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, 1995 Commission File Number 1-5620
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
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, 1995
Common Stock 9,620,938
SAFEGUARD SCIENTIFICS, INC.
QUARTERLY REPORT FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION
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Page
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Item 1 - Financial Statements:
Consolidated Balance Sheets -
March 31, 1995 (unaudited) and December 31, 1994 3
Consolidated Statements of Operations -
Three Months Ended March 31, 1995 and 1994 (unaudited) 5
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1995 and 1994 (unaudited) 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
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Item 4 - Submission of Matters to a Vote of Security Holders 11
Item 6 - Exhibits 11
Signatures 12
SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED BALANCE SHEETS
(000 omitted)
March 31 December 31
ASSETS 1995 1994
------------ ------------
(UNAUDITED)
Current Assets
Cash $ 6,352 $ 7,860
Receivables less allowances
($2,513 - 1995; $6,466 - 1994) 241,414 276,034
Inventories 146,124 160,380
Other current assets 4,384 5,832
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Total current assets 398,274 450,106
Property, Plant and Equipment 72,387 79,569
Less accumulated depreciation
and amortization (30,096) (36,014)
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42,291 43,555
Commercial Real Estate 25,620 25,538
Less accumulated depreciation (7,332) (7,105)
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18,288 18,433
Other Assets
Investments 69,758 66,310
Notes and other receivables 5,859 5,554
Excess of cost over net assets of
businesses acquired 21,321 22,187
Other 11,861 11,010
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108,799 105,061
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$567,652 $617,155
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SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED BALANCE SHEETS
(000 omitted except shares)
March 31 December 31
LIABILITIES AND SHAREHOLDERS' EQUITY 1995 1994
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(UNAUDITED)
Current Liabilities
Current commercial real estate debt $ 3,114 $ 3,120
Current debt obligations 7,829 14,041
Accounts payable 127,308 168,431
Accrued expenses 49,364 63,284
Taxes on income 4,300 374
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Total current liabilities 191,915 249,250
Long-Term Debt 201,967 201,393
Commercial Real Estate Debt 17,549 17,594
Deferred Taxes 6,972 7,336
Other Liabilities 816 969
Minority Interest 31,871 30,066
Shareholders' Equity
Common stock, par value $.10 a share
Authorized -20,000,000 shares
Issued -10,933,114 shares 1,093 1,093
Additional paid-in capital 25,557 25,669
Retained earnings 95,316 91,780
Treasury stock, at cost
1,350,636 shares-1995 (12,344)
1,449,596 shares-1994 (13,228)
Net unrealized appreciation on investments 6,940 5,233
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116,562 110,547
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$567,652 $617,155
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SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(000 omitted except per share data)
Three Months Ended
March 31
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1995 1994
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(UNAUDITED)
Revenues
Information Technology
Microcomputer Systems $ 323,487 $ 280,857
Information Solutions 10,219 17,530
Workstation and Security Systems 17,784
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333,706 316,171
Metal Finishing 8,907 7,260
Commercial Real Estate 546 1,215
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Net Sales 343,159 324,646
Gains on sales of securities, net 2,008 2,307
Other income 2,932 1,731
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Total Revenues 348,099 328,684
Costs and Expenses
Cost of sales 281,959 267,358
Selling 32,242 29,147
General and administrative 17,640 17,367
Depreciation and amortization 4,037 4,210
Interest 5,008 3,698
Income from equity investments (870) (142)
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Total Costs and Expenses 340,016 321,638
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Earnings Before Minority Interest
and Taxes 8,083 7,046
Minority interest (2,191) (1,386)
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Earnings Before Taxes On Income 5,892 5,660
Provision for taxes on income 2,356 2,377
Net Earnings $ 3,536 $ 3,283
============ ==========
Earnings Per Share
Primary $ .34 $ .32
Fully Diluted .31 .30
Average Common Shares Outstanding
Primary 10,027 9,788
Fully Diluted 10,065 9,788
SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000 omitted)
Three Months Ended
March 31
---------------------------------
1995 1994
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(UNAUDITED)
Operating Activities
Net earnings $ 3,536 $ 3,283
Adjustments to reconcile net earnings to
cash from operating activities
Depreciation and amortization 4,037 4,210
Deferred income taxes (1,243) 1,358
Income from equity investments (870) (142)
Gains on sales of securities, net (2,008) (2,307)
Minority interest, net 1,315 811
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4,767 7,213
Cash provided (used) by changes in working
capital items
Receivables 20,992 22,759
Inventories 10,846 (26,098)
Other current assets 296 (1,412)
Accounts payable and accrued expenses (40,561) (11,180)
Taxes on income 3,926 236
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(4,501) (15,695)
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Cash provided (used) by operating activities 266 (8,482)
Proceeds from sales of securities, net 1,806 2,480
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Cash provided (used) by operating activities
and sales of securities, net 2,072 (6,002)
Other Investing Activities
Investments and notes acquired, net (3,909) 99
Expenditures for property, plant & equipment (3,169) (2,742)
Business acquisitions, net of cash acquired (1,185)
Other, net (2,761) (1,418)
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Cash (used) by other investing activities (11,024) (4,061)
Financing Activities
Net borrowings on revolving credit facilities 6,396 10,998
Net repayments on term debt (105) (2,872)
Stock issued by subsidiaries 380 2,590
Repurchase of common stock (32)
Stock options exercised 805 252
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Cash provided by financing activities 7,444 10,968
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Increase (Decrease) in Cash (1,508) 905
Cash - beginning of year 7,860 9,796
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Cash - End of Period $ 6,352 $ 10,701
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SAFEGUARD SCIENTIFICS, INC.
Notes to Consolidated Financial Statements
March 31, 1995
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 1994 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. The Company is negotiating an agreement whereby it will contribute
a portion of its ownership in CenterCore to the company, sell a
significant portion of its remaining interest in CenterCore to
CenterCore's management and provide up to $3 million in advances to
address current funding requirements of CenterCore. Anticipated
obligations of the Company with respect to CenterCore were provided
for in 1994. CenterCore is not included in the consolidated financial
statements effective January 1, 1995 due to the Company's future
reduced ownership.
3. All share and per share data have been retroactively adjusted to
reflect the two-for-one split of the Company's common shares
effective September 7, 1994.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Operations Overview
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Net sales for the first quarter of 1995 were $343.2 million
compared to $324.6 million for the same period in 1994. Net earnings
for the first quarter of 1995 were $3.54 million, or $.34 a share,
compared to $3.28 million, or $.32 a share for the same period in 1994.
Comparison of the first quarter 1995 results to the first quarter
1994 results are impacted by three companies which were consolidated in
1994 but are not included in the consolidated results in 1995. Micro
Decisionware was sold in the second quarter of 1994. The third quarter
1994 rights offering of stock in Coherent Communications to shareholders
of the Company reduced Safeguard's ownership in Coherent to below 50%. In
1995, the Company used the equity method of accounting for its remaining
40% investment in Coherent. During late 1994 into 1995, the Company
initiated actions that will result in Safeguard holding a minority
ownership position in CenterCore, Inc. As a result, CenterCore is not
included in the Company's consolidated financial statements beginning
January 1, 1995.
The net sales increase of 5.7% reflects the 15% increase in sales
at CompuCom Systems, Inc. partially offset by the reduced sales due to
the sale or disposition of the three companies previously mentioned.
The higher revenues at CompuCom reflect the continued demand by
corporate customers for personal computers, as well as CompuCom's focus
on expanding its network and technology services. CompuCom's first
quarter net revenues reflects an increase in service revenue of 80% over
the first quarter of 1994, and includes revenue from three acquisitions
of service companies, International Micronet Systems, acquired in
December 1994, and Allerion Corporation and Benchmark Corporation, both
acquired during the first quarter of 1995. The Company believes the
increase in net revenues can also be attributed to the weakened
financial condition of certain competitors, as corporate customers
consolidate their outsourcing needs and reduce the number of providers
to one or two compared to several. In addition, CompuCom has remained
focused on its selling strategies and providing quality service.
CompuCom's sales growth, coupled with the sale or disposition of
the three companies previously mentioned, resulted in CompuCom first
quarter 1995 sales representing 94% of total sales compared to 86% for
the same period in 1994. 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. CompuCom was a significant
contributor to the improved operating results as it reported a 39%
earnings increase.
Safeguard's principal equity investments, Coherent Communications
and Cambridge Technology Partners, both reported outstanding results in
the first quarter. Coherent's net earnings increased 173% compared to
1994 on a 62% sales increase. The increase was attributable to large
shipments to major customers in the United States, Europe and Australia.
Coherent's outlook for sales and earnings growth in 1995 continues to
be strong as the markets it serves are continuing to expand throughout
the world. Safeguard uses the equity method of accounting for its
40% investment in Coherent.
Cambridge's sales and earnings increased 80% and 84%, respectively,
in 1995. The demand for its services in the U.S. and Europe continues
to increase as the market for client/server applications development and
implementation remains robust and becomes more accepted by
organizations. Cambridge's growth rate far outpaces the overall growth
of the systems integration industry, and is validated by market
acceptance of its unique fixed-time/fixed-price model and client-
centered approach to delivering information technology solutions.
Safeguard uses the equity method of accounting for its 24% investment in
Cambridge.
Gross margin at CompuCom as a percentage of net revenues for the
first quarter 1995 increased when compared to the same quarter in 1994.
This increase is principally due to higher product margins and the
increase in service-related activity resulting from CompuCom's emphasis
on the growth of the service business. The higher product margins
reflect continued price decreases and/or rebates related to certain
products from manufacturers and less price competition in the
marketplace, partially influenced by poor financial results of certain
competitors. In addition, gross margin was positively impacted by
increased service-related sales which carry higher margins than
product sales. 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. Partially offsetting this gross
margin increase was the sale or disposition of three business units
whose gross margins were higher than CompuCom.
Selling, general and administrative expenses increased as a
percentage of sales primarily due to CompuCom's expenses related to
overall service revenue growth, including the effect of recent
acquisitions and infrastructure necessary for expansion. CompuCom's
1995 investment in MIS resources required to enhance customer
satisfaction, particularly in the service segment, also contributed to
an increase in general and administrative expenses.
Interest expense increased in the first quarter of 1995 compared to
the same period in 1994. Higher working capital required to support the
revenue growth at CompuCom, increasing interest rates, and increased
corporate borrowings for new business opportunities contributed to the
higher interest cost.
Liquidity and Capital Resources
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The Company and CompuCom each maintain separate, independent bank
credit facilities. CompuCom's debt facility is nonrecourse to the
Company and prohibits the payment of common stock dividends while the
credit lines remain outstanding.
The Company's $75 million bank credit facility is the current
principal source of cash to fund its business activities including
investment commitments and bank guarantees. There were $46.2 million
of borrowings against the facility at March 31, 1995 and availability
of $28.8 million. In addition, the Company periodically has generated
cash by the sale of publicly traded equity securities which it holds.
At March 31, 1995, the market value of the Company's publicly traded
equity securities, including its common stock investment in CompuCom,
is in excess of $277 million. The bank credit facility is secured by a
pledge of these publicly traded equity securities.
In March 1995, the Company transferred three commercial real estate
properties to the lender in full satisfaction of the related debt.
The Company expects its future corporate liquidity to be generated
through internal cash flow, the sale, as required, of selected minority-
owned, publicly traded securities and borrowing under the credit
facility. These sources should be sufficient to fund the Company's cash
requirements through 1995.
During recent years, CompuCom has utilized equity financing,
operating earnings, the bank credit facility and long-term subordinated
notes to fund its significant revenue growth and related operating asset
requirements. CompuCom maintains a satisfactory relationship with
several banks and has a $150 million bank revolving credit facility,
subject to certain collateral restrictions, with a major bank group. At
March 31, 1995 approximately $119 million of this facility was
outstanding, with an additional $31 million available to borrow.
Negotiations are currently underway to increase CompuCom's bank credit
facility to $175 million in the second quarter of 1995 to support their
projected net revenue growth.
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, 1995.
Item 4. Submission of Matters to a Vote of Security Holders
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The Company held its Annual Meeting of Shareholders on May 11, 1995. At
the meeting, the shareholders voted in favor of electing as directors
the eleven nominees named in the Proxy Statement dated April 3, 1995.
The number of votes cast for, or withheld, were as follows:
I. ELECTION OF DIRECTORS
FOR WITHHELD
Warren V. Musser 8,178,669 84,118
Vincent G. Bell 8,177,499 85,288
Robert A. Fox 8,181,599 81,258
Delbert W. Johnson 8,178,859 83,928
Peter Likins, Ph.D. 8,181,599 81,188
Jack L. Messman 8,160,599 102,188
Russell E. Palmer 8,161,799 100,988
John W. Poduska, Sr., Ph.D. 8,179,259 83,528
Heinz Schimmelbusch, Ph.D. 8,176,559 86,228
Hubert J.P. Schoemaker, Ph.D. 8,158,869 103,918
Jean C. Tempel 8,196,859 65,928
Item 6. Exhibits
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(a) Exhibits
Number Description
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, 1995.
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, 1995 /s/ Warren V. Musser
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Warren V. Musser, Chairman,
President and Chief Executive Officer
Date: May 15, 1995 /s/ Gerald M. Wilk
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Gerald M. Wilk
Vice President
(Principal Financial and
Principal Accounting Officer)