1
EXHIBIT T3E-13
SAN JACINTO HOLDINGS INC. AND SUBSIDIARY
CONSOLIDATED QUARTERLY FINANCIAL STATEMENTS
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997
TABLE OF CONTENTS
Page
----
Chairman's Letter 1 - 2
Report of the Chief Financial Officer 3 - 5
Financial Statements & Notes 6 - 11
The accompanying unaudited interim consolidated financial
statements were prepared on a consistent basis utilizing the
accounting policies described in the Summary of Significant
Accounting Policies included in the notes to the consolidated
financial statements in the Company's 1996 Annual Report. These
policies and the Notes to Consolidated Financial Statements should
be read in conjunction with the accompanying statements. These
interim statements have been drawn from unaudited internal data and
include all adjustments which the Company believes necessary to a
fair presentation of the statements. The interim operating results
are not necessarily indicative of the results expected for the full
year.
Management's Discussion and Analysis of Financial, Condition 12 - 15
and Results of Operations
2
November 14, 1997
TO ALL STOCKHOLDERS AND BONDHOLDERS:
Enclosed are the consolidated financial statements of San Jacinto
Holdings, Inc. (the "Company") and its operating subsidiary, Safeguard Business
Systems, Inc. ("Safeguard") for the three and nine month periods ended September
30, 1997 and September 30, 1996.
Operating earnings in the third quarter improved significantly over
second quarter results. EBITDA was $4.2 million compared to the second quarter
level of $2.5 million. The third quarter result was approximately the same as
the comparable period in 1996. In the report of the Chief Financial Officer,
which follows, you will find a complete discussion of overall financial results
and trends including sales and earnings.
We reported to you in my letter of August 15, included in the report
for the second quarter, that substantial senior management changes were
undertaken in early August and then continued throughout August and September.
We have now completed our senior management realignments and expect no further
changes or additions in the foreseeable future. The management priorities
summarized in my previous letter are being adhered to and we are experiencing
significant improvements in the Company's overall operations. Management's
commitment to these fundamentals will remain in place. I am pleased to report
that the working relationships with our independent distributors have improved
significantly during the past 60 days. We will build upon those relationships in
a positive and constructive manner in the months and years ahead.
3
In early September we conducted a conference call for investors to
permit a thorough discussion of the second quarter and year to date results at
that time. We committed that such conference calls for investors would be held
following the distribution of each quarterly report in future periods. We
anticipate that the next such call will be in early December and our Chief
Financial Office, Mike Magill, will be providing specific information with
respect to the arrangements of that call in the near future.
Safeguard is positioned well in the small business market to achieve
meaningful future progress. I fully expect the Company to retain a high level of
stability and to report further progress in ensuing quarters. We appreciate your
continued support.
Sincerely,
Elvis L. Mason
Chairman & C.E.O.
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REPORT OF THE CHIEF FINANCIAL OFFICER
FINANCIAL AND OPERATING HIGHLIGHTS
Net sales for the third quarter of 1997 are $50.7 million, reflecting
growth of $0.7 million or 1.4% from the same quarter in 1996. For the nine
months of 1997, net sales are $154.3 million reflecting a $0.7 million increase
above sales levels of $153.6 million for the comparable period in 1996. The nine
months' sales results reflect a 4.3% and 13.7% growth in sales of computer forms
and sourced products (products produced by other vendors and sold through
Safeguard), respectively. This growth is off-set by a 6.4% decline in manual
form sales. The changes in sales trends from manual forms to computer forms and
sourced products continues to be addressed strategically and operationally
throughout the Company.
Earnings from operations before amortization, depreciation, interest
and income taxes (EBITDA) for the quarter ended September 30,1997 are $4.2
million which approximates the 1996 level. EBITDA for the nine months ended
September 30, 1997 was $11.7 million compared to $14.2 million for the
comparable nine month period in 1996. The decline in operating results for the
nine month period September 30, 1997 is attributable to a 5.3% decline in gross
profit. The reduction in gross profit is a result of increased material costs
attributable to the shift in product mix, and increased overhead costs
associated with equipment costs in support of the technological advances in the
Company's computer systems. Administrative costs for the nine months of 1997
have also increased as a result of additional equipment costs in support of the
Company's computer hardware and software enhancements.
3
5
Excluding the impact of non-recurring expenses (income) items noted
below, the Company's earnings from operations for the nine month period ended
September 30, 1997 approximate the earnings level for the same period in 1996.
1997 1996
---- ----
($000 Omitted)
EBITDA $11,650 $ 14,153
Non-recurring operating expense (income):
Computer system conversion costs 2,475 --
UPS strike 500 --
Litigation costs -- 1,200
Gain on sale of a facility in Europe -- (675)
------- --------
Adjusted EBITDA $14,625 $ 14,678
======= ========
The technological advances achieved through the conversion and redesign
of the Company's computer system represent investments by the Company to improve
long term operating results through operational efficiencies and cost avoidance.
The manufacturing efficiencies achieved in 1997 include the consolidation of the
Addison, Illinois operations with the East coast facilities, and the
consolidation in the East coast of the order processing functions (order entry,
customer service and composition).
During the third quarter of 1997, United Parcel Service ("UPS") went on
strike which materially disrupted the delivery of products to our customers.
This disruption had a negative impact on operations for the quarter and cost the
Company an estimated $500,000 in additional expenses. These expenses were
non-budgeted and non-recurring in nature.
In 1996, the Company reached an agreement to settle its California
litigation. The settlement of this lawsuit significantly reduced the Company's
on-going legal costs, which had been primarily directed in the defense of this
case.
4
6
The Company's operations in Europe remain strong. Net sales for the
nine months of 1997 are $1.1 million or 7.9% above 1996 levels. This growth is
in both manual forms and sourced product sales. Earnings from operations are
$1.7 million, which is $0.5 million or 39.2% above the earnings in the nine
months of 1996, excluding the $0.7 gain on the sale of an existing manufacturing
facility in June of 1996.
The Company's net loss before extraordinary item is $6.0 million in the
third quarter of 1997 compared to a loss of $5.4 million for the same period in
1996. The loss for the nine month period is $19.2 million compared to a loss of
$14.9 million in 1996. The decline in operating results as discussed above is
attributable to a decline in gross profit and an increase in administrative and
interest expenses. These losses include amortization (non-cash charges) of $14.5
million for the nine months of 1997 and $14.3 million for the same period in
1996.
The Company has celebrated over 40 years of leadership in the small
business arena serving the marketplace as a leading manufacturer and distributor
of business information systems, forms and checks with a total service approach.
Safeguard's management and employees are dedicated to maintaining and expanding
this preeminent position in the small business marketplace in the coming years.
We appreciate your continuing support.
Sincerely,
Michael D. Magill
Senior Vice President
Chief Financial Officer
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SAN JACINTO HOLDINGS INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
($000 omitted)
(Unaudited)
September 30, December 31,
1997 1996
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 1,813 $ 482
Receivables less allowances 27,628 27,912
Inventories 7,851 8,678
Other current assets 1,898 2,480
--------- ---------
Total current assets 39,190 39,552
Property, machinery and equipment - net 20,069 20,855
Excess purchase price over net assets acquired 42,140 43,225
Customer list 4,318 17,273
Other assets 3,166 2,813
--------- ---------
$ 108,883 $ 123,718
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Current debt obligations $ 9,151 $ 8,708
Accounts payable 17,654 14,476
Accrued expenses 13,183 16,572
--------- ---------
Total current liabilities 39,988 39,756
Long-term debt 114,116 110,017
Other liabilities 8,014 7,631
Stockholders' deficiency:
Preferred stock:
$5.00 Junior Preferred Stock, par value $.01 a share
Authorized 1,000,000 shares, $5 cumulative
No shares issued and outstanding
Common stock, par value $.01 a share:
Authorized 2,000,000 shares,
Issued and outstanding 1,052,384 shares 11 11
Additional paid-in capital 94,143 94,143
Deficit (146,241) (126,880)
Foreign currency translation adjustment (1,148) (960)
--------- ---------
Total stockholders' deficiency (53,235) (33,686)
--------- ---------
Total liabilities and stockholders' deficiency $ 108,883 $ 123,718
========= =========
See notes to consolidated financial statements.
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SAN JACINTO HOLDINGS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
($000 omitted)
(Unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
---- ---- ---- ----
Net Sales $ 50,736 $ 51,443 $ 154,340 $ 153,652
Cost of sales 24,949 23,625 76,165 71,114
-------- -------- --------- ---------
Gross profit 25,787 27,818 78,175 82,538
Selling expense 19,231 20,707 59,416 60,541
General & administrative expense 4,507 4,797 13,988 13,455
Other income - cash received greater than
carrying value of distributor receivables (450) (550) (1,439) (1,650)
Amortization expense 4,814 4,572 14,450 14,338
Interest expense 3,627 3,595 11,006 10,565
-------- -------- --------- ---------
Loss from operations before income taxes
and extraordinary item (5,942) (5,303) (19,246) (14,711)
Income tax provision 88 84 115 224
-------- -------- --------- ---------
Loss before extraordinary item (6,030) (5,387) (19,361) (14,935)
Extraordinary item:
Gain on early extinguishment of debt -- -- -- 2,401
-------- -------- --------- ---------
Net Loss $ (6,030) $ (5,387) $ (19,361) $ (12,534)
======== ======== ========= =========
See notes to consolidated financial statements.
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SAN JACINTO HOLDINGS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PERIOD FROM JANUARY 1, 1996
TO SEPTEMBER 30, 1997
($000 omitted)
(Unaudited)
Foreign
Additional Currency
Preferred Stock Common Stock Paid-In Translation
Shares Amount Shares Amount Capital Deficit Adjustment
------ ------ ------ ------ ---------- ------- -----------
Balance -
January 1, 1996 - $ - 999,960 $ 10 $ 94,143 $ (104,591) $ (1,292)
Net loss (22,289)
Issuance of common
stock in conjunction
with exchange offer 52,424 1
Unrealized gain on
foreign currency
translation 332
------ ------ --------- ------ ---------- ----------- -----------
Balance -
December 31, 1996 - - 1,052,834 11 94,143 (126,880) (960)
Net loss (19,361)
Unrealized loss on
foreign currency
translation - - - - - - (188)
------ ------ --------- ------ ---------- ----------- -----------
Balance -
September 30, - $ - 1,052,384 $ 11 $ 94,143 $ (146,241) $ (1,148)
====== ====== ========= ====== ========== =========== ===========
See notes to consolidated financial statements.
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SAN JACINTO HOLDINGS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
($000 omitted)
(Unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
Cash Flows from Operating Activities:
Net Loss $(6,030) $(5,387) $(19,361) $(12,534)
Adjustments to reconcile net loss to cash
provided by operating activities:
Extraordinary item -- -- -- (2,401)
Amortization 4,814 4,572 14,450 14,338
Depreciation 1,674 1,287 5,440 3,961
(Gain) loss on sale of assets -- -- 67 (725)
Unrealized exchange gain (loss) (114) (29) (188) 34
(Increase) decrease in operating assets:
Receivables 1,876 (881) 284 692
Inventories 655 198 827 638
Other assets (287) 797 (1,037) 1,300
Increase (decrease) in operating liabilities
Accounts payable (1,754) (264) 3,179 (539)
Accrued expense and other liabilities (3,517) 1,730 (2,993) 2,548
------- ------- -------- --------
Net cash provided by (used in) operating activities (2,683) 2,023 668 7,312
Cash Flows from Investing Activities:
Purchase of property, machinery and equipment (92) (1,644) (3,680) (5,071)
Proceeds from sales of assets -- -- 787 1,176
Adjustment due to currency fluctuations
and foreign purchase price adjustments 136 (79) 379 (50)
------- ------- -------- --------
Net cash provided by (used in) investing activities 44 (1,723) (2,514) (3,945)
------- ------- -------- --------
Cash Flows from Financing Activities:
Repayment of long-term debt and capital
lease obligations (2,439) (1,859) (7,123) (21,199)
Borrowings from (repayment of) revolving loans 6,526 1,410 9,890 17,067
Net proceeds from (repayment of) foreign obligations (724) (43) 410 137
Deferred financing costs -- -- -- (1,530)
------- ------- -------- --------
Net cash provided by (used in) financing activities 3,363 (492) 3,177 (5,525)
------- ------- -------- --------
Increase (decrease) in cash and cash equivalents 724 (192) 1,331 (2,158)
Cash and cash equivalents at beginning of period 1,089 836 482 2,802
------- ------- -------- --------
Cash and cash equivalents at end of period $ 1,813 $ 644 $ 1,813 $ 644
======= ======= ======== ========
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SAN JACINTO HOLDINGS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
($000 omitted)
(Unaudited)
(Continued)
Supplemental disclosure of non-cash investing and financing activities:
Capital lease obligations of $1,354 and $1,837 were entered into during
the nine months of 1997 and 1996 respectively, to acquire machinery,
equipment and software.
Supplemental disclosure of cash flow information:
Three Months Nine Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
---- ---- ---- ----
Earnings Before Interest, Taxes, Depreciation &
Amortization (EBITDA) $4,173 $4,151 $11,650 $14,153
Earnings Before Interest, Taxes & Amortization
(EBITA) $2,499 $2,864 $ 6,210 $10,192
Cash paid during the period for:
Interest $5,568 $4,853 $ 8,904 $ 8,734
See notes to consolidated financial statements
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SAN JACINTO HOLDINGS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
(Unaudited)
NOTE A. UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS:
Basis of presentation - The accompanying interim financial statements
have been prepared by the Company without audit. These statements
include all adjustments which management believes necessary for a fair
presentation of the statements and have been prepared on a consistent
basis using the accounting policies described in the Summary of
Significant Accounting Policies in the notes to the consolidated
financial statements included in the Company's 1996 audited financial
statements. These policies and notes to consolidated financial
statements should be read in conjunction with the accompanying interim
financial statements. The interim operating results are not necessarily
indicative of the operating results expected for the full year. The
accompanying financial statements as of and for the year ended December
31, 1996 are derived from the Company's audited financial statements as
of that date.
NOTE B. INVENTORIES:
Inventories consist of the following: September 30, 1997 December 31, 1996
------------------ -----------------
($000 omitted)
Raw Material $4,148 $5,327
Work-in-process 278 352
Finished Goods 3,425 2,999
------ ------
Total $7,851 $8,678
====== ======
NOTE C. LONG-TERM DEBT: September 30, 1997 December 31, 1996
-------------- ------------------ -----------------
($000 omitted)
Revolving Loans - Secured $ 20,915 $ 17,525
Revolving Loan - Unsecured 6,500 -
Term Loan 5,617 6,500
Amended Exchange Loan 18,662 22,633
12% Senior Subordinated Notes 65,878 65,878
8% Senior Subordinated Notes 3 3
8% Subordinated Debentures 334 321
Capital lease obligations 1,602 2,519
Foreign obligations 3,756 3,346
--------- --------
123,267 118,725
Less current debt obligations (9,151) (8,708)
--------- --------
Total $ 114,116 $110,017
========= ========
On July 29, 1997, Safeguard amended the revolving loan agreements with
its bank. The amended agreements provide for an additional $4.0 million
in short-term borrowing capacity. The Revolving Loan under the Loan and
Security Agreement (the "Revolving Facility"), secured by eligible
accounts receivable and inventories, was amended to provide a $1.5
million overadvance. The overadvance will be repaid in December 1997,
as amended on October 1, 1997. The $4.0 million Revolving Loan was
amended to allow for borrowings up to $6.5 million. The borrowing
capacity will be reduced by $0.1 million per month beginning January 1,
1998 until it is reduced to $4.0 million.
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SAN JACINTO HOLDINGS INC. AND SUBSIDIARY
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
RESULTS OF OPERATIONS
The following commentary presents management's discussion and analysis of the
Company's financial condition and results of operations. Certain of the
statements included below, including those regarding future financial
performance or results, or that are not historical facts, are or contain
"forward-looking" information as that term is defined in the Securities Act of
1933, as amended. The words "expect", "believe", "anticipate", "project",
"estimate", and similar expressions are intended to identify forward-looking
statements. The Company cautions readers that any such statements are not
guarantees of future performance or events and such statements involve risks,
uncertainties and assumptions, including but not limited to industry conditions,
general economic conditions, interest rates, competition, ability of the Company
to successfully manage its growth, and other factors discussed below and in the
Company's Annual Report for the year ended December 31, 1996 and quarterly
reports for the quarters ended March 31, 1997 and June 30, 1997. Should one or
more of these risks or uncertainties materialize or should the underlying
assumptions prove incorrect, those actual results and outcomes may differ
materially from those indicated in the forward-looking statements. This review
should be read in conjunction with the information provided in the financial
statements, accompanying notes and selected financial data appearing in the
Company's Annual Report for the year ended December 31, 1996 and the quarterly
reports for the quarters ended March 31, 1997 and June 30, 1997.
The following table sets forth, for the periods indicated, selected financial
data as a percentage of net sales.
Three Month Period Nine Month Period
Ended September 30, Ended September 30,
1997 1996 1997 1996
---- ---- ---- ----
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 49.2 45.9 49.3 46.3
Gross profit 50.8 54.1 50.7 53.7
Selling expense 37.9 40.3 38.5 39.4
General & administrative expense 8.9 9.3 9.1 8.8
Other income - distributor receivables (0.9) (1.1) (0.9) (1.1)
Amortization expense 9.5 8.9 9.4 9.3
Interest expense 7.1 7.0 7.1 6.9
Loss from operations before income taxes
and extraordinary item (11.7) (10.3) (12.5) (9.6)
Income tax provision 0.2 0.2 -- 0.2
Loss before extraordinary item (11.9) (10.5) (12.5) (9.8)
Extraordinary item -- -- -- 1.6
Net loss (11.9)% (10.5)% (12.5)% (8.2)%
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SAN JACINTO HOLDINGS INC. AND SUBSIDIARY
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
COMPARISON OF THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997, AND FOR
THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996.
NET SALES. Net sales for the third quarter of 1997 are $50.7 million compared to
$51.4 million for the same period in 1996, representing a sales decline of 1.4%.
For the nine months of 1997, net sales are $154.3 million, reflecting growth of
$0.7 million in comparison to 1996. The sales growth during the nine months
reflects a 4.3% growth in computer forms and a 13.7% growth in sourced product
sales. This growth is partially off-set by the continuing decline in manual
forms sales. Approximately 70% of the growth in computer forms is related to
volume increases, with the remainder attributable to price increases. The
decline in manual forms sales is off-set in part by a 3.2% average price
increase.
The Company's sales growth in 1997 has been influenced by several factors. The
Company's computer hardware and software system conversion, initiated in the
first quarter of 1997, delayed implementation of certain marketing programs
intended to positively effect sales. In addition, a significant amount of
communications with the Company's distributor network occurred during the second
quarter of 1997 regarding proposed changes to its distribution channel; analysis
indicates that the distributors' sales performance was adversely effected by
these announcements. The Company's ships approximately 80% of its products via
UPS. The UPS strike, which occurred in the third quarter of 1997, resulted in
delays in shipment of products which shifted the Company's sale forces focus
from soliciting orders to customer delivery concerns. The nine months of 1997
includes one less work day resulting in less time for plant production than in
the same period in 1996.
GROSS PROFIT. Gross profit margin is 50.8% of net sales for the third quarter of
1997 and 54.1% in 1996. For the nine months, the gross margin is 50.7% of net
sales in 1997 compared to 53.7% in 1996. Gross profit is before selling and
administrative expenses, including commission expense. The decline in gross
profit margin is attributable to the change in the Company's product mix from
manual forms sales to computer forms and sourced products as indicated in the
table below.
Three Month Period Nine Month Period
Ended September 30, Ended September 30,
1997 1996 1997 1996
---- ---- ---- ----
Manual Forms 62.3% 67.4% 62.5% 67.8%
Computer Forms 49.5 49.7 48.7 48.7
Payroll & Data Processing Services 8.9 (1.4) 9.4 3.0
Sourced Products 37.5 42.2 37.5 41.9
---- ---- ---- ----
Total 50.8% 54.1% 50.7% 53.7%
==== ==== ==== ====
Computer forms and sourced products, high growth product lines, carry greater
material, direct labor and overhead costs (as a percentage of sales) resulting
in lower gross profit margin than for manual forms. Overhead costs have also
increased in 1997 as a result of additional equipment costs in support of
technological advances in the computer systems.
SELLING EXPENSE. Selling expenses are $19.2 million in the third quarter of 1997
compared to $20.7 million for the same period in 1996, representing 37.9% and
40.3% of net sales in each period. For the nine months, selling expenses are
$59.4 million in 1997 compared to $60.5 million in 1996, representing 38.5% and
39.4% of net sales in each period. Commissions to independent distributors
account for approximately 80% of total selling costs and, as a percent of total
sales, has remained constant. The dollar decline in selling costs is
attributable to the postponement of certain marketing programs partially offset
by increased computer equipment costs and commission costs associated with the
Company's sales growth for the nine month period.
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SAN JACINTO HOLDINGS INC. AND SUBSIDIARY
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
RESULTS OF OPERATIONS - Continued
GENERAL AND ADMINISTRATIVE. General and administrative expenses are $4.5 million
for the third quarter of 1997 compared to $4.8 million in 1996. For the nine
months, general and administrative expenses are $14.0 million in 1997 and $13.5
million in 1996. The 4% increase in costs for the nine month period is due to
greater temporary salary and administrative costs associated with the system
conversion and the impact of the UPS strike, partially off-set by legal and
benefit cost reductions. In addition, nine month period in 1996 include $0.7
million gain on the sale of a production facility in the United Kingdom.
OTHER INCOME - Distributor Receivables. Other income (cash received greater than
carrying value of Distributor receivables) is $0.5 million for the third quarter
1997 and $0.6 million for the same period in 1996, representing 0.9% of net
sales in 1997 and 1.1% in 1996. Other income for the nine month period is $1.4
million in 1997 and $1.7 million in 1996. In connection with the Company's
purchase price allocation for the acquisition of Safeguard in December 1986, the
value assigned to distributor receivables associated with loans and advances
previously made by Safeguard to facilitate the purchase of account protection
and future income rights by distributors was $4.8 million, net of deferred
interest income of approximately $7.8 million. This value was primarily based on
an independent valuation of the distributor receivables which aggregated
approximately $26.0 million as of December 31, 1986. Due to the effect of
collection and distributor advance policies instituted in 1988, the net
distributor receivables balance was reduced to zero by early 1992. Cash
collection of this distributor receivable are expected to continue in amounts
approximating $2.0 million through the year 2000.
AMORTIZATION EXPENSE. Amortization expense is $4.8 million for the third quarter
of 1997 and $4.6 million in 1996. Amortization expense is $14.5 million and
$14.3 million for the nine months of 1997 and 1996, respectively. The expense
consists primarily of the amortization of intangible assets, including the
customer list, excess purchase price over net assets acquired and deferred
financing costs.
INTEREST EXPENSE. Interest expense is $3.6 million for the third quarter of 1997
and 1996. For the nine months, interest expense is $11.0 million in 1997 in
comparison to $10.6 million in 1996. The increase in interest expense in 1997 is
attributable to the rise in the Company's average outstanding borrowings.
INCOME TAX PROVISION. The Company's provision for income tax is related to its
operations in the United Kingdom. No tax liability is incurred in the United
States as a result of net losses from operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are cash flows generated from
operations, cash on hand and borrowing capacity under the revolving loans. The
Company's cash flows from operating activities provided $0.7 million in the nine
months of 1997. As of September 30, 1997, the Company had $1.8 million in cash
and cash equivalents, $1.1 million in availability under the revolving loans. At
that date, the Company had a working capital deficiency of $0.8 million and a
ratio of current assets to current liabilities of 0.98:1.
Liquidity during 1997 has been adversely affected by the billing problems
associated with the conversion of the Company's computer systems to the AS400
platform. The Company suspended its normal credit collection procedures pending
a stabilization of the systems associated with the billing process. This
suspension had an adverse impact on days sales outstanding ("receivable turn")
which adversely impacted cash flow. The Company has reinstated those collection
procedures and anticipates improved cash flow consistent with its historic
receivable turn.
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SAN JACINTO HOLDINGS INC. AND SUBSIDIARY
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
LIQUIDITY AND CAPITAL RESOURCES - Continued
Reductions in expenses and increased borrowings under the Company's banking
facilities allowed the Company to reduce its accounts payable and accrued
expenses by $1.8 million and $3.5 million, respectively, during the third
quarter of 1997. Improvements in cash flow are expected to continue as expense
reduction and receivable turn improve in the subsequent periods.
The Company's ongoing liquidity requirements arise primarily from capital
expenditures, working capital needs and debt service. The Company's capital
expenditures for the nine months of 1997 are $5.0 million in equipment purchases
and software development costs. The Company anticipates total capital
expenditures in 1997 of $5.5 million, which include the completion of the
installation of an integrated computerized order entry system, the installation
of sales force automation system, and the upgrade of existing manufacturing
production equipment. These expenditures will be funded through additional
capital lease obligations and cash flow from operations.
At the end of the second quarter, the Company notified its bondholders that the
interest payment due June 30, 1997 would be postponed pursuant to the 30 day
grace period allowed pursuant to the Indenture Agreement on the 12% Subordinated
Bonds. This notice was sent pending completion of proposed changes in existing
senior lenders' credit agreements with Safeguard to compensate for the
unexpected operating problems. The interest payment was made to all bondholders
of record during the grace period and no default occurred. During the grace
period the Company amended its credit facilities to provide for a $4.0 million
increase in short-term borrowing capacity with its financial institutions (see
Note C to the financial statements) which provided sufficient funds for the
Company to make its interest payment to its bondholders. As indicated in Note C
to the financial statements, the Revolving Facility was amended during the third
quarter to extend the $1.5 million overadvance, adjust covenants, and increase
the interest rate on the working capital facility from prime plus 1% to prime
plus 1.25%. Future interest payments of the Company are expected to be made out
of improved operating results and cash flow as well as any asset sales which
might be made, although the ability to accurately project futures sales volume,
and events outside of the Company's control could have an impact on future
interest payments. The Company has met all of its debt obligations and is not
currently in default of any of its loan agreements. The Company continues to
monitor its cash position and believes that sufficient funding alternatives
exist to meet its current obligations as they come due.
15