<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 December 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 February 12, 1997
- -------------------------------------------------------------------------------
Common Stock, $0.001 par value 4,945,500
<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, 1996 and December 31, 1996. . . . . . . . 3
Consolidated Statements of Operations
Three Months and Six Months Ended
December 31, 1995 and 1996 . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows
Six Months Ended December 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>
CONSOLIDATED BALANCE SHEETS
(Unaudited)
December 31, June 30,
1996 1996
------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 45,896 $ 24,045
Accounts receivable 8,222,286 9,034,093
Inventories 9,901,410 8,965,018
Maintenance supplies 254,691 298,158
Prepaid expenses and other current assets 720,245 587,723
Income tax refund receivable 672,395 700,000
------------- -------------
Total current assets 19,816,923 19,609,037
------------- -------------
PROPERTY PLANT AND EQUIPMENT, net 38,871,704 38,780,884
INTANGIBLE ASSETS, net 25,766,334 26,975,099
OTHER ASSETS:
Deferred purchase price receivable 2,250,000 2,250,000
Deposits 120,019 126,409
Other 196,261 172,839
------------- -------------
TOTAL ASSETS $ 87,021,241 $ 87,914,268
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term obligations $ 1,123,405 $ 705,006
Accounts payable 5,852,781 7,303,143
Accrued liabilities-other 4,412,641 4,002,926
Accrued interest 3,866,924 3,869,728
Accrued income taxes 204,801 -
Revolving line of credit 7,931,827 6,551,564
Deferred income taxes 142,855 142,855
------------- -------------
Total current liabilities 23,535,234 22,575,222
------------- -------------
LONG-TERM OBLIGATIONS 68,797,508 66,620,558
------------- -------------
DEFERRED INCOME TAXES 1,229,836 1,338,855
------------- -------------
REDEEMABLE STOCK
Class A warrant 592,000 518,000
Class C warrant 371,000 325,000
Class E warrant 20,000 20,000
------------- -------------
Total redeemable stock 983,000 863,000
------------- -------------
SHAREHOLDERS' EQUITY
Series A Preferred stock 9,643 9,261
Series B Preferred stock 5,437 5,169
Common stock 2,500 2,500
Warrants 1,608,150 1,608,150
Additional paid-in capital 13,095,889 13,216,539
Accumulated Deficit (22,245,956) (18,324,986)
------------- -------------
Total shareholders' equity (7,524,337) (3,483,367)
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 87,021,241 $ 87,914,268
------------- -------------
------------- -------------
See accompanying notes to consolidated financial statements
3
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
------------------- -----------------
1996 1995 1996 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
SALES $ 17,910,032 $ 22,674,443 $ 36,470,404 $ 45,201,165
COST OF SALES 13,948,636 17,764,093 28,005,102 35,755,557
------------- ------------- ------------- -------------
GROSS PROFIT 3,961,396 4,910,350 8,465,302 9,445,608
SELLING, GENERAL & ADMINISTRATIVE
EXPENSES 2,869,856 3,767,310 6,087,252 7,459,474
AMORTIZATION OF INTANGIBLE ASSETS 437,724 508,798 875,448 1,020,640
------------- ------------- ------------- -------------
Total Operating Expenses 3,307,580 4,276,108 6,962,700 8,480,114
------------- ------------- ------------- -------------
OPERATING INCOME 653,816 634,242 1,502,602 965,494
OTHER (INCOME) EXPENSE:
Interest expense 2,710,657 2,631,638 5,399,366 5,329,183
Interest income (760) (1,523) (20,485) (3,199)
Other (14,332) 49,450 (68,935) 44,782
------------- ------------- ------------- -------------
Total Other (Income) Expense 2,695,565 2,679,565 5,309,946 5,370,766
------------- ------------- ------------- -------------
LOSS BEFORE INCOME TAXES (2,041,749) (2,045,323) (3,807,344) (4,405,272)
PROVISION (BENEFIT) FOR INCOME
TAXES 28,306 (513,628) 113,626 (1,266,411)
------------- ------------- ------------- -------------
NET LOSS $ (2,070,055) $ (1,531,695) $ (3,920,970) $ (3,138,861)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
See accompanying notes to conslidated financial statements.
4
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
December 31,
1996 1995
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,920,970) $ (3,138,861)
Adjustments to reconcile net loss
to cash provided by operating activities
Depreciation 2,775,290 2,202,502
Amortization 1,293,296 1,439,778
Deferred income taxes (109,019) (890,633)
Gain on sale of assets (7,167) -
Changes in operating assets and liabilities:
Accounts receivable 811,807 2,444,022
Inventories (936,392) 597,006
Prepaid expenses and other current assets (89,055) 295,143
Current income taxes receivable/payable 232,406 (72,188)
Accounts payable (net of financing of
extended vendor terms of $2,100,000
in 1996) 649,638 (1,411,171)
Accrued liabilities-other 409,715 (1,247,077)
Accrued interest (2,804) 323,092
------------ ------------
Net cash provided by operating
activities 1,106,745 541,613
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets 33,000 -
Purchases of property, plant and equipment (2,891,943) (2,687,842)
Other assets (17,032) (57,257)
------------ ------------
Net cash used by investing
activities (2,875,975) (2,745,099)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term obligations (net of
financing of extended vendor terms
of $2,100,000 in 1996) 755,839 -
Repayment of long-term obligations (339,498) (195,545)
Payment of debt issuance costs (5,523) (187,643)
Net borrowings under revolving line of credit 1,380,263 2,948,345
------------ ------------
Net cash provided by financing
activities 1,791,081 2,565,157
------------ ------------
INCREASE IN CASH 21,851 361,671
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 24,045 123,123
------------ ------------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $ 45,896 $ 484,794
------------ ------------
------------ ------------
See accompanying notes to consolidated financial statements.
5
<PAGE>
RXI HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
The accompanying consolidated balance sheet as of December 31, 1996,
consolidated statements of operations for the three months and six months ended
December 31, 1995 and 1996 and consolidated statements of cash flows for the six
months ended December 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,
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 and six months ended December 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, 1996, the Company has completed acquisitions of
other companies on June 17, 1993, May 12, 1994, February 10, 1995, and May 9,
1996. These acquisitions have all 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:
Three Months Ended Six Months Ended
December 31, December 31,
------------------ ------------------
1996 1995 1996 1995
---- ---- ---- -----
Net sales $ 17,910,000 $ 24,933,000 $ 36,470,000 $ 49,929,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net (loss) $ (2,070,000) $ (1,784,000) $ (3,921,000) $ (3,543,000)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
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:
December 31, June 30,
1996 1996
---- ----
Raw materials $ 2,805,859 $ 2,622,858
Finished goods 7,095,551 6,342,160
------------ ------------
Total $ 9,901,410 $ 8,965,018
------------ ------------
------------ ------------
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
December 31, 1996) plus 1%.
At December 31, 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 December 31, 1996, the Company was in compliance with the above
mentioned covenant requirements.
4. CAPITAL STOCK
During the six months ended December 31, 1996 activity in the Company's
Amended and Restated 1994 Stock Option Plan was as follows:
Options outstanding at June 30, 1996. . . . . . . . . . 618,376
Granted . . . . . . . . . . . . . . . . . . . . . . . . 30,000
Forfeited . . . . . . . . . . . . . . . . . . . . . . . (185,319)
----------
Options outstanding at December 31, 1996. . . . . . . . 463,057
----------
----------
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; THE AVAILABILITY OF TRADE CREDIT ON
CUSTOMARY TERMS; 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; AND OTHER RISK FACTORS DESCRIBED
FROM TIME TO TIME IN THE COMPANY'S REPORTS FILED WITH THE SECURITIES AND
EXCHANGE 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"), Patrick Plastics,
Inc. ("Patrick"), and Vanguard transferring Texberry's manufacturing
operations to, and merging Patrick and Vanguard 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.
8
<PAGE>
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 and Houston, Texas
during the fiscal year ended June 30, 1996. 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.
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 Six
Months Months
Three Months Ended Six Months Ended Ended Ended
December 31, December 31, December 31, December 31,
1996 1995 1996 1995 1995 to 1996 1995 to 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales $ 17,910 100.0% $ 22,674 100.0% $ 36,470 100.0% $ 45,201 100.0% (21.0)% (19.3)%
Cost of sales 13,949 77.9% 17,764 78.4% 28,005 76.8% 35,756 79.1% (21.5)% (21.7)%
--------- ------ ---------- ------ --------- ----- --------- ------
Gross Profit 3,961 22.1% 4,910 21.7% 8,465 23.2% 9,445 20.9% (19.3)% (10.4)%
Operating expenses 3,307 18.5% 4,276 18.9% 6,963 19.1% 8,480 18.8% (22.7)% (17.9)%
--------- ------ ---------- ------ --------- ----- ---------- ------
Operating income 654 3.7% 634 2.8% 1,502 4.1% 965 2.1% 3.2% 55.7%
Interest expense 2,710 15.1% 2,630 11.6% 5,378 14.8% 5,326 11.8% (3.0)% (1.0)%
Other (income) expense (14) (0.1)% 50 0.2% (69) (0.2)% 44 0.1% 128.0% 256.8%
--------- ------ ---------- ------ --------- ----- --------- ------
Income (loss) before income
taxes (2,042) (11.4)% (2,046) (9.0)% (3,807) (10.4)% (4,405) (9.8)% 0.2% 13.6%
Provision (benefit) for
income taxes 28 0.2% (514) (2.3)% 114 0.3% (1,266) (2.8)% (105.5)% (109.0)%
--------- ------ ---------- ------ --------- ----- --------- -------
Net income (loss) $ (2,070) (11.6)% $ (1,532) (6.8)%$ (3,921) (10.8)%$ (3,139) (6.9)% (35.1)% (24.9)%
--------- ------ ---------- ------ --------- ----- --------- -------
--------- ------ ---------- ------ --------- ----- --------- -------
EBITDA $ 2,503 14.0% $ 2,200 9.7% $ 5,222 14.3% $ 4,144 9.2% 13.8% 26.0%
</TABLE>
9
<PAGE>
THREE MONTHS ENDED DECEMBER 31, 1996 COMPARED WITH THE THREE MONTHS ENDED
DECEMBER 31, 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 $17.9 million for the three months ended
December 31, 1996, decreased $4.8 million from net sales of $22.7 million for
the three months ended December 31, 1995. The decrease reflects the
inclusion of $7.1 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 $3.0 million of net sales of Vanguard
which was acquired in May 1996, and therefore not included in the comparable
1995 results. Excluding the effects of the disposition and acquisition, sales
decreased $0.7 million from 1995 to 1996. The Company recognized lower sales
volumes at its Houston facility of $1.4 million, representing lost business
of two customers who changed bottle styles ($1.0 million), and a slow start
to the agricultural chemical season. This decrease was offset by increased
sales volumes at the Company's Ohio and West Virginia facilities of $0.3
million and higher sales prices, representing the pass through of higher
resin prices, of $0.4 million.
GROSS PROFIT. Gross profit of $4.0 million in 1996 decreased compared to
$4.9 million in 1995. The 1995 period includes $1.1 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 decreased $0.5 million from 1995 to 1996. This
decrease was primarily the result of decreased production levels, at the
Houston facility.
The Company's overall manufacturing unit volume during the three months ended
December 31, 1996 increased slightly, by 2.7%, compared to manufacturing unit
volume during the three months ended December 31, 1995. Manufacturing volume
during the 1996 period was lower than in the 1995 period, at the Company's
Houston facility, due primarily to the lost business of two customers and the
slow start to the agricultural chemical season as discussed above. This had
an unfavorable impact on the Company's gross profit of $0.2 million. In
addition, decreased levels of production, at the Houston facility, in the
first quarter of fiscal year 1997, resulted in a higher level of fixed costs
being allocated to each item produced, and when the related products were
sold in the second quarter, a lower gross profit was realized. This had an
unfavorable impact on the Company's gross profit of $0.4 million. These
decreases were offset by an increase in gross profit, attributable to higher
production volumes at the Company's Ohio facility of $0.1 million.
Gross margin has improved from 21.7 % of sales in 1995 to 22.1% 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 declined from 24.4% of sales in 1995 to 22.1% of sales in 1996.
The decrease in gross margin reflects lower production levels and higher
costs associated with units sold, which are offset by higher production
volumes at the Company's Ohio operations. These factors impacted gross
profit as a percentage of sales unfavorably by approximately 1% and 2% and
favorably by approximately 1%, respectively.
OPERATING EXPENSES. Operating expenses of $3.3 million in 1996 decreased
$1.0 million from $4.3 million in 1995. This decrease represents personnel,
rent, utilities and other adiministrative 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 $0.8
million from 1995, representing reductions realized at the Company's Houston
operations as a result of the reorganization that occured in June 1996.
10
<PAGE>
INTEREST EXPENSE. Interest expense of $2.7 million in 1996 was up
slightly from interest expense of $2.6 million in 1995. The increase is
represented by a slightly higher average balance on the Company's revolving
credit facility and 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 $0.03 million compared to a
benefit for income taxes of $0.5 million in the 1995 quarter. The provision
recorded in 1996 arises from potentially taxable income in that quarter, as
carryback availability has been fully utilized and there can be no assurance
that the benefit of a carryforward can be realized. The effective rate of
1.4% is less than the effective rate of 25.1% 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.
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 $2.5 million (14.0% of net sales) in the three months ended
December 31, 1996 was higher as compared with $2.2 million (9.7% of net
sales) in the 1995 period. EBITDA in 1996 inlcudes the results of Vanguard
which provided $0.5 million of EBITDA. Excluding the effect of Vanguard,
EBITDA decreased $0.2 million. This decrease was due to the loss of sales
unit volume and lower gross profit in 1996 compared to 1995, as discussed
above under Net Sales and Gross Profit, offset by the decreases in personnel
costs as discussed above under Operating Expenses.
SIX MONTHS ENDED DECEMBER 31, 1996 COMPARED WITH THE SIX MONTHS ENDED DECEMBER
31, 1995
NET SALES. Net sales of $36.5 million for the six months ended
December 31, 1996, decreased $8.7 million from net sales of $45.2 million for
the six months ended December 31, 1995. The decrease reflects the inclusion
of $14.5 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 $6.2 million of net sales of Vanguard
which was acquired in May 1996, and therefore not included in the comparable
1995 results. Excluding the effects of the disposition and acquisition, sales
decreased $0.4 million from 1995 to 1996, due to lower unit sales volumes.
GROSS PROFIT. Gross profit of $8.5 million in 1996 decreased from $9.5
million in 1995. The 1995 period includes $2.5 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 $1.4 million
of gross profit from Vanguard. Excluding the effects of the disposition and the
acquisition, gross profit increased $0.1 million from 1995 to 1996. This
increase was primarily the result of increased production levels at the
Company's Ohio facility and reductions in materials costs at the Company's West
Virginia operations, offset by decreased production levels at the Company's
Houston facility.
The Company's overall manufacturing unit volume during the six months ended
December 31, 1996 increased slightly, by 2.7%, compared to manufacturing unit
volume during the six months ended December 31, 1995. Manufacturing volume
during the 1996 period was lower than in the 1995 period, at the Company's
Houston facility, due to the lost business of two customers and the slow
start to the agricultural chemical season at the Houston facilities, offset
by an increase in production, due to increased seasonal and new customer
demand, at the Ohio and West Virginia facilities. The net effect had a
negligible impact on gross profit. As a result of declining resin prices in
the last half of fiscal year 1996, at the Company's West Virginia facility,
and increased production levels at the Company's Ohio facility, a lower level
of costs were allocated to each item produced, and when the related products
were sold, during the first quarter of fiscal year 1997, a higher gross
profit was realized. This had a favorable impact on the Company's gross
profit of $0.3 million. However, decreased levels of production in the first
quarter of fiscal year 1997, at the Company's Houston facility, resulted in a
higher level of fixed costs being allocated to each item produced, and when
the related products were sold, a lower gross profit was realized. This had
an unfavorable impact on the Company's gross profit of $0.4 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 period over the
1995 period.
Gross margin has improved from 20.9 % of sales in 1995 to 23.2% 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 22.8% of sales in 1995 to 23.4% of sales in 1996.
The slight increase in gross margin reflects lower costs associated with
units sold in the first quarter of fiscal year 1997 and materials cost
savings at the Company's West Virginia operations offset by higher costs
associated with units sold in the second quarter of fiscal year 1997. These
factors impacted gross profit as a percentage of sales favorably by
approximately 1% and 1% and unfavorably by approximately 1%, respectively.
11
<PAGE>
OPERATING EXPENSES. Operating expenses of $6.9 million in 1996 decreased
$1.6 million from $8.5 million in 1995. This decrease represents personnel,
rent, utilities and other adiministrative cost savings, of $1.2 million,
realized as a result of the sale of the distribution operations. The decrease
is offset by the inclusion in the 1996 results of $0.8 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 $1.2
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 $1.1
million decrease realized at the Company's Houston operations as a result of the
reorganization that occured in June 1996.
INTEREST EXPENSE. Interest expense of $5.4 million in 1996 was up
slightly from interest expense of $5.3 million in 1995. The increase is
represented by a slightly higher average balance on the Company's revolving
credit facility and by additional indebtedness related to the acquisition of
Vanguard.
PROVISION (BENEFIT) FOR INCOME TAXES. During the 1996 period the
Company recorded a provision for income taxes of $0.1 million compared to a
benefit for income taxes of $1.3 million in the 1995 period. The provision
recorded in 1996 arises from potentially taxable income in that period, as
carryback availability has been fully utilized and there can be no assurance
that the benefit of a carryforward can be realized. The effective rate of
3.0% is less than the effective rate of 28.7% 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.
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 $5.2 million (14.3% of net sales) in the six months ended December 31,
1996 was higher as compared with $4.1 million (9.2% of net sales) in the 1995
period. EBITDA in 1996 includes the results of Vanguard which provided $0.9
million of EBITDA. Excluding the effect of Vanguard, EBITDA increased $0.2
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity and capital resources have been significantly
impacted by its acquisition and financing activities and the increase in
interest costs, however, these are partially offset by slight increases in
operating income.
The Company has historically financed its business activities and
acquisitions through debt, preferred and common equity placements and
internally generated cash flow. However, in light of the Company's
historical losses and limited cash flow generated from operations, the
Company may no longer be capable of financing its activities through new
debt. During the six months ended December 31, 1996, the Company's
operations provided approximately $1.1 million in cash compared with $0.5
million of cash in 1995. Cash flow from operations was positively affected by
a decrease in accounts receivable of $0.8 million, and increases in accrued
income taxes of $0.2 million, accrued liabilities of $0.4 million, and a net
increase to accounts payable of $0.6 million. At June 30, 1996, the Company
had obtained extended terms, from the vendor, for the purchase of two
machines, at which time the machines were received and a payable of $2.1
million was established to the vendor. In December 1996, long-term financing
was obtained for these two machines and the vendor paid, resulting in a
transfer of the payable to long-term obligations. These positive effects were
offset by an increase in inventories of $0.9 million.
The Company's investing activities used $2.9 million in the six months
ended December 31, 1996 compared with $2.7 million in 1995. These uses
largely reflect capital expenditures of $2.9 million in 1996 and $2.7 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 long-term financing. The capital investments in
1995 were primarily related to starting operations at the Company's Argos,
Indiana facility. At December 31, 1996, the Company has outstanding
commitments to purchase approximately $2.0 million for manufacturing
machinery and equipment and molds. The Company expects to take delivery of
this equipment through August 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
specified amounts of inventory and accounts receivable. At February 12,
1997, outstanding borrowings and remaining availability under the revolving
line of credit agreement were $8.4 million and $3.5 million, respectively.
At December 31, 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 December 31, 1996, the
Company was in compliance with the above mentioned covenant requirements.
12
<PAGE>
While the six months ended December 31, 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 continuing to explore
avenues to increase the Company's liquidity, including additional sales of
selected assets and issuances of additional debt or equity.
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, and thereby to an increase in operating income.
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.
As a result of the Company's continuing inability to generate sufficient
cash flow to cover cash interest expense, the Company elected not to pay
interest due on its Senior Notes on January 15, 1997 in the amount of $4.2
million.
Prior to the January 15, 1997 scheduled interest payment, management
issued a press announcement announcing its intention not to make such
interest payment and met with holders of a substantial majority of the Senior
Notes to discuss a possible modification of the terms of the Senior Notes.
The Company has engaged a financial advisor to advise the Company on its
options and has agreed to pay the fees and costs of financial and legal
advisors to an informal committee of Senior Noteholders in connection with
the Company's proposal to modify the terms of the Senior Notes.
At the end of January 1997, the Company presented its proposal to the
holders of the Senior Notes, which proposal included payment of two interest
payments through issuance of additional notes, the lowering of the interest
rate to 12%, effective July 15, 1997, and the elimination or liberalization of
certain negative covenants contained in the Indenture. The proposal also
offered to issue Senior Noteholders a 15% equity interest in the Company.
The Company anticipates negotiating the terms of a modification during
February and March 1997. There can be no assurance that such negotiations
will result in an agreement between the Company or the holders of the Senior
Notes, or that the terms of any modification of the terms of the Senior Notes
actually agreed upon will be similar in substance to that summarized above.
The failure to pay the interest on the Senior Notes, not cured within
30 days, will consitute an Event of Default under the Indenture, entitling
the Trustee, or holders of not less than 25% of the aggregate princpal amount
of the Senior Notes, to accelerate the maturity date of the Senior Notes.
Such Event of Default will also constitute a default under the Company's
revolving credit facility.
Management believes that so long as negotiations with the holders of the
Senior Notes are continuing, holders of the Senior Notes will not accelerate
the maturity date of the Senior Notes nor will the lender under the Company's
revolving credit facility refuse to extend credit under the terms of that
facility.
While management is optimistic that additional liquidity can be
generated 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 any 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.
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 December 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: February 12, 1997
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
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 45,896
<SECURITIES> 0
<RECEIVABLES> 8,222,286
<ALLOWANCES> 0
<INVENTORY> 9,901,410
<CURRENT-ASSETS> 19,816,923
<PP&E> 38,871,704
<DEPRECIATION> 0
<TOTAL-ASSETS> 87,021,241
<CURRENT-LIABILITIES> 23,535,234
<BONDS> 68,797,508
0
15,080
<COMMON> 2,500
<OTHER-SE> 14,704,039
<TOTAL-LIABILITY-AND-EQUITY> 87,021,241
<SALES> 17,910,032
<TOTAL-REVENUES> 17,910,032
<CGS> 13,948,636
<TOTAL-COSTS> 13,948,636
<OTHER-EXPENSES> 3,307,580
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,710,657
<INCOME-PRETAX> (2,041,749)
<INCOME-TAX> 28,306
<INCOME-CONTINUING> (2,070,055)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,070,055)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
