<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------
POST-EFFECTIVE AMENDMENT NO. 12
TO
FORM T-3
FOR APPLICATIONS FOR QUALIFICATION OF INDENTURES
UNDER THE
TRUST INDENTURE ACT OF 1939
-----------------------------
SAN JACINTO HOLDINGS INC.
(NAME OF APPLICANT)
2121 San Jacinto Street, Suite 1000
Dallas, Texas 75201
(Address of Principal Executive Offices)
-----------------------------
SECURITIES ISSUED UNDER
THE INDENTURE QUALIFIED
Title of Class Amount
-------------- ------
12% Senior Subordinated Notes Maximum of
Due December 31, 2002 $66,138,406
Name and Address of Agent
for Service of Process:
Elvis L. Mason
San Jacinto Holdings Inc.
2121 San Jacinto Street, Suite 1000
Dallas, Texas 75201
with a copy to:
J. Kenneth Menges, Jr., P.C.
Akin, Gump, Strauss, Hauer & Feld, L.L.P.
1700 Pacific Avenue, Suite 4100
Dallas, Texas 75201-4618
Effective Date of Form T-3: January 25, 1996
This Document Consists of ____ Pages
Exhibit Index Begins on Page ____
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August 24, 1998
POST-EFFECTIVE AMENDMENT NO. 12 TO FORM T-3
Filed herewith as Exhibit T3E-16 is the Quarterly Financial Statements for the
three and six month periods ended June 30, 1998 of San Jacinto Holdings Inc.
(the "Company") and Safeguard Business Systems, Inc. which is required to be
furnished to holders of the Company's 12% Senior Subordinated Notes (the "New
Notes") and filed with the Securities and Exchange Commission pursuant to
Section 4.03 of the indenture between the Company and U.S. Trust Company of
Texas, N.A., as Trustee which governs the New Notes of the Company.
THE DATE OF THIS POST-EFFECTIVE AMENDMENT NO. 12 TO FORM T-3 IS AUGUST 12, 1998.
<PAGE> 3
Contents of Application for Qualification. This application for qualification
comprises:
(a) One page, numbered 1.
** (b) The Statement of Eligibility and Qualification of U.S. Trust
Company of Texas, N.A. as trustee under the New Notes
Indenture to be qualified.
(b) The following exhibits in addition to those filed as part of
the Statement of Eligibility and Qualification of the trustee.
** EXHIBIT T3A - Certificate of Incorporation, with all amendments
thereto, of the Company.
** EXHIBIT T3B - Amended and Restated By-laws of the Company.
** EXHIBIT T3C-1 - Indenture dated as of ___________, 1995, between the
Company and U.S. Trust Company of Texas, N.A., as Trustee.
** EXHIBIT T3C-2 - Indenture dated as of ____________, 1995, between the
Company and U.S. Trust Company of Texas, N.A., as Trustee pursuant to
the Supplement to Exchange Offer and Consent Solicitation.
** EXHIBIT T3C-3 - Indenture dated as of _____________, 1996, between the
Company and U.S. Trust Company of Texas, N.A., as Trustee pursuant to
the Third Supplement to Exchange Offer and Consent Solicitation.
** EXHIBIT T3C-4 - Amended Indenture dated as of January 26, 1996, between
the Company and U.S. Trust Company of Texas, N.A., as Trustee.
EXHIBIT T3D - Not Applicable.
** EXHIBIT T3E-1 - Exchange Offer and Consent Solicitation.
** EXHIBIT T3E-2(a) - Form of Letter of Transmittal to holders of the
Company's 8% Senior Subordinated Notes due December 31, 2000.
** EXHIBIT T3E-2(b) - Form of Letter of Transmittal to holders of the
Company's 8% Subordinated Debentures due December 31, 2000.
** EXHIBIT T3E-2(c) - Form of Letter of Transmittal to holders of the
Company's 8% Senior Subordinated Notes due December 31, 2000 pursuant
to the Supplement to Exchange Offer and Consent Solicitation.
** EXHIBIT T2E-2(d) - Form of Letter of Transmittal to holders of the
Company's 8% Subordinated Debentures due December 31, 2000 pursuant to
the Supplement to Exchange Offer and Consent Solicitation.
** EXHIBIT T3E-2(e) - Form of Letter of Transmittal to holders of the
Company's 8% Senior Subordinated Notes due December 31, 2000 pursuant
to the Third Supplement to Exchange Offer and Consent Solicitation.
** EXHIBIT T3E-2(f) - Form of Letter of Transmittal to holders of the
Company's 8% Subordinated Debentures due December 31, 2000 pursuant to
the Third Supplement to Exchange Offer and Consent Solicitation.
** EXHIBIT T3E-3(a) - Form of Notice of Guaranteed Delivery to be provided
to holders of the Company's 8% Senior Subordinated Notes due December
31, 2000.
** EXHIBIT T3E-3(b) - Form of Notice of Guaranteed Delivery to be provided
to holders of the Company's 8% Subordinated Debentures due December 31,
2000.
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** EXHIBIT T3E-3(c) - Form of letter to Brokers, Dealers, Commercial
Banks, Trust Companies and Other Nominees.
** EXHIBIT T3E-3(d) - Form of letter to be sent by Brokers, Dealers,
Commercial Banks, Trust Companies and Other Nominees to their clients.
** EXHIBIT T3E-3(e) - Form of Notice of Guaranteed Delivery to be provided
to holders of the Company's 8% Senior Subordinated Notes due December
31, 2000 pursuant to the Supplement to Exchange Offer and Consent
Solicitation.
** EXHIBIT T3E-3(f) - Form of Notice of Guaranteed Delivery to be provided
to holders of the Company's 8% Subordinated Debentures due December 31,
2000 pursuant to the Supplement to Exchange Offer and Consent
Solicitation.
** EXHIBIT T3E-3(g) - Form of letter to Brokers, Dealers, Commercial
Banks, Trust Companies and Other Nominees pursuant to the Supplement to
Exchange Offer and Consent Solicitation.
** EXHIBIT T3E-3(h) - Form of letter to be sent by Brokers, Dealers,
Commercial Banks, Trust Companies and Other Nominees to their clients
pursuant to the Supplement to Exchange Offer and Consent Solicitation.
** EXHIBIT T3E-3(i) - Form of Notice of Guaranteed Delivery to be provided
to holders of the Company's 8% Senior Subordinated Notes due December
31, 2000 pursuant to the Third Supplement to Exchange Offer and Consent
Solicitation.
** EXHIBIT T3E-3(j) - Form of Notice of Guaranteed Delivery to be provided
to holders of the Company's 8% Subordinated Debentures due December 31,
2000 pursuant to the Third Supplement to Exchange Offer and Consent
Solicitation.
** EXHIBIT T3E-(k) - Form of letter to Broker, Dealers, Commercial Banks,
Trust Companies and Other Nominees pursuant to the Third Supplement to
Exchange Offer and Consent Solicitation.
** EXHIBIT T3E-(l) - Form of letter to be sent by Brokers, Dealers,
Commercial Banks, Trust Companies and Other Nominees to their clients
pursuant to the Third Supplement to Exchange Offer and Consent
Solicitation.
** EXHIBIT T3E-4(a) - Supplement to Exchange Offer and Consent
Solicitation.
** EXHIBIT T3E-4(b) - Second Supplement to Exchange Offer and Consent
Solicitation.
** EXHIBIT T3E-4(c) - Third Supplement to Exchange Offer and Consent
Solicitation.
** EXHIBIT T3E-5 - Notice of Extension of Expiration Date.
** EXHIBIT T3E-6 - 1995 Annual Report of the Company and Safeguard
Business Systems, Inc.
** EXHIBIT T3E-7 - Quarterly Financial Statements for the three month
period ended March 31, 1996.
** EXHIBIT T3E-8 - Quarterly Financial Statements for the three and six
month periods ended June 30, 1996.
- -----------------
* Filed herewith.
** Filed previously.
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** EXHIBIT T3E-9 - Quarterly Financial Statements for the three and nine
month periods ended September 30, 1996.
** EXHIBIT T3E-10 - 1996 Annual Report of the Company and Safeguard
Business Systems, Inc.
** EXHIBIT T3E-11 - Quarterly Financial Statements for the three month
period ended March 31, 1997.
** EXHIBIT T3E-12 - Quarterly Financial Statements for the three and six
month periods ended June 30, 1997.
** EXHIBIT T3E-13 - Quarterly Financial Statements for the three and nine
month periods ended September 30, 1997.
** EXHIBIT T3E-14- 1997 Annual Report of the Company and Safeguard
Business Systems, Inc.
** EXHIBIT T3E-15 - Quarterly Financial Statements for the three month
period ended March 31, 1998.
* EXHIBIT T3E-16 - Quarterly Financial Statements for the three and six
month periods ended June 30, 1998.
** EXHIBIT T3F - A cross reference sheet showing the exact location of the
provisions of the New Notes Indenture inserted therein pursuant to
Section 310 through 318(A), inclusive, of the Act (included as part of
Exhibit T3C).
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* Filed herewith.
** Filed previously.
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SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, the applicant,
San Jacinto Holdings Inc., a corporation organized and existing under the laws
of the State of Delaware, has duly caused this Post-Effective Amendment to be
signed on its behalf by the undersigned, thereunto duly authorized, and its seal
to be hereunto affixed and attested, all in the City of Dallas, Texas on the
12th day of August, 1998.
(SEAL)
SAN JACINTO HOLDINGS INC.
Attest: By: /s/ Elvis L. Mason
----------------------------------
Name: Elvis L. Mason
Title: Chairman and Chief Executive Officer
/s/ Michael D. Magill
- ----------------------------------
Name: Michael D. Magill
Title: President and Chief Operating Officer
<PAGE> 7
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT PAGE
- ----------- ------- ----
<S> <C> <C>
** EXHIBIT T3A Certificate of Incorporation, with all amendments thereto, of the Company.......
** EXHIBIT T3B Amended and Restated By-laws of the Company.....................................
** EXHIBIT T3C-1 Indenture dated as of ___________, 1995, between the Company and U.S.
Trust Company of Texas, N.A., as Trustee........................................
** EXHIBIT T3C-2 Indenture dated as of ___________, 1995, between the Company and U.S.
Trust Company of Texas, N.A., as Trustee pursuant to the Supplement to
Exchange Offer and Consent Solicitation.........................................
** EXHIBIT T3C-3 Indenture dated as of _________, 1996, between the Company and U.S. Trust
Company of Texas, N.A., as Trustee pursuant to the Third Supplement to
Exchange Offer and Consent Solicitation.........................................
** EXHIBIT T3C-4 Amended Indenture dated as of January 26, 1996, between the Company and
U.S. Trust Company of Texas, N.A., as Trustee...................................
EXHIBIT T3D Not Applicable
** EXHIBIT T3E-1 Exchange Offer and Consent Solicitation.........................................
** EXHIBIT T3E-2(a) Form of Letter of Transmittal to holders of the Company's 8% Senior
Subordinated Notes due December 31, 2000........................................
** EXHIBIT T3E-2(b) Form of Letter of Transmittal to holders of the Company's 8%
Subordinated Debentures due December 31, 2000...................................
** EXHIBIT T3E-2(c) Form of Letter of Transmittal to holders of the company's 8% Senior
Subordinated Notes due December 31, 2000 pursuant to the Supplement to
Exchange Offer and Consent Solicitation.........................................
** EXHIBIT T3E-2(d) Form of Letter of Transmittal to holders of the Company's 8% Subordinated
Debentures due December 31, 2000 pursuant to the Supplement to Exchange
Offer and Consent Solicitation.................................................
** EXHIBIT T3E-2(e) Form of Letter of Transmittal to holders of the Company's 8% Senior Subordinated
Notes due December 31, 2000 pursuant to the Third Supplement to
Exchange Offer and Consent Solicitation.......................................
</TABLE>
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* Filed herewith.
** Filed previously.
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<TABLE>
<S> <C>
** EXHIBIT T3E-2(f) Form of Letter of Transmittal to holders of the Company's 8% Senior
Subordinated Debentures due December 31, 2000 pursuant to the Third
Supplement to Exchange Offer and Consent Solicitation......................................
** EXHIBIT T3E-3(a) Form of Notice of Guaranteed Delivery to be provided to holders of the
Company's 8% Senior Subordinated Notes due December 31, 2000...............................
** EXHIBIT T3E-3(b) Form of Notice of Guaranteed Delivery to be provided to holders of the
Company's 8% Subordinated Debentures due December 31, 2000.................................
** EXHIBIT T3E-3(c) Form of letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees...
** EXHIBIT T3E-3(d) Form of letter to be sent by Brokers, Dealers, Commercial Banks, Trust
Companies and Other Nominees to their clients..............................................
** EXHIBIT T3E-3(e) Form of Notice of Guaranteed Delivery to be provided to holders of the
Company's 8% Senior Subordinated Notes due December 31, 2000 pursuant
to the Supplement to Exchange Offer and Consent Solicitation...............................
** EXHIBIT T3E-3(f) Form of Notice of Guaranteed Delivery to be provided to holders of the Company's 8%
Subordinated Debentures due December 31, 2000 pursuant to the
Supplement to Exchange Offer and Consent Solicitation......................................
** EXHIBIT T3E-3(g) Form of letter to Brokers, Dealers, Commercial Banks, Trust Companies and
Other Nominees pursuant to the Supplement to Exchange Offer and Consent Solicitation.......
** EXHIBIT T3E-3(h) Form of letter to be sent by Brokers, Dealers, Commercial Banks, Trust Companies
and Other Nominees to their clients pursuant to the Supplement to Exchange
Offer and Consent Solicitation.............................................................
** EXHIBIT T3E-3(i) Form of Notice of Guaranteed Delivery to be provided to holders of the Company's 8%
Senior Subordinated Notes due December 31, 2000 pursuant to the Third Supplement
to Exchange Offer and Consent Solicitation.................................................
** EXHIBIT T3E-3(j) Form of Notice of Guaranteed Delivery to be provided to holders of the Company's 8%
Subordinated Debentures due December 31, 2000 pursuant to the Third Supplement
to Exchange Offer and Consent Solicitation.................................................
</TABLE>
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* Filed herewith.
** Filed previously.
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<TABLE>
<S> <C>
** EXHIBIT T3E-3(k) Form of letter to Broker, Dealers, Commercial Banks, Trust Companies and Other
Nominees pursuant to the Third Supplement to Exchange Offer and Consent Solicitation.......
** EXHIBIT T3E-3(l) Form of letter to be sent by Brokers, Dealers, Commercial Banks, Trust Companies
and Other Nominees to their clients pursuant to the Third Supplement to Exchange
Offer and Consent Solicitation.............................................................
** EXHIBIT T3E-4(a) Supplement to Exchange Offer and Consent Solicitation......................................
** EXHIBIT T3E-4(b) Second Supplement to Exchange Offer and Consent Solicitation...............................
** EXHIBIT T3E-4(c) Third Supplement to Exchange Offer and Consent Solicitation................................
** EXHIBIT T3E-5 Notice of Extension of Expiration Date.....................................................
** EXHIBIT T3E-6 1995 Annual Report of the Company and Safeguard Business Systems, Inc.
** EXHIBIT T3E-7 Quarterly Financial Statements for the three month period ended March 31, 1996.
** EXHIBIT T3E-8 Quarterly Financial Statements for the three and six month periods ended June 30, 1996.
** EXHIBIT T3E-9 Quarterly Financial Statements for the three and nine month periods ended
September 30, 1996.
** EXHIBIT T3E-10 1996 Annual Report of the Company and Safeguard Business Systems, Inc.
** EXHIBIT T3E-11 Quarterly Financial Statements for the three month period ended March 31, 1997.
</TABLE>
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* Filed herewith.
** Filed previously.
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<TABLE>
<S> <C>
** EXHIBIT T3E-12 Quarterly Financial Statements for the three and six month
periods ended June 30, 1997
** EXHIBIT T3E-13 Quarterly Financial Statements
for the three and nine month periods ended
September 30, 1997.
** EXHIBIT T3E-14 1997 Annual Report of the Company and
Safeguard Business Systems, Inc.
** EXHIBIT T3E-15 Quarterly Financial
Statements for the three month period ended
March 31, 1998.
* EXHIBIT T3E-16 Quarterly Financial
Statements for the three and six month
periods ended June 30, 1998.
</TABLE>
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* Filed herewith.
** Filed previously.
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EXHIBIT T3E-16
SAN JACINTO HOLDINGS INC. AND SUBSIDIARY
CONSOLIDATED QUARTERLY FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1998 AND 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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Letter to Stockholders and Bondholders 1 - 4
Attachment to letter to Stockholders and Bondholders 5 - 6
Financial Statements & Notes 7 - 13
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 1997 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, 14 - 17
Condition and Results of Operations
</TABLE>
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August 12, 1998
TO ALL SHAREHOLDERS AND BONDHOLDERS:
The second quarter of 1998 continued to see improvements in the basic
operating performance of San Jacinto Holdings Inc. and its subsidiary, Safeguard
Business Systems, Inc., (the "Company"). During this quarterly period, earnings
before interest, taxes and amortization ("EBITA") were $2.5 million compared to
the previous quarter's results of $1.8 million or 41% higher; and $1.5 million,
or 156% higher, in comparison to the same period in 1997.
The overall operational quality of the Company has continued to
improve. While sales were off slightly from the first quarter of 1998 (1%),
operating expenses have continued to decline compared to the first quarter of
1998 at an even greater rate (5%). More importantly though, technological
advancements continued to be implemented; managerial positions in key personnel
areas continued to be filled; and customer service initiatives continue to be
emphasized.
The Company has spent a great deal of time focusing on its strategic
direction to improve future growth. Although the events of the past 18 months
were disruptive to normal operating procedures, the lack of major operational
problems during the first half of 1998 has allowed the Company to focus on its
core competencies in renewing its steps toward improved profitability.
TECHNOLOGY ADVANCEMENTS
The conversion to the AS/400 platform has been accomplished and is now
providing substantial improvements in the operations of the Company. The Company
is focused on adding and improving the many peripheral systems that can run from
the AS/400 platform, and which can improve the efficiency and competitiveness of
the Company's operations. The Company has also upgraded its proprietary order
entry system for use in the distribution channel, and is focusing more of its
attention on utilizing the Internet and the Intranet for processing orders and
communicating with the distribution channel. The Internet will have a very
favorable impact on reducing communication costs in the future, and provide an
excellent complimentary sales tool for our distributor network
Additionally the Company is in the beginning phases of automating the
credit and collection function to realize more operational efficiencies from the
conversion to the AS/400. Likewise the Company has implemented bar code scanning
in the Pennsylvania plants to allow
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for the location and monitoring of its orders and the tracking of costs
associated with production. This process should be implemented in the remainder
of the plants by year end, and allow for cost efficiencies as well as improving
customer service capabilities. This is also an integral part of improving the
Company's cost accounting processes.
MANAGEMENT CHANGES
The Company has been successful in attracting and hiring new personnel
to improve its operational strength, as well as provide the managerial talent to
grow the Company. The plant manager from the previously closed plant in Addison,
Illinois has relocated to Pennsylvania to coordinate management of all of the
imprint plants in that area; and a new plant manager has recently begun work at
the Los Angeles facility to fill the vacancy created when Jim Panatone accepted
the position of Senior Vice President and Director of Manufacturing.
Additionally Mike Magill has assumed the role and duties of President
and Chief Operating Officer of the Company. All of his previous reporting
responsibilities as Chief Financial Officer will continue in his new position.
(See enclosed announcement)
CUSTOMER SERVICE INITIATIVES
The Company has established a Customer Service initiative that focuses
on improving many of the operational areas that interface with the distribution
channel and the end-user customer base. Additionally, the Company has
established and filled a key position to manage a customer service department
reporting to Ross Mason, Senior Vice President and Chief Information Officer in
Dallas. The Company believes that customer service must continue to be part of
the overall strategic focus of Safeguard and its distribution channel. It is
critical in the current business environment to retain existing customers, and
the focus and attention to customer service is absolutely necessary to remain
competitive in the marketplace.
FRANCHISE INITIATIVES
During the second quarter of 1998, the California appellate courts in
the Gentis case confirmed a lower court decision that 13 former California
distributors were franchisees within the meaning of the California Franchise
Investment Law. Although the Company and its long-standing outside counsel in
this case disagree with the ruling in the Gentis matter, we deem it appropriate
to address this issue in California. At this time we will move forward and
prepare a franchise registration of our existing form of relationship in
California, and in turn the rest of the states in which the Company operates to
maintain the consistency of the form of relationship by which we operate. While
the Company does not expect such a registration to change the existing
relationship with its current distribution channel, it will provide for
increased flexibility in its dealings with distributors in the future. It will
also allow the Company to comply with the franchise laws in those states where
the Company's activities might be construed to require franchise registration.
STRATEGIC DIRECTION
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The Company has been engaged in overall strategic planning for the past
six months to map its future direction. This has involved every functional area
within the Company, and has necessitated a review of the industry, the Company's
competitors, and other similarly situated businesses within the Forms and Paper
markets. The Company believes that while its one-write product has been, and
will continue, to decline over the future, the Company's focus on providing
business solutions to the Small Business Customer is a very viable arena.
Industry studies from the International Business Forms Institute ("IBFI")
indicate that the Company's segment of the forms market will continue to grow
and remain viable for the future. Additionally, small business solutions or
systems sold through independent distributors are poised for consolidation. The
Company is uniquely positioned to attract such business and grow this channel to
reach a market largely ignored by the forms industry. Through this channel the
Company will continue to expand its systems and solutions for the small business
marketplace to generate growth and profitability for the future.
RESULTS OF OPERATIONS
Quarterly sales were $41.6 million, or 16% below sales for the
comparable period in 1997. Those sales amounts in 1997 included sales from the
U.K. subsidiary of $5.0 million. Sales from payroll operations and data services
were included in the previous years reported sales and total $3.0 million. This
amount has been excluded from the reported numbers in both periods as
discontinued operations. Sales in one-write continue to decline at an 10% rate,
as well as short-run continuous forms at 9% rate. Laser sales continue to
increase at double digit rates. Sourced products have declined from comparable
periods due to several factors including pricing increases put into effect
during the second quarter of 1998. The Company has placed a greater emphasis
with its distribution channel on manufactured products, due to the more
favorable impact that such sales have on financial results of the Company.
Operating expenses have declined by 23% from the comparable period in
1997 due to the sale of the U.K. subsidiary, and the discontinuance of payroll
and data services. However expenses have also declined 5% from the previous
quarter, from $20.8 million to $19.9 million for the quarter ended June 30,
1998. Improvements in cost controls and efficiencies are helping to improve
operating results.
Earnings before interest, taxes and amortization ("EBITA") has
increased from $1.8 million in the first quarter of 1998 to $2.5 million in the
second quarter, primarily due to cost efficiencies and controls to reduce
expenses, and by $1.5 million from the comparable period in 1997. EBITDA (EBITA
plus depreciation) has increased from $3.0 million in the first quarter of 1998
to $3.3 million, or 10%, and by 20%, or $0.5 million, from the comparable period
in 1997.
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All of the above data relate to the Company's results from operations.
From the consolidated statement of operations, the following highlights are
noted. Amortization expense has declined by $4.4 million from the comparable
period in 1997 due to the complete amortization of the customer list at the end
of 1997. Interest expense was essentially flat in the first and second quarters
of 1998 at approximately $3.3 million during each period, although down from the
comparable period in 1997 by $0.4 million. Thus the consolidated loss from
continuing operations declined by $6.2 million, from $7.6 million in the second
quarter of 1997, to $1.3 million for the quarter ended June 30, 1998.
The Company will continue to make strides in improving the quality,
performance and reliability of its operations; achieving improvements in sales
and profitability, identifying and integrating new products, and maintaining our
commitment to our independent distributor network where together, "We help small
business succeed".
Sincerely,
/s/ Elvis L. Mason /s/ Michael D. Magill
Elvis L. Mason Michael D. Magill
Chairman & CEO President & COO
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July 30, 1998
TO: ALL SAFEGUARD DISTRIBUTORS AND EMPLOYEES
FROM: ELVIS L. MASON
CHAIRMAN & C.E.O.
The Board of Directors of San Jacinto Holdings, Inc. and Safeguard
Business Systems, Inc. has approved the election of Michael Magill as President
and Chief Operating Officer, effective August 1, 1998. Mike, 50, who is both an
attorney and a C. P. A., joined Safeguard in July 1997 as Senior Vice President
and Chief Financial Officer.
His direct reporting responsibilities include: Ross Mason, Senior Vice
President, Technology and Communications; James Panatone, Senior Vice President,
Manufacturing; Carol Prisco, Vice President and Controller; Bruce Krum, Vice
President Human Resources; and, Mark Roggenkamp, Senior Director of Strategic
Business Planning. These functions will continue reporting to Mike and he
retains responsibility for the overall functions of the chief financial officer.
Additionally, Mike serves as a member of the Executive Management Committee and
is Chairman of the Operating Committee which meets weekly to coordinate all
operating functions.
Mike earned a law degree at the University of Texas at Austin and an
undergraduate degree in Business Administration from the University of Texas at
Arlington. He has been a member of the Texas Bar Association since 1973 and a
Certified Public Accountant since 1974. His previous employment included working
with two public accounting firms, Ernst & Whinney and Peat, Marwick, Mitchell &
Co. Prior to joining Safeguard, he served as Executive Vice President, Director
and Chief Financial Officer of KBK Capital Corporation, a publicly traded
commercial finance corporation specializing in asset-based lending and working
capital financing for middle market companies. As such he reviewed the
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operations of many small businesses throughout the United States that were
facing the difficulties of growth, both through operational problems, as well as
financial opportunities. Before joining KBK, Mike held senior executive
positions in two Texas banking organizations extending over a period of some 20
years. His experience included serving as Chief Financial Officer of a $22
billion publicly held multi-bank holding company and senior responsibilities in
lending, investments and operations.
Since joining Safeguard, Mike has taken a leadership role in
implementing and supporting a broad range of improvements in all operating
areas. He is dedicated to Safeguard's independent distributor network and has
initiated many changes enhancing operating policies and procedures serving
Safeguard's distributors and customers. Mike is committed to high quality
customer service and is presently leading a company-wide effort to bring about
further improvements in this regard. As Mike has said, "It is a great
opportunity to work with the many distributors and employees who contribute to
the mutual well being of Safeguard, and I look forward to working toward our
joint goals of growth and profitability through serving the needs of small
businesses."
Please join me in congratulating Mike on his election as President and
Chief Operating Officer. He is a highly competent, experienced senior executive
who is providing outstanding leadership throughout Safeguard.
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SAN JACINTO HOLDINGS INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
($000 omitted)
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
--------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 821 $ 385
Receivables less allowances 18,926 22,340
Inventories 7,878 7,424
Assets held for disposition -- 500
Other current assets 2,087 1,113
--------- ---------
Total current assets 29,712 31,762
Property, machinery and equipment 13,512 14,756
Excess purchase price over net assets acquired 41,053 41,773
Other assets 1,685 1,921
--------- ---------
Total assets $ 85,962 $ 90,212
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Current debt obligations $ 8,250 $ 9,563
Accounts payable 15,202 15,740
Accrued expenses 9,596 8,872
--------- ---------
Total current liabilities 33,048 34,175
Long-term debt 97,455 105,507
Other liabilities 9,689 8,091
Commitments and contingencies
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 (147,210) (150,780)
Foreign currency translation adjustment (1,174) (935)
--------- ---------
Total stockholders' deficiency (54,230) (57,561)
--------- ---------
Total liabilities and stockholders' deficiency $ 85,962 $ 90,212
========= =========
</TABLE>
See notes to consolidated financial statements
7
<PAGE> 9
SAN JACINTO HOLDINGS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
($000 omitted)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
------------------------ ------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Sales $ 41,641 $ 49,410 $ 83,894 $ 97,386
Cost of sales 19,699 23,459 39,825 45,469
-------- -------- -------- --------
Gross profit 21,942 25,951 44,069 51,917
Selling and administrative expense 19,904 25,508 40,750 49,007
Other income - cash received greater than
carrying value of distributor receivables (430) (517) (904) (989)
Amortization expense 447 4,799 893 9,586
Interest expense 3,316 3,738 6,710 7,375
-------- -------- -------- --------
Loss from continuing operations
before income taxes (1,295) (7,577) (3,380) (13,062)
Income tax provision (benefit) -- (61) -- 27
-------- -------- -------- --------
Loss from continuing operations (1,295) (7,516) (3,380) (13,089)
Discontinued operations:
Gain on disposition -- -- 6,438 --
Income (loss) from operations -- (279) 512 (242)
-------- -------- -------- --------
Net income (loss) $ (1,295) $ (7,795) $ 3,570 $(13,331)
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
8
<PAGE> 10
SAN JACINTO HOLDINGS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
PERIOD FROM JANUARY 1, 1997
TO JUNE 30, 1998
($000 omitted)
(Unaudited)
<TABLE>
<CAPTION>
Foreign
Additional Currency
Preferred Stock Common Stock Paid-In Translation
Shares Amount Shares Amount Capital Deficit Adjustment
------ ------ ------ ------ ---------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance -
January 1, 1997 -- $ -- 1,052,384 $ 11 $94,143 $(126,880) $ (960)
Net loss (23,900)
Unrealized gain on
foreign currency
translation -- -- -- -- -- -- 25
------- ------- --------- ---------- ------- --------- ---------
Balance -
December 31, 1997 -- -- 1,052,384 11 94,143 (150,780) (935)
Net income 3,570
Unrealized loss on
foreign currency
translation -- -- -- -- -- -- (239)
------- ------- --------- ---------- ------- --------- ---------
Balance -
June 30, 1998 -- $ -- 1,052,384 $ 11 $94,143 $(147,210) $ (1,174)
======= ======= ========= ========== ======= ========= =========
</TABLE>
See notes to consolidated financial statements.
9
<PAGE> 11
SAN JACINTO HOLDINGS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
($000 omitted)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------------- -------------------
1998 1997 1998 1997
------- ------- ------- --------
<S> <C> <C> <C> <C>
Cash flow income from operating activities:
Net income (loss) $(1,295) $(7,795) $ 3,570 $(13,331)
Adjustments to reconcile net loss to cash
provided by operating activities:
Amortization 447 4,799 893 9,586
Depreciation 812 1,748 2,071 3,640
(Gain) loss on sale of assets -- 67 (6,438) 67
Unrealized exchange gain (loss) (124) (137) (239) (74)
Increase (decrease) in operating liabilities:
Receivables 1,100 (240) 3,414 (1,592)
Inventories (296) (280) (454) 172
Assets held for disposition -- 110 500 176
Other assets 226 (74) (1,097) (750)
Increase (decrease) in operating liabilities
Accounts payable (2,059) 4,693 (538) 4,933
Accrued expense and other liabilities (74) 1,798 2,333 524
------- ------- ------- --------
Net cash provided by (used in) operating activities (1,263) 4,689 4,015 3,351
Cash Flows from Investing Activities:
Net proceeds from sale of assets 6,695 787 6,695 787
Purchase of property, machinery and equipment (314) (1,355) (418) (3,588)
Adjustment due to currency fluctuations
and foreign purchase price adjustments 62 (190) 63 243
------- ------- ------- --------
Net cash provided by (used in) investing activities 6,443 (758) 6,340 (2,558)
------- ------- ------- --------
Cash Flows from Financing Activities:
Repayment of long-term debt and capital
lease obligations (3,509) (2,965) (5,769) (4,684)
Borrowings from (repayment of) revolving loans (1,890) (1,472) (4,150) 3,364
Net proceeds from foreign obligations -- 1,109 -- 1,134
------- ------- ------- --------
Net cash used in financing activities (5,399) (3,328) (9,919) (186)
------- ------- ------- --------
Increase (decrease) in cash and cash equivalents (219) 603 436 607
Cash and cash equivalents at beginning of period 1,040 486 385 482
------- ------- ------- --------
Cash and cash equivalents at end of period $ 821 $ 1,089 $ 821 $ 1,089
======= ======= ======= ========
</TABLE>
10
<PAGE> 12
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 $543 and $1,038 were entered into during
the first six months of 1998 and 1997 respectively, to acquire
machinery and equipment.
PIK (Payment in Kind") Debentures totaling $11 was issued during the
six month period ended June 30, 1998. The PIK Debentures are in payment
of accrued interest on the Company's 8% Subordinated Debentures.
Supplemental disclosure of cash flow information:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
--------------------- ----------------------
1998 1997 1998 1997
------- ------ ------- ------
<S> <C> <C> <C> <C>
Earnings Before Interest, Taxes, Depreciation & $ 3,280 $2,708 $ 6,294 $7,539
Amortization (EBITDA)
Earnings Before Interest, Taxes & Amortization $ 2,468 $ 960 $ 4,223 $3,899
(EBITA)
Cash paid during the period for:
Interest $ 5,386 $1,748 $ 6,893 $3,332
</TABLE>
See notes to consolidated financial statements
11
<PAGE> 13
SAN JACINTO HOLDINGS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1998 AND 1997
(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 1997 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, 1997 are derived from the Company's audited financial statements as
of that date.
Reclassification - certain reclassifications have been made to the 1997
financial statements to conform to the classification used in 1998.
NOTE B. DISCONTINUED OPERATIONS:
In the fourth quarter of 1997, the Company announced its decision to
divest of its payroll and data processing operations. On March 31,
1998, effective as of April 1, 1998, the Company sold its payroll
processing operations to Advantage Business Services Holdings, Inc.
Safeguard reported a gain of $6.4 million after expenses and payments
to third parties. The proceeds from the sale were used to repay a
portion of the Revolving Loan and a portion of the Term Loan, and to
fund operations. The net assets of the data processing operations were
sold at approximately net book value, effective January 1998.
Consideration for this sale will be in the form of royalty payments
beginning in 1999.
The net assets relating to the payroll and data processing operations
have been segregated on the consolidated balance sheet from their
historic classification to separately identify them as assets held for
disposition. The net sales from discontinued operations were $2.9
million for the first quarter of 1998 and $3.5 million for the same
period in 1997. The sales and related expenses of the operations were
excluded from the determination of the Company's income (loss) from
continuing operations for the periods presented.
NOTE C. INVENTORIES:
Inventories consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------- ------------
($000 omitted)
<S> <C> <C>
Raw Material $ 4,954 $ 4,514
Work-in-process 326 307
Finished Goods 2,598 2,603
------- -------
Total $ 7,878 $ 7,424
======= =======
</TABLE>
12
<PAGE> 14
SAN JACINTO HOLDINGS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1998 AND 1997
(Unaudited)
(continued)
NOTE D. LONG-TERM DEBT:
The Company's debt outstanding is as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
--------- ------------
($000 omitted)
<S> <C> <C>
Revolving Loan - Collateralized $ 16,436 $ 18,086
Revolving Loan 4,000 6,500
Term Loan 3,592 5,492
Amended Exchange Loan 14,356 17,227
12% Senior Subordinated Notes 65,878 65,878
8% Senior Subordinated Notes 2 2
8% Subordinated Debentures 274 262
Capital lease obligations 1,167 1,623
--------- ---------
105,705 115,070
Less current debt obligations (8,250) (9,563)
--------- ---------
Total $ 97,455 $ 105,507
========= =========
</TABLE>
On April 1, 1998, the Company received proceeds totaling $11.3 million
from the disposition of the payroll operations of which $3.3 million
was payable to third parties associated with the sale of payroll
operations. The funds were used to make an additional $1.3 million pay
down of the Term Loan, and a permanent $2.2 million pay down of the
Revolving Loan. The remaining funds were used to reduce the outstanding
balance under the Collateralized Revolving Loan.
NOTE E. CONTINGENCIES:
On April 22, 1998, the California Supreme Court declined to hear the
Company's appeal of a decision on an issue reached in 1996 relating to
the applicability of the California Franchise Investment Law to the
Company's California distributors. The Court's action means the
appellate court's decision is final. This action has no material impact
on the Company's consolidated financial position and results of
operation since this contingent liability was recorded in 1996. The
remaining financial settlement was satisfied in the second quarter of
1998.
13
<PAGE> 15
SAN JACINTO HOLDINGS INC. AND SUBSIDIARY
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1998 AND 1997
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, 1997 and quarterly
report for the quarter ended March 31, 1998. 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, 1997 and the quarterly report for the
quarter ended March 31, 1998. The following table sets forth, for the periods
indicated, selected financial data as a percentage of net sales.
<TABLE>
<CAPTION>
Three Month Period Six Month Period
Ended June 30, Ended June 30,
-------------------- --------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Sales 47.3 47.5 47.5 46.7
----- ----- ----- -----
Gross profit 52.7 52.5 52.5 53.3
Selling and administrative expense 47.8 51.6 48.6 50.3
Other income - distributor receivables (1.0) (1.0) (1.1) (1.0)
Amortization expense 1.1 9.7 1.1 9.8
Interest Expense 8.0 7.6 8.0 7.6
----- ----- ----- -----
Loss from continuing operations
before income taxes (3.1) (15.3) (4.0) (13.4)
Income tax provision (benefit) 0.0 (0.1) 0.0 0.0
----- ----- ----- -----
Loss from continuing operations (3.1) (15.2) (4.0) (13.4)
Discontinued operations:
Gain on disposition 0.0 0.0 7.7 0.0
Income (loss) from operations 0.0 (0.6) 0.6 (0.2)
----- ----- ----- -----
Net income (loss) (3.1)% (15.8)% 4.3% (13.6)
===== ===== ===== =====
</TABLE>
14
<PAGE> 16
SAN JACINTO HOLDINGS INC. AND SUBSIDIARY
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1998 AND 1997
RESULTS OF OPERATIONS - Continued
COMPARISON OF THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1998, AND FOR THE
THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1997.
San Jacinto Holdings Inc. through its wholly owned subsidiary, Safeguard
Business Systems, Inc., provides business solutions and services to small
businesses through its independent distribution network in the United States and
Canada. Through this distribution channel, Safeguard markets pegboard systems,
continuous forms and checks, laser forms and checks, advertising specialty
goods, filing systems, envelopes, and other business products designed for small
businesses with less than 50 people on staff. Safeguard is a privately owned
company with manufacturing plants in California, Pennsylvania and Georgia.
NET SALES. Net sales from continuing operations by operating segment are as
follows:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Sales:
North America $41,641 $44,410 $83,894 $87,609
Europe - 5,000 - 9,777
------- ------- ------- -------
Total $41,641 $49,410 $83,894 $97,386
======= ======= ======= =======
</TABLE>
Excluding sales from Europe, the second quarter of 1998 sale results are $2.8
million (or 6.2%) below the second quarter of 1997. For the first six months,
excluding sales from Europe, net sales in 1998 are $3.7 million (or 4.2%) below
sales for the same period in 1997. The sales decline in the second quarter and
the first six months of 1998 is due in part to one less workday than in 1997,
which results in less time for sales activity and plant production. The sales
results reflects a 23.5% growth in laser forms off-set by a 9.9% decline in
manual form sales and a 8.6% decline in computer forms sales. The sales
performance of the remaining product lines approximates 1997. The manual and
computer forms sales reflect the small business customer's transition from
manual and pin-fed forms to laser forms. The decline in manual and computer
forms sales is off-set in part by a 3.0% average price increase.
GROSS PROFIT. Gross profit is before selling and administrative expenses,
including commission expense. Gross profit margin from continuing operations in
North America are as follows:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Gross profit margin:
Manual forms 63.3 % 58.5 % 62.9 % 59.8 %
Computer and laser forms 50.7 46.7 49.7 50.0
Sourced products 36.4 36.0 38.3 37.8
---- ---- ---- ----
Total 52.7 % 49.9 % 52.5 % 51.7 %
==== ==== ==== ====
</TABLE>
The improvement in profit margin is attributable to manufacturing efficiencies
as a result of the implementation of an integrated order entry system and the
consolidation of certain manufacturing
15
<PAGE> 17
SAN JACINTO HOLDINGS INC. AND SUBSIDIARY
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1998 AND 1997
RESULTS OF OPERATIONS - Continued
operations in 1997. These efficiencies have been off-set in part by a shift in
the Company's product mix from manual forms sales to laser forms and sourced
products, as percentage of total sales. Computer and laser forms, and sourced
products carry greater material, direct labor and overhead costs (as a
percentage of sales) resulting in lower gross profit margin than for manual
forms.
SELLING AND ADMINISTRATIVE EXPENSE. Selling and administrative expenses are
$19.9 million in the second quarter of 1998 compared to $25.5 million for the
same period in 1997, representing 47.8% and 51.6% of net sales in each period.
For the six months, selling and administrative expenses are $40.8 million in
1998 compared to $49.0 million in 1997, representing 48.6% and 50.3% of net
sales in each period. The reduction in selling and administrative costs in 1998
is attributable to sale of the Company's European operation and strategic cost
reductions. The Company's operation in Europe, of which $1.5 million in the
second quarter and $3.0 million in the six month period of expense is included
in the 1997 results, was sold in December 1997. Commissions to independent
distributors account for 70% of total selling and administrative costs in 1998
and 60% in 1997. As a percent of total sales commission costs have remained
constant at approximately 34% of net sales.
OTHER INCOME - Distributor Receivables. Other income (cash received greater than
carrying value of Distributor receivables) is $0.4 million for the second
quarter 1998 and $0.5 million for the same period in 1997, representing 1.0% of
net sales in 1998 and in 1997. Other income for the six month period is $0.9
million in 1998 and $1.0 million in 1997. 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 $0.4 million for the second
quarter of 1998 and $4.8 million in 1997. Amortization expense is $0.9 million
and $9.6 million for the first six months of 1998 and 1997, 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. The significant decline in amortization expense in 1998 is as a
result of the customer list being fully amortized as of December 31, 1997. The
customer list amortization was $4.3 million in the second quarter of 1997 and
$8.6 million for the six month period of 1997.
INTEREST EXPENSE. Interest expense is $3.3 million for the second quarter of
1998 and $3.7 million for the same period in 1997. For the first six months,
interest expense is $6.7 million in 1996 in comparison to $7.4 million in 1997.
The decrease in interest expense in 1998 is attributable to a reduction in the
Company's average outstanding borrowings as a result of principal repayment and
the repayment of foreign debt obligations.
INCOME TAX PROVISION. The Company's provision for income tax in 1997 is related
to its operations in Europe. No tax liability is incurred in the United States
as a result of net losses from operations.
16
<PAGE> 18
SAN JACINTO HOLDINGS INC. AND SUBSIDIARY
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1998 AND 1997
RESULTS OF OPERATIONS - Continued
DISCONTINUED OPERATIONS. In 1997 the Company announced its decision to divest of
its payroll and data processing operation. On December 31, 1997, effective
January 1, 1998, the data services operation was sold at approximately net book
value of the associated assets. On March 31, 1998, effective April 1, 1998, the
payroll processing operations were sold, resulting in a gain of $6.4 million,
reported in the first quarter of 1998. Net sales from discontinued operations
were $2.9 in the first six months of 1998 and $5.9 for the same period in 1997.
Year to date the sales and related expenses of these operations are excluded
from the determination of the Company's loss from continuing operations for the
periods presented.
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 generated from operating activities is $4.0 million in the
first six months of 1998. As of June 30, 1998, the Company had $0.8 million in
cash and cash equivalents, $1.3 million in availability under the revolving
loans. At that date, the Company had a working capital deficiency of $3.3
million and a ratio of current assets to current liabilities of 0.9:1.
The Company's ongoing liquidity requirements arise primarily from capital
expenditures, working capital needs and debt service. The Company's capital
expenditures for the first six months of 1998 are $1.0 million in software,
hardware and equipment purchases. The Company anticipates total capital
expenditures in 1998 of $3.0 million. These expenditures will be funded through
additional capital lease obligations and cash flow from operations.
As described in Note B and above, on March 31, 1998, the Company sold its
payroll operations. The net proceeds of $8.0 million, net of $3.3 million in
payments due to third parties, was used to reduce the Revolving Loan to a
borrowing capacity of $4.0 million and to repay an additional $1.3 million under
the Term Loan. The remaining proceeds were used to reduce the outstanding
borrowings under the Collateralized Revolving Loan and outstanding trade
payables. The Company has met all of its debt obligations and is not in default
of any of its loan agreements. The Company continues to monitor its cash
position and believes that sufficient funding exists to meet its obligations as
they come due.
17
