<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 11
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
<TABLE>
<CAPTION>
Title of Class Amount
-------------- ------
<S> <C>
12% Senior Subordinated Notes Maximum of
Due December 31, 2002 $66,138,406
</TABLE>
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 ____
<PAGE> 2
May 15, 1998
POST-EFFECTIVE AMENDMENT NO. 11 TO FORM T-3
Filed herewith as Exhibit T3E-15 is the Quarterly Financial Statements for the
three month periods ended March 31, 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. 11 TO FORM T-3 IS MAY 15, 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.
(c) 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.
<PAGE> 4
** 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.
<PAGE> 5
** 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 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).
- ------------------
* Filed herewith.
** Filed previously.
<PAGE> 6
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
15th day of May, 1998.
(SEAL)
SAN JACINTO HOLDINGS INC.
Attest: By: /s/ Elvis L. Mason
----------------------
Name: Elvis L. Mason
Title: President and Chief Executive Officer
/s/ Michael D. Magill
---------------------
Name: Michael D. Magill
Title: Senior Vice President, CFO
<PAGE> 7
<TABLE>
<CAPTION>
EXHIBIT INDEX
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>
- ------------------
* Filed herewith.
** Filed previously.
<PAGE> 8
<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..............
</TABLE>
- ------------------
* Filed herewith.
** Filed previously.
<PAGE> 9
<TABLE>
<S> <C>
** 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-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. .......
** EXHIBIT T3E-12 Quarterly Financial Statements for the six month
period ended June 30, 1997 .............................
</TABLE>
- ------------------
* Filed herewith.
** Filed as part of or as the exhibit indicated to the Form T-3 filed with
the Commission on December 1, 1995 and incorporated herein by reference.
*** Filed as part of or as the exhibit indicated to the Form T-3 filed with
the Commission on December 15, 1995 and incorporated herein by reference.
**** Filed as Exhibit T3C to the Application for Qualification of Indenture on
Form T-3 (No. 22-21350) filed by the Company with the Securities and
Exchange Commission on November 21, 1991 and incorporated herein by
reference.
2
<PAGE> 10
EXHIBIT NO.
EXHIBIT
PAGE
<TABLE>
<S> <C>
** 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. ......
</TABLE>
- ------------------
* Filed herewith.
** Filed as part of or as the exhibit indicated to the Form T-3 filed with
the Commission on December 1, 1995 and incorporated herein by reference.
*** Filed as part of or as the exhibit indicated to the Form T-3 filed with
the Commission on December 15, 1995 and incorporated herein by reference.
**** Filed as Exhibit T3C to the Application for Qualification of Indenture on
Form T-3 (No. 22-21350) filed by the Company with the Securities and
Exchange Commission on November 21, 1991 and incorporated herein by
reference.
3
<PAGE> 1
EXHIBIT T3E-15
SAN JACINTO HOLDINGS INC. AND SUBSIDIARY
CONSOLIDATED QUARTERLY FINANCIAL STATEMENTS
THREE MONTH PERIOD ENDED MARCH 31, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Chairman's Letter 1 - 3
Report of the Chief Financial Officer 4 - 6
Financial Statements and 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 of the Company for the years ended
December 31, 1997 and 1996. 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 14 - 16
and Results of Operations
</TABLE>
<PAGE> 2
May 15, 1998
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 month periods ended March 31, 1998 and
1997.
Operating earnings for the first quarter or 1998 (EBITDA) were $3.0
million compared to the prior year $4.8 million. These operating results were in
line with management expectations and were influenced by several factors as set
forth in the accompanying report. Net sales results and trends did not meet
management expectations for this period. Notwithstanding the decrease compared
to prior year, Safeguard continues to reflect improvements and sound development
commitments for the future which management believes will, in time, reverse the
negative sales trends.
Previously announced divestitures impacted operating results for the
first quarter. The sale of the Company's United Kingdom subsidiary occurred in
December. Those operating results are not included in the first quarter of 1998
as they were in 1997. Safeguard completed, during the first quarter, the
divestiture of its Data Services operation in California reporting neither a
gain or loss in the transaction. The Data Services operations were less than 10%
involved in or related to the primary business of Safeguard and thus did not
represent a significant
<PAGE> 3
opportunity for the core operating direction of the Company. This action is
consistent with management's focus on core operations and basic company
strengths.
As previously reported, Safeguard's Automated Payroll Services, with
sales of $8.0 in 1997 were sold to Advantage Payroll Services, Inc.
headquartered in Maine, effective April 1, 1998. Concurrent with the sale,
Safeguard entered into a Strategic Alliance with Advantage permitting Safeguard
and its Distributors to continue to market and sell this product. The Company's
four payroll operating centers are continuing to function under Advantage's
ownership. The net reported gain on this sale was $6.4 million. During the past
five years, Safeguard incurred operating losses of approximately $8 million in
this line of business and would have been required to make significant capital
expenditures in the near future to remain competitive in the marketplace. The
net reported gain is a partial recovery of prior years' losses and investments
in this line of business. The Company tried over a period of several years to
make a successful operation out of this service. We concluded that it was very
unlikely to happen in the future based on current and previous experiences. We
consider this sale and Strategic Alliance to be a good solution for all
concerned.
During the two year period 1995-1997, Safeguard completed a
comprehensive operational reorganization to provide a foundation and improved
opportunity for future growth. These major initiatives included: relocation of
Corporate Headquarters from Pennsylvania to Texas; centralization of the Sales
and Marketing divisional functions; significant and far reaching technological
changes with the introduction of new operating systems throughout the Company.
During the period of 1995-97, Safeguard invested $15.5 in capital expenditures
to achieve the required technological capabilities needed for the future; and
made broad commitments to strengthen and expand Safeguard's independent
distributor network. Several of these changes, most notably the conversion in
1997 to the AS400 computer system, resulted in significant operating problems
and costly disruptions which are now largely resolved. These and related changes
were a necessary process for Safeguard to transition into a better future
opportunity.
<PAGE> 4
At the present time, Safeguard is undergoing intense scrutiny of its
entire manufacturing process to insure its cost effectiveness and competitive
capabilities going forward. In recent months, significant senior management
changes have been made. That transition is expected to proceed smoothly and will
have a meaningful impact on future operating costs and productivity. It is
essential that the Company remain operationally competitive with respect to its
cost structure, the quality of its products and services and to respond timely
to market demands and trends. This we can and will do.
A Company wide in-depth customer service improvement program was
initiated at the beginning of the second quarter, which will favorably impact
our end-user customers and our Distributors. This far reaching initiative is
lead by senior management personnel and will embrace all operating areas. We
will soon be announcing programs to include the active participation of all
employees, as well as our independent Distributors. The opportunities to enhance
our operations are substantial and we are committed to achieving those
objectives.
During the first quarter of this year, a final resolution was made of
the remaining issues in the previously reported California litigation, known as
the "Gentis" litigation. On April 22, 1998, the California Supreme Court
declined to hear our appeal of the California Court of Appeal decision on the
Gentis litigation. The Court action means that the appellate court decision is
final, in holding that 13 former California distributors were franchisees under
the California Franchise Investment Law. This action has no impact on
Safeguard's current reported operating results since such contingency was
reserved for when the legal settlement was reached in late 1996.
We appreciate your continued support and will inform you of the
progress of these many efforts in subsequent reports.
Sincerely,
/s/Elvis L. Mason
Elvis L. Mason
Chairman & C.E.O.
<PAGE> 5
May 15, 1998
REPORT OF THE CHIEF FINANCIAL OFFICER
Of significant interest during the first quarter of 1998 is the sales
of the data services and payroll processing operations. As reported in the 1997
Annual Report the Company decided in the fourth quarter of 1997 to divest of
these operations to allow greater focus on its core operations of manufacturing
and distributing business information systems, printed forms and checks. The
data services operations, a California based data processing service, was sold
effective January 1, 1998 at approximately the net book value of the assets
associated with this line of business with future consideration to be received
in the form of royalty payments beginning in 1999. On March 31, 1998, the
Company entered into an agreement to sell its payroll processing operations to
Advantage Business Services Holdings, Inc. ("Advantage"). The payroll processing
operations were sold for $8.0 million after payments to third parties, and
resulted in a gain of $6.4 million reported in the first quarter of 1998. The
operating results of the data services and payroll processing operations have
been classified as discontinued operations and are shown below the results from
continuing operations. In conjunction with the sale of the payroll processing
operations, Safeguard entered into a strategic alliance with Advantage to
continue to provide payroll processing services to the small business
marketplace through its distributor network.
<PAGE> 6
FINANCIAL AND OPERATING HIGHLIGHTS
Net sales for the first quarter of 1998 are $42.3 million, some $0.9 million
below the same period in 1997 without the 1997 sales from the European
operations. Viewed historically against first quarter 1997 sales amounts, this
comparison to first quarter 1998 sales reflects a decline of $5.7 million or
11.9% from the same quarter in 1997. The significant drop in sales is primarily
attributable to the Company's decision to sell its investment in Safeguard
Systems Europe Limited, a wholly owned subsidiary of Safeguard. The investment
was sold on December 2, 1997. The sales results for the first quarter of 1998,
excluding European operations, reflect a 6.8% decrease in sales of manual forms,
a 5.9% decline in computer forms and a 2.4% decline in sourced products
(products produced by other vendors and sold through Safeguard) sales. This
decline is off-set in part by double digit growth in laser form sales. The
changes in sales trends from manual forms and pin fed computer forms to laser
forms can only be addressed through continuing efforts to cross sell newer
products to customers that currently utilize Safeguard's more mature products as
well as through new product offerings. The Company has established a formalized
process to identify and explore new products to our customer base of small
businesses.
Earnings from continuing operations before amortization, depreciation, interest
and income taxes (EBITDA) in 1998 are $3.0 million compared to $4.8 million in
1997, reflecting a decline of $1.8 million. The decline in earnings is
attributable to a 1.7%, as a percentage of net sales, decline in gross profit
partially off-set by a reduction in selling and administrative expenses. The
reduction in gross profit is a result of the shift in product mix from
manufactured to non-manufactured products. Non-manufactured products carry
greater direct costs resulting in a smaller product margin.
The Company's operations in Europe were sold on December 2, 1997 at a gain of
$2.5 million. Net sales of $4.8 million and $0.5 million in EBITA are included
in the first quarter of 1997 operation results and are not included in the first
quarter of 1998's operation results.
The Company's net loss from continuing operations is $2.1 million in the first
quarter of 1998 compared to $5.6 million for the same period in 1997. The
improvement in operating results is
<PAGE> 7
attributable to the Company's customer list being fully amortized at December
31, 1997. The amortization savings was partially off-set by a reduction in gross
profit, as discussed above. Additionally, interest expense was reduced by 6.7%
as a result of a reduction in the average outstanding borrowings. The operating
losses include amortization (non-cash) charges of $0.4 million for the first
quarters of 1998 and $4.8 million in 1997. Due to the payroll operation gain of
$6.4 million, the Company recorded net income including discontinued operations
of $4.9 million for the first quarter of 1998 against a net loss of $5.5 million
for the first quarter of 1997.
1998 INITIATIVES
While the Company has many challenges to face in 1998, from within the industry
and internally, management remains committed to improving the relationship with
its distribution channel, as well as improving the quality and performance of
our products and services. As indicated in the Chairman's letter, the Company
has begun to place renewed emphasis on "Customer Satisfaction" as one of its
strategic objectives for the future. To achieve the level of customer
satisfaction that will aid the Company in securing a profitable and strong
future; the management team, our distribution network, and every employee will
be dedicated to providing that extra effort necessary to make our customers, our
most important relationship, completely satisfied with their Safeguard
experience. It is enough to say that the Company's goal will be to provide total
customer satisfaction. Anything less will be unacceptable.
Thank you for your continued support and contribution.
Sincerely,
/s/Michael D. Magill
Michael D. Magill
Senior Vice President
Chief Financial Officer
<PAGE> 8
SAN JACINTO HOLDINGS INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
($000 omitted)
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,040 $ 385
Receivables less allowances 20,026 22,340
Inventories 7,582 7,424
Assets held for disposition -- 500
Other current assets 13,561 1,113
--------- ---------
Total current assets 42,209 31,762
Property, machinery and equipment - net 13,586 14,756
Excess purchase price over net assets acquired 41,413 41,773
Other assets 1,919 1,921
--------- ---------
Total assets $ 99,127 $ 90,212
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Current debt obligations $ 8,185 $ 9,563
Accounts payable 17,261 15,740
Accrued expenses 17,000 8,872
--------- ---------
Total current liabilities 42,446 34,175
Long-term debt 102,468 105,507
Other liabilities 7,024 8,091
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 stockholder's equity:
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 (145,915) (150,780)
Foreign currency translation adjustment (1,050) (935)
--------- ---------
Total stockholders' deficiency (52,811) (57,561)
--------- ---------
Total liabilities and stockholders' deficiency $ 99,127 $ 90,212
========= =========
See notes to consolidated financial statements.
7
</TABLE>
<PAGE> 9
SAN JACINTO HOLDINGS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
($000 omitted)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1997
---- ----
<S> <C> <C>
Net sales $ 42,253 $ 47,976
Cost of sales 20,126 22,010
-------- --------
Gross profit 22,127 25,966
Selling and administrative expense 20,846 23,499
Other income - cash received greater than
carrying value of distributor receivables (474) (472)
Amortization expense 446 4,787
Interest expense 3,394 3,637
-------- --------
Loss from continuing operations before income taxes (2,085) (5,485)
Income tax provision -- 88
-------- --------
Loss from continuing operations (2,085) (5,573)
Discontinued operations:
Gain on disposition 6,438 --
Income from operations 512 37
-------- --------
6,950 37
-------- --------
Net income (loss) $ 4,865 $ (5,536)
======== ========
See notes to consolidated financial statements.
8
</TABLE>
<PAGE> 10
SAN JACINTO HOLDINGS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
PERIOD FROM JANUARY 1, 1997
TO MARCH 31, 1998
($000 omitted)
(Unaudited)
<TABLE>
<CAPTION>
Foreign
Additional Currency
Preferred Stock Common Stock Paid 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 -- -- 1,052,834 11 94,143 (150,780) (935)
Net income 4,865
Unrealized loss on
foreign currency
translation -- -- -- -- -- -- (115)
---------- ---------- ---------- --------- ---------- ---------- ----------
Balance -
March 31, 1998 -- $ -- 1,052,384 $ 11 $ 94,143 ($ 145,915) ($ 1,050)
========== ========== ========== ========== ========== ========== ==========
See notes to consolidated financial statements.
9
</TABLE>
<PAGE> 11
SAN JACINTO HOLDINGS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
($000 omitted)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1997
------- -------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ 4,865 $(5,536)
Adjustments to reconcile net loss to cash
provided by operating activities:
Amortization 446 4,787
Depreciation 1,259 1,892
Gain on disposition of payroll operations (6,438) --
Unrealized exchange gain (loss) (115) 63
(Increase) decrease in operating assets:
Receivables 2,314 (1,352)
Inventories (158) 452
Assets held for disposition 500 66
Other assets (1,323) (676)
Increase (decrease) in operating liabilities:
Accounts payable 1,521 240
Accrued expense and other liabilities 2,407 (1,274)
------- -------
Net cash provided by (used in) operating activities 5,278 (1,338)
Cash Flows from Investing Activities:
Purchase of property, machinery and equipment (104) (2,233)
Adjustment due to currency fluctuations
and foreign purchase price adjustments 1 433
------- -------
Net cash used in investing activities (103) (1,800)
------- -------
Cash Flows from Financing Activities:
Repayment of Long-Term debt and capital lease obligations (2,260) (1,719)
Borrowings from repayment of revolving loans (2,260) 4,836
Net proceeds from foreign obligations -- 25
------- -------
Net cash provided by (used in) financing activities (4,520) 3,142
------- -------
Increase in cash and cash equivalents 655 4
Cash and cash equivalents at beginning of period 385 482
------- -------
Cash and cash equivalents at end of period $ 1,040 $ 486
======= =======
</TABLE>
10
<PAGE> 12
SAN JACINTO HOLDINGS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTH PERIOD ENDED MARCH 31, 1998
($000 omitted)
(Unaudited)
(Continued)
Supplemental disclosure of noncash investing and financing activities:
Capital lease obligations of $102 and $652 were entered into during the
first three months of 1998 and 1997, respectively, to acquire certain
machinery and equipment.
Supplemental disclosure of cash flow information:
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1997
---- ----
<S> <C> <C>
Earnings before interest, taxes, depreciation
and amortization (EBITDA) $3,014 $4,831
Earnings before interest, taxes and
amortization (EBITA) $1,755 $2,939
Cash paid during the period for:
Interest $1,507 $1,587
</TABLE>
See notes to consolidated financial statements
11
<PAGE> 13
SAN JACINTO HOLDINGS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIOD ENDED MARCH 31, 1998
(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 classifications 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 loss from continuing
operations for the periods presented.
NOTE C. INVENTORIES:
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------- -----------------
($000 omitted)
<S> <C> <C>
Raw Material $4,541 $4,514
Work-in-process 311 307
Finished Goods 2,730 2,603
------ ------
Total $7,582 $7,424
====== ======
</TABLE>
12
<PAGE> 14
SAN JACINTO HOLDINGS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIOD ENDED MARCH 31, 1998
(Unaudited)
NOTE D. LONG-TERM DEBT:
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------- -----------------
($000 omitted)
<S> <C> <C>
Collaterialized Revolving Loan $ 16,126 $ 18,086
Revolving Loan 6,200 6,500
Term Loan 5,192 5,492
Amended Exchange Loan 15,792 17,227
12% Senior Subordinated Notes 65,878 65,878
8% Senior Subordinated Notes 2 2
8% Subordinated Debentures 263 262
Capital lease obligations 1,200 1,623
--------- ---------
110,653 115,070
Less current debt obligations (8,185) (9,563)
--------- ---------
Total long-term debt $ 102,468 $ 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 is
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 Collaterialized 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 will be 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 MONTH PERIODS ENDED MARCH 31, 1998 and 1997
RESULTS OF OPERATIONS
The following commentary presents management's discussion and analysis of the
Company's financial condition and result 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.
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.
The following table sets forth, for the periods indicated, selected financial
data as a percentage of net sales.
<TABLE>
<CAPTION>
Three Month Period
Ended March 31,
1998 1997
------ ------
<S> <C> <C>
Net sales 100.0 % 100.0 %
Cost of sales 47.6 45.9
------ ------
Gross profit 52.4 54.1
Selling and administrative expense 49.3 49.0
Other income - distributor receivables (1.1) (1.0)
Amortization expense 1.1 10.0
Interest expense 8.0 7.6
------ ------
Loss from continuing operations before income taxes (4.9) (11.4)
Income tax provision -- 0.2
------ ------
Loss before discontinued operations (4.9) (11.6)
Discontinued Operations:
Gain on disposition 15.2 --
Income from operations 1.2 0.1
------ ------
16.4 0.1
------ ------
Net income (loss) 11.5 % (11.5)%
====== ======
</TABLE>
14
<PAGE> 16
SAN JACINTO HOLDINGS INC. AND SUBSIDIARY
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTH PERIODS ENDED MARCH 31, 1998 AND 1997
RESULTS OF OPERATIONS - Continued
COMPARISON OF THE THREE MONTH PERIOD ENDED MARCH 31, 1998 TO THE THREE MONTH
PERIOD ENDED MARCH 31, 1997. NET SALES. Net sales from continuing operations for
the first quarter of 1998 by operating segment are as follows:
<TABLE>
<CAPTION>
Three Months Period Ended March 31,
1998 1997
<S> <C> <C>
Net Sales:
North America $42,253 $43,199
Europe -- 4,777
------- -------
Total $42,253 $47,976
======= =======
</TABLE>
Excluding sales from Europe, the first quarter of 1998 sales results are $946
(or 2.2%) below the same period in 1997. The sales results reflect a 6.8%
decline in manual forms, a 5.9% decline in computer forms and a 2.4% decline in
sourced product sales, partially off-set by a 25.2% growth in laser forms. The
manual and computer forms sales results reflect the small business customer's
transition from manual and pin-fed computer 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 margin is 52.4% of net sales for the first quarter of
1998 and 54.1% in 1997. Gross profit is before selling and administrative
expenses, including commission expense. This decline in gross profit margin is
attributable to a result of the change in the Company's product mix from manual
and computer forms sales to laser forms and sourced products. 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.
<TABLE>
<CAPTION>
Three Month Period Ended March 31,
1998 1997
Profit margin:
<S> <C> <C>
Manual forms 62.8% 62.2%
Computer and laser forms 47.9 48.6
Sourced products 40.2 39.8
------ ------
Total 52.4% 54.1%
====== ======
</TABLE>
SELLING AND ADMINISTRATIVE EXPENSE. Selling and administrative expenses are
$20.8 million in the first quarter of 1998 compared to $23.5 million for the
same period in 1997, representing 49.3% and 49.0% of net sales in each period.
The reduction in selling and administrative costs in the first quarter of 1998,
is attributable to the Company's European operations and a decline in commission
costs. The Company's operations in Europe, of which $1.5 million in costs are
included in the 1997 results, was sold in December 1997. Commissions to
independent distributors account for approximately 70% of total selling costs in
1998 and have remained constant as a percentage of net sales.
OTHER INCOME - Distributor Receivables. Other income (cash received greater than
carrying value of Distributor receivables) is $0.5 million for the first quarter
1998 and 1997, representing 1.1% of net sales in 1998 and 1.0% 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 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.
15
<PAGE> 17
SAN JACINTO HOLDINGS INC. AND SUBSIDIARY
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTH PERIODS ENDED MARCH 31, 1998 AND 1997
RESULTS OF OPERATIONS - Continued
AMORTIZATION EXPENSE. Amortization expense is $0.4 million for the first
quarters of 1998 and $4.8 million 1997. 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 at December 31, 1997. The customer list amortization was
$4.3 million in the first quarter of 1997.
INTEREST EXPENSE. Interest expense is $3.4 million for the first quarter of 1998
and $3.6 million for the same period 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 payments and the repayment of foreign debt
obligations.
INCOME TAX PROVISION. The Company's provision for income taxes in 1997 is
related to operations in Europe. No tax liability is incurred in the United
States as a result of net losses from operations.
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 operations were 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. The net sales from discontinued
operations were $2.9 in the first quarter of 1998 and $3.5 for the same period
in 1997. 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 from operating activities is funds provided by operations
of $5.2 million in the first three months of 1998. As of March 31, 1998, the
Company had $1.0 million in cash and cash equivalents, $2.3 million in
availability under revolving loans. At that date, the Company has a working
capital deficiency of $0.2 million and a ratio of current assets to current
liabilities of 0.99:1.
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 three months of 1998 are $0.2 million in machinery
and equipment. 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 Collaterialized 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 current obligations
as they come due.
16
