FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended June 30, 1994 Commission File Number 1-5620
SAFEGUARD SCIENTIFICS, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1609753
(state or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
800 The Safeguard Building, 435 Devon Park Drive Wayne, PA 19087
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (215) 293-0600
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the
Securities and Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file
such reports) and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
Number of shares outstanding as of August 10, 1994
Common Stock 4,761,909
PAGE 1 OF 15 PAGES.
EXHIBIT INDEX ON PAGE 2.
SAFEGUARD SCIENTIFICS, INC.
QUARTERLY REPORT FORM 10-Q
INDEX
PART I
Page
Financial Statements:
Consolidated Balance Sheets -
June 30, 1994 and December 31, 1993 3
Consolidated Statements of Operations -
Three Months Ended June 30, 1994 and 1993 5
Six Months Ended June 30, 1994 and 1993 6
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1994 and 1993 7
Notes to Consolidated Financial Statements 8
Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II
Other Information:
Item 6 - Exhibits 14
Signatures 15
SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED BALANCE SHEETS
(000 omitted)
June 30 Dec. 31
ASSETS 1994 1993
-------------- -----------
(UNAUDITED)
Current Assets
Cash $ 8,662 $ 9,796
Receivables less allowances
($5,030 - 1994; $5,480 - 1993) 232,346 258,734
Inventories 162,210 131,263
Other current assets 6,059 4,377
-------------- -----------
Total current assets 409,277 404,170
Property, Plant and Equipment 77,026 79,789
Less accumulated depreciation
and amortization (32,512) (33,429)
-------------- -----------
44,514 46,360
Commercial Real Estate 42,430 47,460
Less accumulated depreciation (10,664) (11,037)
-------------- -----------
31,766 36,423
Other Assets
Investments 38,346 16,663
Notes and other receivables 2,987 3,329
Excess of cost over net assets of
businesses acquired 22,131 25,434
Other 9,076 10,445
-------------- -----------
72,540 55,871
-------------- -----------
$ 558,097 $ 542,824
============== ===========
SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED BALANCE SHEETS
(000 omitted except shares)
June 30 Dec. 31
LIABILITIES AND SHAREHOLDERS' EQUITY 1994 1993
-------------- -----------
(UNAUDITED)
Current Liabilities
Current commercial real estate debt $ 11,004 $ 11,038
Current debt obligations 4,742 5,461
Accounts payable 156,234 168,836
Accrued expenses 43,806 50,261
Taxes on income 3,078
-------------- -----------
Total current liabilities 215,786 238,674
Long-Term Debt 183,170 156,482
Commercial Real Estate Debt 25,076 29,630
Deferred Taxes 3,211 2,141
Other Liabilities 963 1,305
Minority Interest 28,156 25,825
Shareholders' Equity
Common stock, par value $.10 a share
Authorized -20,000,000 shares
Issued - 5,466,557 shares 547 547
Additional paid-in capital 25,924 26,177
Retained earnings 83,131 76,040
Treasury stock, at cost
705,523 shares-1994 (12,707)
795,348 shares-1993 (13,997)
Net unrealized appreciation on investments 4,840
-------------- -----------
101,735 88,767
-------------- -----------
$ 558,097 $ 542,824
============== ===========
SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(000 omitted)
Three Months Ended
June 30
1994 1993
----------- -----------
Revenues (UNAUDITED)
Information Technology
Microcomputer Systems $ 306,625 $ 239,707
Information Solutions 15,824 15,248
Workstation and Security Systems 15,612 8,944
----------- -----------
338,061 263,899
Metal Finishing 7,281 6,872
Commercial Real Estate 856 1,166
----------- -----------
Net Sales 346,198 271,937
Gains on sales of securities, net 4,557 3,878
Other income 431 722
----------- -----------
Total Revenues 351,186 276,537
Costs and Expenses
Cost of sales 287,762 219,532
Selling 29,534 26,402
General and administrative 18,262 15,913
Depreciation and amortization 4,109 4,304
Interest 4,056 3,362
(Income) loss from equity investments (231) 259
----------- -----------
Total Costs and Expenses 343,492 269,772
----------- -----------
Earnings Before Minority Interest
and Taxes 7,694 6,765
Minority interest (1,333) (1,396)
----------- -----------
Earnings Before Taxes On Income 6,361 5,369
Provision for taxes on income 2,553 2,527
----------- -----------
Net Earnings $ 3,808 $ 2,842
=========== ===========
Earnings Per Share
Primary $ .74 $ .52
Fully Diluted .69 .48
Average Common Shares Outstanding
Primary 4,928 5,142
Fully Diluted 4,928 5,142
SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(000 omitted)
Six Months Ended
June 30
1994 1993
----------- -----------
(UNAUDITED)
Revenues
Information Technology
Microcomputer Systems $ 587,482 $ 440,563
Information Solutions 33,354 29,642
Workstation and Security Systems 33,396 17,754
----------- -----------
654,232 487,959
Metal Finishing 14,541 13,923
Commercial Real Estate 2,071 2,398
----------- -----------
Net Sales 670,844 504,280
Gains on sales of securities, 6,864 8,508
net
Other income 2,162 1,404
----------- -----------
Total Revenues 679,870 514,192
Costs and Expenses
Cost of sales 555,120 404,981
Selling 58,681 49,934
General and administrative 35,629 29,756
Depreciation and amortization 8,319 8,778
Interest 7,754 6,618
(Income) loss from equity investments (373) 561
----------- -----------
Total Costs and Expenses 665,130 500,628
----------- -----------
Earnings Before Minority Interest
and Taxes 14,740 13,564
Minority interest (2,719) (2,264)
----------- -----------
Earnings Before Taxes On Income 12,021 11,300
Provision for taxes on income 4,930 5,122
----------- -----------
Net Earnings $ 7,091 $ 6,178
=========== ===========
Earnings Per Share
Primary $ 1.38 $ 1.15
Fully Diluted 1.28 1.08
Average Common Shares Outstanding
Primary 4,911 5,148
Fully Diluted 4,911 5,148
SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000 omitted)
Six Months Ended
June 30
----------------------------------
1994 1993
------------ -----------
(UNAUDITED)
Operating Activities
Net earnings $ 7,091 $ 6,178
Adjustments to reconcile net earnings to
cash from operating activities
Depreciation and amortization 8,319 8,778
Increase in deferred taxes 1,070 2,536
Loss from equity investments (373) 561
Gains on sales of securities, net (6,864) (8,508)
Other, net 1,527 1,426
------------ -----------
10,770 10,971
Cash provided (used) by changes in working
capital items
Receivables 21,364 (5,074)
Inventories (34,387) (5,925)
Other current assets (1,166) (647)
Accounts payable and accrued expenses (12,574) 396
Taxes on income (3,478) 300
------------ -----------
(30,241) (10,950)
------------ -----------
Cash (used) provided by operating activities (19,471) 21
Proceeds from sales of securities, net 2,876 18,855
------------ -----------
Cash (used) provided by operating activities
and sales of securities, net (16,595) 18,876
Other Investing Activities
Investments and notes acquired, net (4,573) (3,379)
Expenditures for property, plant & equipment (6,224) (9,865)
Commercial real estate costs (47)
Businesses acquired (1,388)
Other, net (4,407) (2,066)
------------ -----------
Cash (used) by other investing activities (15,204) (16,745)
Financing Activities
Net borrowings on revolving credit
facilities 18,865 11,557
Repayments on term debt (3,988) (6,915)
Borrowings on term debt 12,121 714
Stock issued by subsidiary 2,631
Stock options exercised 1,036 1,013
------------ -----------
Cash provided by financing activities 30,665 6,369
------------ -----------
(Decrease) Increase in Cash (1,134) 8,500
Cash - beginning of year 9,796 8,903
------------ -----------
Cash - End of Period $ 8,662 $ 17,403
============ ===========
SAFEGUARD SCIENTIFICS, INC.
Notes to Consolidated Financial Statements
1. The accompanying unaudited interim consolidated financial statements
were prepared in accordance with generally accepted accounting
principles for interim financial information. Accordingly, they do
not include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. The summary of Accounting Policies and Notes to
Consolidated Financial Statements included in the 1993 Form 10-K
should be read in conjunction with the accompanying statements.
These statements include all adjustments (consisting only of normal
recurring accruals) which the Company believes are necessary for a
fair presentation of the statements. The interim operating results
are not necessarily indicative of the results for a full year.
2. Inventories, primarily finished goods, are stated primarily at the
lower of average cost or market.
3. Statement of Financial Accounting Standard No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" is effective for
fiscal year 1994. Certain investments accounted for under the cost
method of accounting are classified as available-for-sale and
recorded at fair value with unrealized holding gains and losses
recorded, net of tax, as a separate component of shareholders' equity.
The Company adopted the new accounting rules as of January 1, 1994
and increased investments and shareholders' equity by $4.9 million.
4. The Company sold its controlling interest in Micro Decisionware,
Inc. to Sybase, Inc. in April, 1994. Under the terms of the
agreement, Micro Decisionware shareholders, including Safeguard
which owned approximately 55% on a fully diluted basis, received
shares of Sybase common stock valued at $25 million. Safeguard also
entered into a consulting and non-compete agreement with Sybase and
received $1.6 million at closing with the potential to receive an
additional $11.9 million based upon the future performance of Micro
Decisionware.
5. In June, 1994, the Company expanded its credit facility to $50
million. The facility consists of a $30 million revolving
credit facility that expires March 31, 1997 and a $20 million term
loan. The term loan is repayable in installments of $7 million in
both March 1995 and March 1996 and $6 million in March 1997.
Interest is at prime or, at the Company's option, a portion of the
facility can be converted to LIBOR plus 2.25%.
During March 1994, CompuCom executed an amendment to the August 1993
Financing and Security Agreement increasing the availability under
the CompuCom bank revolving credit facility ("Credit Facility") from
$125 million to $150 million. The new facility provides for a fixed
rate of interest of 7.18% on $60 million of the outstanding principal
balance. In addition, for the remainder of the unpaid principal,
CompuCom has the option to elect the London Interbank Offered Rate
("LIBOR") plus 2.75% per annum, subject to certain limitations,
and/or an interest rate of 0.5% above the prime rate per annum.
During the second quarter of 1994 CompuCom elected to utilize LIBOR
on a portion of the outstanding principal balance. Total borrowings
are based on certain limits, as defined, and are secured by
receivables, a portion of inventories and substantially all other
assets of CompuCom. The Credit Facility subjects CompuCom to certain
restrictions and covenants related to, among others, tangible net
worth, debt to tangible net worth, net earnings, and limits the
amount available for capital expenditures and dividends. All unpaid
principal borrowed and unpaid accrued interest thereon, under the
Credit Facility, are due March 1997.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Operational Overview
Net sales for the second quarter of 1994 increased 27% to $346.2
million compared to $271.9 million for the same period in 1993.
Operating earnings before security gains and minority interest increased
23% to $1.9 million, or $.38 a share, compared to $1.54 million, or $.30
a share in the second quarter of 1993. Net earnings for the second
quarter of 1994 was $3.81 million, or $.74 a share, a 34% increase over
1993 second quarter net earnings of $2.84 million, or $.52 a share.
Included in the second quarter results was a net gain of $2.71 million
($4.56 million pretax) on the sale of Safeguard's controlling interest in
Micro Decisionware to Sybase, Inc.
Net sales for the six months ended June 30, 1994 of $670.8 million
increased 33% over the comparable period in 1993. Operating earnings
before security gains and minority interest increased 68% to $4.64
million, or $.95 a share, compared to $2.76 million, or $.54 a share in
1993. Net earnings for the six months ended June 30, 1994 were $7.09
million, or $1.38 a share, a 15% increase over 1993 net earnings of $6.18
million, or $1.15 a share.
Three Months Six Months
Ended June 30 Ended June 30
1994 1993 1994 1993
Operating earnings before
security gains
and minority interest $1,896 $1,544 $4,645 $2,764
Security gains 2,712 2,047 4,050 4,651
Minority interest (800) (749) (1,604) (1,237)
------- ------- ------- -------
Net earnings $3,808 $2,842 $7,091 $6,178
======= ======= ======= =======
Net sales increased at all but one operating unit for the three
months ended June 30, 1994 compared to the same period in 1993 with
CompuCom again accounting for a large majority of this increase.
CompuCom's higher sales reflect an increase in demand by corporate
customers for personal computers, particularly 486-based machines, and
their continued focus on providing quality products and services at
competitive prices. As corporate customers evaluate their information
needs, more and more are opting for networked personal computer (PC)
platforms instead of continuing their mainframe and mini-computer
environments.
CompuCom's customer order backlog at June 30, 1994 increased 50%
compared to December 31, 1993, primarily as a result of product
availability issues and CompuCom's overall increase in sales activity.
However, the impact of product availability issues has lessened as
certain manufacturers have increased their manufacturing capabilities
resulting in product supply starting to catch up with demand. In
addition, the weakening financial conditions of certain competitors had a
favorable impact on CompuCom's net revenues.
Operating earnings increased 23% for the second quarter ended June
30, 1994 compared to the second quarter of 1993. CompuCom and Coherent
Communications Systems Corp. reported increases in operating earnings of
25% and 107%, respectively which represented most of the improvement.
Partially offsetting this were losses at CenterCore, and the
deconsolidation of Micro Decisionware, which was sold early in the
quarter. A significant portion of CenterCore's loss related to
unanticipated costs associated with certain construction contracts in
progress that adversely affected Maris' gross profit margin.
Cambridge Technology Partners continued its increase in sales and
earnings by recording an 114% increase in net earnings on an 84% sales
increase in the second quarter of 1994 compared to 1993. The Company
uses the equity method in accounting for its approximately 24% ownership
interest in Cambridge.
Security gains for the second quarter of 1994 reflect the sale of
the Company's 55% interest in Micro Decisionware, Inc. to Sybase,
Inc. Under the terms of the agreement, the Company and minority
shareholders of Micro Decisionware received shares of Sybase stock
valued at approximately $25 million dollars. In addition, the Company
entered into a consulting and non-competition agreement with Sybase and
received $1.6 million at closing with the potential to receive an
additional $11.9 million based upon future performance. Security
gains of varying magnitude have been realized in recent periods; prior
gains are not necessarily indicative of gains which may be realized
in the future.
The relationship from quarter to quarter of certain expenses has
fluctuated due to CompuCom's microcomputer sales growth, changes in the
sales mix of the Company's diversified units and the fixed nature of
certain expenses. Because of the relative size and significance of
CompuCom in the consolidated results, fluctuations in the other business
units have tended to have a minimal impact on the relationship of
expenses to sales. The gross margin percentage was 16.9% for the second
quarter of 1994 compared to 19.3% for the same period of 1993. This
decrease is primarily due to the significant increase in microcomputer
sales. An increase in microcomputer sales tends to reduce consolidated
margins since microcomputer margins are lower than margins of other
operating units. The gross margin percentage on microcomputer sales was
13.2% in the second quarter of 1994 and 14.4% in the second quarter of
1993. The decrease is due primarily to a decline in product margins,
resulting from pricing pressures created by intense competition.
However, CompuCom historically has been able to offset the margin decline
(on a percentage of net sales basis) through the control of operating
expenses. In addition, the decline in product margins has been partially
offset by the impact of service margins, which have become a larger
percentage of the Company's net revenues. Future product margins will
be influenced by manufacturers' pricing strategies together with
pressures from competition partially offset by CompuCom's ability to
accelerate the growth of its more profitable service business.
Selling expenses for the second quarter of 1994 decreased as a
percentage of sales from 9.7% in 1993 to 8.5%. General and
administrative expenses for the second quarter of 1994 decreased as a
percentage of sales from 5.8% in 1993 to 5.3%. These trends primarily
reflect CompuCom's continued efforts to control operating expense growth
through enhanced productivity and selling expenses of Micro Decisionware
elimated in the second quarter of 1994.
Interest expense increased in the second quarter of 1994 compared to
the same period in 1993, reflecting increased working capital
requirements at CompuCom needed to support their
significant revenue growth. In addition, interest expense increased
at CenterCore reflecting acquisition related debt. These increases
were partially offset by lower expense on commercial real estate debt
as a result of refinancing certain properties at more favorable rates.
Liquidity and Capital Resources
The Company and its two largest majority-owned public company,
operating subsidiaries - CompuCom, and CenterCore - each
maintain separate, independent bank credit facilities with several banks.
The subsidiaries credit facilities are non-recourse to the Company,
except that the Company has guaranteed $6.1 million of CenterCore's bank
debt. The subsidiaries bank debt prohibit the payment of dividends while
the credit lines remain outstanding. The combination of a satisfactory
relationship with several banks, proceeds from the sale of securities,
internally generated funds and in the case of CompuCom, the
equity of the business and the subordinated debt financing, have been
available to satisfy cash requirements to fund business activities.
During 1994, the Company purchased a total of $10 million of newly
issued convertible preferred stock from CompuCom and has committed to
purchase an additional $10 million in 1994 in two quarterly purchases of
$5 million each. In March 1994, CompuCom increased its bank revolving
credit facility from $125 million to $150 million to support the revenue
growth. The maturity was extended to March 1997. In addition, $60
million of the outstanding principal balance is subject to a fixed rate
of interest at 7.18%; for the remainder of the credit facility CompuCom
may elect an interest rate of LIBOR plus 2.75% per annum subject to
limitations and/or 0.5% above the prime rate per annum.
The commitment to purchase the CompuCom preferred stock together
with other projected cash requirements required the Company to increase
availability under its line of credit. In June 1994, the Company
expanded its credit facility to $50 million. The facility consists of
a $30 million revolving credit facility that expires March 31,
1997 and a $20 million term loan. The term loan is repayable in
installments of $7 million in both March 1995 and March 1996 and $6
million in March 1997. Interest is at prime or, at the Company's option,
a portion of the facility can be converted to LIBOR plus 2.25%. The
facility is secured by a pledge of all of the Company's publicly
traded stocks. The Company expects its future corporate liquidity to be
generated through internal cash flow, the sale, as required, of selected
minority-owned, publicly traded securities and increased availability
under the new credit facility.
In July 1994 the Company and Coherent in a rights offering to
Safeguard shareholders sold approximately 3.5 million shares of Coherent
common stock at $5 a share. The Company received net proceeds from this
sale of approximately $12.5 million and Coherent received approximately
$4 million after underwriting discounts. The Company used the proceeds to
repay debt. In conjunction with the rights offering, Coherent redeemed $4
million of preferred stock held by the Company of which $1 million
was paid in August and the remainder payable in three annual
$1 million installments beginning in 1995.
In June 1994 the Company purchased $1.5 million of CenterCore's
redeemable convertible preferred stock and CenterCore amended its bank
credit agreement. The amended credit agreement expands the credit line
facility to $11 million from $10 million and grants a $1.5 million
overadvance facility above the collateral borrowing base until May 31,
1995. These actions were necessitated by losses at CenterCore compounded
by increased working capital requirements at the Maris operation since
its late 1993 acquisition.
CenterCore's outstanding borrowings under their revolving credit
facility was $6.8 million at June 30, 1994 compared to $5.2 million at
December 31, 1993. Borrowing availability under the facility was
approximately $1 million at June 30, 1994 compared to $1.6 million at
March 31, 1994. Assuming CenterCore's losses do not continue at the
level experienced in the first half, CenterCore believes its 1994
operating cash and capital requirements will be satisfied from internally
generated funds and availability under the bank credit facility.
However, if losses continue and new business is not generated, CenterCore
will become in default of the credit facility's financial covenants and
they will have to implement additional reductions in operating
expenditures to conserve cash or require additional investments from the
Company or other sources. CenterCore has received no commitments for
additional outside funding. Such operating reductions could have
an adverse impact, which may be material, on the CenterCore's operations.
Although success cannot be assured, CenterCore is currently negotiating
with its bank to restructure its covenants.
Capital expenditures were $6.2 million for the first half of 1994
and are expected to be in $12 million range for the year with CompuCom
representing approximately $5 million of 1994 expenditures.
Item 6. Exhibits
(a) Exhibits
Number Description
10 Amended and Restated Credit Agreement and Amended
and Restated Revolving Note page 16
11 Computation of Primary Earnings Per Share - page 68
(b) No reports on Form 8-K have been filed by the Registrant during
the quarter ended June 30, 1994.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
SAFEGUARD SCIENTIFICS, INC.
(Registrant)
Date: August 15, 1994
-------------------------------------
Warren V. Musser, Chairman,
President and Chief Executive Officer
Date: August 15, 1994
-------------------------------------
Gerald M. Wilk
Vice President
(Principal Financial and
Principal Accounting Officer)