend. Interest expense dropped significantly due to debt restructuring and lower mortgage balances.
• Liquidity Pressure: Cash and cash equivalents dropped from $39.4 million at the start of the fiscal year to $1.5 million at period end, largely due to seasonal inventory buildup.

Outlook, Risks, and Unusual Items

• Synthetic Fuel Contingency: Approximately $5.0 million of income recognized from the sale of a synthetic fuel partnership interest is held in escrow pending an IRS audit. The timing of the audit completion is undetermined.
• New Asset Acquisition: The company purchased a synthetic fuel plant in Wyoming for potential relocation. If relocation fails, the company faces an estimated $2 million cost to remove the plant. Commercial operation is not assured.
• Debt Restructuring: The company successfully restructured a large portion of mortgage debt to lower floating rates and extinguished approximately $7.0 million in debt in the first quarter (recorded as an extraordinary loss in the prior fiscal year).
• Store Count: The company closed seven stores in the first nine months of fiscal 2002 and opened none, reducing the total count to 255.
• Accounting Standards: The company noted the issuance of SFAS 145 (debt extinguishment classification) and SFAS 146 (exit costs) but has not yet assessed the full impact on future reporting.

Investor Verification Checklist

• Escrow Status: Verify the status of the $5.0 million held in escrow regarding the synthetic fuel partnership sale and the likelihood of the IRS audit outcome.
• Inventory Levels: Assess the $167.6 million inventory balance against sales trends to ensure the seasonal buildup does not lead to future write-downs.
• Wyoming Plant Viability: Confirm progress on finding a host site for the Wyoming synthetic fuel plant to avoid the $2 million removal cost.
• Comparable Store Sales: Monitor the trend of comparable store sales, which declined 7.8% in the quarter, to gauge the effectiveness of cost-cutting measures versus revenue erosion.
• Debt Covenants: Review debt agreements given the significant reduction in cash reserves and the reliance on a line of credit ($21.8 million drawn) to fund operations.