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 SEPTEMBER 30, 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 NOVEMBER 12, 1996
Common Stock 30,528,725
SAFEGUARD SCIENTIFICS, INC.
QUARTERLY REPORT FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1 - Financial Statements:
Consolidated Balance Sheets -
September 30, 1996 (unaudited) and December 31, 1995 . . . . . . . . . .3
Consolidated Statements of Operations (unaudited)-
Three and Nine Months Ended September 30, 1996 and 1995. . . . . . . . .5
Consolidated Statements of Cash Flows (unaudited)-
Nine Months Ended September 30, 1996 and 1995. . . . . . . . . . . . . .7
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . .8
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . . 10
PART II - OTHER INFORMATION
Item 5 - Other Information . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 6 - Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . 17
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2
SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED BALANCE SHEETS
(000 omitted)
September 30 December 31
1996 1995
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ASSETS (UNAUDITED)
CURRENT ASSETS
Cash and cash equivalents $ 32,955 $ 7,267
Receivables less allowances
($2,676-1996; $2,644-1995) 358,809 285,684
Inventories 254,976 197,948
Other current assets 7,448 7,376
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Total current assets 654,188 498,275
PROPERTY, PLANT AND EQUIPMENT 111,299 80,235
Less accumulated depreciation and amortization (36,483) (36,960)
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74,816 43,275
COMMERCIAL REAL ESTATE 25,810
Less accumulated depreciation (8,023)
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17,787
OTHER ASSETS
Investments 135,190 132,860
Notes and other receivables 9,983 5,882
Excess of cost over net assets of
businesses acquired 28,650 28,830
Other 21,383 15,965
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195,206 183,537
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$ 924,210 $ 742,874
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See Notes to Consolidated Financial Statements.
3
SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED BALANCE SHEETS
(000 omitted except shares)
September 30 December 31
1996 1995
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LIABILITIES AND SHAREHOLDERS' EQUITY (UNAUDITED)
CURRENT LIABILITIES
Current debt obligations $ 5,618 $ 9,382
Current commercial real estate debt 3,103
Accounts payable 223,974 192,919
Accrued expenses 73,858 66,212
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Total current liabilities 303,450 271,616
LONG TERM DEBT 242,807 204,431
COMMERCIAL REAL ESTATE DEBT 17,380
DEFERRED TAXES 22,293 28,449
MINORITY INTEREST AND OTHER 78,213 66,689
CONVERTIBLE SUBORDINATED NOTES 115,000
SHAREHOLDERS' EQUITY
Common stock, par value $.10 a share
Authorized 100,000,000 shares
Issued 32,799,342 shares 3,280 3,280
Additional paid-in capital 20,571 20,709
Retained earnings 124,176 110,043
Treasury stock, at cost
2,812,660 shares-1996; 3,434,828 shares-1995 (8,986) (10,471)
Net unrealized appreciation on investments 23,406 30,748
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162,447 154,309
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$ 924,210 $ 742,874
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See Notes to Consolidated Financial Statements.
4
SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(000 omitted except per share data)
Three Months Ended
September 30
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1996 1995
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(UNAUDITED)
REVENUES
Net Sales
Product $ 459,379 $ 330,193
Services 55,959 36,152
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Total net sales 515,338 366,345
Gains on sales of securities, net 8,137 6,020
Other income 2,591 1,841
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Total revenues 526,066 374,206
COSTS AND EXPENSES
Cost of sales- product 408,622 292,343
Cost of sales- services 38,281 24,516
Selling 34,266 23,878
General and administrative 21,442 13,866
Depreciation and amortization 5,035 4,148
Interest 6,398 4,882
(Income) loss from equity investments 258 (146)
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Total costs and expenses 514,302 363,487
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EARNINGS BEFORE MINORITY INTEREST AND TAXES 11,764 10,719
Minority interest (3,856) (2,877)
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EARNINGS BEFORE TAXES ON INCOME 7,908 7,842
Provision for taxes on income 3,163 3,137
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NET EARNINGS $ 4,745 $ 4,705
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EARNINGS PER SHARE
Primary $ .15 $ .15
Fully diluted $ .15 $ .13
AVERAGE COMMON SHARES OUTSTANDING
Primary 31,284 30,844
Fully diluted 31,358 30,954
See Notes to Consolidated Financial Statements.
5
SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(000 omitted except per share data)
Nine Months Ended
September 30
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1996 1995
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(UNAUDITED)
REVENUES
Net Sales
Product $ 1,326,516 $ 981,595
Services 146,361 98,481
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Total net sales 1,472,877 1,080,076
Gains on sales of securities, net 20,096 12,619
Other income 6,429 6,890
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Total revenues 1,499,402 1,099,585
COSTS AND EXPENSES
Cost of sales- product 1,179,057 867,764
Cost of sales- services 98,307 65,711
Selling 93,567 67,366
General and administrative 60,302 43,558
Depreciation and amortization 14,519 12,321
Interest 17,556 14,996
Income from equity investments (1,708) (1,712)
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Total costs and expenses 1,461,600 1,070,004
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EARNINGS BEFORE MINORITY INTEREST AND TAXES 37,802 29,581
Minority interest (14,247) (7,904)
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EARNINGS BEFORE TAXES ON INCOME 23,555 21,677
Provision for taxes on income 9,422 8,670
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NET EARNINGS $ 14,133 $ 13,007
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EARNINGS PER SHARE
Primary $ .43 $ .41
Fully diluted $ .43 $ .37
AVERAGE COMMON SHARES OUTSTANDING
Primary 31,245 30,596
Fully diluted 31,343 30,872
See Notes to Consolidated Financial Statements.
6
SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000 omitted)
Nine Months Ended
September 30
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1996 1995
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(UNAUDITED)
OPERATING ACTIVITIES
Net earnings $ 14,133 $ 13,007
Adjustments to reconcile net earnings to cash
from operating activities
Depreciation and amortization 14,519 12,321
Deferred income taxes (395) 2,073
Income from equity investments (1,708) (1,712)
Gains on sales of securities, net (20,096) (12,619)
Minority interest, net 8,458 4,743
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14,911 17,813
Cash provided (used) by changes in working
capital items
Receivables (73,227) 11,237
Inventories (57,135) (16,511)
Accrued liabilities and other 34,130 2,992
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(96,232) (2,282)
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Cash provided (used) by operating activities (81,321) 15,531
Proceeds from sales of securities, net 45,220 15,873
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Cash provided (used) by operating activities
and sales of securities, net (36,101) 31,404
OTHER INVESTING ACTIVITIES
Investments and notes acquired, net (36,197) (11,678)
Capital expenditures (42,779) (8,154)
Business acquisitions, net of cash acquired (5,972) (2,874)
Other, net (6,313) (6,673)
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Cash (used) by other investing activities (91,261) (29,379)
FINANCING ACTIVITIES
Issuance of subordinated notes, net 112,109
Net borrowings (repayments) on revolving
credit facilities 22,114 (13,996)
Net borrowings on term debt 16,223 6,995
Issuance of Company and subsidiary stock 2,604 3,520
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Cash provided (used) by financing activities 153,050 (3,481)
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INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 25,688 (1,456)
Cash and Cash Equivalents - Beginning of year 7,267 7,860
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CASH AND CASH EQUIVALENTS - END OF PERIOD $ 32,955 $ 6,404
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See Notes to Consolidated Financial Statements.
7
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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 $28.985 per share. In November 1996,
approximately $12.9 million of notes were converted into 443,988 shares
of the Company's Common Stock. 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. In September 1996, the Company amended its revolving credit facility to
extend the maturity to May 2000. All other significant terms of the
facility remained essentially the same.
4. During September 1996, CompuCom amended its August 1993 Financing and
Security Agreement ("Credit Facility") increasing the amount of the
Credit Facility to $225 million from $175 million and extending the
maturity date to September 25, 1999. The $225 million Credit Facility
is comprised of two elements: a $200 million working capital facility
and a $25 million facility to be used solely to purchase real property
intended to be utilized as CompuCom's corporate headquarters. Initial
pricing on the $200 million component is LIBOR plus 1% while initial
pricing on the $25 million component is LIBOR plus 1.25%. All pricing
on the expanded Credit Facility is subject to adjustment based on
certain performance criteria. CompuCom had previously amended the
Credit Facility in April 1996, extending the maturity and making it
substantially all LIBOR-based. In addition, CompuCom executed
amendments to its April 1996 receivable securitization, whereby a
portion of trade receivables are pledged to a third party as
collateral, increasing the amount from $75 million to $100 million and
extending its maturity to September 17, 1999, subject to certain
conditions. The interest rate applicable to the receivable
securitization is based upon the bank's commercial paper rate (which at
September 30, 1996 was 5.33%) plus 55 basis points.
8
5. In August 1996, the Company sold its commercial real estate operations to
Brandywine Operating Partnership, LP ("BOP"), a subsidiary of Brandywine
Realty Trust ("BRT"), a publicly traded REIT. The Company received
approximately 400,000 ownership units in BOP, each unit being convertible
to one share of BRT upon the occurrence of certain events. In connection
with the sale, the Company agreed to loan BOP up to $1.5 million for
closing costs, capital improvements and future working capital needs. In
addition, a portion of the units received have been escrowed pending
resolution of contingencies. Accordingly, any potential gain associated
with the transaction has been deferred until the resolution of these
contingencies and termination of the Company's funding arrangement.
6. All share and per share data and related data have been retroactively
adjusted to reflect the two-for-one split of the Company's common shares
effective July 17, 1996.
7. 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.
9
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 outstanding 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.
Investments in companies in which the Company owns 50% or less of the
outstanding voting securities, in which significant influence is exercised, are
accounted for on the equity method of accounting. 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 Consolidated Statement of Operations.
OPERATIONS OVERVIEW
Net sales for the quarter and nine months ended September 30, 1996
increased to $515.3 million and $1.47 billion from $366.3 million and $1.08
billion for the same periods in 1995, respectively. Net earnings for the
quarter ended September 30, 1996 were $4.75 million, or $.15 a share, compared
to $4.71 million, or $.15 a share, for the same period in 1995. Net earnings
for the nine months ended September 30, 1996 were $14.1 million, or $.43 a
share, compared to $13 million, or $.41 a share, for the same period in 1995.
CompuCom represented 96% and 95% of the Company's total net sales for the first
nine months of 1996 and 1995, respectively. As a
10
result of the relative significance of CompuCom in the consolidated results,
fluctuations in other business units have tended to have a minimal impact.
The 41% and 36% net sales increase for the three and nine months ended
September 30, 1996 primarily reflects the 43% and 39% increase at CompuCom.
CompuCom's product revenue for the three and nine months ended September 30,
1996 increased 41% and 37%, respectively. This increase in product revenue
reflects higher demand for personal computers, particularly related to the
current Pentium upgrade cycle occurring in large corporations, as well as
increased demand for laptops. The strong product results also reflect the
advancements CompuCom has made in customer procurement systems, data warehouse
queries and web-based order statusing, reducing the customers' overall
procurement cost. Although product revenues continued to exceed prior year,
CompuCom experienced a slight decline in product revenues when compared to the
second quarter of 1996, which CompuCom believes can be attributed to the timing
of shipments to certain large customers and product availability from certain
manufacturers. CompuCom's services revenue for the three and nine months ended
September 30, 1996 increased 73% and 65%, respectively. The increase in
services revenue reflects CompuCom's continued focus on expanding its network
and technology services at competitive prices to meet increased customer demand
for CompuCom's value-added PC network services, as well as the impact of
various small service acquisitions.
CompuCom's net earnings, excluding a non-recurring gain from the sale of
securities in the second quarter of 1996, increased 2% and 32% for the three and
nine months ended September 30, 1996, respectively, which reflects CompuCom's
growth in sales partially offset by the significant costs related to the
overall growth of the business, especially the company's continued investment in
the service business and information systems resources as well as its decision
to make additional investments to exploit opportunities with customers and new
market segments. The Company's share of CompuCom's operating earnings, after
allocation to minority interest, decreased 17% for the three months ended
September 30, 1996 and increased 6% for the nine months ended September 30,
1996. The difference between the change in CompuCom's operating earnings and
the change in the Company's share of such earnings is due to the decrease in the
Company's ownership of CompuCom from approximately 62% in the first nine months
of 1995 to approximately 50% in the comparable period of 1996 which resulted
primarily from CompuCom's conversion in October 1995 of $18.5 million of
convertible subordinated notes into common stock. 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 three months ended September
30, 1996 over the comparable period of 1995 resulted primarily from higher
securities gains, partially offset by the Company's decreased share of
CompuCom's earnings, increased corporate interest expense resulting primarily
from the issuance of the Company's convertible subordinated notes and additional
corporate expenses incurred to support the growing activities of the partnership
companies. The Company's increased net earnings in the nine months ended
September 30, 1996 over the comparable period of 1995 resulted primarily from
the increase in CompuCom's net earnings and higher securities gains, partially
offset by lower earnings in the Company's
11
Information Solutions segment, increased corporate interest expense and
additional corporate expenses.
Securities gains for the three and nine months ended September 30, 1996
included gains from the open market sales of a portion of the Company's interest
in Coherent ($1.8 million and $11.1 million, respectively) and Cambridge ($8.3
million and $18 million, respectively). Included in year to date 1996 securities
gains is $4.4 million which represents the Company's share of CompuCom's second
quarter gain from the sale of substantially all of their holdings in PC Service
Source, Inc. Partially offsetting these gains were a $4.5 million write-down of
the Company's holdings in Sybase, Inc. in the second quarter due to the other
than temporary decline in the market price of that stock and provisions recorded
for other investments and notes. Securities gains in 1995 consisted primarily of
gains from the open market sales of a portion of the Company's interest in
Coherent and the Company's remaining interest in Novell.
Earnings in the Company's Information Solutions segment were lower in
the nine months ended September 30, 1996 compared to the same period in 1995
primarily due to losses incurred by Premier Solutions Ltd. in its MAXIMIS
product line that resulted from a downturn in sales activity for that
product. Premier completed the development of the Windows based version of
its Global Plus-Registered Trademark- software in the second quarter of 1996
which improved sales for this product line compared to 1995. Premier expects
to complete the UNIX version of the Global Plus-Registered Trademark-
software for beta testing by year end 1996. Tangram Enterprise Solutions,
Inc.'s revenue from AM:PM-Registered Trademark- and related products
decreased as a result of the ongoing reallocation of resources and launch of
the new Asset Insight-TM-product. Sales of Asset Insight-TM- have not yet
replaced the decrease in the traditional AM:PM-Registered Trademark- revenue
stream.
Income or loss from equity investments fluctuates with the Company's
ownership percentage and the operating results of investees accounted for on the
equity method. The Company's public equity investments accounted for under the
equity method in 1996 include Cambridge Technology Partners, Coherent
Communications, USDATA Corporation and Integrated Systems Consulting Group
(ISCG).
Cambridge reported increased earnings of 67% on a 56% revenue increase for
the third quarter of 1996, as it continues to see strong demand for its services
both domestically and internationally. European operations represented 22% of
revenues in the third quarter and the Company recently announced an acquisition
to strengthen its position in Europe. In addition, Cambridge sees significant
opportunity in Latin America and during the quarter it conducted business in
Mexico and formed a company in Brazil. Safeguard owns approximately 19% of
Cambridge's common stock at September 30, 1996.
Coherent reported increased earnings of 31% on a 28% sales increase for the
third quarter of 1996. Coherent continues to build significant alliances with
major worldwide partners. Those announced recently include an OEM relationship
with Newbridge Networks Corporation; an expansion of the relationship with
NORTEL to cover worldwide sales of Coherent products; a contract with Omnipoint
to utilize Coherent's echo cancellers equipped with Audio Plus software in its
launch of a PCS network; and a contract with Ameritech to supply echo cancellers
for its
12
cellular services. In addition, Coherent announced its first contract with a
Chinese provincial PTT shortly after quarter end, representing Coherent's
initial entry into the potentially lucrative Chinese market. Safeguard owns
approximately 34% of Coherent's common stock at September 30, 1996.
USDATA reported disappointing results as sales were down 9% compared to the
third quarter of 1995. The majority of the decrease was in the higher margin
software products which, combined with lower hardware systems margins, resulted
in a net loss of $1.6 million for the quarter. The transition from its old
products to the new FactoryLink ECS product has taken longer than anticipated as
the ECS product is part of an enterprise-wide solution versus a departmental
sale, resulting in a longer decision making process. Safeguard owns
approximately 20% of USDATA's common stock at September 30, 1996.
ISCG reported increased earnings of 23% on a 38% sales increase for the
quarter ended September 30, 1996. During the second quarter of 1996, the
Company completed the rights offering of ISCG common stock to the Company's
shareholders. As a result of the rights offering, the Company owns less than
10% of ISCG's common stock at September 30, 1996 and discontinued accounting for
its investment in ISCG on the equity method in the second quarter.
The Company's overall gross margin was 13.3% for the three and nine
months ended September 30, 1996, compared to 13.5% and 13.6% for the
comparable periods in 1995. CompuCom's product gross margin for the three and
nine months ended September 30, 1996 was 10.2% and 10.1%, respectively,
compared to 10.4% for the same periods in 1995 . The lower product margin at
CompuCom is principally due to pricing to win new business and increased
pricing pressures from competitors. 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 three and nine months ended September 30, 1996 improved to
31.1% and 32.4%, respectively, from the comparable periods in 1995 of 30.6%
and 30.7%, respectively, primarily due to 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 and general and administrative expense, in absolute dollars,
increased significantly in 1996 primarily due to the costs to manage and
expand the growing services business and maintain the overall infrastructure
at CompuCom and increased corporate expenses incurred to support the growing
activities of the partnership companies. Selling and general and
administrative expense, as a percentage of net sales, increased only slightly
as the increased costs were spread over higher sales volume. 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.
13
Interest expense increased in the three and nine months ended September 30,
l996 compared to the same periods 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,
CompuCom's lower effective interest rate resulting from the 1996 amendments to
their credit facility and the redemption in October 1995 of $18.5 million of
convertible subordinated notes by CompuCom.
In August 1996, the Company sold its commercial real estate operations
which is more fully described in Note 5 of the accompanying Consolidated
Financial Statements.
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 $28.985 per share. In
November 1996, approximately $12.9 million of notes were converted into
443,988 shares of the Company's Common Stock. 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 borrowings at
September 30, 1996. The credit facility was amended in September 1996 to
extend the maturity of the facility to May 2000. All other significant terms
of the facility remained essentially the same and it continues to be 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 September 30, 1996 the Company held approximately $27 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 1997, 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 financing capability is $325
million, consisting of a $225 million credit facility, which prohibits the
payment of common stock dividends by CompuCom while its credit line remains
outstanding, and a $100 million receivables securitization agreement. At
September 30, 1996, approximately $154 million was outstanding under the credit
facility and approximately $75 million was outstanding under the receivables
securitization. Premier has approximately $3.4 million outstanding on its $4.5
million master demand note at September 30, 1996. The note is payable on demand
within five days of notice, and bears interest at the prime rate plus 0.5%.
14
During recent years, CompuCom has utilized operating earnings, the bank
credit facilities, equity financing and long-term subordinated notes to fund its
significant revenue growth and related operating asset requirements. During
1996, CompuCom amended its credit facilities which is more fully described in
Note 4 of the accompanying Consolidated Financial Statements. Cash used in
operating activities for the nine months ended September 30, 1996 resulted
primarily from the increase in working capital. Working capital increased in
1996 primarily as a result of the net cash proceeds from the issuance of the
Company's convertible subordinated notes, after repayment of all borrowings
under the Company's revolving credit facility, and higher levels of inventory
allocated to specific customers and higher accounts receivable 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. During the third quarter
of 1996, CompuCom purchased real property intended to be utilized as a new
corporate headquarters campus for approximately $26 million which was funded on
an interim basis through its amended bank credit facility pending permanent
mortgage financing. There were no material asset purchase commitments at
September 30, 1996.
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Item 5. OTHER INFORMATION
A Rights Offering to the Company's shareholders of 2,875,000 shares of
Integrated Systems Consulting Group (ISCG) Common Stock was completed on
May 31, 1996. The Company, which sold 350,000 shares of ISCG stock as part
of the offering, beneficially owns less than 10% of ISCG's Common Stock
at September 30, 1996.
Sanchez Computer Associates (Sanchez) filed a registration statement
with the Securities and Exchange Commission on September 27, 1996 for a
Rights Offering to Safeguard's shareholders of approximately 3,030,000
shares of Sanchez Common Stock. Safeguard and Sanchez anticipate that
the rights will have an exercise price of between $5.00 and $6.00 per
share. The offering is expected to become effective on November 13,
1996. Safeguard shareholders will receive Rights, exercisable for
approximately 35 days after issuance, to purchase one share of Sanchez
Common Stock for every ten shares of Safeguard Common Stock owned.
Rights holders will not be able to exercise Rights for fewer than 50
shares of Sanchez Common Stock. Holders of less than 50 Rights will
have the option of selling their Rights, letting them expire, or
acquiring sufficient Rights to reach 50. The offering will be made only
by means of a prospectus, subject to the effectiveness of the
registration statement. The timing of the offering will be subject to
change depending on the length of the SEC review process. In addition,
any material adverse change in the operations or financial condition of
Sanchez could cause a delay in the offering.
16
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Number Description
10.1 Credit Agreement, dated as of September 13, 1996,
between Safeguard Scientifics, Inc., Safeguard
Scientifics (Delaware), Inc. and PNC Bank, N.A.
(exhibits omitted)
10.2 Credit Agreement, dated as of September 26, 1996,
between NationsBank of Texas, N.A. and CompuCom
Systems, Inc. (exhibits and schedules omitted)
10.3 First Amendment to Master Security and Administration
Agreement, dated as of September 25, 1996, among
CompuCom Systems, Inc., NationsBank of Texas, N.A., CSI
Funding, Inc. and Enterprise Funding Corporation.
(exhibits omitted)
10.4 First Amendment to Receivables Purchase Agreement,
dated as of September, 25, 1996, between CompuCom
Systems, Inc. and CSI Funding, Inc. (exhibits omitted)
10.5 First Amendment to Transfer and Administration
Agreement, dated as of September 25, 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 September 30, 1996.
17
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: November 12, 1996 /s/ Warren V. Musser
---------------------------------------
Warren V. Musser
Chairman and Chief Executive Officer
Date: November 12, 1996 /s/ Gerald M. Wilk
---------------------------------------
Gerald M. Wilk
Senior Vice President
(Principal Financial and
Principal Accounting Officer)
18