<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 13
TO
FORM T-3
FOR APPLICATIONS FOR QUALIFICATION OF INDENTURES
UNDER THE
TRUST INDENTURE ACT OF 1939
SAN JACINTO HOLDINGS INC.
(NAME OF APPLICANT)
2121 San Jacinto Street, Suite 1000
Dallas, Texas 75201
(Address of Principal Executive Offices)
SECURITIES ISSUED UNDER
THE INDENTURE QUALIFIED
Title of Class Amount
-------------- ------
12% Senior Subordinated Notes Maximum of
Due December 31, 2002 $66,138,406
Name and Address of Agent
for Service of Process:
Elvis L. Mason
San Jacinto Holdings Inc.
2121 San Jacinto Street, Suite 1000
Dallas, Texas 75201
with a copy to:
J. Kenneth Menges, Jr., P.C.
Akin, Gump, Strauss, Hauer & Feld, L.L.P.
1700 Pacific Avenue, Suite 4100
Dallas, Texas 75201-4618
Effective Date of Form T-3: January 25, 1996
This Document Consists of ____ Pages
Exhibit Index Begins on Page ____
<PAGE> 2
November 24, 1998
POST-EFFECTIVE AMENDMENT NO. 13 TO FORM T-3
Filed herewith as Exhibit T3E-17 is the Quarterly Financial Statements for the
three and nine month periods ended September 30, 1998 of San Jacinto Holdings
Inc. (the "Company") and Safeguard Business Systems, Inc. which is required to
be furnished to holders of the Company's 12% Senior Subordinated Notes (the "New
Notes") and filed with the Securities and Exchange Commission pursuant to
Section 4.03 of the indenture between the Company and U.S. Trust Company of
Texas, N.A., as Trustee which governs the New Notes of the Company.
THE DATE OF THIS POST-EFFECTIVE AMENDMENT NO. 13
TO FORM T-3 IS NOVEMBER 16, 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 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 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
16th day of November 1998.
(SEAL)
SAN JACINTO HOLDINGS INC.
Attest: By: /s/ Elvis L. Mason
-------------------------------------
Name: Elvis L. Mason
Title: Chairman and Chief Executive
Officer
/s/ Michael D. Magill
- --------------------------------
Name: Michael D. Magill
Title: President and Chief
Operating Officer
<PAGE> 7
EXHIBIT INDEX
EXHIBIT NO. EXHIBIT PAGE
- ----------- ------- ----
** 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 ...............................
- --------------
* Filed herewith.
** Filed previously.
<PAGE> 8
** EXHIBIT T3E-2(f) Form of Letter of Transmittal to holders of
the Company's 8% Senior Subordinated
Debentures due December 31, 2000 pursuant
to the Third Supplement to Exchange Offer
and Consent Solicitation ...................
** EXHIBIT T3E-3(a) Form of Notice of Guaranteed Delivery to be
provided to holders of the Company's 8%
Senior Subordinated Notes due December 31,
2000 .......................................
** EXHIBIT T3E-3(b) Form of Notice of Guaranteed Delivery to
be provided to holders of the Company's
8% Subordinated Debentures due December 31,
2000 .......................................
** EXHIBIT T3E-3(c) Form of letter to Brokers, Dealers,
Commercial Banks, Trust Companies and
Other Nominees .............................
** EXHIBIT T3E-3(d) Form of letter to be sent by Brokers,
Dealers, Commercial Banks, Trust Companies
and Other Nominees to their clients ........
** EXHIBIT T3E-3(e) Form of Notice of Guaranteed Delivery to
be provided to holders of the Company's 8%
Senior Subordinated Notes due December 31,
2000 pursuant to the Supplement to Exchange
Offer and Consent Solicitation .............
** EXHIBIT T3E-3(f) Form of Notice of Guaranteed Delivery to
be provided to holders of the Company's 8%
Subordinated Debentures due December 31,
2000 pursuant to the Supplement to Exchange
Offer and Consent Solicitation .............
** EXHIBIT T3E-3(g) Form of letter to Brokers, Dealers,
Commercial Banks, Trust Companies and Other
Nominees pursuant to the Supplement to
Exchange Offer and Consent Solicitation ....
** EXHIBIT T3E-3(h) Form of letter to be sent by Brokers,
Dealers, Commercial Banks, Trust Companies
and Other Nominees to their clients pursuant
to the Supplement to Exchange Offer and
Consent Solicitation .......................
** EXHIBIT T3E-3(i) Form of Notice of Guaranteed Delivery to be
provided to holders of the Company's 8%
Senior Subordinated Notes due December 31,
2000 pursuant to the Third Supplement to
Exchange Offer and Consent Solicitation ....
** EXHIBIT T3E-3(j) Form of Notice of Guaranteed Delivery to be
provided to holders of the Company's 8%
Subordinated Debentures due December 31,
2000 pursuant to the Third Supplement to
Exchange Offer and Consent Solicitation ....
- --------------
* Filed herewith.
** Filed previously.
<PAGE> 9
** 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 ..........
- --------------
* Filed herewith.
** Filed previously.
<PAGE> 10
* 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 ...................................
- --------------
*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
SAN JACINTO HOLDINGS INC. AND SUBSIDIARY
Consolidated Quarterly Financial Statements
For the three and nine month periods ended
September 30, 1998 and 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Letter to Stockholders and Bondholders 1 - 5
Financial Statements & Notes 6 - 12
The accompanying unaudited interim consolidated financial statements
were prepared on a consistent basis utilizing the accounting policies
described in the Summary of Significant Accounting Policies included
in the notes to the consolidated financial statements in the Company's
1997 Annual Report. These policies and the Notes to Consolidated
Financial Statements should be read in conjunction with the
accompanying statements. These interim statements have been drawn from
unaudited internal data and include all adjustments which the Company
believes necessary to a fair presentation of the statements. The
interim operating results are not necessarily indicative of the
results expected for the full year.
Management's Discussion and Analysis of Financial, Condition 13 - 16
and Results of Operations
</TABLE>
<PAGE> 2
SAN JACINTO HOLDINGS INC.
November 15, 1998
TO ALL SHAREHOLDERS AND BONDHOLDERS:
The third quarter of 1998 was a disappointing quarter due to the
negative sales trend in the underlying distribution channel for Safeguard
Business Systems, Inc. During this quarterly period earnings before interest,
taxes and amortization ("EBITA") were $2.0 million, or 20% lower compared to the
previous quarter's results of $2.5 million. The third quarter results were
comparable to the same period of 1997. The overall operational quality of the
Company, however, continues to improve. While sales were off slightly, down .6%,
from the second quarter of 1998, operating expenses continue to decline compared
to the second quarter of 1998. Technological improvements continue to occur,
which translates into greater cost efficiencies and improving the Company's
infrastructure. More importantly, these technological advancements will
strengthen the Company's ability to achieve its growth strategies. In this
regard, the Company spent a great deal of time focusing on its strategic
direction for future growth at the North American Business Meeting, held in
October at Dallas. This meeting, attended by a majority of Safeguard's
independent distributors, allowed the Company to focus its discussions on
profitable growth through expanding the network by integrating new bases of
business into existing distributorships, as well as by recruiting new
distributors.
SALES
Sales were $41.4 million, down 3.8%, or $1.6 million from the
comparable period in 1997, excluding U.K. sales of $5.0 million from last year.
For the nine month period ended September 30,
2121 San Jacinto Street-Suite 1000-Box 66-Dallas, Texas 75201-(214) 754-2623
<PAGE> 3
1998, sales were down 4.1%, or $5.3 million, if you exclude $14.7 million in
sales from the U.K. for the same period in 1997. While One-Write sales and
continuous forms sales continue to decline, sales of laser products continue to
grow. Additionally sales from sourced products were 2.9% above the second
quarter of 1998, and 1.9% above the comparable period in 1997. 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. Clearly though, the distribution
channel as it exists today is not providing the growth in sales necessary to
provide additional financial strength to the Company. It is this problem which
prompted the Company to redirect its focus to adding new sales, either through
distributor aided acquisitions of new business, or through the addition of forms
broker/dealers as new distributors. During the third quarter the bank group
allowed the Company to increase its Term Loan facility to $8 million, and defer
the amortization of principal on the Term Note until September of 1999. This
amendment to our existing debt agreements will allow the Company the capital
necessary to focus on an expansion of the current distribution channel. The
Company also added a LIBOR option to its working capital line, which will have
the effect of reducing interest costs.
TECHNOLOGY ADVANCEMENTS
The continuing and ongoing focus of adding and improving the many
peripheral systems that can run from the AS/400 platform has produced cost
efficiencies, improved customer service, and will aid the Company in adding
business bases for existing distributors and adding new distributors. The
Company has also upgraded its proprietary order entry system for use in the
distribution channel, and continues to focus its attention on utilizing the
Internet and the Intranet for processing orders and communicating with the
distribution channel. The Company has adjusted the pricing on the order entry
service to its distribution channel, and provided several options which
distributors can choose as they move toward greater Internet access
capabilities.
2
<PAGE> 4
The Company has also automated approximately 50% of the credit and
collection function to realize more operational efficiencies from the conversion
to the AS/400. Additionally bar code scanning in the Pennsylvania plants has
allowed for the location and monitoring of customer orders and will provide for
the tracking of costs associated with production. This process will be totally
functional throughout North America by year end, and is providing cost
efficiencies and improving customer service capabilities. The additional systems
in the front-end order entry and photo-composition area are also in the process
of consolidation and automation so that in 1999, orders can go directly from the
distributor to the printing process without human intervention. This will
improve delivery, provide cost efficiencies, and produce fewer mistakes due to
the reduction of human intervention in the process.
CUSTOMER SERVICE INITIATIVES
At the North American Business Meeting, the Company reiterated its
focus on the customer. The establishment of a vision statement that states, "We
Help Small Business Succeed", requires the efforts of the Company and its
distribution channel to effect customer satisfaction and customer loyalty. The
Company is committed to helping its distribution channel provide better service,
quality products, and exemplary service in its drive to improve customer
retention, as well as improve its future sales levels. It is critical from a
cost perspective to retain existing customers. The focus and attention to
customer service is absolutely necessary to remain competitive in the
marketplace and provide cost effective sales growth from the existing base of
customers.
FRANCHISE INITIATIVES
The Company is currently in the process of registering as a franchise
under the applicable franchise laws of all states in which the Company operates.
While the Company does not expect such registration to change the existing
relationship with its current distribution channel, it will allow the Company
more flexibility in its financial dealings with new distributors as they join
the Safeguard organization.
3
<PAGE> 5
"GROWTH" - THE NUMBER ONE PRIORITY
At the North American Business Meeting, the Company made extensive
presentations to its distribution channel about the future direction of the
Company and its principal priority, Growth! Distributors were reminded that
failure to grow was not an option, and that contractual remedies existed to
resolve performance issues. For those distributors who choose to grow through
business base acquisitions, extensive support and incentives would be added
through programs initiated by the Company. Additionally the Company is going to
recruit forms brokers/dealers with existing businesses to become Safeguard
Distributors in areas where it has no existing, or insufficient market coverage.
The Company's direction to improve its technology, manufacturing, and billing &
collecting infrastructure, will uniquely position the Company to attract such
business and grow the distributor channel to reach a market largely in need of
infrastructure support. Through this expanded channel the Company will continue
to expand its systems and solutions for the small business marketplace to
generate growth and profitability for the future.
RESULTS OF OPERATIONS
Quarterly sales were $41.4 million, or 3.8% below sales of $43 million
for the comparable period in 1997 not including sales from the U.K. subsidiary
of $5.0 million. Additionally sales from payroll operations and data services
were included in the previous years reported sales and total $9.0 million. This
amount has been excluded from the reported numbers in both periods as
discontinued operations. Sales in One-Write continue to decline at 9.7% as well
as short-run continuous forms, which are declining at 10.1% from the previous
period last year. Laser sales continue to increase at 23.9% over last years
period, and at a pace greater than industry averages. Sourced products have
declined from comparable periods due to pricing increases put into effect during
the second quarter of 1998.
4
<PAGE> 6
Operating expenses have declined by 1.5% from the comparable period in
1997 due to the sale of the U.K. subsidiary. However expenses have also declined
2.0% from the previous quarter, from $19.9 million to $19.4 million for the
quarter ended September 30, 1998. Improvements in cost controls and efficiencies
are helping to improve operating results.
Earnings before interest, taxes and amortization ("EBITA") has declined
from $2.5 million in the second quarter of 1998 to $2.0 million in the third
quarter, primarily due to the decline in sales, and excluding the operations of
the UK Subsidiary are comparable to the same period in 1997. EBITDA (EBITA plus
depreciation) has increased from $3.3 million in the second quarter of 1998 to
$3.4 million in the third quarter of 1998, which is slightly below the $3.5
million for the comparable period in 1997, excluding the U.K. subsidiary.
Amortization expense has declined by $4.2 million from the comparable
period in 1997 due to the complete amortization of the customer list at the end
of 1997. Interest expense was 7.5% lower than the third quarter of 1997 and
essentially flat from the second quarter of 1998. Thus the loss from continuing
operations, excluding the U.K. subsidiary earnings of $0.6 million, declined by
$3.4 million, from $5.3 million in the third quarter of 1997, to $1.9 million
for the quarter ended September 30, 1998.
The Company has made great strides in improving the quality,
performance and reliability of its operations. What is left to round out the
Company's growth and profitability goals is the expansion of the channel and
transitioning existing members of the channel to create a more effective and
productive sales force. The Company is committed to the independent distributor
network, and such commitment must flow both ways. Together "We help small
business succeed!"
/s/ Elvis L. Mason /s/ Michael D. Magill
--------------------------- -----------------------------
Elvis L. Mason Michael D. Magill
Chairman & CEO President & COO
5
<PAGE> 7
SAN JACINTO HOLDINGS INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
($000 omitted)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---- ----
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,319 $ 385
Receivables less allowances 19,164 22,340
Inventories 7,267 7,424
Assets held for disposition -- 500
Other current assets 1,317 1,113
--------- ---------
Total current assets 30,067 31,762
Property, machinery and equipment 12,569 14,756
Excess purchase price over net assets acquired 40,692 41,773
Other assets 1,542 1,921
--------- ---------
Total assets $ 84,870 $ 90,212
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Current debt obligations $ 6,875 $ 9,563
Accounts payable 14,730 15,740
Accrued expenses 10,228 8,872
--------- ---------
Total current liabilities 31,833 34,175
Long-term debt 100,016 105,507
Other liabilities 9,359 8,091
Commitments and contingencies
Stockholders' deficiency:
Preferred stock:
$5.00 Junior Preferred Stock, par value $.01 a share;
Authorized 1,000,000 shares, $5 cumulative
No shares issued and outstanding
Common stock, par value $.01 a share:
Authorized 2,000,000 shares,
Issued and outstanding 1,052,384 shares 11 11
Additional paid-in capital 94,143 94,143
Deficit (149,106) (150,780)
Foreign currency translation adjustment (1,386) (935)
--------- ---------
Total stockholders' deficiency (56,338) (57,561)
--------- ---------
Total liabilities and stockholders' deficiency $ 84,870 $ 90,212
========= =========
</TABLE>
See notes to consolidated financial statements
6
<PAGE> 8
SAN JACINTO HOLDINGS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
($000 omitted)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $ 41,391 $ 47,934 $ 125,285 $ 145,320
Cost of sales 20,315 22,324 60,140 67,793
--------- --------- --------- ---------
Gross profit 21,076 25,610 65,145 77,527
Selling and administrative expense 19,432 23,457 60,182 72,464
Other income - cash received greater than
carrying value of distributor receivables (346) (450) (1,250) (1,439)
Amortization expense 528 4,788 1,421 14,374
Interest expense 3,358 3,630 10,068 11,005
--------- --------- --------- ---------
Loss from continuing operations
before income taxes (1,896) (5,815) (5,276) (18,877)
Income tax provision -- 88 -- 115
--------- --------- --------- ---------
Loss from continuing operations (1,896) (5,903) (5,276) (18,992)
Discontinued operations:
Gain on disposition -- -- 6,438 --
Income (loss) from operations -- (127) 512 (369)
--------- --------- --------- ---------
Net income (loss) $ (1,896) $ (6,030) $ 1,674 $ (19,361)
========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
7
<PAGE> 9
SAN JACINTO HOLDINGS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
PERIOD FROM JANUARY 1, 1997
TO SEPTEMBER 30, 1998
($000 omitted)
(Unaudited)
<TABLE>
<CAPTION>
Foreign
Additional Currency
Preferred Stock Common Stock Paid-In Translation
Shares Amount Shares Amount Capital Deficit Adjustment
------ ------ ------ ------ ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>>
Balance -
January 1, 1997 -- $ -- 1,052,384 $ 11 $ 94,143 $ (126,880) $ (960)
Net loss (23,900)
Unrealized gain on
foreign currency
translation -- -- -- -- -- -- 25
----- -------- --------- ---------- ---------- ---------- ----------
Balance -
December 31, 1997 -- -- 1,052,384 11 94,143 (150,780) (935)
Net income 1,674
Unrealized loss on
foreign currency
translation -- -- -- -- -- -- (451)
----- -------- --------- ---------- ---------- ---------- ----------
Balance -
September 30, 1998 -- $ -- 1,052,384 $ 11 $ 94,143 $ (149,106) $ (1,386)
===== ======== ========= ========== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
8
<PAGE> 10
SAN JACINTO HOLDINGS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
($000 omitted)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (1,896) $ (6,030) $ 1,674 $(19,361)
Adjustments to reconcile net income (loss) to cash
provided by (used in) operating activities:
Amortization 528 4,788 1,421 14,374
Depreciation 1,426 1,611 3,497 5,251
(Gain) loss on sale of assets -- -- (6,438) 67
Unrealized exchange loss (212) (114) (451) (188)
(Increase) decrease in operating assets:
Receivables (238) 1,876 3,176 284
Inventories 611 655 157 827
Assets held for disposition -- 89 500 265
Other assets 746 (287) (351) (1,037)
Increase (decrease) in operating liabilities:
Accounts payable (472) (1,754) (1,010) 3,179
Accrued expense and other liabilities 304 (3,517) 2,637 (2,993)
-------- -------- -------- --------
Net cash provided by (used in) operating activities 797 (2,683) 4,812 668
Cash flows from investing activities:
Net proceeds from sale of assets -- -- 6,695 787
Purchase of property, machinery and equipment (269) (92) (687) (3,680)
Adjustment due to currency fluctuations
and foreign purchase price adjustments 67 136 130 379
-------- -------- -------- --------
Net cash provided by (used in) investing activities (202) 44 6,138 (2,514)
-------- -------- -------- --------
Cash flows from financing activities:
Repayment of long-term debt and capital
lease obligations (2,258) (2,439) (8,027) (7,123)
Borrowings from (repayment of) revolving loans (1,547) 6,526 (5,697) 9,890
Borrowings from term loan 4,708 -- 4,708 --
Net proceeds from foreign obligations -- (724) -- 410
-------- -------- -------- --------
Net cash provided by (used in) financing activities 903 3,363 (9,016) 3,177
-------- -------- -------- --------
Increase in cash and cash equivalents 1,498 724 1,934 1,331
Cash and cash equivalents at beginning of period 821 1,089 385 482
-------- -------- -------- --------
Cash and cash equivalents at end of period $ 2,319 $ 1,813 $ 2,319 $ 1,813
======== ======== ======== ========
</TABLE>
9
<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 $824 and $1,354 were entered into during
the first nine months of 1998 and 1997 respectively, to acquire
machinery and equipment.
PIK ("Payment in Kind") Debentures totaling $11 was issued during the
nine month period ended September 30, 1998. The PIK Debentures are in
payment of accrued interest on the Company's 8% Subordinated
Debentures.
Supplemental disclosure of cash flow information:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Earnings before interest, taxes, depreciation & $3,416 $4,214 $9,710 $11,753
amortization (EBITDA)
Earnings before interest, taxes & amortization $1,990 $2,603 $6,213 $ 6,502
(EBITA)
Cash paid during the period for:
Interest $1,357 $5,571 $8,250 $ 8,903
</TABLE>
See notes to consolidated financial statements
10
<PAGE> 12
SAN JACINTO HOLDINGS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
NOTE A. UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS:
Basis of presentation - The accompanying interim financial statements
have been prepared by the Company without audit. These statements
include all adjustments which management believes necessary for a fair
presentation of the statements and have been prepared on a consistent
basis using the accounting policies described in the Summary of
Significant Accounting Policies in the notes to the consolidated
financial statements included in the Company's 1997 audited financial
statements. These policies and notes to consolidated financial
statements should be read in conjunction with the accompanying interim
financial statements. The interim operating results are not necessarily
indicative of the operating results expected for the full year. The
accompanying financial statements as of December 31, 1997 are derived
from the Company's audited financial statements as of that date.
Reclassification - certain reclassifications have been made to the 1997
financial statements to conform to the classification used in 1998.
NOTE B. DISCONTINUED OPERATIONS:
In the fourth quarter of 1997, the Company announced its decision to
divest of its payroll and data processing operations. On March 31,
1998, effective as of April 1, 1998, the Company sold its payroll
processing operations to Advantage Business Services Holdings, Inc.
Safeguard reported a gain of $6.4 million after expenses and payments
to third parties. The proceeds from the sale were used to repay a
portion of the Revolving Loan and a portion of the Term Loan, and to
fund operations. The net assets of the data processing operations were
sold at approximately net book value, effective January 1998.
Consideration for this sale will be in the form of royalty payments
beginning in 1999.
The net assets relating to the payroll and data processing operations
have been segregated on the consolidated balance sheet from their
historic classification to separately identify them as assets held for
disposition. The net sales from discontinued operations are $2.9
million in 1998 and $9.0 million for the nine month period in 1997. The
sales and related expenses of the operations were excluded from the
determination of the Company's income (loss) from continuing operations
for the periods presented.
NOTE C. INVENTORIES:
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---- ----
($000 omitted)
<S> <C> <C>
Raw Material $ 4,543 $ 4,514
Work-in-process 277 307
Finished Goods 2,447 2,603
------- -------
Total $ 7,267 $ 7,424
======= =======
</TABLE>
11
<PAGE> 13
SAN JACINTO HOLDINGS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
(continued)
NOTE D. LONG-TERM DEBT:
The Company's debt outstanding is as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---- ----
($000 omitted)
<S> <C> <C>
Revolving Loan - Collateralized $ 16,017 $ 18,086
Revolving Loan 2,872 6,500
Term Loan 8,000 5,492
Amended Exchange Loan 12,922 17,227
12% Senior Subordinated Notes 65,878 65,878
8% Senior Subordinated Notes 2 2
8% Subordinated Debentures 274 262
Capital lease obligations 926 1,623
--------- ---------
106,891 115,070
Less current debt obligations (6,875) (9,563)
--------- ---------
Total $ 100,016 $ 105,507
========= =========
</TABLE>
On April 1, 1998, the Company received proceeds totaling $11.3 million
from the disposition of the payroll operations of which $3.3 million
was payable to third parties associated with the sale of payroll
operations. The funds were used to make an additional $1.3 million pay
down of the Term Loan, and a permanent $2.2 million pay down of the
Revolving Loan. The remaining funds were used to reduce the outstanding
balance under the Collateralized Revolving Loan.
On September 2, 1998, the Company amended its' Revolving and Term Loan
Agreement to increase the Term Loan to $8.0 million and to defer the
monthly principal repayments of the Term Loan until September 1, 1999.
NOTE E. CONTINGENCIES:
On April 22, 1998, the California Supreme Court declined to hear the
Company's appeal of a decision on an issue reached in 1996 relating to
the applicability of the California Franchise Investment Law to the
Company's California distributors. The Court's action means the
appellate court's decision is final. This action has no material impact
on the Company's consolidated financial position and results of
operation since this contingent liability was recorded in 1996. The
remaining financial settlement was satisfied in the second quarter of
1998.
12
<PAGE> 14
SAN JACINTO HOLDINGS INC. AND SUBSIDIARY
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
RESULTS OF OPERATIONS
The following commentary presents management's discussion and analysis of the
Company's financial condition and results of operations. Certain of the
statements included below, including those regarding future financial
performance or results, or that are not historical facts, are or contain
"forward-looking" information as that term is defined in the Securities Act of
1933, as amended. The words "expect", "believe", "anticipate", "project",
"estimate", and similar expressions are intended to identify forward-looking
statements. The Company cautions readers that any such statements are not
guarantees of future performance or events and such statements involve risks,
uncertainties and assumptions, including but not limited to industry conditions,
general economic conditions, interest rates, competition, ability of the Company
to successfully manage its growth, and other factors discussed below and in the
Company's Annual Report for the year ended December 31, 1997 and quarterly
reports for the quarters ended March 31, 1998 and June 30, 1998. Should one or
more of these risks or uncertainties materialize or should the underlying
assumptions prove incorrect, those actual results and outcomes may differ
materially from those indicated in the forward-looking statements. This review
should be read in conjunction with the information provided in the financial
statements, accompanying notes and selected financial data appearing in the
Company's Annual Report for the year ended December 31, 1997 and the quarterly
reports for the quarters ended March 31, 1998 and June 30 1998. The following
table sets forth, for the periods indicated, selected financial data as a
percentage of net sales.
<TABLE>
<CAPTION>
Three Month Period Nine Month Period
Ended September 30, Ended September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of Sales 49.1 46.6 48.0 46.7
----- ----- ----- -----
Gross profit 50.9 53.4 52.0 53.3
Selling and administrative expense 46.9 48.9 48.0 49.9
Other income - distributor receivables (0.8) (0.9) (1.0) (1.0)
Amortization expense 1.3 10.0 1.1 9.9
Interest Expense 8.1 7.5 8.1 7.6
----- ----- ----- -----
Loss from continuing operations
before income taxes (4.6) (12.1) (4.2) (13.0)
Income tax provision -- 0.2 - 0.1
----- ----- ----- -----
Loss from continuing operations (4.6) (12.3) (4.2) (13.1)
Discontinued operations:
Gain on disposition -- -- 5.1 --
Income (loss) from operations -- (0.3) 0.4 (0.2)
----- ----- ----- -----
Net income (loss) (4.6)% (12.6)% 1.3 % (13.3)%
===== ===== ===== ======
</TABLE>
13
<PAGE> 15
SAN JACINTO HOLDINGS INC. AND SUBSIDIARY
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
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 goods, filing systems, envelopes, and other business products designed
for small businesses with less than 50 people on staff. Safeguard is a privately
owned company with manufacturing plants in California, Pennsylvania and Georgia.
COMPARISON OF THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998, AND FOR
THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997.
NET SALES. Net sales from continuing operations by operating segment are as
follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales:
North America $41,391 $43,005 $125,285 $130,614
Europe - 4,929 - 14,706
------- ------- -------- --------
Total $41,391 $47,934 $125,285 $145,320
======= ======= ======== ========
</TABLE>
Excluding sales from Europe, the third quarter of 1998 sale results are $1.6
million (or 3.8%) below the third quarter of 1997. For the first nine months,
excluding sales from Europe, net sales in 1998 are $5.3 million (or 4.1%) below
sales for the same period in 1997. The sales decline in the third quarter and
the first nine months of 1998 is due in part to one less workday than in 1997,
which results in less time for sales activity and plant production. The sales
results reflects a 23.9% growth in laser forms off-set by a 9.7% decline in
manual form sales and a 10.1% decline in computer forms sales. The sales
performance of the remaining product lines approximates 1997. The Company is
addressing the sales performance through extensive distributor network expansion
efforts. These efforts are focused on recruiting new distributors and assisting
the existing distributors in purchasing customer bases from independent dealers.
The 1998 sales performance has been negatively impacted by the strengthening of
the US dollar in the Canadian marketplace. The change in the value of the
Canadian dollar has results in approximately a $0.7 million reduction in 1998
sales.
GROSS PROFIT. Gross profit is before selling and administrative expenses, which
includes commission expense. Gross profit margin from continuing operations in
North America is as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Gross profit margin:
Manual forms 60.0 % 59.5 % 62.0 % 59.7 %
Computer and laser forms 49.4 50.7 49.6 50.2
Sourced products 37.5 37.5 38.0 37.7
---- ---- ---- ----
Total 50.9 % 51.7 % 52.0 % 51.7 %
==== ==== ==== ====
</TABLE>
14
<PAGE> 16
SAN JACINTO HOLDINGS INC. AND SUBSIDIARY
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
RESULTS OF OPERATIONS - Continued
The decline in profit margin is attributable to a shift in the Company's product
mix from manual forms sales to laser forms and sourced products, as a percentage
of total sales. Computer and laser forms, and sourced products carry greater
material, labor and overhead costs (as a percentage of sales) resulting in lower
gross profit margin than for manual forms. This shift in product mix has been
offset in part by manufacturing efficiencies as a result of the implementation
of an integrated order entry system and the consolidation of certain
manufacturing operations in 1997.
SELLING AND ADMINISTRATIVE EXPENSE. Selling and administrative expenses are
$19.4 million in the third quarter of 1998 compared to $23.5 million for the
same period in 1997, representing 46.9% and 48.9% of net sales in each period.
For the nine months, selling and administrative expenses are $60.2 million in
1998 compared to $72.5 million in 1997, representing 48.0% and 49.9% of net
sales in each period. The reduction in selling and administrative costs in 1998
is attributable to sale of the Company's European operation and strategic cost
reductions. The Company's operation in Europe, of which $2.8 million in the
third quarter and $8.3 million in the nine month period of expense is included
in the 1997 results, was sold in December 1997. Commissions to independent
distributors account for 70% of total selling and administrative costs in 1998
and 66% in 1997. As a percent of total sales commission costs have remained
constant at approximately 34% of net sales.
OTHER INCOME - Distributor Receivables. Other income (cash received greater than
carrying value of Distributor receivables) is $0.4 million for the third quarter
1998 and $0.5 million for the same period in 1997. Other income for the nine
month period is $1.3 million in 1998 and $1.4 million in 1997, representing 1.0%
of net sales in 1998 and in 1997. In connection with the Company's purchase
price allocation for the acquisition of Safeguard in December 1986, the value
assigned to distributor receivables associated with loans and advances
previously made by Safeguard to facilitate the purchase of account protection
and future income rights by distributors was $4.8 million, net of deferred
interest income of approximately $7.8 million. This value was primarily based on
an independent valuation of the distributor receivables which aggregated
approximately $26.0 million as of December 31, 1986. Due to the effect of
collection and distributor advance policies instituted in 1988, the net
distributor receivables balance was reduced to zero by early 1992. Cash
collection of this distributor receivable are expected to continue in amounts
approximating $1.5 million through the year 2000.
AMORTIZATION EXPENSE. Amortization expense is $0.5 million for the third quarter
of 1998 and $4.8 million in 1997. Amortization expense is $1.4 million and $14.4
million for the first nine months of 1998 and 1997, respectively. The expense
consists primarily of the amortization of intangible assets, including the
customer list, excess purchase price over net assets acquired and deferred
financing costs. The significant decline in amortization expense in 1998 is as a
result of the customer list being fully amortized as of December 31, 1997. The
customer list amortization was $4.3 million in the third quarter of 1997 and
$13.0 million for the nine month period of 1997.
INTEREST EXPENSE. Interest expense is $3.4 million for the third quarter of 1998
and $3.6 million for the same period in 1997. For the first nine months,
interest expense is $10.1 million in 1998 in comparison to $11.0 million in
1997. The decrease in interest expense in 1998 is attributable to a reduction in
the Company's average outstanding borrowings as a result of principal repayment
and the repayment of foreign debt obligations.
15
<PAGE> 17
SAN JACINTO HOLDINGS INC. AND SUBSIDIARY
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
RESULTS OF OPERATIONS - Continued
INCOME TAX PROVISION. The Company's provision for income tax in 1997 is related
to its operations in Europe. No tax liability is incurred in the United States
as a result of net losses from operations.
DISCONTINUED OPERATIONS. In 1997 the Company announced its decision to divest of
its payroll and data processing operation. On December 31, 1997, effective
January 1, 1998, the data services operation was sold at approximately net book
value of the associated assets. On March 31, 1998, effective April 1, 1998, the
payroll processing operations were sold, resulting in a gain of $6.4 million,
reported in the first quarter of 1998. Year to date the sales and related
expenses of these operations are excluded from the determination of the
Company's loss from continuing operations for the periods presented.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are cash flows generated from
operations, cash on hand and borrowing capacity under the revolving loans. The
Company's cash flows generated from operating activities is $4.8 million in the
first nine months of 1998. As of September 30, 1998, the Company had $2.3
million in cash and cash equivalents, $2.0 million in availability under the
revolving loans. At that date, the Company had a working capital deficiency of
$1.8 million and a ratio of current assets to current liabilities of 0.9:1.
The Company's ongoing liquidity requirements arise primarily from capital
expenditures, working capital needs and debt service. The Company's capital
expenditures for the first nine months of 1998 are $1.5 million in software,
hardware and equipment purchases. The Company anticipates total capital
expenditures in 1998 of $2.6 million. These expenditures will be funded through
additional capital lease obligations and cash flow from operations.
As described in Note B and above, on March 31, 1998, the Company sold its
payroll operations. The net proceeds of $8.0 million, net of $3.3 million in
payments due to third parties, was used to reduce the Revolving Loan to a
borrowing capacity of $4.0 million and to repay an additional $1.3 million under
the Term Loan. The remaining proceeds were used to reduce the outstanding
borrowings under the Collateralized Revolving Loan and outstanding trade
payables.
On September 2, 1998 the Company amended its Revolving and Term Loan Agreement.
The amendment included an increase in the borrowings under the Term Loan by $4.6
million to $8.0 million, and a deferral of principal repayments on the Term Loan
until September 1, 1999. The funds provided will be used to fund the network
expansion endeavors and continuing operations. The Company has met all of its
debt obligations and is not in default of any of its loan agreements. The
Company continues to monitor its cash position and believes that sufficient
funding exists to meet its obligations as they come due.
16
