SELECTED FINANCIAL DATA
(in thousands except per share amounts)
1995 1994 1993 1992 1991
- - --------------------------------------------------------------------------------------------
Net sales........................ $1,517,740 $1,412,026 $1,168,349 $845,018 $644,192
Net earnings..................... 18,263 15,740 3,853* 8,864 10,518
Earnings per share
Primary....................... 1.14 1.03 .21 .59 .69
Fully diluted................. 1.07 .94 .14 .55 .68
Total assets..................... 742,874 617,155 542,824 416,299 379,955
Long-term debt................... 204,431 201,393 156,482 109,536 101,489
Commercial real estate debt...... 20,483 20,714 40,668 41,159 41,812
Shareholders' equity............. 154,309 110,547 88,767 91,685 84,316
<FN>
The Company's strategy is to offer its shareholders, through the
rights offering process, the opportunity to acquire direct
ownership in selected partnership companies which are ready for
public ownership. The Company has no present intention to pay cash
dividends.
Per share amounts have been retroactively restated to reflect the
three-for-two split of the Company's common shares effective August
31, 1995.
*After goodwill write-off of $6,419 or $.43 per share.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company's business strategy is the development of advanced
technology-oriented, entrepreneurially-driven partnership companies to
achieve maximum returns for its shareholders. The Company provides to its
partnership companies and associated venture funds active strategic
management, operating guidance, acquisition and disposition assistance, board
and management recruitment and innovative financing. The Company offers its
shareholders, through the rights offering process, the opportunity to acquire
direct ownership in selected partnership companies which are ready for public
ownership.
If the Company significantly increases or reduces its investments in any
of the partnership companies, the Company's consolidated net sales and
earnings may fluctuate primarily due to the applicable accounting methods
used for recognizing its participation in the operating results of those
companies.
The net sales and related costs and expenses of partnership companies are
included in the Company's consolidated operating results if the Company owns
more than 50% of the voting securities of the partnership company.
Participation of shareholders other than the Company in the earnings of the
partnership company is reflected in the caption ``Minority interest'' in the
Consolidated Statement of Operations which adjusts consolidated earnings to
reflect only the Company's share of the earnings or losses of each
partnership company.
If the Company reduces its ownership of voting securities in a partnership
company below 50%, the equity method of accounting is used. Under this
method, the partnership company's net sales and related costs and expenses
are not included in the Company's consolidated operating results; however,
the Company's share of the earnings or losses of the partnership company are
reflected under the caption ``Income (loss) from equity investments'' in the
Consolidated Statement of Operations. Under either consolidation ac-
SAFEGUARD SCIENTIFICS, INC. 25
counting or the equity method of accounting, only the Company's share of the
earnings or losses of the partnership company is included in the Statement of
Operations.
OPERATIONS REVIEW
The 1995 and 1994 operating results reflect management's continued focus
on building value in each of the operating units. Sales increased 7% in 1995
and 21% in 1994. This sales trend is primarily attributable to CompuCom's
(Microcomputer Systems and Services) 15% and 24% sales increases for the same
periods. CompuCom accounted for 95% and 89% of the Company's consolidated net
sales in 1995 and 1994, respectively. Because of the significance of CompuCom
in the consolidated results, fluctuations in the financial results of the
other business units have tended to have a minimal impact.
Comparability of 1995 and 1994 sales and earnings to prior periods is
impacted by the sale of Micro Decisionware, Inc. in the first quarter of
1994, the mid 1994 rights offering of Coherent Communications Systems
Corporation stock to shareholders of the Company which reduced the Company's
ownership below 50% and resulted in its continuing investment in Coherent
being accounted for under the equity method, and actions taken during late
1994 which resulted in the Company holding a minority ownership position in
Core Technologies (Pennsylvania), Inc., formerly CenterCore, Inc. (``Core'')
which is not included in the Company's consolidated financial statements
beginning January 1, 1995.
The following after-tax data reflect the components of the Company's net
earnings (in thousands):
Year Ended December 31,
------------------------------
1995 1994 1993
Earnings before securities gains and minority
interest..................................... $15,212 $ 4,189 $ 2,207
Securities gains.............................. 11,375 14,501 5,038
Minority interest............................. (8,324) (2,950) (3,392)
-------------------------------
Net earnings............................... $18,263 $15,740 $3,853
-------------------------------
-------------------------------
The increase in earnings before securities gains and minority interest in
1995 was primarily a result of a 41% increase in CompuCom's earnings and the
elimination of losses incurred by Core in 1994, partially offset by losses or
reduced earnings at other business units and an increase in interest expense
resulting from an increased level of investments in partnership companies.
The Company does not expect that it will incur any significant post-1994
losses as a result of its limited future involvement with Core. CompuCom's
28% earnings increase in 1994, augmented by improved earnings at Metal
Finishing and other business units, was substantially offset in 1994 by the
Company's share of losses at Core.
Security gains in 1995 were primarily the result of the sale of the
Company's remaining interest in Novell, Inc. resulting in an aggregate
after-tax gain of $3.8 million and of a portion of its interests in Coherent
and Gandalf Technologies, Inc. for after-tax gains of $3.3 million and $2.6
million, respectively. Two significant transactions accounted for the vast
majority of 1994 security gains. In 1994, the Company sold its 55% interest
in Micro Decisionware to Sybase, Inc. which resulted in an after-tax gain of
$7.1 million. The gain includes the value of Sybase stock received at the
closing plus additional stock and cash earned based on the 1994 performance
of Micro Decisionware subsequent to the sale. In 1995, the Company recognized
an additional after-tax gain of $2.1 million based upon the 1995 performance
of Micro Decisionware. In July 1994, the Company and Coherent sold 2.7 and
0.8 million shares, respectively, of Coherent stock at $5 per share in a
rights offering to the Company's shareholders resulting in a $7.8 million
after-tax gain. Security gains of varying magnitude have been realized in
recent years; prior gains are not indicative of gains which may be realized
in the future.
The significant equity investment companies showed improved earnings in
1995 and in 1994. After adjusting for acquisitions accounted for under the
pooling of interests method of accounting, Cambridge's sales and earnings
increased 59% and 77%, respectively, in 1995 and 67% and 95%, respectively,
in 1994, excluding the favorable impact of a change in accounting principle
in 1993. Cambridge con-
26 SAFEGUARD SCIENTIFICS, INC.
tinues to see increased demand for its services in the U.S. and Europe.
Cambridge recently completed two acquisitions which are expected to enhance
its capabilities to provide a more comprehensive solution for its clients
through custom and package rapid application development combined with
management consulting. The Company owns 21% of the common stock of Cambridge
at December 31, 1995. Coherent's sales and earnings increased 44% and 100%,
respectively, in 1995 and 33% and 152%, respectively, in 1994 as it continued
to add to its impressive list of major customers. Sales of its echo
cancellers and related products were particularly strong in Europe and Asia.
The earnings increase in 1994 excludes the impact of Coherent's 1993 goodwill
write-off. The Company owns 38% of the common stock of Coherent at December 31,
1995.
USDATA Corporation, the Company's latest rights offering, reported sales
and earnings for 1995 of $44.4 million and $1.6 million, respectively,
compared to $39.9 million and $3.1 million, respectively, for 1994. The
operating results reflect USDATA's strategy to make substantial investments
in product development, sales channel expansion and marketing promotions to
position itself to pursue the broad international opportunities that exist
in its markets. It recently received the largest contract in its history,
signing a multi-million dollar contract with AEG Schneider Automation
(ASA), one of the world's largest industrial automation providers. Under
the terms of the contract, ASA will expand its purchase and resale of
USDATA's FactoryLink real-time development systems to ASA customers
throughout the world. The Company owns 21% of the common stock of USDATA at
December 31, 1995.
SEGMENT TRENDS
Microcomputer Systems and Services (CompuCom) posted record sales and
earnings for the seventh consecutive year in 1995. Product sales, derived
from the sale of computer hardware, software and peripherals to corporate
customers increased to $1.33 billion in 1995 compared to $1.2 billion in
1994 and $0.9 billion in 1993. Revenues from systems integration services,
including product configuration, field engineering, network management,
help desk services and network project management, were $101 million, $56
million and $44 million in 1995, 1994 and 1993, respectively. Revenues from
customized software applications were $6 million, $3 million and $38 million
in 1995, 1994 and 1993, respectively. These 1993 revenues included revenues
of various non-core businesses which were sold in January 1994. CompuCom's
1995 product sales reflect the increased demand by corporate customers for
personal computers, particularly Pentium-based systems and laptops. Also
favorably impacting CompuCom's net product sales was corporate customers
continuing to consolidate the number of suppliers to only one or two. The
increase in service revenues reflects CompuCom's continued focus on
expanding its network and technology services at competitive prices through
internal growth augmented by a series of small acquisitions. These
acquisitions have broadened the variety of network management platform
offerings, increased remote network monitoring capabilities and greatly
expanded CompuCom's systems engineer resources.
CompuCom's product gross margin increased to 10.6% in 1995 compared to
10.2% in 1994, due to certain manufacturer price reductions and reduced price
competitiveness in the marketplace in the first half of 1995, as well as
CompuCom's decision not to do business with the lowest margin customers.
Product gross margin decreased to 10.2% in 1994 from 11.4% in 1993
principally due to an industry-wide decline in product margins created by
intense competition. Services gross margin was 30.5% in 1995 compared to
32.7% in 1994. The lower margin in 1995 was primarily the result of
increasing costs related to the scarcity of system engineers and CompuCom's
continuing investment in its service business. Future profitability will
depend on competition, increased focus on providing technical service and
support to customers, the ability to hire and retain quality service
personnel, manufacturer pricing changes and product availability, as well as
CompuCom's control of operating expenses and effective utilization of vendor
programs. CompuCom participates in certain manufacturer-sponsored programs
designed to increase sales of specific products. These programs, excluding
volume rebates and specific product rebates offered by certain manufacturers,
are not mate-
SAFEGUARD SCIENTIFICS, INC. 27
rial when compared to CompuCom's overall financial results.
Information Solutions sales declined in 1995 and 1994 due to the sale of
Micro Decisionware in the first quarter of 1994 and Coherent being accounted
for under the equity method of accounting subsequent to its mid-1994 rights
offering. After considering the sale and deconsolidation of Micro
Decisionware and Coherent, Information Solutions sales marginally increased
and operating profits decreased in 1995 from 1994, respectively. The decrease
in operating profits was primarily due to customer deferral of decisions
associated with the development of new UNIX and Windows based versions of
Premier's software, and the accelerated merger activity of large financial
institutions, Premier's primary market. Premier expects to complete
development of the Windows and UNIX based versions of its software in
mid-1996 and late 1996, respectively.
Workstation and Security Systems (Core) is not included in the Company's
consolidated financial statements beginning January 1, 1995 as a result of
actions initiated in late 1994 that resulted in the Company holding a
minority interest in Core. Core reported significant losses in 1994
reflecting lower than anticipated margins or losses incurred in an effort to
complete many of the major detention and other contracts in process at the
time of the acquisition of Maris Equipment Company. Included in these losses
was the write-off of $2.1 million of goodwill primarily related to the Maris
acquisition. Safeguard's participation in the 1994 after-tax, after-minority
interest losses incurred by Core was $10.4 million in 1994. No losses are
anticipated to occur subsequent to 1994 based on the Company's limited future
involvement with Core.
Increased cookware sales and sales to automotive customers accounted for
most of the 7% and 13% sales improvements at Metal Finishing in 1995 and in
1994. Occupancy levels in Commercial Real Estate properties were 97% at
December 31, 1995. Operating earnings in 1995 and 1994 included gains
aggregating $1.5 million from the transfer of three properties in early
1995 to the lenders in full satisfaction of the related nonrecourse debt
and a $0.9 million gain from a building sale in 1994. The business
typically generates pretax losses from operations because of mortgage
interest and depreciation, but operates on an approximate cash break-even
basis. The Company is evaluating additional potential transactions with its
commercial real estate holdings including the potential contribution of its
holdings and the related debt to a Real Estate Investment Trust (REIT) in
exchange for an ownership interest in the REIT.
COSTS AND EXPENSES
Gross margin as a percentage of sales declined to 13.6% in 1995 compared to
14.2% for 1994, primarily due to the deconsolidation of Coherent, Micro
Decisionware and Core, which had higher gross margins as a percentage of
sales than other consolidated business units and decreased gross margins at
Premier, partially offset by increased services sales at CompuCom as a
percentage of CompuCom's total sales. Services sales carry a higher margin
than CompuCom's product sales. Gross margin decreased to 14.2% in 1994
compared to 17.5% in 1993, primarily due to the deconsolidation of Coherent
and Micro Decisionware, lower margins on product sales at CompuCom and the
sale of certain higher margin non-core businesses by CompuCom, partially
offset by increased services revenue.
Selling expense as a percentage of sales decreased to 6.1% in 1995, from
6.9% in 1994 and 8.4% in 1993. General and administrative expenses as a
percentage of sales decreased to 4.2% in 1995, from 4.8% in 1994 and 5.1% in
1993. The lower selling and general and administrative expenses as a
percentage of sales were principally due to the deconsolidation of Core,
Coherent and Micro Decisionware in 1994. General and administrative expenses
at CompuCom are reported net of reimbursements from certain manufacturers for
specific training, promotional and marketing programs. These reimbursements
offset the expenses incurred by CompuCom.
Depreciation and amortization for 1995 did not differ significantly from
1994. Depreciation and amortization decreased $1.1 million in 1994 compared
to 1993, primarily due to the 1993 goodwill writeoffs.
Interest expense increased from the prior year in both 1995 and 1994 due
to increased borrowings at CompuCom
28 SAFEGUARD SCIENTIFICS, INC.
to fund working capital requirements and at the Company to fund new business
opportunities. The Company and CompuCom each reduced their cost of funds in
1995 and are pursuing alternatives to reduce these costs further. Interest
expense is expected to increase in 1996 as a result of the Company's expected
investments in new and existing partnership companies and to support
CompuCom's sales growth.
While overall interest expense is expected to increase in 1996, the
October 1995 conversion of CompuCom's 9% Convertible Subordinated Notes will
result in annual after-tax interest savings to CompuCom of approximately $1
million. However, as a result of the increased CompuCom shares outstanding,
the Company's ownership of the common stock of CompuCom decreased from
approximately 62% immediately prior to the transaction to approximately 50%.
As a result, a greater portion of future CompuCom earnings will be allocable
to minority interest. Accordingly, CompuCom earnings in 1996 have to increase
by approximately 20% for the Company's participation in CompuCom's 1996 net
income to approximate the earnings participation in 1995. The Company
continues to hold up to a 60% voting interest in CompuCom as a result of
voting rights associated with the Company's ownership of CompuCom's Series B
cumulative convertible preferred stock.
The 1994 effective tax rate was lower than the 1995 effective tax rate as
the tax basis of Coherent stock sold in the 1994 rights offering was greater
than the accounting basis due to the prior amortization of goodwill which had
not been deductible for tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
In February 1996, the Company issued $115 million of 6% Convertible
Subordinated Notes (the ``Notes'') due February 1, 2006. The Notes are
convertible into the Company's Common Stock at $57.97 per share. The Company
used approximately $67 million of the net proceeds to repay all of its
outstanding indebtedness under its $100 million revolving credit facility,
which will continue to be maintained. During 1995, the Company increased the
availability under the revolving credit facility from $50 million and reduced
the interest rate on the LIBOR based borrowings under the facility by 0.5%.
This facility, which matures in January 1998, unless renegotiated, is secured
by the equity securities the Company holds of its publicly traded partnership
companies, including CompuCom. The value of these securities significantly
exceeds the total availability under the bank credit facility. The remaining
net proceeds from the Notes, availability under the Company's revolving
credit facility, proceeds from the sales from time to time of selected
minority-owned publicly traded securities and other internal sources of cash
flow should be sufficient to fund the Company's cash requirements through
1996 including investments in new or existing partnership companies and
general corporate requirements. Until used, the Company will invest the
remaining net proceeds of the Notes in investment grade securities.
CompuCom and Premier maintain separate, independent bank credit
facilities, which are nonrecourse to the Company. CompuCom's $175 million
credit facility prohibits the payment of common stock dividends by CompuCom
while its credit line remains outstanding. At December 31, 1995,
approximately $117 million was outstanding under this facility which matures
in March 1997, unless renegotiated. In 1995, Premier entered into a $4.5
million master demand note, of which $4.3 million was outstanding at December
31, 1995. The note is payable on demand within 5 days of notice, bears
interest at the prime rate plus 0.5% and is secured by substantially all of
Premier's assets.
Working capital slightly increased in 1995 as a result of increases in
accounts receivable and inventories, partially offset by an increase in
accounts payable. These working capital changes were primarily due to
increased sales activity at CompuCom. The Company's business is not capital
intensive and capital expenditures in any year normally would not be
significant in relation to total assets. Capital asset requirements are
generally funded through internally generated funds, the bank credit facility
or other financing sources. There are no material capital asset purchase
commitments at December 31, 1995.
SAFEGUARD SCIENTIFICS, INC. 29
FINANCIAL INFORMATION -- INDUSTRY SEGMENTS
(in thousands)
- - --------------------------------------------------------------------------------
1995 1994 1993
- - --------------------------------------------------------------------------------
NET SALES
Information Technology
Microcomputer Systems and Services... $1,441,597 $1,255,813 $1,015,482
Information Solutions................ 40,517 53,962 67,320
Workstation and Security Systems..... 67,227 53,167
--------------------------------------
1,482,114 1,377,002 1,135,969
Metal Finishing......................... 33,315 31,135 27,650
Commercial Real Estate.................. 2,311 3,889 4,730
--------------------------------------
$1,517,740 $1,412,026 $1,168,349
--------------------------------------
--------------------------------------
OPERATING PROFIT (LOSS)
Information Technology
Microcomputer Systems and Services... $ 46,567 $ 34,702 $ 27,163
Information Solutions................ (2,513) 3,353 (1,946)*
Workstation and Security Systems..... (16,049) (395)
--------------------------------------
44,054 22,006 24,822
Metal Finishing......................... 1,592 2,688 1,937
Commercial Real Estate.................. 2,587 2,565 2,237
--------------------------------------
48,233 27,259 28,996
Gains on sales of securities, net....... 18,925 21,789 9,574
Income (loss) from equity investments... 2,731 2,669 (818)
Interest expense........................ (19,538) (17,468) (13,701)
General corporate expense, net.......... (6,111) (6,171) (4,190)
Minority interest....................... (13,853) (4,428) (6,523)
--------------------------------------
Earnings before taxes on income......... $ 30,387 $ 23,650 $ 13,338
--------------------------------------
--------------------------------------
DEPRECIATION & AMORTIZATION
Information Technology
Microcomputer Systems and Services... $ 6,866 $ 5,221 $ 4,640
Information Solutions................ 6,140 6,129 8,060
Workstation and Security Systems..... 1,577 1,427
--------------------------------------
13,006 12,927 14,127
Metal Finishing......................... 2,070 2,044 1,837
Commercial Real Estate.................. 1,061 1,699 1,892
General Corporate....................... 790 640 566
--------------------------------------
$ 16,927 $ 17,310 $ 18,422
--------------------------------------
--------------------------------------
CAPITAL EXPENDITURES
Information Technology
Microcomputer Systems and Services... $ 5,999 $ 5,018 $ 6,584
Information Solutions................ 2,130 4,066 3,354
Workstation and Security Systems..... 376 555
--------------------------------------
8,129 9,460 10,493
Metal Finishing......................... 2,349 1,428 4,623
Commercial Real Estate.................. 272 130
General Corporate....................... 541 947 1,874
--------------------------------------
$ 11,291 $ 11,835 $ 17,120
--------------------------------------
--------------------------------------
ASSETS EMPLOYED
Information Technology
Microcomputer Systems and Services... $ 514,674 $ 434,545 $ 370,651
Information Solutions................ 36,261 28,828 40,339
Workstation and Security Systems..... 26,413 42,371
--------------------------------------
550,935 489,786 453,361
Metal Finishing......................... 18,366 18,091 18,404
Commercial Real Estate.................. 19,784 21,124 36,183
General Corporate....................... 153,789 88,154 34,876
--------------------------------------
$ 742,874 $ 617,155 $ 542,824
--------------------------------------
--------------------------------------
<FN>
Information Technology consists of the delivery of personal computer
services, including procurement and configuration of personal computers,
application software and related products, network integration, and technical
support; and the design, development and sale of strategic business
applications systems software solutions.
Metal Finishing provides specialty metal finishing services.
Commercial Real Estate owns and leases income-producing commercial real
estate properties. Operating profit is before interest expense of $1.8
million, $3 million and $3.5 million in 1995, 1994 and 1993, respectively, and
includes gains on disposal of properties of $1.5 million and $0.9 million in
1995 and 1994, respectively.
*After goodwill write-off of $6,419.
30 SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
- - ---------------------------------------------------------------------------------
Year ended December 31
1995 1994 1993
- - ---------------------------------------------------------------------------------
REVENUES
NET SALES
Product.................................. $1,380,371 $1,331,803 $1,071,300
Services................................. 137,369 80,223 97,049
----------------------------------
Total net sales............................. 1,517,740 1,412,026 1,168,349
Gains on sales of securities, net........... 18,925 21,789 9,574
Other income................................ 9,132 4,616 2,698
----------------------------------
Total revenues........................... 1,545,797 1,438,431 1,180,621
COSTS AND EXPENSES
Cost of sales--product...................... 1,219,055 1,160,475 896,440
Cost of sales--services..................... 92,277 50,789 67,772
Selling..................................... 92,998 97,260 98,160
General and administrative.................. 63,493 67,614 59,028
Depreciation and amortization............... 16,927 17,310 18,422
Interest.................................... 19,538 17,468 13,701
(Income) loss from equity investments....... (2,731) (2,669) 818
Goodwill write-off.......................... 2,106 6,419
----------------------------------
Total costs and expenses................. 1,501,557 1,410,353 1,160,760
----------------------------------
Earnings Before Minority Interest and Taxes. 44,240 28,078 19,861
Minority interest........................... (13,853) (4,428) (6,523)
----------------------------------
Earnings Before Taxes On Income............. 30,387 23,650 13,338
Provision for taxes on income............... 12,124 7,910 9,485
----------------------------------
Net Earnings................................ $ 18,263 $ 15,740 $ 3,853
----------------------------------
----------------------------------
EARNINGS PER SHARE
Primary.................................. $1.14 $1.03 $.21
Fully diluted............................ $1.07 $ .94 $.14
AVERAGE COMMON SHARES OUTSTANDING
Primary.................................. 15,367 14,720 15,069
Fully diluted............................ 15,454 14,840 15,204
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
SAFEGUARD SCIENTIFICS, INC. 31
CONSOLIDATED BALANCE SHEETS
(in thousands except share and per share amounts)
- - --------------------------------------------------------------------------------
Assets December 31
1995 1994
- - --------------------------------------------------------------------------------
CURRENT ASSETS
Cash.................................................... $ 7,267 $ 7,860
Receivables less allowances ($2,644-1995; $6,466-1994).. 285,684 276,034
Inventories............................................. 197,948 160,380
Other current assets.................................... 7,376 5,832
---------------------
Total current assets................................. 498,275 450,106
PROPERTY, PLANT AND EQUIPMENT
Land.................................................... 788 788
Buildings and improvements.............................. 24,585 24,183
Equipment and machinery................................. 54,862 54,598
---------------------
80,235 79,569
Less accumulated depreciation and amortization.......... 36,960 36,014
---------------------
43,275 43,555
Commercial Real Estate.................................. 25,810 25,538
Less accumulated depreciation........................... 8,023 7,105
---------------------
17,787 18,433
OTHER ASSETS
Investments............................................. 132,860 66,310
Notes and other receivables............................. 5,882 5,554
Excess of cost over net assets of businesses acquired... 28,830 22,187
Other................................................... 15,965 11,010
---------------------
183,537 105,061
---------------------
$742,874 $617,155
---------------------
---------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
32 SAFEGUARD SCIENTIFICS, INC.
- - ----------------------------------------------------------------------------
DECEMBER 31
Liabilities and Shareholders' Equity 1995 1994
- - ----------------------------------------------------------------------------
Current Liabilities
Current commercial real estate debt................. $ 3,103 $ 3,120
Current debt obligations............................ 9,382 14,041
Accounts payable.................................... 192,919 168,431
Accrued expenses.................................... 66,212 63,658
-----------------------
Total current liabilities......................... 271,616 249,250
Long Term Debt...................................... 204,431 201,393
Commercial Real Estate Debt......................... 17,380 17,594
Deferred Taxes...................................... 28,449 7,336
Other Liabilities................................... 1,057 969
Minority Interest................................... 65,632 30,066
Shareholders' Equity
Common stock, par value $.10 a share
Authorized 20,000,000 shares;
Issued 16,399,671 shares........................... 1,640 1,640
Additional paid-in capital.......................... 22,349 25,122
Retained earnings................................... 110,043 91,780
Treasury stock, at cost (1995--1,717,414 shares;
1994--2,174,394 shares)............................. (10,471) (13,228)
Net unrealized appreciation on investments.......... 30,748 5,233
-----------------------
154,309 110,547
-----------------------
$742,874 $617,155
-----------------------
-----------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
SAFEGUARD SCIENTIFICS, INC. 33
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
- - ---------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
1995 1994 1993
- - ---------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net earnings...................................... $ 18,263 $ 15,740 $ 3,853
Adjustments to reconcile net earnings to cash
from operating activities
Depreciation and amortization.................... 16,927 17,310 18,422
Deferred income taxes............................ 7,968 2,500 2,598
(Income) loss from equity investments............ (2,731) (2,669) 818
Gains on sales of securities, net................ (18,925) (21,789) (9,574)
Minority interest, net........................... 8,419 1,536 3,933
Write-off of goodwill............................ 2,106 6,419
------------------------------
29,921 14,734 26,469
Cash provided (used) by changes
in working capital items
Receivables...................................... (30,113) (30,828) (80,842)
Inventories...................................... (41,298) (34,350) (26,241)
Other current assets............................. (2,515) (555) (41)
Accounts payable and accrued expenses............ 38,825 12,755 61,796
------------------------------
(35,101) (52,978) (45,328)
------------------------------
Cash (used) by operating activities............... (5,180) (38,244) (18,859)
Proceeds from sales of securities, net............ 24,952 16,953 20,129
------------------------------
Cash provided (used) by operating activities
and sales of securities, net...................... 19,772 (21,291) 1,270
OTHER INVESTING ACTIVITIES
Business acquisitions, net of cash acquired....... (2,310) (442) (2,202)
Investments and notes acquired, net............... (25,707) (19,379) (8,013)
Capital expenditures.............................. (11,291) (11,835) (14,778)
Other, net........................................ (8,250) (5,719) (5,071)
------------------------------
Cash (used) by other investing activities......... (47,558) (37,375) (30,064)
FINANCING ACTIVITIES
Net borrowings on revolving credit facilities..... 22,934 32,898 40,535
Net borrowings (repayments) on term debt.......... (1,576) 20,040 (4,077)
Repurchase of common stock........................ (33) (551) (8,000)
Issuance of Company and subsidiary stock.......... 5,868 4,343 1,229
------------------------------
Cash provided by financing activities............. 27,193 56,730 29,687
------------------------------
Increase (Decrease) in Cash....................... (593) (1,936) 893
Cash--beginning of year........................... 7,860 9,796 8,903
------------------------------
Cash--End of Year................................. $ 7,267 $ 7,860 $ 9,796
------------------------------
------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
34 SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands except share amounts)
- - --------------------------------------------------------------------------------------------------------------------------
Net
Unrealized
Common Stock Additional Treasury Stock Appreciation
-------------------- Paid-in Retained ---------------------- on
Shares Amount Capital Earnings Shares Amount Investments
- - --------------------------------------------------------------------------------------------------------------------------
Balance--December 31, 1992......... 16,399,671 $1,640 $25,151 $ 72,187 1,480,167 $ (7,293)
Net earnings....................... 3,853
Stock options exercised............ (67) (294,123) 1,296
Repurchase of common stock......... 1,200,000 (8,000)
---------------------------------------------------------------------------------------
Balance--December 31, 1993......... 16,399,671 1,640 25,084 76,040 2,386,044 (13,997)
Net earnings....................... 15,740
Stock options exercised............ 38 (274,650) 1,320
Repurchase of common stock......... 63,000 (551)
Net unrealized appreciation
on investments.................... $ 5,233
---------------------------------------------------------------------------------------
Balance--December 31, 1994......... 16,399,671 1,640 25,122 91,780 2,174,394 (13,228) 5,233
Net earnings....................... 18,263
Stock options exercised............ 981 (459,080) 2,790
Repurchase of common stock......... 2,100 (33)
Subsidiaries' equity transactions.. (3,754)
Net unrealized appreciation
on investments.................... 25,515
---------------------------------------------------------------------------------------
Balance--December 31, 1995......... 16,399,671 $1,640 $22,349 $110,043 1,717,414 $(10,471) $30,748
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE COMPANY--The Company is engaged in the business of
identifying, acquiring interests in and developing partnership companies,
most of which are engaged in information technology businesses, broadly
defined to include all activities related to the acquisition, processing
and dissemination of information and related technology to improve business
and personal productivity. The most significant of the Company's
partnership companies are engaged in the distribution of microcomputer
hardware, software and related services. In addition, partnership companies
in the information technology industry are engaged in the development and
sale of strategic business software and services, imaging equipment and
software and telecommunications technology. Other partnership companies
provide specialty metal finishing and commercial real estate ownership and
services.
PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include
the accounts of the Company
SAFEGUARD SCIENTIFICS, INC. 35
and its subsidiaries, primarily CompuCom Systems, Inc., Premier Solutions,
Ltd., Pioneer Metal Finishing, and Tangram Enterprise Solutions, Inc. The
effect of adjustments to the Company's carrying values of subsidiaries
resulting from their underlying equity transactions is included in the
Company's additional paid-in capital. Investments in companies owned 50% or
less, in which significant influence is exercised, are accounted for on the
equity method of accounting. Certain investments accounted for under the cost
method are classified as available-for-sale and recorded at fair value with
net unrealized appreciation of $30.7 and $5.2 million, which are net of taxes
of $15.8 million and $2.7 million, recorded as a separate component of
shareholders' equity at December 31, 1995 and 1994, respectively. All other
investments are stated at the lower of cost or net realizable value. All
material intercompany accounts and transactions have been eliminated.
Prior to 1995, the consolidated financial statements included the results of
Core Technologies (Pennsylvania) Inc. (Core), formerly CenterCore, Inc. In
1995, the Company contributed a portion of its ownership in Core to the
company, sold a significant portion of its remaining interest in Core to Core's
management and provided $3 million in advances and standby letters of credit
to address Core's funding requirements. The Company wrote off its investment
in Core and provided for anticipated obligations of the Company with respect
to Core in 1994. Core is not included in the consolidated financial
statements effective January 1, 1995 due to the Company's reduced ownership.
ACCOUNTING ESTIMATES--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
INVENTORIES, primarily finished goods, are stated at the lower of average
cost or market. Periodically, the Company assesses the appropriateness of
the inventory valuations considering obsolete, slow moving and non-salable
inventory.
PROPERTY, PLANT AND EQUIPMENT are carried at cost less accumulated
depreciation and amortization. Provision for depreciation and amortization
is based on the estimated useful lives of the assets (buildings and
improvements--3 to 33 years; equipment and machinery--3 to 12 years) and is
computed primarily on the straight-line method.
COMMERCIAL REAL ESTATE construction costs and tenant required improvements
are capitalized. These costs are depreciated on the straight-line method
over a 10 or 30-year estimated useful life. Costs incurred in connection
with obtaining financing and tenant leases are deferred and amortized over
the term of the related financing or the related lease.
EXCESS OF COST OVER NET ASSETS OF BUSINESSES ACQUIRED is amortized on a
straight-line basis primarily over 7 to 10 years. Accumulated amortization
at December 31, 1995 and 1994 was $13.9 million and $10.1 million,
respectively. The Company continually evaluates goodwill for indications of
impairment based on the forecasted undiscounted cash flow from the related
business activity (including possible proceeds from a sale of the
business). The amount by which the Company's carrying value exceeds its
share of the underlying net assets of equity investees is amortized on a
straight-line basis which adjusts the Company's share of the investee's
earnings or losses.
TAXES ON INCOME are reduced by allowable tax credits. Deferred taxes are
accounted for using the asset and liability method of accounting for income
taxes. Under this method, deferred taxes are recognized for the tax
consequences of "temporary differences" by applying enacted statutory tax
rates applicable to future years to differences between the financial
statement carrying amounts and the tax basis of existing assets and
liabilities. The effect on deferred taxes of a change in tax rates is
recognized in income in the period the change occurs.
THRIFT PLANS are contributory and cover eligible employees of the Company
and certain subsidiaries. The Company generally matches from 50% to 75% of
the first 4% of employee contributions to the thrift plans. Annual
contributions to a non-contributory defined contribution pension plan are
based on 4.5% of a participant's eligible compensation. Amounts expensed
relating to these plans were $1.9 million, $1.8 million and $1.5 million in
1995, 1994 and 1993, respectively.
36 SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FINANCIAL INSTRUMENTS--The Company's financial instruments, principally
cash, accounts receivable, accounts payable and accrued liabilities, are
carried at cost due to the short maturity of these instruments. The
Company's debt is carried at cost as the debt bears interest at rates
approximating current market rates.
EARNINGS PER SHARE of common stock are computed on adjusted net earnings
using the weighted-average number of common shares outstanding during each
year, including common stock equivalents (unless anti-dilutive) which would
arise from the exercise of stock options. Net earnings are adjusted for the
dilutive effect of common stock equivalents (primary) and convertible
securities (fully diluted) issued by the Company's public subsidiaries.
REVENUE RECOGNITION--Product revenues are generally recognized upon
shipment with provisions made for anticipated returns, which historically
have been immaterial. Service revenues are generally recognized when the
service is rendered or on a straight-line basis if performed over a service
contract period.
VENDOR PROGRAMS--CompuCom receives volume rebates from manufacturers
related to sales of certain products which are recorded when earned as a
reduction of cost of sales. CompuCom also receives manufacturer
reimbursements for certain training, promotional and marketing activities,
which are recorded as earned as a reduction of general and administrative
expense. These reimbursements offset expenses incurred.
STOCK SPLIT--All share and per share data have been retroactively adjusted
to reflect the three-for-two split of the Company's common shares effective
August 31, 1995.
RECLASSIFICATIONS--Certain amounts previously reported in the consolidated
financial statements have been reclassified to conform to the presentation
for the year ended December 31, 1995, primarily the reclassification of
direct expenses related to services revenue from operating expenses to cost
of sales. These reclassifications had no effect on previously reported net
earnings or shareholders' equity.
STOCK OPTIONS--Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123") was issued in
October 1995. SFAS 123, which is effective for the Company beginning in
1996, gives companies the option to adopt the fair value method for expense
recognition of employee stock options and stock based awards or to continue
to account for such items using the intrinsic value method as outlined
under Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25") with pro forma disclosures of net income
and net income per share as if the fair value method had been applied. The
Company has elected to continue to apply APB 25 for future stock options
and stock based awards.
NOTE 2 -- INVESTMENTS
In the following summary of investments, market value reflects the price
of minority-owned publicly-traded securities at the close of business on
December 31 of each year. Unrealized appreciation reflects the net excess
of market value over carrying value of publicly-traded securities
classified as available-for-sale.
- - ---------------------------------------------------------------------------
1995 1994
------------------- ---------------------
Carrying Market Carrying Market
Value Value Value Value
------- ------- -------- ------
($000 omitted)
Equity Investees
Cambridge Technology Partners
(Massachusetts), Inc......... $ 10,280 $195,567 $ 6,599 $75,029
Coherent Communications
Systems Corporation......... 7,160 107,075 4,479 47,713
USDATA Corporation............ 6,844 41,147 7,780
Non-public companies.......... 27,623 13,728
-------- -------
51,907 32,586
National Media Corporation..... 2,035 45,390 2,018 3,197
Sybase, Inc. .................. 17,451 16,674 14,923 16,340
Novell, Inc. .................. 243 5,994
Gandalf Technologies and
other public companies........ 905 4,915 1,190 771
Unrealized appreciation........ 46,588 7,928
Non-public companies........... 13,974 7,422
-------- -------
$132,860 $66,310
-------- -------
-------- -------
SAFEGUARD SCIENTIFICS, INC. 37
The Company owns approximately 21%, 38% and 21% of Cambridge, Coherent and
USDATA, respectively, at December 31, 1995. For the years ended December 31,
1995 and 1994, equity investees had aggregate net sales of $395 million and
$243.6 million, respectively, and aggregate net income of $11.1 million and
$10.9 million, respectively.
Average cost is generally used to compute securities gains. Securities gains
are net of related costs, charges incurred in the disposition of the
investments and provisions for other investments and notes. The following
summarizes significant pre-tax gains from securities transactions (in
millions):
- - -----------------------------------------------
1995 1994 1993
- - -----------------------------------------------
Coherent.............. $ 5.5 $11.7
Micro Decisionware.... 3.5 10.7
Cambridge............. .7 $ 4.2
Novell................ 6.4 1.6 5.4
Gandalf............... 4.3
QVC Network........... 3.2
Other................. (1.5) (2.2) (3.2)
- - -----------------------------------------------
$18.9 $21.8 $9.6
- - -----------------------------------------------
- - -----------------------------------------------
Securities gains in 1995 included the sale of the Company's remaining
interest in Novell and a portion of its interest in Coherent and Gandalf. A
portion of securities gains in 1995 and 1994 resulted from the Company's
sale of its controlling interest in Micro Decisionware to Sybase including
amounts earned based on the performance of Micro Decisionware subsequent to
the sale. Securities gains in 1994 and 1993 included gains resulting from
the rights offerings of Coherent and Cambridge and open market sales of
Novell and QVC.
NOTE 3 -- DEBT
- - --------------------------------------------------------------
1995 1994
- - --------------------------------------------------------------
($000 omitted)
PARENT COMPANY AND OTHER RECOURSE DEBT
Revolving credit facility............... $ 47,800 $ 44,100
Notes payable to equity investee
companies.............................. 23,589 6,975
Other................................... 9,642 8,915
----------------------
81,031 59,990
----------------------
SUBSIDIARY DEBT (NON-RECOURSE TO PARENT)
CompuCom revolving credit facility...... 117,510 115,227
CompuCom 9% subordinated notes.......... 18,214
Premier revolving credit facility....... 4,300
Core obligations........................ 11,872
Other................................... 10,972 10,131
----------------------
132,782 155,444
----------------------
213,813 215,434
----------------------
Current debt obligations................ (9,382) (14,041)
----------------------
Long-term debt.......................... $204,431 $201,393
----------------------
----------------------
In 1995, availability under the Company's revolving credit facility was
increased from $50 million to $100 million and the interest rate on London
Interbank Offered Rate (``LIBOR'') based borrowings was reduced by .5%. The
stock of certain subsidiaries and investments is pledged as collateral for
the facility. The facility, which matures in January 1998, bears interest
at the prime rate and/or, at the Company's option, at LIBOR plus 1.75% and
is subject to a commitment fee of .25% on the unused portion. During 1995
and 1994, the Company borrowed a maximum of $52.6 million and $48.1
million, respectively, and the weighted average interest rate was
approximately 8.4% in 1995 and 7.1% in 1994, respectively.
In February 1996, the Company issued $115 million of 6% Convertible
Subordinated Notes due February 1, 2006. The Notes are convertible into the
Company's Common Stock at $57.97 per share. The Company used approximately
$67 million of the net proceeds from the Notes to repay all of the
Company's outstanding indebtedness under its revolving credit facility at
that date.
In 1995, availability under CompuCom's bank revolving credit facility was
increased from $150 million to $175 million and the interest rate on LIBOR
based and prime borrowings was reduced by 1.25% and .5%, respectively. The
facility provides for a fixed rate of interest of 7.18% on up
38 SAFEGUARD SCIENTIFICS, INC.
to $60 million of outstanding borrowings with an option to elect LIBOR plus
1.5%, subject to certain limitations, and/or interest at the prime rate for the
remainder of the outstanding borrowings. The facility matures in March 1997,
unless renegotiated. During 1995 and 1994, CompuCom borrowed a maximum of $156
million and $132 million, respectively, and the weighted average interest rate
was 7.9% and 7.3%, respectively.
In 1995, CompuCom called for the redemption of $18.5 million of 9%
convertible subordinated notes due September 2002. The notes were converted into
8.4 million shares of CompuCom's common stock in accordance with their
conversion feature at a price less than the per share carrying value of the
Company's investment in CompuCom, resulting in a decrease in the Company's
additional paid-in capital. Primarily as a result of this transaction, the
Company's ownership of CompuCom decreased from 63% at December 31, 1994 to 50%
at December 31, 1995. The Company continues to hold up to a 60% voting interest
in CompuCom as a result of voting rights associated with the Company's ownership
of CompuCom's Series B Cumulative Convertible Preferred Stock.
In 1995, Premier entered into a $4.5 million secured master demand note, of
which $4.3 million was outstanding at December 31, 1995. The note is payable on
demand within five days of notice and bears interest at prime plus .5%.
The credit facilities generally require some or all of the following: the
maintenance of specified levels of tangible net worth, debt to tangible net
worth and net earnings; specified interest coverage ratios; and limitations on
the amount available for dividends, capital expenditures, investments and third
party guarantees. The aggregate net assets of subsidiaries which are restricted
and unavailable for dividends at December 31, 1995 are approximately $70
million. The credit facilities are secured by substantially all the assets of
the applicable borrower.
The Company had aggregate indebtedness of $23.6 million and $7 million to
certain equity investee companies as of December 31, 1995 and 1994,
respectively. Approximately $6 million of the amount outstanding at December 31,
1995 is payable in January 1996 and the remainder is payable on demand. Interest
on the notes generally varies with the Company's effective borrowing rate, with
weighted average interest rates at December 31, 1995 and 1994 of 6.8% and 7.2%,
respectively. The Company has the intent and ability, if necessary, to repay
these notes with proceeds from the revolving credit facility; accordingly, they
are classified as long term. In January 1996 the Company repaid $19.6 million of
these notes with proceeds from the revolving credit facility.
Aggregate maturities of long-term debt at December 31, 1995 during future
years are as follows (in millions): $9.4-- 1996; $121.6--1997; $75.3--1998;
$0.9--1999; $2.0--2000 and $4.6--thereafter.
Interest paid in 1995, 1994 and 1993 was $19.2 million, $16.8 million and
$14 million, respectively, of which $2.0 million, $2.7 million and $3.5 million
in 1995, 1994 and 1993, respectively, related to commercial real estate debt.
NOTE 4 - COMMERCIAL REAL ESTATE DEBT
1995 1994
-------------------
($000 OMITTED)
Permanent mortgage financing, interest ranging
from 9.2% to 9.5%............................... $ 6,935 $ 7,012
Cash flow participation permanent mortgage
financing, interest at 7.1%......................... 13,548 13,702
-------------------
20,483 20,714
Current commercial real estate debt................. (3,103) (3,120)
-------------------
Long-term commercial real estate debt............... $17,380 $17,594
-------------------
-------------------
All debt is secured by the related property and $18.8 million of the debt
at December 31, 1995 is non-recourse financing.
In 1995, the Company transferred three properties to the mortgage holders in
full satisfaction of the related non-recourse debt which resulted in a net
pre-tax gain of approximately $1.5 million.
Principal payments are due in future years as follows (in millions): $3.1--
1996; $1.7--1997; $0.2--1998; $0.2--1999 and $15.3--2000.
NOTE 5 - COMMERCIAL REAL ESTATE LEASES
The Company leases space in its Commercial Real Estate properties to
tenants under operating leases with terms ranging from one to ten years. Minimum
future rentals expected to be received under non-cancelable leases are as
follows (in millions): $2.0--1996; $1.6--1997; $1.1--1998; $0.8--1999;
$0.5--2000 and $0.2--thereafter.
SAFEGUARD SCIENTIFICS, INC. 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
These future minimum rentals do not include additional rent from leases
which provide for pass-through of operating expenses or escalation based upon
increases in the consumer price index.
NOTE 6 - LEASES
The Company conducts a portion of its operations in leased facilities and leases
equipment under leases expiring at various dates to 2004.
Future minimum lease payments under non-cancellable operating leases with
initial or remaining terms of one year or more at December 31, 1995 are (in
millions): $8.8--1996; $6.2--1997; $5.4--1998; $4.6--1999; $2.7--2000 and
$2.3--thereafter.
Total rental expense under operating leases was $8.9 million, $9.3 million
and $9.5 million in 1995, 1994 and 1993, respectively.
NOTE 7 - INCOME TAXES
The provision for income taxes is comprised of:
1995 1994 1993
---- ---- ----
($000 OMITTED)
Current............................. $ 4,156 $5,410 $6,887
Deferred ........................... 7,968 2,500 2,598
-----------------------------
$12,124 $7,910 $9,485
-----------------------------
-----------------------------
State taxes on income included above $ 1,248 $1,025 $1,378
A reconciliation of the effective tax rate to the federal statutory rate is
as follows:
1995 1994 1993
--------------------------
($000 OMITTED)
Statutory tax provision ............ $10,635 $8,278 $4,668
Increase (decrease) in taxes resulting
from:
Non-deductible goodwill
amortization/write-off........... 1,181 1,187 4,042
Book/tax basis difference on securities
sold............................. (59) (2,552)
State taxes, net of federal tax benefit 812 666 896
Income taxed at rates other than
statutory rate................... (445) 331 (121)
-----------------------------
$12,124 $7,910 $9,485
-----------------------------
-----------------------------
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1995 and 1994 are presented below.
1995 1994
----------------------
($000 OMITTED)
Deferred tax assets:
Subsidiary/investee carrying values................. $ 4,250 $ 9,190
Accounts receivable allowances ..................... 829 716
Inventories, reserves and tax capitalized costs..... 1,453 3,866
Other............................................... 1,712 1,863
----------------------
Gross deferred tax assets........................... 8,244 15,635
Less valuation allowance ........................... (1,876) (1,935)
----------------------
Deferred tax assets................................. 6,368 13,700
----------------------
Deferred tax liabilities:
Subsidiary/investee carrying values................. (3,907) (3,025)
Accelerated depreciation ........................... (6,453) (5,583)
Unrealized appreciation on investments ............. (15,840) (2,695)
Other............................................... (8,617) (9,733)
----------------------
Deferred tax liabilities ........................... (34,817) (21,036)
----------------------
Net deferred tax liabilities ....................... $(28,449) $ (7,336)
----------------------
----------------------
The net change in the valuation allowance for the years ended December 31,
1995 and 1994 was a decrease of $59,000 and $286,000, respectively.
Subsequently recognized tax benefits relating to the valuation allowance
for deferred tax assets as of December 31, 1995 will be reported as an income
tax benefit in the consolidated statement of operations.
Income taxes paid were $10.9 million, $11.2 million and $5.5 million in
1995, 1994, and 1993, respectively.
NOTE 8 - COMMON STOCK
Options may be granted to Company employees and directors under various
stock option plans. Options to non-employee directors are required to be
granted at fair market value with an initial 30,000 share grant upon
election to the Board. Subsequent service grants and incentive grants are
awarded to all non-employee directors in accordance with formulas based
upon years of service and compensation. Generally, outstanding options vest
over periods not exceeding four years after the date of grant and expire
eight years after the date of grant. To the extent allowable, all grants
are incentive stock options. All options granted under the plans
40 SAFEGUARD SCIENTIFICS, INC.
have been at prices which were equal to the fair market value at the date
of grant.
A summary of employee and director stock options is as follows:
1995 1994
-----------------------
Shares under option beginning of year .... 1,552,037 1,540,041
Options granted........................... 263,300 364,500
Options exercised......................... (459,671) (340,452)
Options cancelled......................... (4,814) (12,052)
-----------------------
Shares under option end of year........... 1,350,852 1,552,037
-----------------------
-----------------------
Options exercisable....................... 610,180 690,596
Shares available for future grant......... 627,542 886,028
Average price of shares under option ..... $14.22 $6.31
Average price of shares exercised ....... $5.45 $5.15
At December 31, 1995, the Company reserved 1,978,394 shares of common
stock for possible future issuance under these plans. Several subsidiaries
also maintain stock option plans for their employees and directors.
Under the Company's Shareholders' Rights Plan certain shareholders may
be entitled to purchase the Company's common stock at $20 per share if a
person or group acquires or commences a tender offer for 20% or more of the
Company's outstanding common stock. This plan expires April 11, 1996.
NOTE 9 - PREFERRED STOCK
Shares of preferred stock, par value $10 a share, are voting and are
issuable in one or more series with rights and preferences as to dividends,
redemption, liquidation, sinking funds and conversion determined by the
Board of Directors. At December 31, 1995, there were 55,423 shares
authorized and none outstanding.
NOTE 10 - GOODWILL WRITE-OFF
Due to the significant losses incurred at Core in 1994, it became apparent
that prospective cash flows would not be sufficient to recover unamortized
goodwill related to prior Core acquisitions, primarily the September 1993
acquisition of Maris Equipment Company. Accordingly, Core wrote-off
goodwill of $2.1 million in 1994.
The Company acquired a majority interest in Premier in 1990. In 1993,
it became apparent that technological advances in computer design, the
rapidly accelerating movement toward client/server computing and the
development cost associated with re-engineering its product impeded the
ability of the existing product to generate adequate future cash flows to
recover the unamortized goodwill. These changes caused the Company to
write-off goodwill of $5.3 million in 1993.
The Company acquired a majority interest in Coherent in 1981. In 1993,
the Company identified a clear deterioration of the acquired analog
business originally acquired in 1981. As a result of this deterioration the
remaining goodwill of $1.1 million was written off in 1993.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries are involved in various claims and legal
actions arising in the ordinary course of business. In the opinion of
management, the ultimate disposition of these matters will not have a
material adverse effect on the Company's consolidated financial position or
results of operations.
In connection with investments in certain companies, the Company is
contingently obligated for approximately $26 million in bank loan and other
guarantees and $3 million for possible future investments.
SAFEGUARD SCIENTIFICS, INC. 41
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Safeguard Scientifics, Inc.
Wayne, Pennsylvania [LOGO] KPMG PEAT MARWICK LLP
We have audited the accompanying consolidated balance sheets of Safeguard
Scientifics, Inc. and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of operations, cash flows and shareholders'
equity for each of the years in the three-year period ended December 31, 1995.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Safeguard
Scientifics, Inc. and subsidiaries at December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1995, in conformity with generally accepted
accounting principles.
The Company changed its method of accounting for investments by adopting
the provisions of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" as of January
1, 1994.
/s/ KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
February 12, 1996
STATEMENT OF MANAGEMENT'S FINANCIAL RESPONSIBILITY
[LOGO] SAFEGUARD SCIENTIFICS, INC.
Management has prepared and is responsible for the integrity and
objectivity of the consolidated financial statements and related financial
information in this Annual Report. The statements are prepared in conformity
with generally accepted accounting principles. The financial statements reflect
management's informed judgment and estimation as to the effect of events and
transactions that are accounted for or disclosed.
Management maintains a system of internal control at each business unit.
This system, which undergoes continual evaluation, is designed to provide
reasonable assurance that assets are safeguarded and records are adequate for
the preparation of reliable financial data. In determining the extent of the
system of internal control, management recognizes that the cost should not
exceed the benefits derived. The evaluation of these factors requires estimates
and judgment by management.
KPMG Peat Marwick LLP is engaged to render an opinion as to whether
management's financial statements present fairly, in all material respects,
Safeguard Scientifics' financial condition and operating results in accordance
with generally accepted accounting principles. The scope of their engagement
included a review of the internal control system, tests of the accounting
records and other auditing procedures to the extent deemed necessary to render
their opinion on the financial statements. Their report is presented above.
The Audit Committee of the Board of Directors meets with the independent
auditors and management to satisfy itself that they are properly discharging
their responsibilities. The auditors have direct access to the Audit Committee.
Safeguard Scientifics, Inc.
/s/ Gerald M. Wilk
Gerald M. Wilk
Senior Vice President-Finance
42 SAFEGUARD SCIENTIFICS, INC.
QUARTERLY FINANCIAL DATA
(in thousands except per share data)
In the opinion of the Company, the following unaudited quarterly data include
all adjustments (consisting of only normal recurring adjustments) necessary
for a fair presentation of operations for such periods.
QUARTER ENDED
-------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
-------------------------------------------
1995
Net Sales ........................... $343,159 $370,572 $366,345 $437,664
After-tax Operating Earnings* ....... 3,646 3,712 2,819 5,035
After-tax Securities Gains .......... 1,205 2,755 3,612 3,803
Net Earnings ........................ 3,536 4,766 4,705 5,256
Earnings Per Share ..................
Primary ........................... .23 .30 .29 .32
Fully Diluted ..................... .21 .27 .27 .32
1994
Net Sales ........................... $324,646 $346,198 $343,366 $397,816
After-tax Operating Earnings (Loss)*. 2,749 1,896 2,436 (2,892)
After-tax Securities Gains .......... 1,338 2,712 6,287 4,164
Net Earnings ........................ 3,283 3,808 7,569 1,080
Earnings Per Share
Primary ............................ .21 .25 .51 .06
Fully Diluted ...................... .20 .23 .49 .03
<FN>
*Before securities gains and minority interest.
Included in the fourth quarter of 1994 are after-tax, after-minority
interest losses of approximately $7 million related to Core. Core is not
included in the consolidated financial statements effective January 1, 1995
due to the Company's reduced ownership.
Net securities gains of varying magnitude have been realized in recent
years; prior gains are not necessarily indicative of gains which might be
realized in the future.
Earnings per share calculations for each of the quarters are based on the
weighted average number of shares outstanding in each period and adjust net
earnings for the dilutive effect of public subsidiary common stock
equivalents (primary) and convertible securities (fully diluted). Therefore,
the sum of the quarters does not necessarily equal the year-to-date earnings
per share.
Per share amounts have been retroactively restated to reflect the
three-for-two split of the Company's common shares effective August31,1995.
Sales are typically higher in the fourth quarter of each year, reflecting
the historically stronger fourth quarter results at CompuCom, the Company's
largest subsidiary.
COMMON STOCK DATA
Safeguard Scientifics, Inc.
Common Stock Listed on New York Stock Exchange
Symbol SFE
1995 1994
-------------------------------------
High Low High Low
- - ----------------------------------------------------------------
First Quarter ........... 18 1/4 11 1/3 10 7 5/8
Second Quarter .......... 31 1/6 16 1/3 11 2/3 8 11/24
Third Quarter ........... 51 1/2 26 1/6 10 1/4 8 11/24
Fourth Quarter .......... 50 3/8 38 3/8 11 11/12 8 11/12
There are approximately 11,500 holders of the Company's common stock.
SAFEGUARD SCIENTIFICS, INC. 43