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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended July 2, 1995
Commission File Number 0-10886
REXON INCORPORATED
(Exact name of Registrant as specified in its charter)
Delaware 95-4317481
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Progress Plaza
Suite 2110
St. Petersburg, Florida 33701
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(Address of principal executive offices) Zip Code
(813) 896-9609
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
--- ---
At August 1, 1995, Registrant had 10,376,157 shares of Common Stock
outstanding.
(This document contains a total of 15 pages.)
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REXON INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands)
July 2, October 2,
1995 1994
---- ----
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 786 $ 2,045
Trade accounts receivable, less
allowance of $2,122 (1995)
and $1,343 (1994) 37,981 36,885
Inventories 25,423 26,538
Net assets of business held for sale 4,056 0
Prepaid expenses and other current
assets 2,814 2,016
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TOTAL CURRENT ASSETS 71,060 67,484
GOODWILL, LESS ACCUMULATED
AMORTIZATION 0 12,444
PROPERTY, EQUIPMENT AND LEASEHOLD
IMPROVEMENTS 38,100 36,871
Less: Accumulated depreciation and
amortization (26,611) (24,687)
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11,489 12,184
CAPITALIZED SOFTWARE, NET OF
ACCUMULATED AMORTIZATION 0 5,777
OTHER ASSETS 2,042 2,495
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$ 84,591 $100,384
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See Notes to consolidated financial statements.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REXON INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands)
July 2, October 2,
1995 1994
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 35,644 $ 28,148
Accrued other expenses 8,195 9,005
Accrued income taxes 1,467 3,124
Current portion of long-term obligations 20,175 387
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TOTAL CURRENT LIABILITIES 65,481 40,664
LONG-TERM OBLIGATIONS 4,877 18,631
OTHER 1,959 2,643
CONTINGENCIES (Note E)
REDEEMABLE convertible preferred stock, $.01 par value;
authorized 1,000,000 shares; issued and outstanding
480,000 shares at July 2, 1995 and at October 2, 1994 4,800 4,800
COMMON STOCKHOLDERS' EQUITY
Common Stock, $.01 par value;
authorized 15,000,000 shares;
issued and outstanding 10,376,000 shares
at July 2, 1995 and 10,054,000 shares
at October 2, 1994 103 101
Additional paid-in capital -- common stock 51,487 50,129
Accumulated deficit (44,116) (16,584)
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Total Stockholders' Equity 7,474 33,646
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$ 84,591 $100,384
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See Notes to consolidated financial statements.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REXON INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL PERIODS ENDED JULY 2, 1995
AND JULY 3, 1994
(Unaudited)
(in thousands, except per share amounts)
Quarter Ended Nine Months Ended
----------------------- -------------------------
July 2, July 3, July 2, July 3,
1995 1994 1995 1994
-------- -------- -------- --------
Net Sales $ 38,360 $ 49,133 $132,838 $141,861
Cost of Goods Sold 36,338 37,467 109,437 109,906
Other Costs 2,824 0 2,824 0
-------- -------- -------- --------
(802) 11,666 20,577 31,955
-------- -------- -------- --------
Selling, general and administrative 7,025 8,418 20,812 23,413
Research and development 2,173 2,774 6,661 8,317
Other, net 815 366 2,273 893
Restructuring and Reorganization 2,644 0 2,644 0
-------- -------- -------- --------
12,657 11,558 32,390 32,623
-------- -------- -------- --------
Income (loss) before discontinued business
and income taxes (13,459) 108 (11,813) (668)
Income taxes (benefit) (2,060) 12 (2,000) (78)
-------- -------- -------- --------
Income (loss) from continuing operations
before discontinued operations (11,399) 96 ( 9,813) (590)
-------- -------- -------- --------
Discontinued Operations
Income (loss) on discontinued business
(less applicable income taxes of
$10 and $100 for the three and nine months
ended July 3, 1994, respectively) (866) 124 (1,398) 848
Loss on disposal of discontinued business (16,141) 0 (16,141) 0
-------- -------- -------- --------
Net income (loss) (28,406) 220 (27,352) 258
Dividends on preferred stock (60) (60) (180) (145)
-------- -------- -------- --------
Net income (loss) attributable to common stock ($28,466) $160 ($27,532) $113
======== ======== ======== ========
Net income (loss) per share attributable to
Common stock:
Continuing operations ($1.11) $0.01 ($0.97) ($0.07)
Discontinued operations (1.64) 0.01 (1.71) 0.08
======== ======== ======== ========
Net income (loss) per share ($2.75) $0.02 ($2.68) $0.01
Weighted average shares outstanding 10,361 10,535 10,268 10,350
See Notes to consolidated financial statements.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REXON INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JULY 2, 1995
AND JULY 3, 1994
(Unaudited)
(in thousands)
Nine Months Ended
-------------------------------
July 2, July 3,
1995 1994
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OPERATING ACTIVITIES:
Net income (loss): ($27,352) 258
Restructuring, reorganization and other costs 5,468 0
Depreciation and amortization 5,937 6,612
Provision for doubtful accounts 804 927
Accrued and deferred income taxes (1,657) 22
Loss on disposal of business 16,141 0
Changes in operating assets and liabilities:
Accounts receivable (2,933) (2,281)
Inventories and prepaid expenses, net (3,178) (383)
Accounts payable and accrued expenses 4,035 (2,789)
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Net cash provided by (used in) operating activities (2,735) 2,366
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INVESTING ACTIVITIES:
Purchases of property and equipment (2,100) (3,879)
Increase in capitalized software, licenses and other assets (3,140) (4,116)
Cash acquired in acquisition of Cal-Emeritus 0 185
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Net cash used in investing activities (5,240) (7,810)
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FINANCING ACTIVITIES:
Net proceeds from line of credit and long term obligations 5,536 3,666
Proceeds from issuance of common stock 1,360 1,050
Preferred dividends paid (180) (145)
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Net cash provided by financing activities 6,716 4,571
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Decrease in cash and cash equivalents (1,259) (873)
Cash and cash equivalents at beginning of period 2,045 3,273
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Cash and cash equivalents at end of period $ 786 $ 2,400
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See notes to consolidated financial statements.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Nine Months Ended
-----------------
July 2, July 3,
1995 1994
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Cash Paid For:
Interest $1,585 $671
Income Taxes $ -0- $ -0-
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REXON INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited Consolidated Financial Statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. In the opinion of management, adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the period ended July 2, 1995 are not
necessarily indicative of the results that may be expected for the year. For
further information, refer to the consolidated financial statements and notes
thereto for the year ended October 2, 1994, included in the 1994 Annual Report
to Stockholders.
Certain reclassifications have been made to prior year amounts to conform with
current year classifications.
NOTE B -- INVENTORIES
Inventories consist of the following:
July 2, October 2,
1995 1994
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(in thousands)
Raw materials $14,099 $14,255
Work-in-process 5,072 7,870
Finished products 6,252 4,413
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$25,423 $26,538
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NOTE C -- INCOME PER SHARE
Per share data is based on the weighted average number of shares outstanding
and common stock equivalents, excluding those common stock equivalents that
would have the effect of being antidilutive.
Income per share computations limit the assumption of the repurchase of
treasury shares to a maximum of twenty percent of the outstanding shares of the
Company, with the remaining pro forma proceeds, where applicable, being applied
to reduce interest-bearing liabilities. Accordingly, interest expense based on
the Company's average cost of funds is reduced, and net income is increased.
For purposes of the income per share computations, the net income (loss)
attributable to common stock was computed by deducting (adding) preferred stock
dividends from the Company's reported net income (loss) for the period.
NOTE D -- DISCONTINUED OPERATIONS
In the third quarter of fiscal year 1995, the Company entered into discussions
with potential buyers of its software business segment which includes Sytron
Corporation and Rexon Software. An agreement was entered into on July 25, 1995
for the sale of a substantial portion of the assets of Sytron Corporation to
Arcada Software Corporation for $4,500,000. The Company anticipates that the
sale of the remaining operations of such business segment will be completed by
the end of calendar 1995.
The results below for the business segment being divested have been reported
separately as discontinued operations in the consolidated statements of
operations.
Quarter Ended Nine Months Ended
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July 2, July 3, July 2, July 3,
1995 1994 1995 1994
---- ---- ---- ----
Sales $2,704 $3,928 $9,601 $10,937
(Loss) Income before income taxes (866) 134 (1,398) 948
Income tax (benefit) expense -0- 10 -0- 100
Net income (loss) from
discontinued operations (866) 124 (1,398) 848
------ ------ ------ -------
The estimated loss on disposal of the discontinued operations is $16,141,000,
which includes a provision for anticipated operating losses until disposal
totaling approximately $950,000 and goodwill and capitalized software cost.
The net assets and liabilities relating to the software operations have been
segregated on the consolidated balance sheet for the period ended July 2, 1995
from their historical classifications to
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separately identify them at their estimated net realizable value. As
management completed the disposition of most of these assets in August 1995,
and anticipate the remainder to occur in calendar 1995, the net assets of
business held for sale have been classified in current assets.
NOTE E -- LONG TERM DEBT
The Company entered into a secured revolving credit agreement with Sanwa
Business Credit Corporation in October 1994 (amended from time to time through
July 1995) (the "Credit Agreement"), which provides for a total line of credit
of up to $23 million, consisting of advances against eligible domestic and
foreign accounts receivable. The credit agreement has financial covenants that
require the Company to meet a quarterly pre-tax operating profit (loss) level
in the third quarter of not greater than ($4.3) million, a leverage ratio of
5.5 to 1 or less and the actual ratio was 6.21 to 1, and a tangible net worth
equal to or greater than $10.9 million and the actual was $10.9 million. At
July 2, 1995, the Company was out of compliance with the profit and lever or
ratio covenant, and the Company has entered into negotiations with its lender
seeking to modify such covenants. There is, of course, no assurance that the
Company will be successful in these efforts (see discussion in Management's
Discussion and Analysis of Financial Condition and Results of Operations).
As a result of such noncompliance the indebtedness of $19.9 million could be
accelerated by its lender. Accordingly, at July 2, 1995 the borrowings have
been classified as current.
NOTE F -- RESTRUCTURING AND REORGANIZATION, AND OTHER COSTS
During the third quarter, the Company announced the closure of its Solon, Ohio
administration and distribution facility, and its repair center located in
Puerto Rico. The total costs of these closures is approximately $2.6 million,
including $1.6 million for Solon and $1.0 million for Puerto Rico. As of July
2, 1995 accrued closure costs amounted to approximately $1.3 million and is
expected to be incurred in the fourth quarter of fiscal 1995. Accrued costs
are primarily severance costs for employees for which notice of termination was
given during the third quarter.
In addition, during the third quarter the Company completed its closure of Simi
Valley and the Puerto Rico manufacturing facilities and identified inventory
losses associated with these closures and further inventory which was
considered obsolete for the continuing business. These items have been
reported as a separate component of cost of goods due to the nature of the
items noted.
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PART 1. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentages which
certain items of expense or income bear to the Company's net sales.
Percentage of Net Sales
Quarter Ended Nine Months Ended
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7/2/95 7/3/94 7/2/95 7/3/94
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Net sales 100% 100% 100% 100%
Cost of goods sold 95% 76% 82% 77%
Other Costs 7% 0% 2% 0%
Selling, general and administrative 18% 17% 16% 17%
Research & development 6% 6% 5% 6%
Other, net 2% 1% 2% 1%
Restructuring and reorganization expense 7% 0% 2% 0%
Income (loss) before discontinued operations
and income taxes (35%) 1% (9%) (1%)
Income taxes (benefit) (5%) 0% (1%) 0%
Income (loss) from continuing operations
before discontinued operations (30%) 1% (8%) (1%)
Income (loss) on discontinued business (2%) 1% (1%) 1%
Loss on disposal of discontinued business (42%) 0% (12%) 0%
Net income (loss) (74%) 1% (21%) 1%
Net sales decreased by $10.8 million or 22% in the third quarter of fiscal 1995
compared with the same quarter in fiscal 1994 and decreased by $9.0 million or
6% for the first nine months of fiscal 1995 over the same period of fiscal
1994. The decrease in revenues was principally due to the continuing softness
in the markets for the Company's lower-capacity drive products, which was
caused, in substantial part, by market uncertainties resulting from the
introduction of the new TRAVAN format tape drives. The Company's objective is
to increase revenues through the introduction of its new TRAVAN products.
Cost of goods sold as a percentage of net sales increased to 95% from 76% in
the third quarter of fiscal 1995 and increased to 82% from 77% for the first
nine months of fiscal 1995. The significant decrease in third quarter revenues
was principally responsible for the major increase in the cost of goods sold as
a percentage of net sales, as average selling prices and gross margins declined
significantly due to the adverse market conditions noted above. The Company
plans to improve gross margins through the introduction of its new products,
including TRAVAN and by reducing the cost of its product by reducing factory
overhead (closure of Solon) and by redesigning its products to take advantage
of lower cost materials.
In addition, during the third quarter the Company completed its closure of Simi
Valley and the Puerto Rico manufacturing facilities and identified inventory
losses associated with these closures and further inventory which was
considered obsolete for the continuing business.
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These items have been reported as a separate component of cost of goods due
to the nature of the items noted.
Selling, general and administrative expenses increased to 18% from 17% of net
sales for the third fiscal quarters of fiscal 1995 and 1994, respectively,
while decreasing to 16% from 17% for the first nine months of fiscal 1995
versus the first nine months of fiscal 1994. Actual selling, general and
administrative expense decreased by $1.4 million, or 17%, for the third fiscal
quarter of 1995 as compared to the third fiscal quarter of 1994, and decreased
by $2.6 million, or 11%, for the first nine months of fiscal 1995 compared with
the first nine months of fiscal 1994. These reductions results from the
Company's restructuring plan, including facilities closure and reduced
headcount.
Research and development expenditures remained constant at 6% of net sales for
the third fiscal quarter of fiscal 1995 and fiscal 1994, while decreasing to 5%
for the first nine months of fiscal 1995 from 6% for the first nine months of
fiscal 1994. The Company continues to work on the development of new products,
such as the TRAVAN product line, and cost reduced versions of the Company's
existing products. Headcount reductions resulting from the Company's
restructure plan account for the fall in absolute terms from the prior year.
During the third quarter, the Company announced the closure of its Solon, Ohio
administration and distribution facility, and its repair center located in
Puerto Rico. The total costs of these closures is approximately $2.6 million,
including $1.6 million for Solon and $1.0 million for Puerto Rico. As of July
2, 1995, accrued closure costs amounted to approximately $1.3 million and is
expected to be incurred in the fourth quarter of fiscal 1995. Accrued costs
are primarily severance costs for employees for which notice of termination was
given during the third quarter.
Income from continuing operations before income taxes as a percent of net sales
decreased to (35%) in the third quarter of fiscal 1995 from 1% in the third
quarter of fiscal 1994, while decreasing to (9%) from (1%) for the first nine
months of fiscal 1995 as compared to the first nine months of fiscal 1994. The
results of the third fiscal quarter of 1995 were significantly impacted by the
reorganization and restructuring and other costs incurred, as well as the
significant revenue and gross margin declines previously discussed.
As of July 2, 1995, the Company's balance of cash and cash equivalents was $0.8
million compared to $2.0 million at October 2, 1994. For the first nine months
of fiscal 1995, net cash used by operating activities amounted to $2.7 million
after taking into account an increase of $2.9 million in accounts receivable, a
$3.2 million increase in inventories and prepaid expenses and a $4.0 million
increase in accounts payable and accrued expenses. Major cash expenditures for
investing activities for the period included the purchase of $2.1 million of
capital equipment. Cash generated from financing activities include $5.5
million provided from the Company's line of credit and $1.4 million from
issuance of common stock.
The Company entered into a secured revolving credit agreement with Sanwa
Business Credit Corporation in October 1994 (amended from time to time through
July 1995) (the "Credit Agreement"), which provides for a total line of credit
of up to $23 million, consisting of advances against eligible domestic and
foreign accounts receivable. The advances under the credit agreement are
limited to eighty percent (80%) of eligible domestic accounts and sixty percent
(60%) of eligible foreign accounts up to a maximum advance on eligible foreign
accounts of $10
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million. The credit agreement has financial covenants that require the Company
to meet quarterly profit levels, specified leverage ratios, and certain levels
of tangible net worth. At July 2, 1995, the Company was out of compliance with
the required financial covenants (see Note E of Notes to Financial Statements),
and the Company has entered into negotiations with its lender seeking to
modify such covenants. The Company believes that such lender would be willing
to enter into a further amendment to the Credit Agreement to bring the Company
into compliance if it is successful in raising additional working capital
through the placement of debt and/or the issuance of additional securities, and
the Company is presently taking efforts in this regard. There is, of course,
no assurance that the Company will be successful in these efforts nor that,
even if successful, a Credit Agreement amendment will be completed;
furthermore, any such financing could be materially dilutive to the existing
stockholders. Pursuant to such proposed new financing, the Company is also
seeking to modify payment terms to certain of its major vendors, and believes
it necessary to issue common stock purchase warrants in this regard. The
completion of such new financing is deemed to be essential to the Company.
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PART II. OTHER INFORMATION
ITEMS 1 THROUGH 5 - Not Applicable
ITEM 6 - Exhibits and Reports on Form 8-K
(a) The following exhibits are included herein:
10.1 Fifth Amendment to Loan and Security Agreement,
dated May 15, 1995.
10.2 Sixth Amendment to Loan and Security Agreement,
dated July 1995.
10.3 Asset Purchase Agreement by and among Rexon, Incorporated,
Sytron Corporation and Arcada Software, Inc.
11.1 Statement of Computation of Per Share Earnings.
(b) No reports on Form 8-K were filed during the fiscal quarter covered by
this Report on Form 10-Q.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REXON INCORPORATED
(Registrant)
Dated: August 15, 1995 /s/Irvin R. Reuling
-----------------------------------
Irvin R. Reuling
Chief Financial Officer & Secretary
(Principal Financial and
Accounting Officer)
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