FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended June 30, 1995 Commission File Number
1-5620
SAFEGUARD SCIENTIFICS, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1609753
(state or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
800 The Safeguard Building, 435 Devon Park Drive Wayne, PA 19087
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code
(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
--- ---
Number of shares outstanding as of August 9, 1995
Common Stock 9,749,563
SAFEGUARD SCIENTIFICS, INC.
QUARTERLY REPORT FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION
Page
Item 1 - Financial Statements:
Consolidated Balance Sheets -
June 30, 1995 (unaudited) and December 31, 1994 3
Consolidated Statements of Operations (unaudited) -
Three and Six Months Ended June 30, 1995 and 1994 5
Consolidated Statements of Cash Flows (unaudited) -
Six Months Ended June 30, 1995 and 1994 7
Notes to Consolidated Financial Statements 8
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K. 13
Signatures 14
SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED BALANCE SHEETS
(000 omitted)
June 30 December 31
ASSETS 1995 1994
----------- -----------
(UNAUDITED)
Current Assets
Cash $ 11,581 $ 7,860
Receivables less allowances
($2,566 - 1995; $6,466 - 1994) 238,110 276,034
Inventories 151,657 160,380
Other current assets 4,209 5,832
----------- -----------
Total current assets 405,557 450,106
Property, Plant and Equipment 74,930 79,569
Less accumulated depreciation
and amortization (32,180) (36,014)
----------- -----------
42,750 43,555
Commercial Real Estate 25,627 25,538
Less accumulated depreciation (7,559) (7,105)
----------- -----------
18,068 18,433
Other Assets
Investments 74,789 66,310
Notes and other receivables 6,065 5,554
Excess of cost over net assets of
businesses acquired 20,917 22,187
Other 13,593 11,010
----------- -----------
115,364 105,061
----------- -----------
$581,739 $617,155
=========== ===========
SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED BALANCE SHEETS
(000 omitted except shares)
June 30 December 31
LIABILITIES AND SHAREHOLDERS' EQUITY 1995 1994
---------- ----------
(UNAUDITED)
Current Liabilities
Current commercial real estate debt $ 3,108 $ 3,120
Current debt obligations 8,444 14,041
Accounts payable 137,151 168,431
Accrued expenses 52,132 63,284
Taxes on income 1,100 374
---------- ----------
Total current liabilities 201,935 249,250
Long-Term Debt 192,656 201,393
Commercial Real Estate Debt 17,491 17,594
Deferred Taxes 9,246 7,336
Other Liabilities 810 969
Minority Interest 33,853 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 25,397 25,669
Retained earnings 100,082 91,780
Treasury stock, at cost
1,214,552 shares-1995 (11,108)
1,449,596 shares-1994 (13,228)
Net unrealized appreciation on investments 10,284 5,233
---------- ----------
125,748 110,547
---------- ----------
$ 581,739 $ 617,155
========== ==========
SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(000 omitted except per share data)
Three Months Ended
June 30
--------------------------
1995 1994
-------- --------
(UNAUDITED)
Revenues
Information Technology
Microcomputer Systems $350,710 $306,625
Information Solutions 10,793 15,824
Workstation and Security Systems 15,612
-------- --------
361,503 338,061
Metal Finishing 8,560 7,281
Commercial Real Estate 509 856
-------- --------
Net Sales 370,572 346,198
Gains on sales of securities, net 4,591 4,557
Other income 2,117 431
-------- --------
Total Revenues 377,280 351,186
Costs and Expenses
Cost of sales 303,044 287,762
Selling 35,220 29,534
General and administrative 19,691 18,262
Depreciation and amortization 4,136 4,109
Interest 5,106 4,056
Income from equity investments (696) (231)
-------- --------
Total Costs and Expenses 366,501 343,492
-------- --------
Earnings Before Minority Interest
and Taxes 10,779 7,694
Minority interest (2,836) (1,333)
-------- --------
Earnings Before Taxes On Income 7,943 6,361
Provision for taxes on income 3,177 2,553
-------- --------
Net Earnings $ 4,766 $ 3,808
======== ========
Earnings Per Share
Primary $ .45 $ .37
Fully Diluted .41 .35
Average Common Shares Outstanding
Primary 10,193 9,856
Fully Diluted 10,239 9,856
SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(000 omitted except per share data)
Six Months Ended
June 30
--------------------------
1995 1994
-------- --------
(UNAUDITED)
Revenues
Information Technology
Microcomputer Systems $674,197 $587,482
Information Solutions 21,012 33,354
Workstation and Security Systems 33,396
-------- --------
695,209 654,232
Metal Finishing 17,467 14,541
Commercial Real Estate 1,055 2,071
-------- --------
Net Sales 713,731 670,844
Gains on sales of securities, net 6,599 6,864
Other income 5,049 2,162
-------- --------
Total Revenues 725,379 679,870
Costs and Expenses
Cost of sales 585,003 555,120
Selling 67,462 58,681
General and administrative 37,331 35,629
Depreciation and amortization 8,173 8,319
Interest 10,114 7,754
Income from equity investments (1,566) (373)
-------- --------
Total Costs and Expenses 706,517 665,130
-------- --------
Earnings Before Minority Interest
and Taxes 18,862 14,740
Minority interest (5,027) (2,719)
-------- --------
Earnings Before Taxes On Income 13,835 12,021
Provision for taxes on income 5,533 4,930
-------- --------
Net Earnings $ 8,302 $ 7,091
======== ========
Earnings Per Share
Primary $ .79 $ .69
Fully Diluted .72 .64
Average Common Shares Outstanding
Primary 10,124 9,822
Fully Diluted 10,211 9,822
SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000 omitted)
Six Months Ended
June 30
------------------------
1995 1994
------- -------
(UNAUDITED)
Operating Activities
Net earnings $ 8,302 $ 7,091
Adjustments to reconcile net earnings to
cash from operating activities
Depreciation and amortization 8,191 8,319
Deferred income taxes (698) 1,070
Income from equity investments (1,566) (373)
Gains on sales of securities, net (6,599) (6,864)
Minority interest, net 3,016 1,527
------- -------
10,646 10,770
Cash provided (used) by changes in working
capital items
Receivables 17,302 21,364
Inventories 5,313 (34,387)
Other current assets (118) (1,166)
Accounts payable and accrued expenses (27,746) (12,574)
Taxes on income 726 (3,478)
------- -------
(4,523) (30,241)
------- -------
Cash provided (used) by operating activities 6,123 (19,471)
Proceeds from sales of securities, net 13,044 2,876
------- -------
Cash provided (used) by operating activities
and sales of securities, net 19,167 (16,595)
Other Investing Activities
Investments and notes acquired, net (3,841) (4,573)
Expenditures for property, plant & equipment (5,860) (6,224)
Business acquisitions, net of cash acquired (1,754)
Other, net (4,765) (4,407)
------- -------
Cash (used) by other investing activities (16,220) (15,204)
Financing Activities
Net borrowings (repayments)on revolving
credit facilities (2,020) 18,865
Repayments on term debt (3,047) (3,988)
Borrowings on term debt 3,443 12,121
Stock issued by subsidiaries 549 2,631
Repurchase of common stock (32)
Stock options exercised 1,881 1,036
------- -------
Cash provided by financing activities 774 30,665
------- -------
Increase (Decrease) in Cash 3,721 (1,134)
Cash - beginning of year 7,860 9,796
------- -------
Cash - End of Period $ 11,581 $ 8,662
======= =======
SAFEGUARD SCIENTIFICS, INC.
Notes to Consolidated Financial Statements
June 30, 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 has agreed to 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 CenterCore's funding requirements.
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. In August 1995, the Company's credit facility was
renegotiated to increase the availability from $75 million
to $100 million and reduce the effective interest rate by
.5%. All other significant terms of the facility remained
the same.
In April 1995, CompuCom's credit facility was renegotiated
to increase the availability from $150 million to $175
million. All other significant terms of the facility
remained the same.
4. 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.
SAFEGUARD SCIENTIFICS, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Net sales for the quarter and six months ended June 30, 1995
increased to $370.6 million and $713.7 million from $346.2
million and $670.8 million for the same periods in 1994,
respectively. Net earnings for the quarter ended June 30, 1995
increased to $4.77 million or $.45 per share from $3.81 million
or $.37 per share for the same period in 1994. Net earnings for
the six months ended June 30, 1995 increased to $8.3 million or
$.79 per share from $7.1 million or $.69 per share for the same
period in 1994.
Comparison of the second quarter 1995 results to the second
quarter 1994 results is impacted by two companies which were
consolidated in 1994 but are not included in the consolidated
results in 1995. 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 uses the equity method of accounting for its remaining
investment in Coherent. During late 1994 into 1995, the Company
initiated actions that will result in Safeguard holding a
minority ownership position in CenterCore. As a result,
CenterCore is not included in the Company's consolidated
financial statements beginning January 1, 1995.
The net sales increase for the quarter ended June 30, 1995
reflects the 14% increase in sales at CompuCom Systems, Inc.
partially offset by the reduced sales due to the sale or
disposition of the two companies previously mentioned. The
higher sales at CompuCom are a result of the continued demand by
corporate customers for personal computers, as well as CompuCom's
strategy of expanding its enterprise network integration
capabilities through internal growth and growth via acquisitions,
remaining focused on its selling strategies, and providing
quality service. CompuCom's second quarter net sales reflect an
increase in service revenue in excess of 80% over the second
quarter of 1994 and approximately 25% over the first quarter of
1995, and include revenue from four acquisitions in the service
arena, International Micronet Systems, acquired in December 1994,
certain assets related to Allerion Corporation and Benchmark
Corporation, acquired during the first quarter of 1995, and the
purchase of Trellis-Hayes-Mirconet in the second quarter of 1995.
In addition, CompuCom believes the increase in net sales can also
be attributed to the weakened financial condition of certain
competitors, as corporate customers consolidate their outsourcing
and outtasking needs. Corporate demand for the remainder of 1995
will be influenced by the timing and acceptance of Windows '95.
CompuCom's sales growth, coupled with the sale or
disposition of the two companies previously mentioned, resulted
in CompuCom sales representing 94% of total sales for the six
months ended June 30, 1995 compared to 88% 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 increase in net earnings as it reported a 48%
earnings increase for the three months ended June 30, 1995.
Also contributing to the earnings improvement in the quarter
ended June 30, 1995 was an increase in income from equity
investments in Coherent Communications, Cambridge Technology
Partners and USDATA Corporation.
Coherent's net earnings increased 149% compared to 1994 on
a 52% sales increase. Sales of its echo cancellers and related
products continued to increase, with particularly strong growth
in its European and Asian markets.
Cambridge's sales and earnings increased 73% and 98%,
respectively, in the second quarter of 1995 compared to the
comparable quarter of 1994. The company continues to see
increased demand for its services in the U.S. and Europe. It has
established itself as a global force in the client/server
application market by successfully applying its business
methodology globally, gaining international acceptance of its
unique fixed-time/fixed-price model and client-centered approach.
Cambridge presently has nine offices in the U.S. and seven in
Europe, with plans to establish a software development center in
Ireland.
Safeguard's latest rights offering, USDATA Corporation,
reported record sales of $11 million for the second quarter, its
initial quarter as a public company. USDATA's net income for the
quarter was $356,000, compared to $650,000 in 1994. The lower
income reflects USDATA's strategy to make significant investments
in sales and marketing in 1995 to increase awareness of its
products, accelerate growth and obtain a larger share of a
rapidly growing market. USDATA's objective is to ramp up sales
growth to new levels and begin to enjoy the bottom-line impact of
those revenue gains late this year.
Gross margin increased at CompuCom when compared to the same
quarter in 1994, 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.
Although product margins at CompuCom declined from the first
quarter to the second quarter in 1995, product margins are higher
than the same periods in 1994 primarily due to price decreases
related to certain manufacturers' products and less price
competition, partially influenced by poor financial results of
certain competitors. Future product margins will be influenced
by manufacturers' pricing strategies together with competitive
pressures, and will be enhanced to the extent CompuCom is able to
increase service sales through internal growth and growth via
acquisitions. As service sales increase at a rate greater than
product sales, overall gross margin is favorably impacted due to
service margin as a percentage of service net sales being higher
than product margin. 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 material when compared to CompuCom's overall financial
results.
The significant increase in selling expense both as a
percentage of net sales and in absolute dollars reflects expenses
associated with the overall service sales growth at CompuCom,
including the recent acquisitions, as well as costs related to
the planned development of an infrastructure necessary to manage
and expand the service business. Partially offsetting this
increase was continued improvement in product sales productivity
at CompuCom.
General and administrative expenses stayed relatively flat
as a percentage of sales. The increase in absolute dollars.
CompuCom's investment in information system resources required to
enhance customer satisfaction, particularly in the service
segment, and other discretionary spending necessary to meet
CompuCom's objectives increased these expenses relative to sales.
CompuCom's operating expenses are reported net of reimbursements
by certain manufacturers for specific training, promotional and
marketing programs. These reimbursements offset the expenses
incurred by CompuCom. Offsetting this is the relatively higher
sales growth compared to the increase in general and
administrative expenses at the Company's other business units.
Interest expense increased by $1 million and $2.4 million
for the quarter and six months ended June 30, 1995, respectively,
primarily as a result of higher average interest rates, increased
borrowing levels at CompuCom to fund working capital requirements
and increased borrowings at the Company for new business
opportunities. CompuCom is pursuing alternatives to reduce its
cost of funds.
Liquidity and Capital Resources
The Company and CompuCom each maintain separate, independent
bank credit facilities with several banks. CompuCom's credit
facility is non-recourse to the Company, and prohibits the
payment of common stock dividends while the credit lines remain
outstanding.
During August 1995 the Company increased total availability
under its credit facility to $100 million from $75 million and
effectively reduced the interest rate on the facility by .5%.
Borrowings at June 30, 1995 were $43 million leaving an
availability of $57 million if the credit facility increase were
in effect at that time. The Company also periodically generates
cash from the sale of publicly traded securities which it holds.
At June 30, 1995 the market value of its publicly traded
securities, including its common stock investment in CompuCom, is
in excess of $425 million. The bank credit facility is secured
by a pledge of these 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 increased
availability under the credit facility. These sources should be
sufficient to fund the Company's cash requirements into 1996.
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. In April 1995,
CompuCom increased its bank revolving credit facility from $150
million to $175 million to support its revenue growth. The
credit facility is subject to certain collateral restrictions and
matures in March 1997. At June 30, 1995 approximately $115
million of this facility was outstanding, with in additional $60
million available for borrowing. In addition, CompuCom currently
has outstanding $18.5 million of 9% Convertible Subordinated
Notes ("Notes") issued in 1992. The Notes are due in 2002 and
are convertible into 8,409,000 shares of CompuCom's common stock
at $2.20 per share. CompuCom may call the Notes on or after
September 15, 1995 subject to certain conditions as provided in
the Notes. However, given that CompuCom's stock price is well
above the conversion price of $2.20 per share, it is likely, that
if the debt is called by CompuCom, the holders will convert their
notes into common stock rather than accept cash repayment of the
principal.
The business is not capital asset 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 June 30, 1995.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Description
10.1 $210,000 Secured Promissory Note dated November 1, 1994
from James W. Dixon to CompuCom Systems, Inc.
10.2 Financing and Security Agreement dated April 26, 1995
between Nations Bank of Texas, N.A. and CompuCom Systems,
Inc.
10.3 $175,000,000 Master Revolving Promissory Note due March
31, 1997 to Nations Bank of Texas, N.A. dated April 26, 1995
between Nations Bank of Texas, N.A. and CompuCom Systems, Inc.
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 June 30, 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: August 14, 1995 /s/ Warren V. Musser
_____________________________________
Warren V. Musser, Chairman,
President and Chief Executive Officer
Date: August 14, 1995 /s/ Gerald M. Wilk
_____________________________________
Gerald M. Wilk
Vice President
(Principal Financial and
Principal Accounting Officer)