<PAGE>
FORM 10-Q/A
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 March 31, 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:
Class Number of Shares Outstanding at May 10, 1996
- ------------------------------ ---------------------------------------------
Common Stock, $0.001 par value 5,098,238
<PAGE>
RXI HOLDINGS, INC.
INDEX
Page Reference
---------------
COVER PAGE . . . . . . . . . . . . . . . . . . . . . . . . . . 1
INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets
June 30, 1995 and March 31, 1996 . . . . . . . . . 3
Consolidated Statements of Operations
Three Months and Nine Months Ended
March 31, 1995 and 1996 . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows
Nine Months Ended March 31, 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 . . . . . . . . . . . 14
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2
<PAGE>
RXI HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, March 31
1995 1996
---- ----
(audited) (unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 123,123 $ 253,775
Accounts receivable 11,549,469 10,348,268
Inventories 12,145,258 12,004,239
Maintenance supplies 430,767 354,567
Prepaid expenses and other current assets 464,547 644,314
Income tax refund receivable 2,306,406 211,363
Current deferred income taxes 876,009 876,009
----------- -------------
Total current assets 27,895,579 24,692,535
----------- -------------
PROPERTY PLANT AND EQUIPMENT, net 35,890,657 36,691,736
INTANGIBLE ASSETS, net 35,901,722 34,093,972
OTHER ASSETS:
Deferred transaction costs - 360,000
Deposits 57,261 76,455
----------- -------------
TOTAL ASSETS $99,745,219 $ 95,914,698
----------- -------------
----------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term obligations $ 206,035 $ 175,000
Accounts payable 8,446,017 8,569,254
Accrued liabilities-other 5,079,531 3,702,022
Accrued interest 3,294,513 1,473,436
Revolving line of credit 7,206,549 12,347,813
----------- -------------
Total current liabilities 24,232,645 25,655,024
----------- -------------
LONG-TERM OBLIGATIONS 64,526,103 64,787,796
----------- -------------
DEFERRED INCOME TAXES 3,609,639 2,698,519
----------- -------------
REDEEMABLE STOCK
Class A warrant 370,000 481,000
Class C warrant 233,000 302,000
Class E warrant 20,000 20,000
----------- -------------
Total redeemable stock 623,000 803,000
----------- -------------
SHAREHOLDERS' EQUITY
Series A Preferred stock 8,377 9,077
Series B Preferred stock 4,561 5,041
Common stock 2,653 2,653
Warrants 1,608,150 1,608,150
Additional paid-in capital 13,477,479 13,296,299
Accumulated Deficit (8,347,388) 13,563,362
----------- -------------
Total shareholders' equity 6,753,832 1,357,858
----------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $99,745,219 $ 95,914,698
----------- -------------
----------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
RXI HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
--------- ---------
1995 1996 1995 1996
----- ---- ---- ----
<S> <C> <C> <C> <C>
SALES $24,154,665 $24,962,352 $61,137,033 $70,163,517
COST OF SALES 17,731,719 19,886,535 45,055,695 55,642,092
----------- ----------- ----------- -----------
GROSS PROFIT 6,422,946 5,075,817 16,081,338 14,521,425
SELLING, GENERAL & ADMINISTRATIVE
EXPENSES 3,583,833 4,108,655 8,977,992 11,712,599
AMORTIZATION OF INTANGIBLE ASSETS 484,814 510,985 1,140,586 1,531,625
----------- ----------- ----------- -----------
OPERATING INCOME 2,354,299 456,177 5,962,760 1,277,201
OTHER (INCOME) EXPENSE:
Interest expense 2,062,526 2,637,542 4,729,276 7,966,725
Other (74,470) 33,457 (92,404) 78,239
Interest income (10,748) (1,897) (10,748) (5,096)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 376,991 (2,212,925) 1,336,636 (6,762,667)
PROVISION (BENEFIT) FOR INCOME
TAXES 250,845 (446,119) 637,807 (1,546,693)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE MINORITY
INTEREST IN INCOME OF SUBSIDIARY 126,146 (1,766,806) 698,829 (5,215,974)
MINORITY INTEREST IN INCOME OF
SUBISIDIARY - - 10,457 -
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM 126,146 (1,766,806) 688,372 (5,215,974)
EXTRAORDINARY ITEM, NET OF BENEFIT
FROM INCOME TAXES OF $1,477,156 2,943,080 - 2,943,080 -
----------- ----------- ----------- -----------
NET (LOSS) $(2,816,934) $(1,766,806) $(2,254,708) $(5,215,974)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
RXI HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
---------
1995 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($2,254,708) $(5,215,974)
Adjustments to reconcile net loss
to cash used by operating activities:
Depreciation 2,423,118 3,368,860
Amortization 1,140,586 2,148,931
Deferred income taxes 29,878 (911,120)
Minority interest in income of subsidiary 10,457 -
Non-cash portion of extraordinary item 1,799,477 -
Changes in operating assets and liabilities, net of
affects of business acquisition:
Accounts receivable (1,485,865) 1,201,201
Inventories (5,284,219) 217,219
Prepaid expenses and other current assets (170,653) (179,767)
Current income taxes receivable/payable 927,350 2,095,043
Accounts payable 831,255 123,237
Accrued liabilities 50,949 (1,377,509)
Accrued interest 1,176,339 (1,821,077)
---------- ----------
Net cash used by operating
activities (806,036) (350,956)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash used in business acquisition (22,053,664) -
Prepaid compensation (2,000,000) -
Deferred Acquisition Costs - (360,000)
Purchases of property, plant and equipment (7,052,515) (4,169,939)
Other assets (9,968) (19,194)
---------- ----------
Net cash used by investing
activities (31,116,147) (4,549,133)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of senior notes 58,828,050 -
Issuance of long-term debt 3,025,000 346,113
Proceeds from issuance of preferred stock 3,951,717 -
Proceeds from issuance of common stock 493,965 -
Proceeds from issuance of warrants 1,608,150 -
Proceeds from issuance of redeemable stock 20,000 -
Repayment of long-term obligations (35,269,428) (233,968)
Payment of debt issuance costs (4,433,109) (222,668)
Dividends paid on preferred stock (331,200) -
Repurchase of class B common stock (650,000) -
Net borrowings under revolving line of credit 4,704,979 5,141,264
---------- ----------
Net cash provided by financing
activities 31,948,124 5,030,741
---------- ----------
INCREASE IN CASH 25,941 130,652
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 924,586 123,123
---------- ----------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $ 950,527 $ 253,775
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
RXI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION RELATED TO THE THREE MONTHS AND NINE MONTHS
ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
The accompanying consolidated balance sheet as of March 31, 1996,
consolidated statements of operations for the three months and nine months ended
March 31, 1995 and 1996 and consolidated statements of cash flows for the nine
months ended March 31, 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,
1995, and the notes thereto, which are included in the Registration Statement on
Form S-4 filed with the Securities and Exchange Commission. Additional copies
are available from the Company.
The results of operations for the three months and nine months ended March 31,
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, 1995, the Company has completed acquisitions of
other companies on June 17, 1993, May 12, 1994 and on February 10, 1995. 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 Nine Months Ended
March 31, March 31,
--------- ---------
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $25,658,000 $24,962,000 $70,187,000 $70,164,000
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Income (loss) before
extraordinary item $ 1,281,000 $(1,767,000) $ 1,084,000 $(5,216,000)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net (loss) $(1,662,000) $(1,767,000) $(1,859,000) $(5,216,000)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net loss per share $ (0.49) $ (0.35) $ (0.64) $ (1.02)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
6
<PAGE>
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
June 30, March 31,
1995 1996
---- ----
<S> <C> <C>
Raw materials $ 3,073,034 $ 2,775,488
Finished goods 9,072,224 9,228,751
----------- -----------
Total $12,145,258 $12,004,239
----------- -----------
----------- -----------
</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 (8.25% at
March 31, 1996) plus 1%.
Covenants contained in the line of credit agreement require the Company to
maintain certain financial ratios and balances including maximum working capital
deficiency of $1,000,000, consolidated net worth of not less than $1,600,000, an
interest coverage ratio, as defined, of not less than 0.8 to 1, a fixed charge
coverage ratio, as defined, of not less than 0.2 to 1. The agreement also
provides for the maintenance by the Company's subsidiaries of specified levels
of net worth and places restrictions on intercompany advances and dividends, the
payment of dividends to third parties and certain other activities without the
bank's prior written consent.
4. CAPITAL STOCK
During the nine months ended March 31, 1996 activity in the Company's
Amended and Restated 1994 Stock Option Plan was as follows:
Options outstanding at June 30, 1995 ............... 367,076
Granted ............................................ 195,000
Forfeited .......................................... (11,200)
-------
Options outstanding at March 31, 1996 .............. 550,876
-------
-------
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 complementary
plastic container manufacturers within the United States. The Company has
completed acquisitions in June 1993, May 1994 and February 1995.
These 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 facilities in Houston, Texas and Cape Girardeau, Missouri,
during the 1995 period, and at the Company's Argos, Indiana facility during the
1996 period. 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. The Company believes these expenditures will result in increased
customer satisfaction, increased sales supported by the new capacity and,
ultimately, 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 Nine
Months Months
Three Months Ended Nine Months Ended Ended Ended
March 31, March 31, March 31, March 31,
1995 1996 1995 1996 1995 to 1996 1995 to 1996
---- ---- ---- ---- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales $24,155 100.0% $24,962 100.0% $61,137 100.0% $70,164 100.0% 3.3% 14.8%
Cost of sales 17,732 73.4% 19,887 79.7% 45,056 73.7% 55,642 79.3% 12.2% 23.5%
------- ------ ------- ------ ------- ------ ------- -----
Gross Profit 6,423 26.6% 5,075 20.3% 16,081 26.3% 14,522 20.7% (21.0)% (9.7)%
Operating expenses 3,584 14.8% 4,108 16.5% 8,978 14.7% 11,712 16.7% 14.6% 30.5%
Amortization of intangible assets 485 2.0% 511 2.1% 1,140 1.9% 1,532 2.2% 5.4% 34.4%
------- ------ ------- ------ ------- ------ ------- -----
Operating income 2,354 9.8% 456 1.7% 5,963 9.7% 1,277 1.8% (80.6)% (78.6)%
Interest expense 2,052 8.5% 2,636 10.6% 4,719 7.7% 7,962 11.4% 28.5% 68.7%
Other (income) expense (75) (0.3)% 33 0.1% (92) (0.2)% 78 0.11% 144.0% 184.7%
------- ------ ------- ------ ------- ------ ------- -----
Income (loss) before provision
for income taxes 377 1.6% (2,213) (6.9)% 1,336 2.2% (6,763) (9.6)% (687.0)% (606.2)%
Provision (benefit) for income
taxes 251 1.0% (446) (1.8)% 638 1.0% (1,547) (2.2)% (277.7)% (342.5)%
------- ------ ------- ------ ------- ------ ------- -----
Income before minority interest 126 0.6% (1,767) (7.1)% 698 1.2% (5,216) (7.4)% (1502.4)% (847.3)%
Minority interest - - - - 10 0.02% - - - -
------- ------ ------- ------ ------- ------ ------- -----
Income before extraordinary item 126 0.6% (1,767) (7.1)% 688 1.2% (5,216) (7.4)% (1502.4)% (858.1)%
Extraordinary item 2,943 12.2% - - 2,943 4.8% - - NM NM
------- ------ ------- ------ ------- ------ ------- -----
Net income (loss) $(2,817) (11.6)% $(1,767) (7.1)% $(2,255) (3.6)% $(5,216) (7.4)% (37.3)% 131.3%
------- ------ ------- ------ ------- ------ ------- -----
------- ------ ------- ------ ------- ------ ------- -----
EBITDA $ 817 3.4% $ 2,100 8.4% $ 6,711 11.0% $ 6,099 8.7% 157.0% (9.1)%
</TABLE>
THREE MONTHS ENDED MARCH 31, 1996 COMPARED WITH THE THREE MONTHS ENDED
MARCH 31, 1995
NET SALES. Net sales of $25.0 million for the three months ended March
31, 1996, increased $0.8 million from net sales of $24.2 million for the three
months ended March 31, 1995. The increase reflects the inclusion of $1.8
million of net sales of Continental which was acquired in February 1995, and
therefore not fully included in the comparable 1995 results. Excluding the
effect of this acquisition, sales decreased $1.0 million from 1995 to 1996.
This decrease resulted from lower volumes in the 1996 period ($0.5 million) and
by reductions in selling prices from 1995 to 1996. The Company believes the
severe winter weather experienced by much of the midwest and eastern portions of
the United States during the 1996 quarter adversely affected shipping volumes.
GROSS PROFIT. Gross profit of $5.1 million in 1996 decreased
$1.3 million from $6.4 million in 1995. The results of Continental provided
$0.5 million of gross profit in 1996. Excluding Continental's results, gross
profit decreased $1.8 million from 1995 to 1996. This decrease was
primarily the result of reduced production levels, lower gross profit
provided by the Company's distribution activities and costs related to
starting up the Company's Argos, Indiana, facility.
The Company's manufacturing unit volume during the three months ended March
31, 1996 was flat compared to manufacturing unit volume during the three
months ended March 31, 1995. However, production volume through December 31,
1995 was lower than production levels at the same point in the prior year by
18%. As a result of the reduced volume of production, higher unit costs were
attached to each unit produced during the current fiscal year. When this
inventory was sold during the March quarter, the higher unit costs resulted
in lower gross profit per unit sold. Manufacturing volume during the 1996
period was lower than in the 1995 period because of decisions made by
management in response to a combination of softer demand for the Company's
manufactured products and anticipated reductions in raw material prices. This
had an unfavorable impact on the Company's gross profit in the amount of $0.8
million during the three months ended March 31, 1996 compared to the three
months ended March 31, 1995.
Gross profit provided by the Company's distribution activities was lower in
1996 compared to 1995 as a result of both lower sales prices ($0.7 million)
and lower sales volume ($0.1 million). The lower sales prices result from
continued competitive pressures felt by the Company during 1996 and
management's decision to meet competitors' prices at lower margins where
appropriate. In addition, gross profit was adversely impacted by higher
manufacturing fixed costs, primarily consisting of depreciation and operating
leases ($0.1 million), and costs related to bringing the Company's Argos,
Indiana facility operational ($0.2 million). The Argos facility began
production on February 19, 1996, and shipping from this facility began during
March 1996. However, because of fixed costs in the facility, Management does
not expect Argos to absorb its fixed costs at a level to provide normal gross
margins until October 1996, when four production lines are operational.
9
<PAGE>
Gross margin has deteriorated from 26.6% of sales in 1995 to 20.3% of sales
in the 1996 period, which included the results of Continental. Without
including Continental's gross margin, gross margin has deteriorated to 18.6%
of sales. The decrease in gross margin reflects lower production levels,
competitive pressures on distribution activities, higher manufacturing fixed
costs, and costs related to the Argos, Indiana facility. These factors
adversely impacted gross profit as a percentage of sales by 3%, 3%, 1% and
1%, respectively.
OPERATING EXPENSES. Operating expenses of $4.6 million in 1996 increased
$0.5 million from $4.1 million in 1995, primarily due to the inclusion of $0.4
million of operating expenses from Continental. The balance of $0.1 million
consists of higher personnel costs in the 1996 quarter as compared to the 1995
quarter reflecting, increases in salaries at the Company's Ohio operations, and
increased sales staff to support the Company's Bettix(TM) product line.
INTEREST EXPENSE. Interest expense of $2.6 million in 1996 increased
$0.6 million from interest expense of $2.0 million in 1995. The increase
reflects additional indebtedness related to the acquisition of Continental
($0.4 million), and higher balances on the Company's revolving credit
facility in 1996, ($0.5 million), and an increase in the effective interest
rate on the Company's new senior notes as compared with prior financing.
PROVISION (BENEFIT) FOR INCOME TAXES. During the 1996 quarter the Company
recorded a benefit from income taxes of $0.4 million compared to a provision
for income taxes of $0.3 million in the 1995 quarter. The benefit recorded in
1996 arises from the losses incurred in that quarter. The effective rate of
27.9% is less than the effective rate of 66.6% recorded in 1995, primarily
because of the limitations on benefits generated from the losses in 1996. The
effective tax rate in the 1995 period is higher than the statutory rate due to
exclusion of goodwill amortization in determining taxable income.
EXTRAORDINARY ITEM. In February 1995, in connection with the placement
of its senior notes, the Company repaid all of its then existing debt. The
repayment of this debt was early and resulted in an extraordinary charge of
$1.9 million consisting of cash prepayment premiums of $1.1 million plus $3.3
million from the write off of existing deferred financing costs, partially
offset by a related income tax benefit of $1.5 million. There was no similar
transaction during the 1996 period.
NINE MONTHS ENDED MARCH 31, 1996 COMPARED WITH THE NINE MONTHS ENDED
MARCH 31, 1995
NET SALES. Net sales of $70.2 million for the nine months ended March 31,
1996, increased $9.1 million from net sales of $61.1 million for the nine months
ended March 31, 1995. The increase reflects the inclusion of $10.1 million of
net sales of Continental acquired in February 1995, and therefore not fully
included in the comparable 1995 results. Excluding the effect of this
acquisition, sales decreased $1.0 million from 1995 to 1996. This reflects
lower sales volumes for the nine months ended March 31, 1996 than for the nine
months ended March 31, 1995 ($0.8 million) and lower selling prices in the 1996
compared with the 1995 period.
GROSS PROFIT. Gross profit of $14.5 million in 1996 decreased $1.6 million
from $16.1 million in 1995. The results of Continental provided $3.4 million
more gross profit in 1996 than in the 1995 period due to the timing of its
acquisition. Excluding Continental's results, gross profit decreased $5.0
million from 1995 to 1996. This decrease was primarily the result of lower
production levels in the 1996 period as compared with the 1995 period, and lower
gross profit provided by the Company's distribution activities.
The Company's manufacturing unit volume was down approximately 7% for the nine
months ended March 31, 1996 compared with the nine months ended March 31,
1995. Manufacturing volume during the 1996 period was lower than in the 1995
period because of decisions made by management in response to a combination of
softer demand for the Company's manufactured products and anticipated
reductions in raw material prices. The lower production volume resulted in a
higher level of fixed costs allocated to each item produced and, when the
related products were sold, a lower gross profit realized. This had an
unfavorable impact on the Company's gross profit in the amount of $2.4 million.
10
<PAGE>
Gross profit provided by the Company's distribution activities was lower in the
1996 period compared to the 1995 period as a result of lower selling prices
($1.4 million), and as a result of lower unit volume ($0.3 million). The lower
selling prices reflect continued competitive pressures felt by the Company
during 1996 and management's decision to meet its competitors' prices at lower
margins where appropriate. In addition, gross profit was adversely impacted by
higher fixed costs, primarily consisting of depreciation and operating leases
($0.4 million), higher freight costs ($0.2 million), and costs related to
bringing the Company's Argos, Indiana facility operational ($0.3 million).
Gross margin has deteriorated from 26.3% of sales in 1995 to 20.7% of sales in
the 1996 period, which included the results of Continental. Without including
Continental's gross margin, gross margin has deteriorated to 18.6% of sales.
The decrease in gross margin reflects lower production levels, higher
manufacturing fixed costs, competitive pressures on distribution activities, and
costs related to the Argos, Indiana facility. These factors impacted gross
margin as a percentage of sales by 4%, 1%, 3% and 1%, respectively.
OPERATING EXPENSES. Operating expenses of $13.2 million in 1996 increased
$3.1 million from $10.1 million in 1995 primarily due to the inclusion of $2.4
million of operating expenses from Continental. The balance of $0.7 million
consists of higher personnel costs in the 1996 period as compared to the 1995
period reflecting new management personnel in the Company's Houston operations,
increases in salaries at the Company's Ohio operations, and increased sales
staff to support the Company's Bettix(TM) sales efforts.
INTEREST EXPENSE. Interest expense of $8.0 million in 1996 increased
$3.3 million from interest expense of $4.7 million in 1995. The increase
reflects additional indebtedness related to the acquisition of Continental
($2.0 million), higher balances on the Company's revolving credit facility in
1996 ($0.5 million), and an increase in the effective interest rate on the
Company's new senior notes as compared with prior financing.
PROVISION (BENEFIT) FOR INCOME TAXES. During the 1996 period the Company
recorded a benefit from income taxes of $1.5 million compared to a provision
for income taxes of $0.6 million in the 1995 period. The benefit recorded in
1996 arises from the losses incurred in that period. The effective rate of
25.2% is less than the effective rate of 47.8% recorded in 1995, primarily
because of the limitations on benefits generated from the losses in 1996. The
effective tax rate in the 1995 period is higher than the statutory rate due to
exclusion of goodwill amortization in determining taxable income.
EXTRAORDINARY ITEM. In February 1995, in connection with the placement
of its senior notes, the Company repaid all of its then existing debt. The
repayment of this debt was early and resulted in an extraordinary charge of
$1.9 million consisting of cash prepayment premiums of $1.1 million plus $3.3
million from the write off of existing deferred financing costs, partially
offset by a related income tax benefit of $1.5 million. There was no similar
transaction during the 1996 period.
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 nine months ended March 31, 1996,
the Company's operations used approximately $0.4 million in cash compared with
$0.8 million in 1995. However, interest costs have risen to $8.0 million
during the nine months ended March 31, 1996 from $4.7 million during the nine
months ended March 31, 1995. Cash flow from operations was positively
affected by decreases in accounts receivable of $1.2 million, inventories of
$0.2 million, and the income tax refund receivable of $2.1 million, offset by
an increase in prepaid expenses and accounts payable of $0.2 million and $0.1
million, respectively, and reductions in accrued liabilities and accrued
interest of $1.4 million and $1.8 million, respectively.
11
<PAGE>
The Company's investing activities used $4.5 million in the nine months
ended March 31, 1996 compared with $31.1 million in 1995. The use in 1996
largely reflects capital expenditures of $4.2 million and the use in 1995
includes capital expenditures of $7.1 million. The capital expenditures
comprise significant capital investments which 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 starting
operations at the Company's Argos, Indiana facility and have been funded
primarily through internally generated cash flow. The capital investments in
1995 were primarily related to its Houston facilities. At March 31, 1996, the
Company has outstanding commitments to purchase approximately $2.4 million
for manufacturing machinery and equipment and molds. The Company expects to
take delivery of this equipment through December 1996. In 1995 the Company
also used $24.1 million (including payment of prepaid compensation) in
investing activities related to the acquisition of Continental which was
completed in February 1995.
The Company bills its customers upon delivery of products. The Company's
standard payment terms provide for a 2% cash discount if current purchases are
paid for by the tenth day of the month following invoicing. All unpaid invoices
are due by the end of the month following invoicing. The average days' sales
outstanding was approximately 40 days at March 31, 1996 and 49 days at June 30,
1995. Days sales outstanding decreased as a result of Management's continued
emphasis on improved collection efforts. Accounts receivable also decreased
from June 30, 1995 as a result of lower sales in the March quarter as compared
with the June quarter.
The Company's inventories at March 31, 1996 represented approximately 59
days' sales compared to 66 days at June 30, 1995. This decrease resulted from
Management's decision to maintain reduced production levels through the March
quarter. Production levels were reduced in response to soft demand for products
during the quarter.
Accounts payable at March 31, 1996, represented approximately 39 days'
purchases compared to 46 days' purchases at June 30, 1995. Accounts payable was
affected by lower production levels during the March quarter and the impact of
the lower production levels on purchase requirements. At March 31, 1996, the
Company does not have any material purchase commitments for inventory purchases.
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 specified
amounts of inventory and accounts receivable. At May 9, 1996, outstanding
borrowings and remaining availability under the revolving line of credit
agreement were $11.8 million and $1.1 million, respectively. At March 31, 1996,
covenants contained in the line of credit agreement required the Company to
maintain the following financial statistics, measured quarterly on a
consolidated basis: maximum working capital deficiency of $1,000,000, an
interest coverage ratio of not less than 0.8 to 1, a fixed charge ratio of not
less than 0.2 to 1, and consolidated net worth of not less than $1,600,000.
Additionally, Patrick was required to maintain minimum net worth of $2,700,000,
and Texberry and Continental were required to maintain maximum net worth deficit
of $4,600,000 and $2,500,000, respectively.
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 could (i) 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.
The Company has experienced significantly lower gross profits in 1996 as
compared with the same periods during 1995. Additionally, the Company's sales
levels during the three and nine months ended March 31, 1996 are
approximately the same as sales levels experienced during the same period of
the prior year, after taking account of the impact of including Continental's
net sales. The reduction in gross profit and flat sales, together with higher
cash requirements to service the Company's indebtedness, has resulted in
liquidity levels lower than historical levels. While these liquidity levels
are sufficient to cover the Company's present operating requirements and many
debt service requirements, they are not sufficient to cover the Company's
interest payments due in the near term on the Company's senior notes.
Management is addressing this issue by exploring avenues to obtain additional
liquidity. These avenues consist of the possible sale of selected assets or
raising additional capital. While management is optimistic that sufficient
liquidity can be obtained through the sale of selected assets, 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 debt
service requirements, or that the sale of assets will not adversely affect
the Company's future operating results.
12
<PAGE>
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 $6.1 million (8.7% of net sales) in the nine months ended March 31,
1996 was flat as compared with the 1995 period. However, as a percentage of
sales EBITDA in 1996 was 8.7% of sales as compared with 11.0% in 1995. EBITDA
in 1996 includes the results of Continental for the full period which provided
$3.1 million of EBITDA compared with $0.7 million provided in the 1995 period
when Continental was included from its February 10 acquisition date. Excluding
the effect of Continental, EBITDA decreased $3.0 million. This decrease was due
to the degradation of the Company's gross margin in 1996 compared to 1995, as
discussed above under Gross Profit, and the increases in personnel costs as
discussed above under Operating Expenses.
13
<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 March 31, 1996.
14
<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
15
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<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
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