<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 16
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
August 19, 1999
POST-EFFECTIVE AMENDMENT NO. 16 TO FORM T-3
Filed herewith as Exhibit T3E-20 is the Quarterly Financial Statements for the
six month period ended June 30, 1999 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. 16 TO FORM T-3 IS AUGUST 19, 1999.
<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.
<PAGE> 4
** 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.
** 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.
- ----------
* Filed herewith.
** Filed previously.
<PAGE> 5
** 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 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 T3E-17 - Quarterly Financial Statements for the three
and nine month periods ended September 30, 1998.
** EXHIBIT T3E-18- 1998 Annual Report of the Company and
Safeguard Business Systems, Inc.
** EXHIBIT T3E-19 - Quarterly Financial Statements for the three
month period ended March 31, 1999
* EXHIBIT T3E-20 - Quarterly Financial Statements for the three
and six month periods ended June 30, 1999.
** 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 19
day of August 1999.
(SEAL)
SAN JACINTO HOLDINGS INC.
Attest: By: /s/ Elvis L. Mason
------------------------------------
Name: Elvis L. Mason
Title: Chairman
/s/ Michael D. Magill
- ------------------------------
Name: Michael D. Magill
Title: President and Chief Executive 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
</TABLE>
- ----------
* Filed herewith.
** Filed previously.
<PAGE> 8
<TABLE>
<S> <C>
Supplement to Exchange Offer and Consent
Solicitation............................................
** 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
</TABLE>
- ----------
* Filed herewith.
** Filed previously.
<PAGE> 9
<TABLE>
<S> <C>
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-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>
- ----------
* Filed herewith.
** Filed previously.
<PAGE> 10
<TABLE>
<S> <C>
** EXHIBIT T3E-12 Quarterly Financial Statements for the six month
period 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 month
and six month periods ended June 30, 1998.
** EXHIBIT T3E-17 Quarterly Financial Statements for the three month
and nine month periods ended September 30, 1998.
** EXHIBIT T3E-18 1998 Annual Report of the Company and Safeguard
Business Systems, Inc.
** EXHIBIT T3E-19 Quarterly Financial Statements for the three month
period ended March 31, 1999.
* EXHIBIT T3E-20 Quarterly Financial Statements for the three month
and six month periods ended June 30, 1999.
</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.
<PAGE> 1
EXHIBIT T3E-20
SAN JACINTO HOLDINGS INC. AND SUBSIDIARY
CONSOLIDATED QUARTERLY FINANCIAL STATEMENTS
THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1999 AND 1998
[SAFEGUARD LOGO]
<PAGE> 2
SAN JACINTO HOLDINGS INC. AND SUBSIDIARY
CONSOLIDATED QUARTERLY FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1999 AND 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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Letter to Stockholders and Bondholders 1 - 4
Financial Statements & Notes 5 - 11
The accompanying unaudited interim consolidated financial
statements were prepared on a consistent basis utilizing the
accounting policies described in the Summary of Significant
Accounting Policies included in the notes to the consolidated
financial statements in the Company's 1998 Annual Report. These
policies and the Notes to Consolidated Financial Statements should
be read in conjunction with the accompanying statements. These
interim statements have been drawn from unaudited internal data and
include all adjustments, which the Company believes necessary to a
fair presentation of the statements. The interim operating results
are not necessarily indicative of the results expected for the full
year.
Management's Discussion and Analysis of Financial, Condition 12 - 15
and Results of Operations
</TABLE>
<PAGE> 3
[SAN JACINTO HOLDINGS INC. Letterhead]
August 16, 1999
TO ALL STOCKHOLDERS AND BONDHOLDERS:
Enclosed are the unaudited financial statements of San Jacinto
Holdings, Inc. (the "Company") and its operating subsidiary, Safeguard Business
Systems, Inc. ("Safeguard") for the fiscal period ended June 30, 1999. Operating
earnings (EBITDA) totaled $6.3 million for the six months ended June 30, 1999,
flat from the same period in 1998. Although sales have been relatively flat from
last year, operating earnings (EBITDA) totaled $2.8 million in the second
quarter of 1999 compared to $3.3 million on a comparable basis for 1998.
Operating earnings for the second quarter have declined due to increased
commissions and shift in the product mix and its impact on margins. There are
modest sales from the Company's Network Expansion program realized in the second
quarter, as seven transactions closed during the second quarter of 1999. For
additional information please review the Management's Discussion and Analysis
following the financial statements and footnotes in this Report.
OVERVIEW
During the second quarter the Company continued to advance its
opportunities to grow sales through Network Expansion. Additionally, having
completed its Year 2000 update in the first quarter, the Company is following up
on vendors with whom it conducts business with to ensure their compliance with
the Year 2000 issue. The Company also continued a system wide focus on customer
service in an effort to strengthen its ties to the small business marketplace.
This focus will be continued into 2000 and will remain a critical element of
Safeguard's strategic direction for the future.
RESULTS OF OPERATIONS
Net sales for the second quarter of 1999 were $41.3 million, down 0.7%
from $41.6 million for the comparable period in 1998. This modest decline
reflects a 6.2% decline in One-Write sales from $15.4 million in the second
quarter of 1998, to $14.4 million for the second quarter of 1999, and
<PAGE> 4
a 14.8% decline in computer form sales from $10.1 million to $8.6 million. While
the decline in One-Write products has lessened from its previous declines,
computer forms have accelerated their decline as more small business customers'
shift to laser products. For this reason our Laser growth continues at a 26.8%
growth over comparable sales in 1998.
With regard to pricing issues, during 1998, Safeguard reduced prices on
its computer forms products to remain competitive with the marketplace.
Additionally Safeguard announced a price increase on its One-Write products at
the end of 1998, and implemented an approximate 6% increase beginning in the
first quarter of 1999. Safeguard is implementing an additional price increase in
the third quarter of 1999 to offset the increases in some of its material costs.
Additionally, sales from sourced products were $8.3 million, up 6.7% from the
$7.8 million recorded in the second quarter of 1998. Envelopes were essentially
flat at $2.4 million compared to the second quarter of 1998.
The Company has placed a greater emphasis with its distribution channel
on manufactured products, due to the impact that such sales have on absorbing
overhead built into the financial structure of the Company. One of the tools
utilized to emphasize manufactured products was a form of additional
compensation for growth in manufactured products. During the second quarter of
1999 an additional $2.0 million in sales were generated through this program.
Selling and administrative expenses have increased from the comparable
period in 1998 from $19.9 million to $20.2 million. This increase was occasioned
by the additional commissions generated on new sales of products manufactured by
the Company.
Earnings before interest, taxes and amortization ("EBITA") has
decreased 28.5%, from $2.5 million in 1998 to $1.8 million in 1999, primarily
due to the drop in sales from manufactured products from the previous year.
EBITDA (EBITA plus depreciation) has decreased by 14%, from $3.3 million in 1998
to $2.8 million in 1999.
Amortization expense has remained flat in the comparable quarterly
period in 1999 and 1998. Interest expense was 7.1% lower than the amount in 1998
due to the reduced levels of borrowing caused by reductions in our borrowings
and slight reduction in borrowing rates under the working capital line of
credit. Thus the loss from continuing operations increased from $1.3 million in
1998, to $1.8 million for the quarter ended June 30, 1999.
2
<PAGE> 5
NETWORK EXPANSION
During the second quarter the Company continued to focus on Network
Expansion, a program for the expansion of sales volume through either
integration of new business into existing distributorships or the addition of
new distributors to Safeguard. As the second quarter of 1999 ended, seven
integration transactions had closed and ten more were scheduled to close within
60 days. Safeguard continues to believe that there is a significant amount of
additional business through consolidations of the channel within North America,
and that growth in sales volume can be generated through this program. Clearly
though, the process has taken longer than initially anticipated. All of the
expansion has occurred within the existing distribution channel in transactions
referred to as "integrations". These transactions occur through the integration
of an existing book of business from an independent dealer into a Safeguard
distributor. Safeguard does not advance funds on these transactions and the
business is brought into Safeguard through renewals of the existing business.
The direct benefit of new sales is that additional volume will absorb fixed
overhead and excess capacity within the Safeguard infrastructure.
PRODUCT PLATFORM
Safeguard continues to remind distributors that our profit margins are
derived from the sale of manufactured products. The Company provides many
services at either very little cost or no cost to distributors because they are
the Company's only channel to the small business market. The Company's business
model is not designed to support the sale of products through Sourced Products
which could either be manufactured by the Company, or sold through a Standard
Program.
The Company supports the concept of Sourced Products as a means of
allowing distributors to service their customers with other products which are
neither manufactured nor set up as Alliance products. The fees charged for this
service, however, do not provide sufficient profit margins to allow Safeguard to
provide some of the many services currently provided to Safeguard. A joint
communique from the United Safeguard Distributors Association ("USDA") Board and
Safeguard was issued in May of this year setting forth our position on this
issue.
It is Safeguard's position that when we manufacture a product, it is a
violation of the fundamental relationship between distributors and Safeguard if
a product is sold to a customer through Sourced Products. As Safeguard's only
channel to the marketplace, this is the primary tenet upon which this business
model is predicated, and has been so since the Company was founded.
3
<PAGE> 6
EAST COAST CONSOLIDATION
During the second quarter of 1999, the Company consolidated its contact
centers from its MSC facility to its Fort Washington facility. Additionally the
Company finalized the consolidation of its Tustin, California operations to its
facility in Los Angeles and its facility in Fort Washington, Pennsylvania. The
facility in Tustin has been subleased to an independent party and the expense
savings from this transaction should approximate $1 million per annum.
REGIONAL BUSINESS FORUMS
During the second quarter of 1999 the Company successfully completed
its Regional Business Forums ("RBF's). These RBF's were held in fourteen cities
throughout North America and were extremely well received by all distributors
based upon the evaluation forms received. Safeguard is committed to these local
forums as a means of meeting with distributors in their marketplace to provide
training, information, and recognition for their successes in sales growth.
These forums will continue into the year 2000 and will most likely encompass
tours of the Plants as Safeguard attempts to raise the level of recognition of
the Company's capabilities and level of service.
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 customer base. The Company has recently begun consolidating the
contact center environments in its eastern plants to the administrative center
in Fort Washington, Pennsylvania. The purpose for this consolidation is to
improve the level of service which distributors and customers receive when they
contact Safeguard. The Company is committed to helping its independent
distributors provide quality products and exemplary service in its efforts to
improve customer retention, as well as improve its future sales levels.
The Company will continue to improve its operations through automation
of Sourced Products sales, improved CMS technology; growth in sales and
profitability through network expansion; identify and integrate new products to
manufacture; and maintain our commitment to our independent distributor network
where together, "We help small business succeed" in their efforts to grow and
prosper.
/s/ Elvis L. Mason /s/ Michael D. Magill
------------------------- -------------------------
Elvis L. Mason Michael D. Magill
Chairman of the Board President & CEO
4
<PAGE> 7
SAN JACINTO HOLDINGS INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
($000 omitted)
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 980 $ 639
Receivables less allowances 19,099 20,055
Inventories 5,805 6,985
Other current assets 1,645 861
--------- ---------
Total current assets 27,529 28,540
Property, machinery and equipment 10,967 12,179
Excess purchase price over net assets acquired 39,611 40,332
Other assets 1,151 1,547
--------- ---------
Total assets $ 79,258 $ 82,598
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Current debt obligations $ 7,301 $ 6,978
Accounts payable 15,466 15,593
Accrued expenses 8,874 8,073
--------- ---------
Total current liabilities 31,641 30,644
Long-term debt 98,494 100,703
Other liabilities 10,257 9,383
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 stockholders' 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 (153,925) (150,950)
Accumulated other comprehensive loss (1,363) (1,336)
--------- ---------
Total stockholders' deficiency (61,134) (58,132)
--------- ---------
Total liabilities and stockholders' deficiency $ 79,258 $ 82,598
========= =========
</TABLE>
See notes to consolidated financial statements
5
<PAGE> 8
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,
-------------- --------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $ 41,337 $ 41,641 $ 83,283 $ 83,894
Cost of sales 19,659 19,699 39,164 39,825
-------- -------- -------- --------
Gross profit 21,678 21,942 44,119 44,069
Selling and administrative expense 20,188 19,904 40,576 40,750
Other income - distributor receivables (275) (430) (650) (904)
Amortization expense 467 447 974 893
Interest expense 3,081 3,316 6,194 6,710
-------- -------- -------- --------
Loss from continuing operations
before income taxes (1,783) (1,295) (2,975) (3,380)
Income tax provision -- -- -- --
-------- -------- -------- --------
Loss from continuing operations (1,783) (1,295) (2,975) (3,380)
Discontinued operations:
Gain on sale of assets -- -- -- 6,438
Income from discontinued operations -- -- -- 512
-------- -------- -------- --------
Net income (loss) (1,783) (1,295) (2,975) 3,570
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment (18) (124) (27) (239)
-------- -------- -------- --------
Comprehensive income (loss) $ (1,801) $ (1,419) $ (3,002) $ 3,331
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 9
SAN JACINTO HOLDINGS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
PERIOD FROM JANUARY 1, 1998
TO JUNE 30, 1999
($000 omitted)
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Additional other
Preferred stock Common stock paid in comprehensive
Shares Amount Shares Amount capital Deficit loss
------ ------ ------ ------ ------- ------- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance -
January 1, 1998 -- $ -- 1,052,384 $ 11 $ 94,143 $(150,780) $ (935)
Net loss (170)
Accumulated other
comprehensive loss -- -- -- -- -- -- (401)
--------- --------- --------- --------- --------- --------- ---------
Balance -
December 31, 1998 -- -- 1,052,384 11 94,143 (150,950) (1,336)
Net loss (2,975)
Accumulated other
comprehensive loss -- -- -- -- -- -- (27)
--------- --------- --------- --------- --------- --------- ---------
Balance -
June 30, 1999 -- -- 1,052,384 $ 11 $ 94,143 $(153,925) $ (1,363)
--------- --------- ========= ========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
7
<PAGE> 10
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,
-------------- --------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash flow income from operating activities:
Net income (loss) $(1,783) $(1,295) $(2,975) $ 3,570
Adjustments to reconcile net loss to cash
provided by (used in) operating activities:
Amortization 467 447 974 893
Depreciation 1,051 812 2,071 2,071
Net (gain) loss on sale of assets -- -- -- (6,438)
Unrealized exchange gain (loss) (18) (124) (27) (239)
(Increase) decrease in operating assets:
Receivables (11) 1,100 956 3,414
Inventories 905 (296) 1,180 (454)
Assets held for disposition -- -- -- 500
Other assets (17) 226 (491) (1,097)
Increase (decrease) in operating liabilities
Accounts payable (360) (2,059) (127) (538)
Accrued expense and other liabilities (1,947) (74) 1,682 2,333
------- ------- ------- -------
Net cash provided by (used in) operating activities (1,713) (1,263) 3,243 4,015
Cash flows from investing activities:
Net proceeds from sale of assets -- 6,695 -- 6,695
Purchase of software, machinery and equipment (248) (314) (465) (418)
Adjustment due to currency fluctuations 3 62 (24) 63
------- ------- ------- -------
Net cash provided by (used in) investing activities (245) 6,443 (489) 6,340
------- ------- ------- -------
Cash flows from financing activities:
Repayment of long-term debt and capital
lease obligations (1,659) (3,509) (3,513) (5,769)
Borrowings from (repayment of) revolving loans 2,974 (1,890) 1,250 (4,150)
Financing costs -- -- (150) --
------- ------- ------- -------
Net cash provided by (used in) financing activities 1,315 (5,399) (2,413) (9,919)
------- ------- ------- -------
Net increase (decrease) in cash and cash equivalents (643) (219) 341 436
Cash and cash equivalents at beginning of period 1,623 1,040 639 385
------- ------- ------- -------
Cash and cash equivalents at end of period $ 980 $ 821 $ 980 $ 821
======= ======= ======= =======
</TABLE>
8
<PAGE> 11
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 $370 and $543 were entered into
during the first six months of 1999 and 1998 respectively, to
acquire software, machinery and equipment.
PIK (Payment in Kind") Debentures totaling $7 and $11 were issued
in June, 1999 and June 1998, respectively. 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,
-------------- --------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Earnings before interest, taxes, depreciation & $2,816 $3,280 $6,264 $6,294
amortization (EBITDA)
Earnings before interest, taxes & amortization $1,765 $2,468 $4,193 $4,223
(EBITA)
Cash paid during the period for:
Interest $4,789 $5,386 $6,074 $6,893
</TABLE>
See notes to consolidated financial statements
9
<PAGE> 12
SAN JACINTO HOLDINGS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1999 AND 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 1998 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 December 31, 1998 are derived
from the Company's audited financial statements as of that date.
NOTE B. DISCONTINUED OPERATIONS:
In 1997, the Company decided 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 sales from discontinued operations were $2.9 million for the
first six months of 1998. 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,
1999 1998
---- ----
($000 omitted)
<S> <C> <C>
Raw Material $3,321 $4,380
Work-in-process 288 258
Finished Goods 2,196 2,347
------ ------
Total $5,805 $6,985
====== ======
</TABLE>
10
<PAGE> 13
SAN JACINTO HOLDINGS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1999 AND 1998
(Unaudited)
(continued)
NOTE D. LONG-TERM DEBT:
The Company's debt outstanding is as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- ----
($000 omitted)
<S> <C> <C>
Revolving Loan - Collateralized $ 18,627 $ 17,377
Revolving Loan 4,000 4,000
Term Loan 8,000 8,000
Amended Exchange Loan 8,617 11,487
12% Senior Subordinated Notes 65,878 65,878
8% Senior Subordinated Notes 1 2
8% Subordinated Debentures 201 194
Capital lease obligations 471 744
--------- ---------
105,795 107,682
Less current debt obligations (7,301) (6,978)
--------- ---------
Total $ 98,494 $ 100,704
========= =========
</TABLE>
On June 30, 1999, Safeguard amended the collateralized revolving loan
agreement with its bank. The agreement was amended to provide for a
short-term $2.5 million overadvance. The overadvance will be repaid in
conjunction with a restructuring of the unsecured Revolving Loan and
the Amended Exchange Loan. The finalization of this restructuring is
scheduled to be completed in August 1999.
11
<PAGE> 14
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, 1999 AND 1998
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 years ended December 31, 1998 and 1997, and
quarterly report for the quarters ended March 31, 1999 and 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, the Company's Annual Report for the years ended
December 31, 1998 and 1997 and the quarterly report for the quarters ended March
31, 1999 and 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,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Sales 47.6 47.3 47.0 47.5
------ ------ ------ ------
Gross profit 52.4 52.7 53.0 52.5
Selling and administrative expense 48.8 47.8 48.7 48.6
Other income - distributor receivables (0.7) (1.0) (0.8) (1.1)
Amortization expense 1.1 1.1 1.2 1.1
Interest Expense 7.5 8.0 7.4 8.0
------ ------ ------ ------
Loss from continuing operations
before income taxes (4.3) (3.1) (3.6) (4.0)
Income tax provision 0.0 0.0 0.0 0.0
------ ------ ------ ------
Loss from continuing operations (4.3) (3.1) (3.6) (4.0)
Discontinued operations:
Gain on sale of assets 0.0 0.0 0.0 7.7
Income from discontinued operations 0.0 0.0 0.0 0.6
------ ------ ------ ------
Net income (loss) (4.3)% (3.1)% (3.6)% 4.3%
====== ====== ====== ======
</TABLE>
12
<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, 1999 AND 1998
RESULTS OF OPERATIONS - Continued
San Jacinto Holdings Inc. through its wholly owned subsidiary, Safeguard
Business Systems, Inc. ("Safeguard"), 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 products, 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.
COMPARISON OF THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1999, AND FOR THE
THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1998.
NET SALES. Net sales from continuing operations for the second quarter of 1999
are $41.3 million which is slightly (0.7% or $300) below the sales level for the
second quarter of 1998. For the first six months net sales in 1999 are $83.3
million which is $.06 million (or 0.7%) below sales for the same period in 1998.
The sales decline in the first six months of 1999 is due in part to one less
workday than in 1998, which results in less time for sales activity and plant
production. The sales results reflects a 27.3% growth in laser forms and a 8.6%
growth in sourced product sales off-set by a 7.1% decline in manual form sales
and a 14.7% decline in computer forms sales. The sales results reflect the
anticipated shift in product mix from manual and computer forms sales to laser
forms and promotional products. The decline in manual form sales is offset in
part by a 6.0% price increase effective January 1999.
The Company's 1999 objectives are focused on the expansion of its distributor
network through recruiting new distributors and assisting existing distributors
in purchasing customer bases from independent forms dealers interested in
selling their businesses. Substantial efforts have occurred in identifying and
contacting potential new distributors and form dealers during the first six
months of 1999. Negotiations are currently underway with several dealers for the
acquisition of their customer bases by existing Safeguard distributors. Seven
such acquisitions have closed in 1999 to date with estimated annual revenue of
approximately $1.3 million.
GROSS PROFIT. Gross profit is before selling and administrative expenses,
including commission expense. Gross profit margins from continuing operations
are as follows:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Manual forms 60.9% 63.3% 61.7% 62.9%
Computer and laser forms 51.9 50.7 52.3 49.7
Sourced products 38.9 36.4 39.3 38.3
------ ------ ------ ------
Total 52.7% 52.7% 53.0% 52.5%
====== ====== ====== ======
</TABLE>
The profit margin for the second quarter of 1999 remained flat in comparison to
1998 despite the shift in product mix from manual to laser forms and sourced
products. The fluctuations in margins by product line are attributable to the
order volume changes; manual forms volume declines resulted in fewer orders to
absorb fixed overhead costs, and laser forms and sourced product volume
increases result in reduced per order fixed overhead costs.
13
<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, 1999 AND 1998
RESULTS OF OPERATIONS - Continued
The improvement in profit margin for the first six months of 1999 is
attributable to a significant reduction in manufacturing overhead costs. The
cost reductions are in leased and owned equipment costs related to technological
advances in the computer systems implemented in 1997. The Company realized
additional manufacturing facility cost savings in 1999 associated with the
closure of the Addison, Illinois plant. These cost savings have been offset in
part by increases in material, labor and delivery costs.
SELLING AND ADMINISTRATIVE EXPENSE. Selling and administrative expenses are
$20.2 million in the second quarter of 1999 compared to $19.9 million for the
same period in 1998, representing 48.8% and 47.8% of net sales in each period.
For the six months, selling and administrative expenses are $40.6 million in
1999 compared to $40.8 million in 1998, representing 48.7% and 48.6% of net
sales in each period. The reduction in selling and administrative costs in 1999
is attributable to strategic reductions in costs throughout the company and
efficiencies achieved through technological advancements in the operating
system. These cost reduction efforts have been offset in part by additional
costs in support of the Company's network expansion initiative. Commissions to
independent distributors account for 70% of total selling and administrative
costs in 1999 and 1998. As a percent of total sales commission costs have
remained constant at approximately 33.5% of net sales.
OTHER INCOME - Distributor Receivables. Other income (cash received greater than
carrying value of Distributor receivables) is $0.3 million for the second
quarter 1999 and $0.4 million for the same period in 1998, representing 0.7% of
net sales in 1999 and 1.0% in 1998. Other income for the six-month period is
$0.7 million in 1998 and $0.9 million in 1998. 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 is expected to continue in amounts
approximating $1.5 million through the year 2000.
AMORTIZATION EXPENSE. Amortization expense is approximately $450 for the second
quarter of 1999 and 1998. Amortization expense is $1.0 million and $0.9 million
for the first six months of 1999 and 1998, respectively. The expense consists of
the amortization of intangible assets, including excess purchase price over net
assets acquired and financing costs.
INTEREST EXPENSE. Interest expense is $3.1 million for the second quarter of
1999 and $3.3 million for the same period in 1998. For the first six months,
interest expense is $6.2 million in 1999 in comparison to $6.7 million in 1998.
The decrease in interest expense in 1999 is attributable to a reduction in the
Company's average outstanding borrowings as a result of principal repayment
under the Amended Exchange Loan, and a slight (0.5%) reduction in the Company's
borrowing rate under its collateralized Revolving Loan.
INCOME TAX PROVISION. No tax liability is incurred in the United States or
Canada as a result of net losses from operations.
14
<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, 1999 AND 1998
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's primary source of liquidity has been cash flows
generated from operations, availability of operating and capital leases, and
borrowing capacity from its primary banking group. The Company's cash flows from
its operating activities were $3.2 million during the first half of the year and
were primarily used in the financing activities. As of June 30, 1999, the
Company had $980 thousand in cash and cash equivalents and had $1.0 million in
borrowing capacity under its existing debt structure. These funds were
sufficient to aid in satisfying the Company's debt service payments on July 1,
1999. At June 30, 1999, the Company had a working capital deficit of $4.1
million and a ratio of current assets to current liabilities (as defined in the
loan agreement) of 1.13:1. The Company's ongoing liquidity requirements for the
second half of 1999 will arise from working capital requirements and debt
service. Any requirements for capital assets during the second half of 1999 will
be primarily through capital or operating leases.
The Company's debt instruments require the Company to meet certain covenants
including certain financial ratios. The Company was in default of certain
covenants in its bank line and has obtained waivers from its bank group. The
Company is currently in compliance with its bank loan agreements. The Company is
currently in the process of reassessing its cash flow and operating forecasts.
The Company's ability to fund its future obligations is based in large part upon
achieving sales growth and margins from a product mix predominantly manufactured
by the Company. Failure to meet growth in sales and appropriate product mix
margins could diminish the Company's ability to fund its obligations on an
ongoing basis. Sales projections and growth in sales for the Company is largely
based upon the success of its efforts in the Network Expansion program and the
ability of its existing distributors to improve their sales. The Company cannot
be assured that sufficient sales will be generated to meet its projections and
therefore its cash flow needs. The Company has suspended any further significant
capital expenditure for the remainder of 1999 to ensure that it focuses its cash
resources on its current obligations.
The Company is also exploring alternatives for obtaining additional working
capital. The Company is looking at both additional debt and equity financing.
However at this time the Company has not entered into any agreements to obtain
any additional capital and there can be no assurances that additional capital
will be available to or obtained by the Company.
15
