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 MARCH 31, 1996 Commission File Number 1-5620
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SAFEGUARD SCIENTIFICS, INC.
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-1609753
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(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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (610) 293-0600
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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
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Number of shares outstanding as of MAY 9, 1996
Common Stock 14,837,521
SAFEGUARD SCIENTIFICS, INC.
QUARTERLY REPORT FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1 - Financial Statements:
Consolidated Balance Sheets -
March 31, 1996 (unaudited) and December 31, 1995. . . . . . . . . . . . .3
Consolidated Statements of Operations (unaudited)-
Three Months Ended March 31, 1996 and 1995. . . . . . . . . . . . . . . .5
Consolidated Statements of Cash Flows (unaudited)-
Three Months Ended March 31, 1996 and 1995. . . . . . . . . . . . . . . .6
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . .7
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . . . .8
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders . . . . . . . . .12
Item 5 - Other Information . . . . . . . . . . . . . . . . . . . . . . . . . .12
Item 6 - Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . .13
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
2
SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED BALANCE SHEETS
(000 omitted)
March 31 December 31
ASSETS 1996 1995
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(UNAUDITED)
CURRENT ASSETS
Cash and cash equivalents $ 48,730 $ 7,267
Receivables less allowances ($2,639-1996; $2,644-1995) 286,818 285,684
Inventories 232,408 197,948
Other current assets 5,894 7,376
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Total current assets 573,850 498,275
PROPERTY, PLANT AND EQUIPMENT 72,259 80,235
Less accumulated depreciation and amortization (32,106) (36,960)
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40,153 43,275
COMMERCIAL REAL ESTATE 25,893 25,810
Less accumulated depreciation (8,257) (8,023)
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17,636 17,787
OTHER ASSETS
Investments 115,723 132,860
Notes and other receivables 9,765 5,882
Excess of cost over net assets of businesses acquired 27,384 28,830
Other 19,663 15,965
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172,535 183,537
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$ 804,174 $ 742,874
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3
SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED BALANCE SHEETS
(000 omitted except shares)
March 31 December 31
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995
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(UNAUDITED)
CURRENT LIABILITIES
Current commercial real estate debt $ 3,103 $ 3,103
Current debt obligations 6,983 9,382
Accounts payable 214,788 192,919
Accrued expenses 57,120 66,212
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Total current liabilities 281,994 271,616
LONG TERM DEBT 152,615 204,431
COMMERCIAL REAL ESTATE DEBT 17,327 17,380
DEFERRED TAXES 21,215 28,449
OTHER LIABILITIES 856 1,057
MINORITY INTEREST 69,529 65,632
CONVERTIBLE SUBORDINATED NOTES 115,000
SHAREHOLDERS' EQUITY
Common stock, par value $.10 a share
Authorized 20,000,000 shares
Issued 16,399,671 shares 1,640 1,640
Additional paid-in capital 22,350 22,349
Retained earnings 114,023 110,043
Treasury stock, at cost
1,594,227 shares-1996 (9,761)
1,717,414 shares-1995 (10,471)
Net unrealized appreciation on investments 17,386 30,748
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145,638 154,309
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$ 804,174 $ 742,874
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4
SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(000 omitted except per share data)
Three Months Ended
March 31
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1996 1995
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(UNAUDITED)
REVENUES
Net Sales
Product $390,087 $314,511
Services 40,010 28,648
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Total net sales 430,097 343,159
Gains on sales of securities, net 5,680 2,008
Other income 1,888 2,932
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Total revenues 437,665 348,099
COSTS AND EXPENSES
Cost of sales- product 346,292 277,660
Cost of sales- services 25,477 19,192
Selling 27,954 21,009
General and administrative 17,665 13,980
Depreciation and amortization 4,616 4,037
Interest 5,355 5,008
Income from equity investments (887) (870)
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Total costs and expenses 426,472 340,016
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EARNINGS BEFORE MINORITY INTEREST AND TAXES 11,193 8,083
Minority interest (4,559) (2,191)
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EARNINGS BEFORE TAXES ON INCOME 6,634 5,892
Provision for taxes on income 2,654 2,356
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NET EARNINGS $ 3,980 $ 3,536
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EARNINGS PER SHARE
Primary $ .25 $ .23
Fully diluted $ .25 $ .21
AVERAGE COMMON SHARES OUTSTANDING
Primary 15,528 15,040
Fully diluted 15,586 15,097
5
SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000 omitted)
Three Months Ended
March 31
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1996 1995
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(UNAUDITED)
OPERATING ACTIVITIES
Net earnings $ 3,980 $ 3,536
Adjustments to reconcile net earnings to cash from operating
activities
Depreciation and amortization 4,616 4,037
Deferred income taxes (71) (1,243)
Income from equity investments (887) (870)
Gains on sales of securities, net (5,680) (2,008)
Minority interest, net 2,669 1,315
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4,627 4,767
Cash provided (used) by changes in working capital items
Receivables 1,872 20,992
Inventories (34,567) 10,846
Accrued liabilities and other 17,305 (36,339)
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(15,390) (4,501)
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Cash provided (used) by operating activities (10,763) 266
Proceeds from sales of securities, net 6,848 1,806
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Cash provided (used) by operating activities and sales of
securities, net (3,915) 2,072
OTHER INVESTING ACTIVITIES
Investments and notes acquired, net (6,230) (3,909)
Capital expenditures (2,135) (3,169)
Business acquisitions, net of cash acquired (5,372) (1,185)
Other, net (2,492) (2,761)
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Cash (used) by other investing activities (16,229) (11,024)
FINANCING ACTIVITIES
Issuance of subordinated notes, net 112,413
Net borrowings (repayments) on revolving credit facilities (45,271) 7,646
Net repayments on term debt (7,182) (1,355)
Issuance of Company and subsidiary stock 1,647 1,153
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Cash provided by financing activities 61,607 7,444
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INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 41,463 (1,508)
Cash and Cash Equivalents - beginning of year 7,267 7,860
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CASH AND CASH EQUIVALENTS - END OF PERIOD $ 48,730 $ 6,352
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6
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
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
1995 Form 10-K should be read in conjunction with the accompanying
statements. These statements include all adjustments (consisting only of
normal recurring adjustments) 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. 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.
3. During April 1996, CompuCom executed amendments to its August 1993
Financing and Security Agreement ("Credit Facility") eliminating the $60
million fixed rate portion and increasing the amount of borrowings CompuCom
may allocate to LIBOR tranches up to $165 million. The amount of the
Credit Facility remained at $175 million, with the interest rate on the
remaining $10 million at prime. The amendment also extended the maturity
date of the Credit Facility to April 1, 1998. In addition, during April
1996, CompuCom entered into an agreement for a $75 million receivable
securitization whereby a portion of trade receivables are pledged to a
third party as collateral, increasing its financing capacity to $250
million. The interest rate applicable to the receivable securitization is
based upon the commercial paper rate plus .55%. The receivable
securitization agreement matures on April 1, 1998, subject to certain
conditions.
4. 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.
5. Certain amounts in the 1995 consolidated financial statements have been
reclassified to conform with the 1996 presentation, the most significant of
which is 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.
7
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 investment 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 a partnership company 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 or losses
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 the 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 accounting 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 OVERVIEW
Net sales for the first quarter of 1996 were $430.1 million compared to
$343.2 million for the comparable period in 1995. Net earnings were $3.98
million, or $.25 a share in 1996, compared to $3.54 million, or $.23 a share,
for the same period in 1995. CompuCom represented 96% and 94% of the
Company's total net sales for the first quarter of 1996 and 1995,
respectively. As a result of the relative significance of CompuCom in the
consolidated results, fluctuations in other business units have tended to
have a minimal impact.
The 25% net sales increase primarily reflects the 28% increase at CompuCom.
CompuCom's product and services revenue increased 25% and 67%, respectively.
The increased
8
product revenue reflects higher demand by corporate customers for personal
computers, particularly related to the current Pentium upgrade cycle and
increased demand for laptops. Also favorably impacting CompuCom's product
revenue was corporate customers continuing to consolidate the number of
suppliers. The increase in services revenue reflects CompuCom's continued focus
on expanding its network and technology services at competitive prices as well
as the impact of various small service acquisitions which occurred after the
first quarter of 1995. Strong product demand has continued into the second
quarter of 1996 at CompuCom. However, CompuCom expects this will be partially
offset by services revenue growing at a slower pace in the second quarter of
1996 when compared to the first quarter of 1996.
Net earnings at CompuCom improved 50% in 1996 primarily as a result of the
growth in sales. However, the Company's share of CompuCom's earnings, after
allocation to minority interest, increased only 21% in 1996 due to the decrease
in the Company's ownership of CompuCom from 63% in the first quarter of 1995 to
50% in the first quarter of 1996. 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 Company's increased net earnings in the first quarter of 1996 over
the comparable period of 1995 resulted from CompuCom's increase in net
earnings and higher securities gains. These increases were partially offset
by lower sales and earnings in the Company's Information Solutions segment
primarily due to the continuing effect of deferral of customer buying
decisions associated with the development by Premier of new UNIX and Windows
based versions of its software and from merger activity at large financial
institutions, Premier's primary market. Premier expects to complete the
Windows and UNIX based versions of its software in mid and late 1996,
respectively. In addition, corporate expenses increased to support the
additional investments in and growing activities of the partnership companies.
With respect to Safeguard's principal equity investments, Cambridge
Technology Partners and Coherent Communications each reported strong results
in the first quarter and USDATA Corporation announced a major new product
release.
Cambridge's earnings increased 74% on a 46% revenue increase, as it
continues to see increased demand for its services in North America and Europe
resulting from an expanding market for client/server systems performed on a
fixed time/fixed price basis. Growth of Cambridge's European operations was
particularly impressive, representing 24% of total revenues in the first quarter
of 1996 compared to 17% for the same period in 1995. Safeguard owns
approximately 21% of Cambridge's common stock at March 31, 1996.
Coherent Communications reported increased earnings of 29% on a 14% sales
increase for the first quarter of 1996. Sales increases of echo cancellers were
particularly strong in Europe, North America and Latin America. Revenue
increases were attributable to large shipments to Alcatel, Nokia, Kapsch
Aktiengesellschaft and TRT in Europe; and Ameritech Cellular and Motorola in
North America. Safeguard owns approximately 37% of Coherent's common stock at
March 31, 1996.
In late 1994, USDATA determined that in order to increase awareness of its
products, accelerate growth, obtain a larger share of a rapidly growing market
and position itself for future revenue growth, it should substantially increase
expenditures for sales, marketing and product
9
development. USDATA increased spending in these areas throughout 1995 and into
the first quarter of 1996. In March 1996, USDATA launched its most powerful
real-time system, the FactoryLink Enterprise Control System (ECS). FactoryLink
ECS represents a significant upgrade of FactoryLink that adds important
additional features, power and "ease of use" to USDATA's products. Safeguard
owns approximately 21% of USDATA's common stock at March 31, 1996.
The Company's overall gross margin was 13.6% and 13.5% in the first quarter
of 1996 and 1995, respectively. CompuCom's product gross margin for the first
quarter of 1996 was 10.1% compared to 10.5% for the same period in 1995. The
lower margin at CompuCom is principally due to increased competitive pricing
pressures. Future product margins at CompuCom will be influenced by
manufacturers' pricing strategies together with competitive pressures from other
resellers in the industry. CompuCom's services gross margin for the first
quarter increased to 37.2% in 1996 from 28.3% in 1995, primarily as a result
of the higher margins of the various small service acquisitions previously
mentioned and an increase in higher-end, higher margin services performed for
customers. Future improved profitability at CompuCom will depend on its
ability to retain and hire quality service personnel, increased focus on
providing technical service and support to customers, competition,
manufacturer product pricing changes, product availability, effective
utilization of vendor programs, and control of operating expenses. CompuCom
participates in certain manufacturer-sponsored programs designed to increase
sales of specific products. These programs, excluding volume rebates, are
not material when compared to CompuCom's overall financial results.
Selling expense as a percentage of net sales increased to 6.5% in 1996 from
6.1% in 1995 largely as a result of costs incurred by CompuCom to expand the
services business. General and administrative expense was 4.1% of net sales in
1996 and 1995. CompuCom's general and administrative expenses are reported net
of reimbursements by certain manufacturers for specific training, promotional
and marketing programs. These reimbursements offset the expenses incurred by
CompuCom.
Interest expense increased in the first quarter of l996 compared to the
same period in 1995 primarily as a result of the issuance of the Company's
convertible subordinated notes and higher working capital required to support
the revenue growth at CompuCom. These increases were partially offset by the
repayment of all of the outstanding indebtedness under the Company's revolving
credit facility, the lower interest rate on the Company's convertible
subordinated notes compared to the bank credit facility, and the redemption in
October 1995 of $18.5 million of convertible subordinated notes by CompuCom.
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 the
outstanding indebtedness under its $100 million revolving credit facility, which
continues to be maintained and against which there were no outstanding
10
borrowings at March 31, 1996. The credit 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.
As of March 31, 1996 the Company held approximately $43 million of
temporary cash investments in institutional money market accounts. Existing
cash resources, availability under the Company's $100 million 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.
CompuCom and Premier maintain separate, independent bank credit facilities,
which are nonrecourse to the Company and are secured by substantially all of the
assets of the applicable borrower. CompuCom's $175 million credit facility
prohibits the payment of common stock dividends by CompuCom while its credit
line remains outstanding. At March 31, 1996, approximately $136 million was
outstanding under this facility. Premier has $3.7 million outstanding on its
master demand note at March 31, 1996. The note is payable on demand within five
days of notice, and bears interest at the prime rate plus 0.5%.
During recent years, CompuCom has utilized operating earnings, the bank
credit facility, equity financing and long-term subordinated notes to fund its
significant revenue growth and related operating asset requirements. During
April 1996, the Company executed amendments to the August 1993 Financing and
Security Agreement ("Credit Facility") eliminating the $60 million fixed rate
portion and increasing the amount of borrowings the Company may allocate to
LIBOR tranches up to $165 million. The amount of the Credit Facility remained
at $175 million, with the interest rate on the remaining $10 million at prime.
The amendments also extended the maturity date of the Credit Facility to April
1, 1998. In addition, during April 1996, CompuCom entered into an agreement for
a $75 million receivable securitization whereby a portion of trade receivables
are pledged to a third party as collateral, increasing its financing capacity to
$250 million. The interest rate on amounts borrowed under the receivable
securitization will be based on the commercial paper rate plus .55%. The
receivable securitization agreement matures on April 1, 1998, subject to certain
conditions.
Working capital increased in 1996 as a result of the issuance of the
Company's convertible subordinated notes, net of repayment of all borrowings
under the Company's revolving credit facility, and higher levels of inventory
allocated to specific customers at CompuCom, partially offset by an increase
in accounts payable. The Company's operations are not capital intensive.
Capital additions are generally funded through internally generated funds or
other financing sources. There were no material asset purchase commitments at
March 31, 1996.
11
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on May 9, 1996. At the
meeting, the shareholders voted in favor of electing as directors the twelve
nominees named in the Proxy Statement dated April 2, 1996 and authorized the
amendment of the Company's Articles of Incorporation to increase the number of
authorized shares of common stock from 20,000,000 to 100,000,000. The number of
votes cast were as follows:
I. ELECTION OF DIRECTORS
FOR WITHHELD
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Warren V. Musser 11,986,333 26,759
Vincent G. Bell, Jr. 11,979,133 26,759
Donald R. Caldwell 11,979,133 26,759
Robert A. Fox 11,979,133 26,759
Delbert W. Johnson 11,979,133 26,759
Robert E. Keith, Jr. 11,978,083 27,809
Peter Likins, Ph.D. 11,979,133 26,759
Jack L. Messman 11,979,133 26,759
Russell E. Palmer 11,978,083 27,809
John W. Poduska, Sr., Ph.D. 11,979,133 26,759
Heinz Schimmelbusch, Ph.D. 11,978,933 26,959
Hubert J.P. Schoemaker, Ph.D. 11,979,133 26,759
II. AMENDMENT OF COMPANY'S ARTICLES OF INCORPORATION
FOR AGAINST ABSTAIN
--- ------- -------
10,132,050 1,837,107 37,335
Item 5. OTHER INFORMATION
A rights offering to Safeguard shareholders of approximately 2,625,000
shares of Integrated Systems Consulting Group (ISCG) common stock was commenced
in April 1996. The ISCG rights offering was effective April 17, 1996 and
Safeguard shares began trading ex-rights April 19, 1996. Safeguard
shareholders received one transferable right to purchase one share of ISCG
common stock at $5.00 per share for each six shares of Safeguard common stock
owned. The rights will be exercisable until 5:00 p.m., New York City time, on
May 22, 1996. After completion of the rights offering, Safeguard will
beneficially own approximately 11% of ISCG's common stock.
12
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Number Description
10.1 Fourth Amendment A to Financing and Security Agreement,
dated as of March 22, 1996, between NationsBank of Texas,
N.A. and CompuCom Systems, Inc.
10.2 Fifth Amendment to Financing and Security Agreement, dated
as of April 1, 1996, between NationsBank of Texas, N.A. and
CompuCom Systems, Inc. (exhibits omitted)
10.3 Pledge and Security Agreement, dated as of April 1, 1996,
between NationsBank of Texas, N.A. and CompuCom Systems,
Inc.
10.4 Intercreditor Agreement, dated as of April 1, 1996, among
NationsBank of Texas, N.A., CompuCom Systems, Inc., and IBM
Credit Corporation.
10.5 Master Security and Administration Agreement, dated as of
April 1, 1996, among CompuCom Systems, Inc., NationsBank of
Texas, N.A., CSI Funding, Inc. and Enterprise Funding
Corporation. (exhibits omitted)
10.6 Receivables Purchase Agreement, dated as of April 1, 1996,
between CompuCom Systems, Inc. and CSI Funding, Inc.
(exhibits omitted)
10.7 Transfer and Administration Agreement, dated as of April 1,
1996, among CSI Funding, Inc., CompuCom Systems, Inc.,
Enterprise Funding Corporation and NationsBank, N.A.
(exhibits omitted)
11 Computation of Per Share Earnings
27 Financial Data Schedule (electronic filing only)
(b) No reports on Form 8-K have been filed by the Registrant during the
quarter ended March 31, 1996.
13
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: May 15, 1996 /s/ Warren V. Musser
-------------------------------------
Warren V. Musser, Chairman
and Chief Executive Officer
Date: May 15, 1996 /s/ Gerald M. Wilk
-------------------------------------
Gerald M. Wilk
Senior Vice President
(Principal Financial and
Principal Accounting Officer)
14