REX AMERICAN RESOURCES Corp - Quarter Report: 2007 April (Form 10-Q)

fiscal year 2007, the Company recorded approximately $909,000 of income which relates to 2006 production and a change in the estimated Section 29/45K phase out. The 2006 production payments were based upon estimated income tax credits per ton of coal produced. The payment was made to the Company after the Internal Revenue Service published the 2006 income tax credit per ton amount in April of 2007. During the first quarter of fiscal year 2006, the Company recorded approximately $504,000 of income which relates to a payment received for 2005 production. The 2005 production payments were based upon estimated income tax credits per ton of coal produced. The $504,000 payment was made to the Company after the Internal Revenue Service published the 2005 income tax credit per ton amount in April of 2006.

          Income from continuing operations for the first quarter of fiscal year 2007 includes approximately $1.9 million of pre-tax investment income from the sale of the Company’s entire partnership interest in Somerset Synfuel, L.P. (Somerset), which produces synthetic fuel. Effective October 1, 2005, the Company sold its entire ownership interest in Somerset, which owned two synthetic fuel facilities. The Company received $1.2 million, net of commissions, at closing along with a secured contingent payment note that could provide additional investment income. The Company expects to receive quarterly payments through 2007 equal to 80% of the Section 29/45K tax credits attributable to the ownership interest sold, subject to production levels.

          The Company sold its entire membership interest in the limited liability company that owned a synthetic fuel facility in Gillette, Wyoming on March 30, 2004. The Company received $2.8 million at the time of sale along with a secured contingent payment note that could provide additional income. The facility resumed commercial operations during the second quarter of fiscal 2005; as such, the Company received $3.5 million as a one-time payment per the terms of the purchase agreement. In addition, the Company is eligible to receive $1.50 per ton of “qualified production” produced by the facility and sold through 2007. The plant was subsequently sold and during the third quarter of fiscal year 2006, the Company modified its agreement with the owners and operators of the synthetic fuel facility. Based on the terms of the modified agreement, the Company currently is not able to determine the likelihood of collecting payments related to production occurring after September 30, 2006. Thus, the Company cannot currently determine the impact and timing of income recognition, if any, related to production occurring after September 30, 2006.

          As provided by the current Internal Revenue Code, the Code Section 29/45K tax credit program is expected to continue through December 31, 2007; however, recent increases in the price of oil could limit the amount of those credits or eliminate them altogether for 2007. This possibility is due to a provision of Section 29/45K that provides that if the average wellhead price per barrel for unregulated domestic crude oil for the year (the “Annual Average Price”) exceeds a certain threshold value (the “Threshold Price”), the Section 29/45K tax credits are subject to phase out. For calendar year 2006, the Threshold Price was $55.06 per barrel and the Phase Out Price was $69.12 per barrel, resulting in a phase out of 33% for calendar year 2006. The Threshold Price and the Phase Out Price are adjusted annually as a result of inflation and are published by the Internal Revenue Service in April of the following year.

          The Company cannot predict with absolute certainty the Annual Average Price for 2007. Therefore, it cannot predict whether the price of oil will have a material effect on its synthetic fuel business after 2006. However, if during 2007 oil prices remain at historically high levels or increase,

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such that the Annual Average Price exceeds the Threshold Price, the Company’s synthetic fuel business may be adversely affected for 2007, and, depending on the magnitude of such increases in oil prices, the adverse effect for 2007 could be material and could have an impact on the Company’s synthetic fuel income. Based upon the price of oil to date and considering the NYMEX futures market, the Company estimates the tax credits would not be subject to a phase out as of April 30, 2007. Because synthetic fuel is not economical to produce absent the associated tax credits and the fact that the Company has no control or decision involvement with production levels, the Company cannot determine the impact of possible production reduction or elimination on the Company’s financial results.

          Below is a table summarizing the income from the sales, net of certain expenses, of the Company’s interests in synthetic fuel entities (in thousands):

		Three Months Ended
		April 30,
		2007			2006
February 1, 1999 Colona sale		$	1,945		$	259
July 31, 2000 Colona sale			1,552			473
May 31, 2001 Colona sale			1,379			421
October 1, 2005 Somerset sale			1,857			423
March 30, 2004 Gillette sale			-			486
		$	6,733		$	2,062

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Note 12. Investments

          The following tables summarize investments at April 30, 2007, January 31, 2007 and 2006 (amounts in thousands):

Debt Securities April 30, 2007

Fair Market

Carrying

Investment

Coupon Rate

Maturity

Classification

Value

Amount

Federal National

Mortgage

Held to

Association Note

5.13

%

5/16/2007

Maturity

$

1,492

$

1,492

Millennium

Ethanol, LLC

Available for

Convertible Note

15.60

%

4/1/2015

Sale

14,000

14,000

Total Debt

Securities

$

15,492

$

15,492

Debt Securities January 31, 2007

Fair Market

Carrying

Investment

Coupon Rate

Maturity

Classification

Value

Amount

Federal National

Mortgage

Held to

Association Note

5.04

%

2/16/2007

Maturity

$

1,473

$

1,473

Millennium

Ethanol, LLC

Available for

Convertible Note

15.60

%

4/1/2015

Sale

14,000

14,000

Total Debt

Securities

$

15,473

$

15,473

Debt Securities April 30, 2006

Fair Market

Carrying

Investment

Coupon Rate

Maturity

Classification

Value

Amount

Federal Home

Loan Mortgage

Held to

Corp Note

4.51

%

5/9/2006

Maturity

$

1,420

$

1,420

Total Debt

Securities

$

1,420

$

1,420

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          There were no material realized or unrealized holding gains or losses in fiscal year 2007 or 2006.

          On March 17, 2006, the Company entered into an agreement to purchase a note in the principal amount of $14 million to be issued by Millennium Ethanol, LLC (“Millennium”) which has commenced construction of an ethanol producing facility in Marion, South Dakota. The facility is expected to have a design capacity of 100 million gallons annually. The Company funded the note on December 18, 2006. The note agreement provides the Company rights to purchase a minority equity interest in Millennium in exchange for the note. Monthly payments of principal and interest are scheduled to begin on the earlier of the date the ethanol plant is certified ready for production or April 1, 2008. Accrued interest receivable was approximately $819,000 at April 30, 2007. See Note 17 for a discussion of a subsequent event related to the Millennium note.

          The Company has approximately $933,000, $933,000 and $917,000 at April 30, 2007, January 31, 2007 and April 30, 2006, respectively, on deposit with the Florida Department of Financial Services to secure its obligation to fulfill future obligations related to extended warranty contracts sold in the state of Florida. The deposits earned 4.9%, 5.7% and 3.5% at April 30, 2007, January 31, 2007 and April 30, 2006, respectively.

The following table summarizes equity method investments at April 30, 2007 (amounts in thousands):

Entity	Ownership Percentage					Carrying Amount					Initial Investment
Big River Resources, LLC		6.9	%				$	11,393				$	10,000
Patriot Renewable Fuels, LLC		23.3	%					16,543					16,000
Total Equity Securities							$	27,936				$	26,000
The following table summarizes equity method investments at January 31, 2007 (amounts in thousands):
Entity	Ownership Percentage					Carrying Amount					Initial Investment
Big River Resources, LLC		4.3	%				$	5,499				$	5,000
Patriot Renewable Fuels,LLC		23.3	%					16,200					16,000
Total Equity Securities							$	21,699				$	21,000

          On October 1, 2006, the Company entered into an agreement to invest $20 million in Big River Resources, LLC (“Big River”). Big River is an Iowa limited liability company and holding company for several entities including Big River Resources West Burlington, LLC which presently operates a 52 million gallon ethanol manufacturing facility. The Company has funded $10 million of

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this investment in exchange for a 6.9% ownership interest. The remaining $10 million investment is expected to occur in fiscal year 2007. The Company’s final ownership percentage will be determined once Big River has obtained all funding. During the first quarter of fiscal year 2007, the Company recorded income of $1,070,000 as its share of earnings from Big River.

          On June 8, 2006, the Company entered into an agreement to invest $16 million in Patriot Renewable Fuels, LLC (“Patriot”) which has commenced construction of an ethanol producing facility in Annawon, Illinois. The facility is expected to have a design capacity of 100 million gallons annually. The Company funded this investment on December 4, 2006 in exchange for a 23.3% ownership interest. Patriot is a development stage enterprise; the Company has capitalized interest of $503,000 at April 30, 2007 as Patriot is constructing its ethanol plant. During the first quarter of fiscal year 2007, the Company recorded income of $40,000 as its share of earnings from Patriot.

          Undistributed earnings of equity method investees totaled approximately $1.4 million at April 30, 2007.

Note 13. Income Taxes

          The effective tax rate on consolidated pre-tax income was 38.6% for the quarter ended April 30, 2007, 33.1% for the year ended January 31, 2007 and 38.7% for the quarter ended April 30, 2006. An adjustment for recognizing the benefit of Section 29/45K tax credits of (1.4)% is reflected in the effective rate for the year ended January 31, 2007. The provision for state taxes is approximately 3% and 6% for the quarters ended April 30, 2007 and 2006, respectively. The provision for state taxes is approximately (0.4)% for the year ended January 31, 2007.

          The Company files a U.S. federal income tax return and income tax returns in various states. In general, the Company is no longer subject to U.S. federal, state or local income tax examinations by tax authorities for years ended before January 31, 2002.

          The Company adopted the provisions of FIN 48 on February 1, 2007. As a result of the adoption of FIN 48, the Company recorded a $287,000 decrease to retained earnings. As of February 1, 2007, total unrecognized tax benefits were $639,000, and accrued penalties and interest were $301,000. If the company were to prevail on all unrecognized tax benefits recorded, approximately $639,000 of the reserve would benefit the effective tax rate. There were no unrecognized tax benefits that represented temporary differences. In addition, the impact of penalties and interest would also benefit the effective tax rate. Interest and penalties associated with unrecognized tax benefits are recorded within income tax expense.

          On a quarterly and annual basis, the Company accrues for the effects of open uncertain tax positions and the related potential penalties and interest. There were no material adjustments to the recorded liability for unrecognized tax benefits during the first quarter of fiscal year 2007, other than those made in connection with the adoption of FIN 48 that are described above.

          It is reasonably possible that the amount of the unrecognized tax benefit with respect to certain unrecognized tax positions will increase or decrease during the next 12 months; however, the

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Company does not expect the change to have a significant effect on results of operations or financial position.

Note 14. Discontinued Operations and Assets Held for Sale

          During the first three months of fiscal year 2007 the Company closed 25 stores in which the Company vacated the market or will not have a further continuing involvement with the related property. These stores, and certain other stores closed in previous periods were classified as discontinued operations for all periods presented. One closed store and one store to be closed are classified as held for sale. The net assets of those stores at April 30, 2007 were approximately $1.7 million. The Company expects to sell the fixed assets related to these stores within the next 12 months through normal real estate channels.

          Below is a table reflecting certain items of the income statement that were reclassified as discontinued operations for the period indicated.

		Three Months Ended
		April 30,
		2007				2006
		(In Thousands)
Net sales and revenue		$	11,789			$	20,609
Cost of sales			9,326				14,706
(Loss) income before income taxes			(1,166	)			483
Benefit (provision) for income taxes			408				(169	)
Gain on disposal			3,490				-
Provision for income taxes			(1,222	)			-
Net income		$	1,510			$	314

Note 15. Commitments

          On May 26, 2006, the Company entered into a contingent agreement to invest $24.9 million in One Earth Energy, LLC (“One Earth”) which was organized to construct and, subsequently, operate an ethanol producing facility in Gibson City, Illinois. The facility is expected to have a design capacity of 100 million gallons annually. The current agreement calls for the equity investment to occur before June 30, 2007, subject to One Earth obtaining additional financing and certain other conditions.

          On October 1, 2006, the Company entered into an agreement to invest $20 million in Big River Resources, LLC (“Big River”.) The Company has funded $10 million of this investment in exchange for a 6.9% ownership interest. The remaining $10 million investment is expected to occur in fiscal year 2007, subject to certain conditions. The Company’s final ownership percentage will be determined once Big River has obtained all funding.

Note 16. Segment Reporting

          The Company has two reportable segments, consumer electronics and appliance retailing

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(“retail”) and alternative energy. The Company evaluates the performance of each reportable segment based on segment profit. Segment profit excludes income taxes, interest expense, discontinued operations, indirect interest income and certain other items that are included in net income determined in accordance with accounting principles generally accepted in the United States of America.

          Amounts in the other category below include business activities that are not separately reportable and income from synthetic fuel investments (amounts in thousands):

		Quarters Ended April 30,
		2007				2006
Net sales and revenue:
Retail		$	57,933			$	66,049
Alternative energy			-				-
Total net sales and revenues		$	57,933			$	66,049
Segment profit:
Retail segment profit		$	2,725			$	940
Alternative energy segment profit			1,656				(440	)
Corporate expense			(864	)			(535	)
Interest expense			(815	)			(401	)
Interest income			530				292
Income from synthetic fuel investments			6,733				2,062
Income from continuing operations before income taxes		$	9,965			$	1,918
		April 30,				January 31,				April 30,
			2007				2007				2006
Assets:
Retail		$	261,785			$	233,666			$	267,672
Alternative energy			74,239				67,653				-
Corporate			39,063				44,123				42,031
Total assets		$	375,087			$	345,442			$	309,703

          Certain corporate costs and expenses, including information technology, employee benefits and other shared services are allocated to the business segments. The allocations are generally amounts agreed upon by management, which may differ from amounts that would be incurred if such services were purchased separately by the business segment. Corporate assets are primarily synthetic fuel accounts receivable and deferred income tax benefits.

          Cash, except for cash held by Levelland/Hockley, is considered to be fungible and available for both corporate and segment use dependent on liquidity requirements. Cash of approximately $7.7 million held by Levelland/Hockley will be used primarily to fund the construction of a 40 million gallon ethanol plant and to provide working capital until the plant commences operations.

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Note 17. Subsequent Events

          On May 31, 2007, the Company entered into an agreement with U.S. BioEnergy Corporation and Millennium Ethanol, LLC (“Millennium”) for the conversion of the Company’s $14 Million Convertible Secured Promissory Note including accrued interest, and Related Purchase Rights (“the Note”) issued by Millennium. Pursuant to the Note, funded in December 2006, the Company’s interest will convert to 33.92% of the membership interests in Millennium.

          US BioEnergy Corporation, has agreed to acquire Millennium for approximately $135 million (before certain expenses) payable in US BioEnergy common stock, cash, or any combination thereof at US BioEnergy’s election; provided that, in no event will US BioEnergy issue more then 11.5 million shares of stock in the transaction. If US BioEnergy would otherwise be required to issue more than 11.5 million shares of stock to provide approximately $135 million of value, US BioEnergy will pay the balance of the consideration in cash. If, however, the closing price of US BioEnergy’s common stock for the ten trading days immediately prior to the Special Meeting of Millennium’s members to approve the merger is greater than or equal to $15.88 per share, the aggregate consideration payable to Millennium’s members will be 8.5 million shares of US BioEnergy common stock. Should US Bio Energy elect to issue shares as full consideration for the acquisition, the Company would expect to receive approximately 3.3 million shares of US BioEnergy common stock, based upon the closing price of US BioEnergy common stock at May 31, 2007.

          The proposed transaction is subject to customary closing conditions and regulatory approvals, including the affirmative vote of all Classes of Millennium’s members. The transaction is expected to close in the third quarter of this year and has been unanimously approved by the governing boards of US BioEnergy and Millennium, respectively.

          On May 31, 2007, the Company’s Board of Directors increased the authorized number of shares that can be repurchased to 1 million shares.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

          We are a specialty retailer in the consumer electronics/appliance industry. As of April 30, 2007 we operated 164 stores in 35 states, predominantly in small to medium-sized markets under the trade name "REX".

          In fiscal year 2006, we entered the alternative energy industry by investing in several entities organized to construct and, subsequently operate, ethanol producing plants. As we continue to seek to diversify sources of revenue and earnings, we have invested in four entities as of April 30, 2007, utilizing both debt and equity investments.

          Since fiscal year 1998, we invested in three entities which owned facilities producing synthetic fuel. These entities earn federal income tax credits under Section 29/45K of the Internal Revenue Code based on the tonnage and content of solid synthetic fuel produced and sold to related

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parties. We have sold our entire ownership interest in these entities in prior years, and as a result, receive payments in connection with current production of synthetic fuel.

Fiscal Year

          All references in this report to a particular fiscal year are to REX's fiscal year ended January 31. For example, "fiscal year 2007" means the period February 1, 2007 to January 31, 2008.

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 and revenue:

		Three Months Ended
		April 30,
		2007			2006
Net sales and revenue		100.0	%		100.0	%
Cost of sales		69.7			72.3
Gross profit		30.3			27.7
Selling, general and administrative expenses		29.1			27.7
Interest income		2.2			0.4
Interest expense		(0.3	)		(0.6	)
Loss on early termination of debt		(1.1	)		-
Gain on sale of real estate		1.7			-
Equity in income of unconsolidated ethanol affiliates		1.9			-
Income from synthetic fuel investments		11.6			3.1
Income from continuing operations before
provision for income taxes, minority interest and
discontinued operations		17.2			2.9
Provision for income taxes		6.6			1.1
Minority interest		(0.2	)		-
Income from continuing operations		10.4			1.8
(Loss) income from discontinued operations, net of tax		(1.3	)		0.5
Gain on disposal of discontinued operations, net of tax		3.9			-
Net income		13.0	%		2.3	%

Business Segment Results

          As discussed in Note 16, our chief operating decision maker (as defined by SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information”) evaluates the operating performance of our business segments using a measure we call segment profit. Segment profit excludes income taxes, interest expense, discontinued operations, indirect interest income and certain other items that are included in net income determined in accordance with accounting principles generally accepted in the United States of America.

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Management believes these are useful financial measures; however, they should not be construed as being more important than other comparable GAAP measures.

          Items excluded from segment profit generally result from decisions made by corporate executives. Financing, divestiture and tax structure decisions are generally made by corporate executives. Excluding these items from our business segment performance measure enables us to evaluate business segment operating performance based upon current economic conditions.

          The following table sets forth, for the periods indicated, sales and profits by segment (amounts in thousands):

		Quarters Ended April 30,
		2007				2006
Net sales and revenue:
Retail		$	57,933			$	66,049
Alternative energy			-				-
Total net sales and revenues		$	57,933			$	66,049
Segment profit:
Retail segment profit		$	2,725			$	940
Alternative energy segment profit			1,656				(440	)
Corporate expense			(864	)			(535	)
Interest expense			(815	)			(401	)
Interest income			530				292
Income from synthetic fuel investments			6,733				2,062
Income from continuing operations
before income taxes		$	9,965			$	1,918

Comparison of Three Months Ended April 30, 2007 and 2006

          All of our net sales and revenue was generated by our retail segment, as the only ethanol entity we consolidate did not have an operating plant in the first quarter of fiscal year 2007 or 2006. Net sales and revenue in the quarter ended April 30, 2007 were $57.9 million compared to $66.0 million in the prior year’s first quarter, representing a decrease of $8.1 million or 12.3% . Net sales and revenue do not include sales from stores classified in discontinued operations.

          This decrease was primarily caused by a decrease in comparable store sales of 10.0% for the first quarter of fiscal year 2007. The decrease in comparable store sales accounted for approximately $4.7 million of the decrease in net sales and revenue. In addition, the decrease was caused by a reduction of 47 stores (36 of which were classified as discontinued operations) since the end of the first quarter of fiscal year 2006. The reduction in stores accounted for approximately $3.4 million of the decrease. We consider a store to be comparable after it has been open six full fiscal quarters. Comparable store sales do not include sales of extended service contracts.

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          Our strongest product category for the first quarter of fiscal year 2007 was the appliance category which positively impacted comparable store sales by 4.2% . The appliance category performance was primarily due to improved sales across most of the appliance category products as we continue to emphasize a broader selection of appliance products. The television category negatively impacted comparable store sales by 9.1% . This resulted from gains in LCD and plasma television sales being offset by declines in high definition projection, light engine and traditional tube televisions. The audio category negatively impacted comparable store sales by 3.3% . The video category negatively impacted comparable store sales by 1.2% . Both the audio and video categories have been impacted by lower price points of their respective products, as these products are continuing to become more of a commodity item with very high levels of competition.

          The following table reflects the approximate percent of net sales for each major product group for the following periods:

		Three Months Ended
		April 30,
Product Category		2007			2006
Televisions		52.4	%		56.4	%
Appliances		29.8			23.2
Audio		5.6			8.5
Video		2.6			3.6
Extended warranties		5.4			3.9
Other		4.2			4.4
		100.0	%		100.0	%

          As of April 30, 2007, we operated 164 stores compared to 211 stores one year earlier. We did not open any stores and closed 29 stores during the first three months of fiscal year 2007. We are marketing five of the closed locations for lease or sale. We sold 21 of the closed stores and abandoned three of the stores upon the expiration of our lease as tenant. We did not open any stores and closed five stores during the first three months of fiscal year 2006.

           At April 30, 2007, we had lease agreements, as landlord/sub landlord, for all or parts of 15 properties. We own 12 of these properties and are the tenant/sub landlord for three of the properties. In five of the owned locations, we operate a store and lease a portion of the property to another party. We do not operate a store in seven of the owned properties. We have seven owned properties that are vacant at April 30, 2007. The assets for one of these properties are classified as assets held for sale.

          Gross profit of $17.6 million (30.3% of net sales and revenue) in the first quarter of fiscal year 2007 was approximately $0.7 million lower than the $18.3 million (27.7% of net sales and revenue) recorded in the first quarter of fiscal year 2006. Gross profit for the first quarter of fiscal year 2007 was negatively impacted by lower sales compared to the prior year. This decrease was partially offset by higher gross profit margin percentage of approximately 2.6%. Gross profit was also

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positively impacted by a higher percentage of extended warranty sales, which have a higher gross profit margin, in the first quarter of fiscal year 2007 compared to the first quarter of fiscal year 2006.

          Selling, general and administrative expenses for the first quarter of fiscal year 2007 were $16.9 million (29.1% of net sales and revenue), a decrease of $1.4 million or 7.7 % from $18.3 million (27.7% of net sales and revenue) for the first quarter of fiscal year 2006. The decrease in expenses was primarily a result of lower advertising expenses of $1.0 million as we had fewer markets to serve after our store closings.

          Interest income was $1,293,000 (2.2% of net sales and revenue) for the first quarter of fiscal year 2007 compared to $292,000 (0.4% of net sales and revenue) for the first quarter of fiscal year 2006. The increase results primarily from larger amounts of excess cash invested in fiscal year 2007 versus 2006 and interest income from our alternative energy segment of $759,000.

          Interest expense was $165,000 for the first quarter of fiscal year 2007 compared to $401,000 for the first quarter of fiscal year 2006. Interest expense for the current year has been lowered due to capitalizing interest on certain of our ethanol investments.

          We paid off approximately $15.6 million of debt in connection with the sale and leaseback transaction with Klac. As a result, we incurred prepayment penalties and the write off of prepaid loan fees totaling approximately $651,000.

          On April 30, 2007, we completed a transaction for the sale of 86 of our current and former store locations to Klac for $74.5 million in cash, before selling expenses. We also entered into leases to leaseback 40 of the properties from Klac for initial lease terms expiring January 31, 2010, with renewal options for up to 15 additional years. Both we and Klac may terminate a lease after the initial six months of the initial lease term on 28 of the leases. We also entered into license agreements with Klac for 15 of the properties that allow us to occupy the properties for up to 90 days rent free. Upon the expiration of the license period, we must vacate the property.

          A pre-tax financial statement gain of $3.2 million (net of expenses and losses) resulted from this sale. Of this gain, $2.2 million was classified as discontinued operations and the remaining $1.0 million was classified as continuing operations. We also deferred $11.6 million, which represents the present value of the minimum lease payments and the gain associated with stores that we have continuing involvement with, as defined in SFAS 98, “Accounting for Leases”. The deferred gain will be amortized as a reduction to lease expense over the lease or license periods or recognized as gain on disposal at the end of the lease or license period. The leases have been accounted for as operating leases. Future minimum annual rentals on the properties leased back are $3.0 million, $4.1 million and $4.4 million for the fiscal years ended January 31, 2008, 2009 and 2010, respectively, subject to earlier termination of individual leases.

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The following table summarizes the components of the sale and leaseback transaction amounts in thousands):

Property Category	Number of Properties				Deferred Gain					Recognized Gain
Vacated		31				$	-				$	3,026
Licensed		15					3,307					(580	)
Leased until January 31, 2010		12					4,235					(216	)
Leased until January 31, 2010
(6 month kickout clause)		28					4,048					986
Total		86				$	11,590				$	3,216

          During the first quarter of fiscal year 2007, we recognized income of approximately $1,070,000 and $40,000 from our equity investments in Big River Resources, LLC and Patriot Renewable Fuels, LLC, respectively.

           Results for the first quarter of fiscal years 2007 and 2006 reflect the impact of the sales of our investment in Colona SynFuel Limited Partnership, L.L.L.P. (Colona) and Somerset Synfuel, L.P. (Somerset), which produce synthetic fuel. We sold our ownership interest in the Colona limited partnership through a series of three sales. We expect to receive payments from the three separate sales of our interests in Colona, on a quarterly basis through 2007, which will range from 74.25% to 82.5% of the federal income tax credits attributable to the interest sold subject to certain annual limitations and production levels. During the first quarter of fiscal year 2007, we recorded approximately $909,000 of income which relates to a payment received for 2006 production. The 2006 production payments were based upon estimated income tax credits per ton of coal produced. The $909,000 payment was made to us after the Internal Revenue Service published the 2006 income tax credit per ton amount in April of 2007. During the first quarter of fiscal year 2006, we recorded approximately $504,000 of income which relates to a payment received for 2005 production. The 2005 production payments were based upon estimated income tax credits per ton of coal produced. The $504,000 payment was made to us after the Internal Revenue Service published the 2005 income tax credit per ton amount in April of 2006.

          Effective October 1, 2005, we sold our entire ownership interest in the Somerset limited partnership that owned two synthetic fuel facilities. We received $1.2 million, net of commissions, at closing along with a secured contingent payment note that could provide additional investment income. We expect to receive quarterly payments through 2007 equal to 80% of the Section 29/45K tax credits attributable to the ownership interest sold, subject to production levels.

          We sold our entire membership interest in the limited liability company that owned a synthetic fuel facility in Gillette, Wyoming. We received $2.8 million at the time of sale on March 30, 2004 along with a secured contingent payment note that could provide additional investment income to us.

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The facility resumed commercial operations during the second quarter of fiscal 2005; as such, we received $3.5 million as a one-time payment per the terms of the purchase agreement. In addition, we are eligible to receive $1.50 per ton of “qualified production” produced by the facility and sold through 2007. The plant was subsequently sold and during the third quarter of fiscal year 2006, we modified our agreement with the owners and operators of the synthetic fuel facility. Based on the terms of the agreement, we are not currently able to determine the likelihood of collecting payments related to production occurring after September 30, 2006. Thus, we cannot currently determine the impact and timing of income recognition related to production occurring after September 30, 2006. At April 30, 2007, we estimate that there is approximately 3.1 million tons of production for which we did not recognize income.

          As provided by the current Internal Revenue Code, the Code Section 29/45K tax credit program is expected to continue through December 31, 2007; however, recent increases in the price of oil could limit the amount of those credits or eliminate them altogether for 2007. This possibility is due to a provision of Section 29/45K that provides that if the average wellhead price per barrel for unregulated domestic crude oil for the year (the “Annual Average Price”) exceeds a certain threshold value (the “Threshold Price”), the Section 29/45K tax credits are subject to phase out. For calendar year 2006, the Threshold Price was $55.06 per barrel and the Phase Out Price was $69.12 per barrel. The Threshold Price and the Phase Out Price are adjusted annually as a result of inflation and are published by the Internal Revenue Service in April of the following year.

          We cannot predict with absolute certainty the Annual Average Price for 2007. Therefore, we cannot predict whether the price of oil will have a material effect on our synthetic fuel income after 2006. However, if during 2007 oil prices remain at historically high levels or increase, such that the Annual Average Price exceeds the Threshold Price, our synthetic fuel income may be adversely affected for 2007, and, depending on the magnitude of such increases in oil prices, the adverse affect for 2007 could be material and could have an impact on our synthetic fuel income. Based upon the price of oil to date and considering the NYMEX futures market, we estimate the tax credits would not be subject to a phase out as of April 30, 2007. Because synthetic fuel is not economical to produce absent the associated tax credits and the fact that we have no control or decision involvement with production levels, we cannot determine the impact of possible production reduction or elimination on our financial results.

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          Below is a table summarizing the income (loss) recognized from the sales, net of certain expenses, of our interests in synthetic fuel entities.

		Three Months Ended
		April 30
		2007			2006
		(In Thousands)
February 1, 1999 Colona sale		$	1,945		$	259
July 31, 2000 Colona sale			1,552			473
May 31, 2001 Colona sale			1,379			421
October 1, 2005 Somerset sale			1,857			423
March 30, 200 Gillette sale			-			486
		$	6,733		$	2,062

          Our effective tax rate was 38.6% and 38.7% for the first quarter of fiscal years 2007 and 2006, respectively.

          Minority interest of $95,000 represents the owners’ (other than us) share of the income of Leveland/Hockley County Ethanol, LLC.

          During the quarter ended April 30, 2007 we closed 29 stores that were classified as discontinued operations. As a result of these closings and certain other store closings from prior periods, we had a loss from discontinued operations, net of tax benefit, of $0.8 million for the first quarter of fiscal year 2007 compared to income of $0.3 million for the first quarter of fiscal year 2006.

          As a result of the previously discussed sale and leaseback with Klac and the sale of two properties that had been previously closed, we had a gain from discontinued operations, net of tax expense, of approximately $2.3 million for the first quarter of fiscal year 2007.

          As a result of the foregoing, net income for the first quarter of fiscal year 2007 was $7.5 million, an increase of $6.0 million from $1.5 million for the first quarter of fiscal year 2006.

Liquidity and Capital Resources

          Net cash used in operating activities was approximately $5.9 million for the first quarter of fiscal year 2007, compared to $6.1 million for the first quarter of fiscal year 2006. For the first three months of fiscal year 2007, cash was provided by net income of $7.5 million, adjusted for the impact of $6.7 million for gains on our installment sales of the limited partnership interests, the gain on the disposal of real estate and property and equipment of $4.5 million and non-cash items of $2.1 million, which consisted of depreciation and amortization, stock based compensation expense, impairment charges, deferred income and the deferred income tax provision. In addition, accounts payable provided cash of $18.2 million, primarily a result of changes in inventory levels and extended terms

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from vendors. The primary use of cash was an increase in inventory of $20.3 million primarily due to seasonal fluctuations. The inventory increase from January 31, 2007 primarily results from higher television levels. The other use of cash was a decrease in other current liabilities of $1.3 million.

          For the first three months of fiscal year 2006, cash was provided by net income of $1.5 million, adjusted for the impact of $2.1 million for gains on our installment sales of the limited partnership interests, non-cash items of $1.9 million, which consisted of depreciation and amortization, stock based compensation expense, impairment charges, deferred income and the deferred income tax provision. In addition, accounts payable provided cash of $6.2 million, primarily a result of changes in inventory levels and prepaid expenses provided cash of $0.9 million. The primary use of cash was an increase in inventory of $11.1 million primarily due to seasonal fluctuations. The other use of cash was a decrease in other current liabilities of $3.2 million.

          At April 30, 2007, working capital was $136.6 million compared to $83.8 million at January 31, 2007. This increase is primarily a result of the sale and leaseback transaction with Klac and greater cash proceeds from our synthetic fuel investments. The ratio of current assets to current liabilities was 2.8 to 1 and 2.6 to 1 at April 30, 2007 and January 31, 2007, respectively.

          Cash of $78.3 million was provided by investing activities for the first quarter of fiscal year 2007, compared to $1.0 million for the first quarter of fiscal year 2006. During the first quarter of fiscal year 2007, we received proceeds of $77.3 million from the sale and leaseback transaction with Klac and other real estate sales and $10.1 million from the installment sales of our ownership interests in synthetic fuel entities. We had capital expenditures of approximately $9.1 million during the first quarter of fiscal year 2007, primarily related to the Levelland/Hockley County Ethanol, LLC ethanol plant construction.

          Cash of $0.6 million was provided by investing activities for the first quarter of fiscal year 2006. During the first quarter of fiscal year 2006, we received proceeds of $0.7 million from installment sales of our ownership interests in synthetic fuel entities. We had capital expenditures of approximately $0.1 million during the first quarter of fiscal year 2006, primarily related to improvements at selected stores.

          Cash used in financing activities totaled approximately $10,000,000 for the first quarter of fiscal year 2007 compared to cash provided by financing activities of $457,000 for the first quarter of fiscal year 2006. Cash was provided by new debt borrowings of $5.0 million and stock option activity of $1.3 million. Cash of $16.3 million was used for scheduled and early payments of mortgage debt. On May 31, 2007, our Board of Directors increased our share repurchase authorization to one million shares.

          Cash provided by financing activities totaled approximately $0.5 million for the first quarter of fiscal year 2006. Cash was provided by stock option activity of $1.2 million. Cash of $0.7 million was used for scheduled payments of mortgage debt.

          On October 1, 2006, we entered into an agreement to invest $20 million in Big River Resources, LLC (“Big River”). Big River is an Iowa limited liability company and holding company for several entities including Big River Resources West Burlington, LLC which presently operates a

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52 million gallon ethanol manufacturing facility. We have funded $10 million of this investment in exchange for a 6.9% ownership interest. The remaining $10 million investment is expected to occur in fiscal year 2007. Our final ownership percentage will be determined once Big River has obtained all funding. Big River intends to expand the plant to produce approximately 80 million gallons annually and intends to develop additional ethanol production plants.

          On May 26, 2006, we entered into a contingent agreement to invest $24.9 million in One Earth Energy, LLC (“One Earth”) which was organized to construct and, subsequently, operate an ethanol producing facility in Gibson City, Illinois. The facility is expected to have a design capacity of 100 million gallons annually. The current agreement calls for the equity investment to occur before June 30, 2007, subject to One Earth obtaining additional financing and certain other conditions.

          We believe we have sufficient resources to fund these and other potential ethanol investments.

Forward-Looking Statements

          This Form 10-Q contains or may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Such statements can be identified by use of forward-looking terminology such as “may,” “expect,” “believe,” “estimate,” “anticipate” or “continue” or the negative thereof or other variations thereon or comparable terminology. Readers are cautioned that there are risks and uncertainties that could cause actual events or results to differ materially from those referred to in such forward-looking statements. These risks and uncertainties include the risk factors set forth from time to time in the Company’s filings with the Securities and Exchange Commission and among other things: risks and uncertainties relating to the proposed acquisition of REX Stores' interest in Millennium Ethanol, LLC by U.S. BioEnergy Corporation including, but not limited to the satisfaction of conditions to closing; including receipt of member, regulatory and other consents and approvals; delays in consummating the proposed transaction; uncertainty of the financial performance of U.S. BioEnergy Corporation following completion of the proposed transaction; fluctuations in the market prices and trading volumes of U.S. BioEnergy Corporation common stock; the highly competitive nature of the consumer electronics retailing industry, changes in the national or regional economies, weather, the effects of terrorism or acts of war on consumer spending patterns, the availability of certain products, technological changes, changes in real estate market conditions, new regulatory restrictions or tax law changes relating to the Company’s synthetic fuel investments, the fluctuating amount of quarterly payments received by the Company with respect to sales of its partnership interest in a synthetic fuel investment, the potential for Section 29/45K tax credits to phase out based on the price of crude oil adjusted for inflation, and the uncertain amount of synthetic fuel production and resulting income received from time to time from the Company’s synthetic fuel investments. As it relates to ethanol investments, risks and uncertainties include among other things: the uncertainty of constructing plants on time and on budget, the price volatility of corn, dried distiller grains, ethanol, gasoline and natural gas, and the ability to remain in compliance with related debt covenants. Other factors that could cause actual results to differ materially from those in the forward-looking statements are set forth in Item 1A of the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2007 (File No. 001-09097).

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

          No material changes since January 31, 2007.

Item 4. Controls and Procedures

          Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures, as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

          There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1A. Risk Factors

          During the quarter ended April 30, 2007, there have been no material changes to the risk factors discussed in our Annual Report on Form 10-K for the year ended January 31, 2007.

Item 4. Submission of Matters to a Vote of Security Holders.

          The annual meeting of shareholders of REX Stores Corporation was held on May 31, 2007, at which the following matter was submitted to a vote of shareholders:

          1. Election of seven directors.

Nominee			For		Withheld
Stuart A. Rose			7,394,636		2,006,790
Lawrence Tomchin			7,200,479		2,200,947
Robert Davidoff			9,029,455		371,971
Edward M. Kress			7,201,154		2,200,272
Charles A. Elcan			6,995,392		2,406,034
David S. Harris			9,030,613		370,813
Mervyn L. Alphonso			9,202,680		198,746

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Item 6. Exhibits.

          The following exhibits are filed with this report:

	31	Rule 13a-14(a)/15d-14(a) Certifications
	32	Section 1350 Certifications

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SIGNATURES

          Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

REX STORES CORPORATION Registrant

 

Signature	Title	Date
/s/ Stuart A. Rose	Chairman of the Board	June 8, 2007
(Stuart A. Rose)	(Chief Executive Officer)
/s/ Douglas L. Bruggeman	Vice President, Finance and Treasurer	June 8, 2007
(Douglas L. Bruggeman)	(Chief Financial Officer)

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