<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
- --- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________.
Commission file number: 33-94420
RXI HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-4426626
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
11111 SANTA MONICA BOULEVARD, SUITE 270
LOS ANGELES, CALIFORNIA 90025
(Address and zip code of principal executive offices)
(310) 473-7005
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Number of Shares Outstanding
Class at November 11, 1996
- ------------------------------ ----------------------------
Common Stock, $0.001 par value 4,945,500
<PAGE>
RXI HOLDINGS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE REFERENCE
--------------
<S> <C>
COVER PAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
INDEX. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets
June 30, 1996 and September 30, 1996 . . . . . . . . 3
Consolidated Statements of Operations
Three Months Ended September 30,
1995 and 1996. . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows
Three Months Ended September 30, 1995 and 1996 . . . 5
Notes to Consolidated Financial Statements. . . . . . 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . 8
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . 13
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
</TABLE>
2
<PAGE>
RXI HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, June 30,
1996 1996
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 275,754 $ 24,045
Accounts receivable 9,445,154 9,034,093
Inventories 9,177,876 8,965,018
Maintenance supplies 293,415 298,158
Prepaid expenses and other current assets 650,748 587,723
Income tax refund receivable 732,750 700,000
------------ ------------
Total current assets 20,575,697 19,609,037
------------ ------------
PROPERTY PLANT AND EQUIPMENT, net 38,753,007 38,780,884
INTANGIBLE ASSETS, net 28,620,812 29,225,099
OTHER ASSETS:
Deposits 126,409 126,409
Other 196,857 172,839
------------ ------------
TOTAL ASSETS $ 88,272,782 $ 87,914,268
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Current portion of long-term obligations $ 700,977 $ 705,006
Accounts payable 6,074,011 7,303,143
Accrued liabilities -- other 6,244,097 4,002,926
Accrued interest 1,770,531 3,869,728
Revolving line of credit 9,701,069 6,551,564
Deferred income taxes 77,912 142,855
------------ ------------
Total current liabilities 24,568,597 22,575,222
------------ ------------
LONG-TERM OBLIGATIONS 66,721,007 66,620,558
------------ ------------
DEFERRED INCOME TAXES 1,454,461 1,338,855
------------ ------------
REDEEMABLE STOCK
Class A warrant 555,000 518,000
Class C warrant 348,000 325,000
Class E warrant 20,000 20,000
------------ ------------
Total redeemable stock 923,000 863,000
------------ ------------
SHAREHOLDERS' DEFICIENCY
Series A Preferred stock 9,450 9,261
Series B Preferred stock 5,301 5,169
Common stock 2,500 2,500
Warrants 1,608,150 1,608,150
Additional paid-in capital 13,156,217 13,216,539
Retained Earnings (Deficit) (20,175,901) (18,324,986)
------------ ------------
Total shareholders' deficiency (5,394,283) (3,483,367)
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIENCY $ 88,272,782 $ 87,914,268
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
RXI HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
----------------------------
1996 1995
------------ ------------
<S> <C> <C>
SALES $ 18,560,372 $ 22,526,722
COST OF SALES 14,056,466 17,991,464
------------ ------------
GROSS PROFIT 4,503,906 4,535,258
SELLING, GENERAL & ADMINISTRATIVE EXPENSES 3,217,396 3,674,587
AMORTIZATION OF INTANGIBLE ASSETS 437,724 529,419
------------ ------------
OPERATING INCOME 848,786 331,252
------------ ------------
OTHER (INCOME) EXPENSE:
Interest expense 2,688,709 2,697,545
Interest income (19,725) (1,676)
Other (58,330) (4,668)
------------ ------------
Total Other (Income) Expense 2,610,654 2,691,201
------------ ------------
LOSS BEFORE INCOME TAXES (1,761,868) (2,359,949)
PROVISION (BENEFIT) FOR INCOME TAXES 85,320 (752,783)
------------ ------------
NET LOSS $(1,847,188) $(1,607,166)
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
RXI HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-----------------------------
1996 1995
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,847,188) $ (1,607,166)
Adjustments to reconcile net loss
to cash used by operating activities
Depreciation 1,378,403 1,095,843
Amortization 646,554 712,208
Deferred income taxes 50,663 (594,796)
Gain on sale of assets (7,167) -
Changes in operating assets and liabilities:
Accounts receivable (411,061) 1,857,624
Inventories (212,858) 1,350,453
Other current assets (58,282) 112,832
Income tax refund receivable (32,750) (158,180)
Accounts payable (1,229,132) (2,117,392)
Accrued liabilities - other 2,241,171 (1,564,087)
Accrued interest (2,099,197) (786,991)
------------ ------------
Net cash used by operating
activities (1,580,844) (1,699,652)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets 33,000 -
Purchases of property, plant and equipment (1,376,359) (1,594,181)
Other assets (24,018) (50,971)
------------ ------------
Net cash used by investing
activities (1,367,377) (1,645,152)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt 157,492 -
Repayment of long-term obligations (100,576) (92,353)
Payment of debt issuance costs (6,491) (37,220)
Net borrowings under revolving line of credit 3,149,505 3,697,316
------------ ------------
Net cash provided by financing
activities 3,199,930 3,567,743
------------ ------------
INCREASE IN CASH 251,709 222,939
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 24,045 123,123
------------ ------------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $ 275,754 $ 346,062
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
RXI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
The accompanying consolidated balance sheet as of September 30, 1996,
consolidated statements of operations for the three months ended September
30, 1995 and 1996 and consolidated statements of cash flows for the three
months ended September 30, 1995 and 1996 are unaudited but, in the opinion of
management, include all adjustments consisting of normal, recurring accruals
necessary for a fair presentation of the financial position and results of
operations for such periods. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been omitted pursuant to
applicable requirements for the presentation of interim financial statements,
although the Company believes that the disclosures included in the financial
statements included herein are adequate to make the information therein not
misleading. The financial statements included herein should be read in
conjunction with the Company's audited consolidated financial statements for
the year ended June 30, 1996, and the notes thereto, which are included in
the Form 10-K filed with the Securities and Exchange Commission. Additional
copies are available from the Company.
The results of operations for the three months ended September 30, 1995 and
1996 are not necessarily indicative of the results for a full year.
As discussed in Note 2 to the Company's consolidated financial statements for
its fiscal year ended June 30, 1996, the Company has completed acquisitions
of other companies on June 17, 1993, May 12, 1994, February 10, 1995, and May
9, 1996. Each of these acquisitions have been accounted for as purchases
and, accordingly, their results of operations have been included with those
of the Company from their respective dates of purchase. The following table
sets forth the unaudited pro forma results of operations for each of the
indicated periods as if these acquisitions were completed at the beginning of
the earliest period presented:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1996 1995
------------ ------------
<S> <C> <C>
Net sales $ 18,560,000 $ 24,996,000
------------ ------------
------------ ------------
Net (loss) $ (1,847,000) $ (1,488,000)
------------ ------------
------------ ------------
</TABLE>
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles 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.
6
<PAGE>
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, June 30,
1996 1996
------------ ------------
<S> <C> <C>
Raw materials $ 2,497,981 $ 1,441,484
Finished goods 6,679,895 7,523,534
------------ ------------
Total $ 9,177,876 $ 8,965,018
------------ ------------
------------ ------------
</TABLE>
3. REVOLVING LINE OF CREDIT
The Company has a line of credit agreement with a financial institution,
which expires in 2000. The agreement provides for borrowings up to the
lesser of $15,000,000 or, the sum of 85% of eligible accounts receivable plus
the lesser of 50% of eligible inventory or $6 million. The agreement also
provides the Company with the facility to issue letters of credit for the
purchase of equipment provided, however, that the aggregate amount of letters
of credit outstanding at any time cannot exceed $1 million. Borrowings under
the revolving line of credit bear interest at the bank's prime rate ( %
at September 30, 1996) plus 1%.
At September 30, 1996, covenants contained in the line of credit
agreement required the Company to maintain certain financial statistics
related to working capital, interest coverage, fixed charge ratio and net
worth, measured quarterly on a consolidated basis.
At September 30, 1996, the Company was in compliance with the above
mentioned covenant requirements.
4. CAPITAL STOCK
During the three months ended September 30, 1996 activity in the
Company's Amended and Restated 1994 Stock Option Plan was as follows:
<TABLE>
<S> <C>
Options outstanding at June 30, 1996 . . . . . . . . . . . . . . 618,376
Granted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
Forfeited. . . . . . . . . . . . . . . . . . . . . . . . . . . . (172,719)
-------
Options outstanding at September 30, 1996. . . . . . . . . . . . 455,657
-------
-------
</TABLE>
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The Private Securities Litigation Reform Act of 1995 (the "Act")
provides a "safe harbor" for forward-looking statements to encourage
companies to provide prospective information about their business without
fear of litigation so long as their statements are identified as
forward-looking and are accompanied by meaningful cautionary statements
identifying important factors that could cause actual results to differ
materially from those projected in such statements.
This Quarterly Report on Form 10-Q contains statements about the
Company's projected financial results and its future plans and strategies.
These statements are forward-looking in nature and involve a number of risks
and uncertainties. Actual results may differ materially from those included
in the forward-looking statements made herein. Among the factors that could
cause actual results to differ materially are the following: the availability
of sufficient capital to finance the Company's business plans on terms
satisfactory to the Company; competitive factors such as the introduction of
new product lines or production methods in the same markets; changes in
development and operating costs, including costs of resources, labor and
shipping; risks associated with debt financing, including the Company's
ability to meet required payments of principal and interest; general business
and economic conditions; and other risk factors described from time to time
in the Company's reports filed with the Securities and Exchnage Commission.
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH, AND IS
QUALIFIED IN ITS ENTIRETY BY, THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
THERETO INCLUDED ELSEWHERE IN THIS QUARTERLY REPORT. HISTORICAL RESULTS AND
PERCENTAGE RELATIONSHIPS AMONG ANY AMOUNTS INCLUDED IN THE CONSOLIDATED
FINANCIAL STATEMENTS ARE NOT NECESSARILY INDICATIVE OF TRENDS IN OPERATING
RESULTS FOR ANY FUTURE PERIOD.
BACKGROUND OF THE COMPANY AND ACQUISITION ACCOUNTING
The Company was organized on April 22, 1993 to acquire and operate
complementary plastic container manufacturers within the United States. The
Company currently manufactures plastic containers, caps, closures, and
fitments in the Gulf Coast, Western, Midwestern, and Eastern regions of the
United States. In May 1996, the Company acquired Vanguard Plastics of
California, Inc. ("Vanguard") a privately held plastic container
manufacturing company, and in June 1996, the Company sold its distribution
operations.
In May of 1996, the Company completed a reorganization of its wholly owned
subsidiaries, Texberry Container Corporation ("Texberry") and Patrick
Plastics, Inc. ("Patrick"), transferring Texberry's manufacturing operations
to, and merging Patrick with, the third wholly owned subsidiary, Continental
Plastics, Incorporated ("Continental"), which had been renamed RXI Plastics,
Inc. ("Plastics").
The acquisitions have been accounted for as purchases, giving rise to
significant amounts of intangible assets and related amortization expense in
subsequent periods. In addition, these acquisitions have been financed
through the incurrence of debt and the issuance of preferred stock, which has
resulted in increased financing costs when compared with the historical
results of the acquired businesses.
The Company's acquisitions have enabled it to enter new markets and increase
penetration of existing markets, resulting in significant sales growth. Upon
the consummation of each acquisition, the Company has endeavored to identify
all material net assets of each acquired business in order to allocate the
total purchase price to those assets. In each case, this has included an
evaluation of the fungibility of current assets and current liabilities, and
the state of manufacturing and other equipment and facilities. Material
amounts of goodwill have also been recorded and are being amortized against
earnings.
The Company's strategy includes increased investment in its acquired
companies to increase their productivity and better position them to pursue
growth opportunities. This strategy has resulted in significant capital
expenditures at the Company's facility in Argos, Indiana during the fiscal
year ending June 30, 1996. The Company also has phased in a new management
information system and has trained personnel and installed hardware. Costs
associated with the consolidation of manufacturing operations, and phasing in
new management information systems, including the training of personnel, have
been charged to operations as incurred. Management anticipates that the future
benefits of these actions will include reduced manufacturing costs that reflect
lower labor costs and higher throughput from (i) added automation and
manufacturing process improvements, (ii) increased product quality, (iii) better
material control and reduced scrap, resulting in increased customer
satisfaction, and increased sales supported by new capacity. The full effect
of, and savings from, these types of programs are rarely achieved in the fiscal
year in which they were first implemented. The Company believes these
expenditures will result in improved operating results and cash flows over those
which would otherwise have been achieved.
8
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, summary
statement of operations data and the percentages that selected income
statement items bear to sales and the percentage change in the dollar amounts
of such items.
<TABLE>
<CAPTION>
Percentage Change
Three Months Ended Three Months
September 30, Ended
------------------------------------------------------ September 30,
1996 1995 1995 to 1996
------------------------ ------------------------ -----------------
<S> <C> <C> <C> <C> <C>
Sales $ 18,560 100.0% $ 22,527 100.0% $ (17.6)%
Cost of sales 14,056 75.7% 17,992 79.9% (21.9)%
--------- ------ --------- ------
Gross Profit 4,504 24.3% 4,535 20.1% (0.7)%
Operating expenses 3,655 19.7% 4,204 18.7% (13.1)%
--------- ------ --------- ------
Operating income 849 4.6% 331 1.5% 156.5%
Interest expense 2,669 14.4% 2,696 12.0% (1.0)%
Other (income) expense (58) (0.3)% (5) (0.0)% 1080.0%
--------- ------ --------- ------
Income (loss) before income
taxes (1,762) (9.5)% (2,360) (10.5)% 25.3%
Provision (benefit) for income taxes 85 0.5% (753) (3.3)% (111.3)%
--------- ------ --------- ------
Net income (loss) $ (1,847) (10.0)% $ (1,607) (7.1)% (14.9)%
--------- ------ --------- ------
--------- ------ --------- ------
EBITDA $ 2,723 14.7% $ 1,944 8.6% 40.1%
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 1995
Due to the acquisition of Vanguard in May 1996, the results for the 1996
period include the results of operations for Vanguard that are not in the
comparable 1995 period. Also, due to the disposition of the Company's
distribution operations, effective June 1, 1996, the results for the 1996
period do not include results of distribution operations that are in the
comparable 1995 period.
NET SALES. Net sales of $18.6 million for the three months ended
September 30,1996, decreased $3.9 million from net sales of $22.5 million for
the three months ended September 30, 1995. The decrease reflects the
inclusion of $7.4 million, in 1995, of net sales related to the Company's
distribution operations, which are not in the comparable 1996 results. This
decrease is offset by the inclusion of $3.1 million of net sales of Vanguard
which was acquired in May 1996, and therefore not fully included in the
comparable 1995 results. Excluding the effects of the disposition and
acquisition, sales increased $0.4 million from 1995 to 1996, due to higher
sales volumes.
GROSS PROFIT. Gross profit of $4.5 million in 1996 was flat compared to
$4.5 million in 1995. The 1995 period includes $1.3 million of gross profit
from the Company's distribution operations, which are not in the comparable
1996 period. This is offset by the inclusion, in the 1996 results, of $0.7
million of gross profit from Vanguard. Excluding the effects of the
disposition and the acquisition, gross profit increased $0.6 million from
1995 to 1996. This increase was primarily the result of increased
production levels, and reductions in materials costs at the Company's West
Virginia operations.
9
<PAGE>
The Company's manufacturing unit volume during the three months ended
September 30, 1996 increased by 9.2% compared to manufacturing unit volume
during the three months ended September 30, 1995. Manufacturing volume during
the 1996 period was higher than in the 1995 period as a response to increased
seasonal and new customer demand. This had a favorable impact on gross profit
of $0.1 million. In addition to the increased levels of production and as a
result of declining resin prices in the last half of fiscal year 1996, a
lower level of fixed costs were allocated to each item produced, and when the
related products were sold,a higher gross profit was realized. This had a
favorable impact on the Company's gross profit of $0.3 million. The Company
recognized materials cost savings at its West Virginia operations of $0.2
million, due to an increase in production of higher margin product and a
decrease in production of lower margin product in the 1996 quarter over the
1995 quarter.
Gross margin has improved from 20.1% of sales in 1995 to 24.3% of sales in
the 1996 period. Without including the distribution operations gross margin
in the 1995 period and Vanguard's gross margin in the 1996 period, gross
margin has improved from 14.2% of sales in 1995 to 20.4% of sales in 1996.
The increase in gross margin reflects higher production levels, lower costs
associated with units sold, and materials cost savings at the Company's West
Virginia operations. These factors favorably impacted gross profit as a
percentage of sales by 1%, 2%, and 1%, respectively.
OPERATING EXPENSES. Operating expenses of $3.6 million in 1996
decreased $0.6 million from $4.2 million in 1995. This decrease represents
personnel, rent, utilities and other administrative cost savings, of $0.6
million, realized as a result of the sale of the distribution operations. The
decrease is offset by the inclusion in the 1996 results of $0.4 million of
operating expenses at Vanguard. Excluding the results of Vanguard in 1996 and
the results of the distribution operations in 1995, operating expenses
decreased $0.4 million from 1995, consisting of $0.1 million decrease
realized at the Company's West Virginia operations as a result of a reduction
in sales personnel, and $0.3 million decreases realized at the Company's
Houston operations as a result of the reorganization that occurred in June
1996.
INTEREST EXPENSE. Interest expense of $2.7 million in 1996 was
consistent with interest expense of $2.7 million in 1995. The consistency is
represented by slightly lower balances on the Company's revolving credit
facility offset by additional indebtedness related to the acquisition of
Vanguard.
PROVISION (BENEFIT) FOR INCOME TAXES. During the 1996 quarter the
Company recorded a provision for income taxes of $0.1 million compared to a
benefit for income taxes of $0.8 million in the 1995 quarter. The provision
recorded in 1996 arises from potentially taxable income in that quarter. The
effective rate of 4.8% is less than the effective rate of 31.9% recorded in
1995, primarily because of the limitations on benefits generated from the
losses in 1996. The effective tax rate in the 1996 period is less than the
statutory rate due to goodwill and other permanent differences from the sale
of the distribution operations.
10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity and capital resources have been significantly
impacted by its acquisition and financing activities and has been recently
adversely impacted by the reduction in operating income and the increase in
interest costs.
The Company has historically financed its business activities and
acquisitions through debt, preferred and common equity placements and
internally generated cash flow. During the three months ended September 30,
1996, the Company's operations used approximately $1.6 million in cash
compared with $1.7 million in 1995. Cash flow from operations was positively
affected by an increase in accrued liabilities of $2.2 million, offset by
increases in accounts receivable of $0.4 million, inventories of $0.2
million, prepaid expenses of $0.06 million and reductions in accounts payable
and accrued interest of $1.2 million and $2.1 million, respectively.
The Company's investing activities used $1.4 million in the three months
ended September 30, 1996 compared with $1.6 million in 1995. These uses
largely reflect capital expenditures of $1.4 million in 1996 and $1.6 million
in 1995. The capital investments are directed toward increasing the
efficiency and overall capacity of the Company's manufacturing operations.
The capital investments in the 1996 period are principally related to new
machinery and equipment at the Company's West Virginia facility and have been
funded primarily through internally generated cash flow. The capital
investments in 1995 were primarily related to starting operations at the
Company's Argos, Indiana facility. At September 30, 1996, the Company has
outstanding commitments to purchase approximately $2.5 million for
manufacturing machinery and equipment and molds. The Company expects to take
delivery of this equipment through January 1997.
The Company has a line of credit agreement with a bank which provides
for up to $15 million of borrowings (expandable to $20 million) limited to
specific amounts of inventory and accounts receivable. At November 7, 1996,
outstanding borrowings and remaining availability under the revolving line of
credit agreement were $9.3 million and $2.2 million, respectively. At
September 30, 1996, covenants contained in the line of credit agreement
required the Company to maintain certain levels of working capital
deficiency, interest coverage, fixed charge coverage, and net worth, which
are measured quarterly on a consolidated basis. At September 30, 1996, the
Company was in compliance with the above mentioned covenant requirements.
Following the sale of the Company's senior notes and as a result of the
debt incurred to finance the Company's acquisitions and capital improvements,
the Company became substantially leveraged. The degree to which the Company
is leveraged (i) could impact the ability of the Company to obtain additional
financing in the future for working capital, capital expenditures or general
corporate purposes, (ii) will require the Company to devote a substantial
portion of its cash flow from operations to the payment of interest on
indebtedness, and (iii) may result in the Company's becoming more vulnerable
to economic conditions or competitive pressures.
11
<PAGE>
While the three months ended September 30, 1996 have shown a modest
improvement to gross profit, the higher cash requirements to service the
Company's indebtedness has resulted in lower liquidity levels. Management has
taken numerous steps to improve the Company's liquidity, including the sale
of the distribution operations in June 1996, the reduction of personnel and
other administrative costs, as well as steps to improve the gross margin of
its manufacturing operations. In addition, management is coontinuing to
explore avenues to increase the Company's liquidity, including additional
sales of selected assets and issuances of additional debt or equity.
The sale of the distribution operations in June 1996, provided
additional liquidity of approximately $2.1 million. As a result of this sale,
working capital needs have been reduced and cost savings were achieved
through the closure of the Company's branch operations, including a reduction
in administrative personnel and other related costs.
The Company has invested significantly in new machinery and equipment
over the past three years to improve its manufacturing operations. As a
result, the Company expects to be able to reduce its capital expenditures to
approximately $5.0 million in 1997, which is less than previous years'
levels. A significant portion of these capital expenditures are expected to
be financed under currently available borrowing arrangements.
Management believes that the Company's continued focus on increasing
sales while decreasing costs of operations coupled with the recent
acquisition of Vanguard and the reorganization of the Company's operating
units will lead to increased production capabilities and eventually, an
increase in the Company's customer base.
While management is optimistic that sufficient liquidity can be
maintained through the above actions, its current borrowing arrangements, and
ultimately through improved operating results at the Company's operating
units, there can be no assurance that such additional sources of liquidity
will be available on terms acceptable to the Company, or at all, or that
operating results can be improved sufficiently to cover all of the Company's
obligations, or that a sale of assets can be effected, or that any sale of
assets will not adversely affect the Company's future operating results.
EBITDA. EBITDA is computed by adding the sum of interest income, interest
expense, amortization of deferred loan costs, depreciation and amortization,
to income before income taxes. EBITDA is presented to provide additional
information about the Company's ability to meet its future debt service,
capital expenditure and working capital requirements. EBITDA is not an
alternative to operating income as a measure of liquidity or representative
of cash available to fund all cash flow needs.
EBITDA of $2.7 million (14.7% of net sales) in the three months ended
September 30, 1996 was higher as compared with $1.9 million (8.6% of net
sales) in the 1995 period. EBITDA in 1996 includes the results of Vanguard
which provided $0.4 million of EBITDA. Excluding the effect of Vanguard,
EBITDA increassed $0.4 million. This increase was due to the improvement of
the Company's gross margin in 1996 compared to 1995, as discussed above under
Gross Profit, and the decreases in personnel costs as discussed above under
Operating Expenses.
12
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) No reports on Form 8-K were filed by the Company during the quarter
ended September 30, 1996.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: May 10, 1996
RXI HOLDINGS, INC.
By: /s/ Leon Farahnik
-------------------------------------
Leon Farahnik
Chairman of the Board,
President and Chief
Executive Officer
By: /s/ Marvin Liebman
-------------------------------------
Marvin Liebman
Executive Vice President-Finance,
Chief Financial Officer and
Secretary
14
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<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
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<SECURITIES> 0
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