SAFEGUARD SCIENTIFICS, INC.
SELECTED FINANCIAL DATA
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
1997 1996 1995 1994 1993(1)
------------ ------------ ------------ ------------ ------------
Net sales.................................. $ 1,985,225 $ 2,062,809 $ 1,517,740 $ 1,412,026 $ 1,168,349
Net earnings............................... 21,501 19,927 18,263 15,740 3,853(1)
Earnings per share(3)
Basic..................................... .69 .67 .63 .56 .13
Diluted................................... .66 .61 .53 .47 .07
Total assets............................... 714,541(2) 936,070 742,874 617,155 542,824
Long-term debt, including current portion
CompuCom.................................. 100,425(2) 239,946 123,461 137,310 125,354
Other..................................... 30,060 21,419 110,835 98,838 77,257
Convertible subordinated notes............. 90,881 102,131
Shareholders' equity....................... 207,070 169,011 154,309 110,547 88,767
- ------------------------
The Company offers its shareholders, through the rights offering process,
the opportunity to acquire direct ownership in selected partnership
companies which it believes are ready for public ownership.
No cash dividends have been declared in any of the years presented and the
Company has no present intention to declare cash dividends.
(1) After goodwill write-off of $6.4 million or $.22 per share (basic) and $.21
per share (diluted).
(2) Reflects the effect of $175 million in off-balance sheet financing. (See
Note 3)
(3) Per share amounts have been retroactively restated in accordance with the
Company's adoption of a new accounting pronouncement. (See Note 1)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The Company's business strategy is the development of primarily information
technology-oriented, entrepreneurially-driven partnership companies to achieve
superior 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 it believes are ready for public
ownership.
If the Company's ownership in any of the partnership companies changes
significantly, the Company's consolidated revenues and related costs and
expenses may fluctuate primarily due to the applicable accounting method used
for recognizing its participation in the operating results of that company.
The revenues 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 a more than 50% owned partnership company is reflected in the caption
"Minority interest" in the Consolidated Statements of Operations. Minority
interest adjusts consolidated earnings to reflect only the Company's share of
the earnings or losses of the partnership company. The partnership companies
that are included in the Company's consolidated operating results in 1997 are
CompuCom Systems, Inc., Tangram Enterprise Solutions, Inc., Premier Solutions
Ltd., and Pioneer Metal Finishing. Premier and Pioneer were sold in 1997 and are
included in the Company's consolidated operating results through their
respective sale dates.
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. Significant influence is
presumed at a 20% ownership level; however, the Company applies the equity
method for certain companies in which it owns less than 20% because it exerts
significant influence through representation on those companies' Boards of
Directors and other means. On the equity method of accounting, a partnership
company's revenues 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 is reflected in the caption
"Income from equity investments, net" in the Consolidated Statements of
Operations.
The net effect of a partnership company's results of operations on the
Company's net earnings is the same under either consolidation accounting or the
equity method of accounting, as only the Company's share of the earnings or
losses of a partnership company is included in the Company's net earnings in the
Consolidated Statements of Operations.
27
Investments not consolidated or accounted for on the equity method are
accounted for on the cost method of accounting under which the Company's
share of the earnings or losses of such companies is not included in the
Company's Consolidated Statements of Operations.
As mentioned in Operations Overview, the Company's consolidated revenues,
costs, and expenses are significantly influenced by CompuCom's results of
operations. At December 31, 1997, the Company owns approximately 51% of
CompuCom's outstanding common stock and owns preferred stock which gives it 60%
of the vote for CompuCom's directors.
CompuCom competes in the computer reseller industry which has been
undergoing significant transformation and consolidation. Several of
CompuCom's competitors have been growing through acquisitions and others have
been acquired. In addition, companies previously engaged in the retail
channel have begun to enter the corporate reseller market, heightening the
competition.
As a result, while growing internally, CompuCom is also looking to
strengthen its market share through acquisitions. If CompuCom were to use its
stock for acquisitions or if some other dilutive event were to occur, the
Company's voting interest in CompuCom could decrease below 50%. Under current
generally accepted accounting principles, the Company would cease consolidating
CompuCom's results and instead would account for its investment in CompuCom on
the equity method provided the Company maintained the ability to exercise
significant influence over CompuCom's ordinary course of business. The Company's
share of CompuCom's earnings, on the equity method versus consolidation, would
differ only to the extent that the Company's ownership of CompuCom changed.
However, the presentation of the Consolidated Statements of Operations and
Balance Sheets would change dramatically.
Note 9 to the Company's Consolidated Financial Statements summarizes the
Parent Company Statements of Operations and Balance Sheets of the Company for
the same periods presented in the Consolidated Financial Statements. These
statements differ from the Consolidated Financial Statements by excluding the
revenues, costs, expenses, assets, and liabilities of the Company's less than
wholly-owned subsidiaries (primarily CompuCom and Tangram) and instead treating
these companies as if they were accounted for on the equity method. The
Company's share of the results of operations of less than wholly-owned
subsidiaries is included in "Equity income, net" and the carrying value of these
companies is included in "Investments" in the Parent Company Statements of
Operations and Balance Sheets, respectively.
Although the Parent Company Statements of Operations and Balance Sheets
presented in Note 9 are accurate relative to the Company's historical
Consolidated Financial Statements, they are not necessarily indicative of future
Parent Company Statements of Operations and Balance Sheets.
OPERATIONS OVERVIEW
Comparability of 1997 and 1996 net sales and earnings to prior periods is
impacted by the sale of Premier and Pioneer in 1997 and the sale of the
Company's commercial real estate operations in 1996. These entities are only
included in the Company's consolidated results through their respective sale
dates.
Net sales decreased 4% in 1997 compared to an increase of 36% in 1996. The
decrease in 1997 is primarily attributable to the sale of Premier and Pioneer
during 1997 and decreased product sales at CompuCom (Microcomputer Systems and
Services) as CompuCom focused primarily on increasing earnings through growth in
its higher-margin services business in 1997. CompuCom's total sales decreased 2%
for the year, with services sales increasing 40% while product sales decreased
6%. CompuCom represented 98% and 97% of the Company's total consolidated net
sales in 1997 and 1996, respectively. As a result of the relative significance
of CompuCom in the consolidated results, fluctuations in the financial results
of other business units have tended to have a minimal impact.
The following after-tax data reflect the components of the Company's net
earnings (in thousands):
YEAR ENDED DECEMBER 31 1997 1996 1995
- --------------------------------------------------------------------------------- ---------- --------- ---------
Earnings before securities and other gains, net and minority interest............ $ 20,823 $ 13,664 $ 15,212
Securities and other gains, net.................................................. 16,114 18,223 11,375
Minority interest................................................................ (15,436) (11,960) (8,324)
--------- --------- ---------
Net earnings..................................................................... $ 21,501 $ 19,927 $ 18,263
--------- --------- ---------
Earnings before securities and other gains and minority interest increased
52% in 1997 primarily due to a 26% increase in CompuCom's earnings (excluding
non- recurring gains) and the elimination of losses at Premier due to its sale
in early 1997. Partially offsetting this increase was the elimination of
Pioneer's earnings due to its sale in mid-1997, increased losses at Tangram,
lower income from equity investments, and an increase in general corporate
expense to support the increased activity at partnership companies. In 1996,
CompuCom's earnings, excluding a non-recurring gain, increased 22%. However,
overall earnings before securities and other gains and minority interest
decreased 10% in 1996 due to losses at Premier, losses or reduced earnings at
certain of the Company's other business units, and an increase in general
corporate and interest expense to support the increased activity at partnership
companies.
Securities and other gains in 1997 include the open market sales of a
portion of the Company's interest in Cambridge Technology Partners, the sale of
shares of
28
Diamond Technology Partners and ChromaVision Medical Systems in rights
offerings to the Company's shareholders, distributions from the Company's
associated venture funds, and the Company's share of CompuCom's gain from the
sale of its former headquarters building. The Company also recorded gains in
1997 from the sale of Premier and Pioneer. Partially offsetting these gains was
a write-down of the Company's holdings in Sybase due to the other than temporary
decline in the market price of that stock, charges incurred in the disposition
of investments, and provisions for other investments and notes. Securities and
other gains in 1996 included the open market sales of a portion of the Company's
interests in Coherent Communications Systems Corporation and Cambridge, and the
sale of shares of Integrated Systems Consulting Group and Sanchez Computer
Associates in rights offerings to the Company's shareholders.
Securities and other gains in 1996 also included the sale of the Company's
remaining interest in Gandalf Technologies and the Company's share of
CompuCom's gain from the sale of substantially all of their holdings in PC
Service Source. Partially offsetting these 1996 gains was a write-down of the
Company's holdings in Sybase due to the other than temporary decline in the
market price of that stock. Securities and other gains in 1995 included the open
market sales of the Company's remaining interest in Novell, the open market
sales of a portion of its interests in Coherent and Gandalf, and distributions
from the Company's associated venture funds. Partially offsetting the 1996 and
1995 securities and other gains were charges incurred in the disposition of
investments and provisions for other investments and notes. Securities and other
gains of varying magnitude have been realized in recent years; prior gains are
not necessarily indicative of gains which may be realized in the future.
Several of the Company's partnership companies are accounted for on the
equity method. The Company's current strategy is to acquire, where possible,
significant minority positions in larger, more mature companies. As a result of
this strategy and increased sales of existing equity method companies, total net
sales of the Company's equity investments, which are not included in the
Consolidated Statements of Operations, have increased significantly (see Note 2
to the Consolidated Financial Statements). Also, the excess of carrying value of
equity investments over the Company's share of the underlying net assets of such
investments has increased.
Income from equity investments fluctuates with the Company's ownership
percentage and the operating results of investees accounted for on the equity
method. Increased equity income from most of the Company's public investments
in 1997 was more than offset by the Company's share of losses at certain
private, early-stage equity investments and increased amortization of the
excess of the Company's carrying value of equity investments over its share
of the underlying net assets. The Company's public investments accounted for
on the equity method in 1997 included Cambridge, ChromaVision, Coherent, OAO
Technology Solutions, Sanchez, and USDATA Corporation.
Cambridge's sales and earnings increased 49% and 52%, respectively, in
1997 and 52% and 53%, respectively, in 1996. In 1997, Cambridge expanded its
service offerings through advancement of its proprietary service
methodologies, including an electronic commerce and interactive solutions
methodology. At year end, 50% of its completed projects contained an Internet
or interactive component. Cambridge also continued its successful acquisition
strategy with the fourth quarter acquisition of Peter Chadwick Holdings
Limited which significantly increased Cambridge's skills in the areas of
operations strategies and performance improvements. The Company owns
approximately 16% of Cambridge's common stock at December 31, 1997.
ChromaVision completed its initial public offering through a rights offering
to the Company's shareholders in the third quarter of 1997. ChromaVision
achieved several significant milestones in 1997 including the signing of a
worldwide distribution and development agreement with Sigma Diagnostics related
to prenatal screening, receipt of 510(k) clearance from the Food and Drug
Administration for a leukemia screen, and the initiation of clinical trials for
the identification of cancer micrometastases. ChromaVision reported a net loss
of $6.3 million for 1997, primarily due to research and product development
initiatives and commencement of clinical trials. The Company owns approximately
20% of ChromaVision's common stock at December 31, 1997. In February 1998, the
Company purchased an additional 6% of ChromaVision's common stock in a private
transaction with an unrelated third party.
Coherent's sales and earnings increased 35% and 43%, respectively, in 1997
and 24% and 28%, respectively, in 1996 as it continued to add to its impressive
list of major customers worldwide. Sales were especially strong in Europe, and
Coherent also increased its sales in the Asia Pacific region despite the decline
other companies have experienced in that region. The Company owns approximately
32% of the common stock of Coherent at December 31, 1997. In February 1998,
Tellabs, Inc. announced it would exchange shares of its publicly-traded stock
valued at approximately $670 million for all of the outstanding shares of
Coherent based on a ratio of .72 shares of Tellabs stock for each share of
Coherent stock. The Company's pre-tax gain from the transaction would be
approximately $190 million based on the closing price of Tellabs common stock on
February 13, 1998, and the Company would own less than 5% of Tellabs. The
ultimate gain recorded by the Company will vary based on the value of Tellabs
stock at the completion of the transaction. There is no assurance the
transaction will be completed, as it is subject to various conditions and
approvals by appropriate government agencies and Coherent's stockholders.
OAO's sales and earnings increased 46% and 58%, respectively, in 1997
compared to 1996. OAO completed its initial public offering through a rights
offering to the
29
Company's shareholders in the fourth quarter of 1997. OAO completed its first
acquisition in the fourth quarter of 1997 when it acquired a business which
develops and markets software for managed care operations. The Company owns
approximately 29% of OAO's common stock at December 31, 1997.
Sanchez's sales and earnings increased 60% and 221%, respectively, in 1997
compared to 1996. During 1997, Sanchez executed ten contracts valued at more
than $40 million with banking organizations in eight countries. Sanchez
continues to focus on increasing its presence in the U.S. and global
marketplaces and significantly enhanced its strategic partnership relationships
in 1997. The Company owns approximately 25% of Sanchez's common stock at
December 31, 1997.
In February 1998, USDATA announced its intention to dispose of its system
integration and hardware servicing business and focus primarily on growing and
expanding its software business. Also in February 1998, USDATA announced the
release of Factory Link ECS 6.5 for Microsoft Windows NT and Windows 95. USDATA
reported a 1997 net loss from continuing operations of approximately $3.9
million compared to a net loss from continuing operations of approximately $2.7
million in 1996. USDATA's results from continuing operations will continue to be
impacted by investment spending required to implement its new strategy. The
Company owns approximately 24% of USDATA's common stock at December 31, 1997.
SEGMENT TRENDS
MICROCOMPUTER SYSTEMS AND SERVICES (CompuCom) posted record earnings for
the ninth consecutive year in 1997, while sales decreased slightly. Product
sales, which are primarily derived from the sale of distributed desktop
computer products to corporate customers, were $1.7 billion, $1.8 billion,
and $1.3 billion in 1997, 1996, and 1995, respectively. Although CompuCom
shipped more desktop, laptop, and server units in 1997 compared to 1996, the
units were sold at lower average sales prices primarily due to manufacturer
price reductions, contributing to the overall decrease in product sales. In
addition, CompuCom believes the decrease in product sales is also
attributable to an increase in direct marketers' market share and CompuCom's
efforts during much of 1997 to reduce the amount of low-margin product
business.
Services sales, primarily derived from systems integration services,
including field engineering, product configuration, consulting, network
management, and help desk services, increased to $251 million in 1997, compared
to $178 million in 1996 and $107 million in 1995, or 13%, 9%, and 7% of
CompuCom's total sales in 1997, 1996, and 1995, respectively. The increase in
services sales reflects CompuCom's continued focus on growing this higher-margin
portion of its business through the hiring of additional service personnel and
growing its higher-end service offerings. Also contributing to the increase in
services sales was the increase in the number of units sold during 1997 as
compared to 1996, which increased demand for services such as configuration and
installation.
Part of CompuCom's strategy to increase revenues is through acquisitions to
increase its presence in certain geographical markets and continuing to
focus on increasing its services business through growing its higher-end service
offerings and number of service personnel.
CompuCom's product gross margin increased to 10.4% in 1997 compared to 10.0%
in 1996, due primarily to an increased focus on higher-margin product business,
and an increase in the amount of manufacturer-sponsored incentives in 1997
compared to 1996. Product gross margin decreased to 10.0% in 1996 from 10.6% in
1995 due principally to pricing to win new business and increased price
competitiveness in the marketplace. Services gross margin increased to 35.7% in
1997 from 33.3% in 1996 and 30.5% in 1995 primarily due to improved utilization
of CompuCom's service personnel and growth in CompuCom's higher-end service
offerings, such as systems engineering and consulting, which typically have
higher margins than some of CompuCom's other services.
Primarily as a result of the higher services sales and increased services
margins, CompuCom was able to increase its earnings in 1997 despite its overall
sales decrease. Future profitability at CompuCom will depend on its ability
to hire and retain quality service personnel while effectively managing the
utilization of such personnel. It will also depend on increased focus on
providing technical service and support to customers, product demand,
competition, manufacturer product availability and pricing changes, effective
utilization of vendor programs, successfully designing and implementing
final assembly programs with its major vendors, and control of operating
expenses. CompuCom participates in certain manufacturer-sponsored programs
designed to increase sales of specific products. These programs, excluding
volume incentive programs and specific product rebates offered by certain
manufacturers, are not material when compared to CompuCom's overall financial
results.
The Company owns approximately 51% of the outstanding common stock of
CompuCom and owns preferred stock which gives the Company 60% of the vote for
CompuCom's directors at December 31, 1997.
INFORMATION SOLUTIONS (Tangram) sales increased in 1997 principally due to
the signing of major contracts for the purchase of Tangram's Asset Insight-TM-
product. In 1997, Tangram developed relationships with several additional
resellers for the marketing of Asset Insight-TM-. Tangram's net loss increased
in 1997 compared to 1996 due to its investments in workforce and research and
development to support the Asset Insight-TM- opportunity. Tangram expects Asset
Insight-TM- to account for a significant portion of its sales for the
foreseeable future and expects to continue devoting substantial resources to
developing sales and research and development of this product. The Company owns
approximately 67% of Tangram's common stock at December 31, 1997.
30
COSTS AND EXPENSES
The Company's overall gross margin was 14.4% in 1997 compared to 13.1% for
1996. The increase is attributable to the increased product margin at CompuCom,
as well as increased services sales at CompuCom which generate higher gross
margins relative to product sales. Gross margin decreased to 13.1% in 1996 from
13.6% in 1995 primarily due to decreased product margin at CompuCom, partially
offset by its increased higher-margin services sales.
Selling and service and general and administrative expenses, in absolute
dollars and as a percentage of sales, increased in 1997 and 1996 compared to the
respective prior years. This was primarily due to CompuCom's costs to manage and
expand the growing services business and its continued investment in its
information systems resources required to broaden electronic commerce
capabilities and improve efficiency within CompuCom's customer center. This
increase was also due to Tangram's investment in workforce and research and
development for Asset Insight-TM-, and increased corporate expenses incurred to
support the growing activities of the partnership companies. These increases
were partially offset by the elimination of expenses resulting from the sale of
Premier and Pioneer in 1997. 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.
Depreciation and amortization decreased in 1997 primarily due to the
elimination of depreciation and amortization resulting from the sale of Premier
and Pioneer in 1997 and the Company's commercial real estate operations in 1996,
partially offset by increased depreciation at CompuCom. The increase at CompuCom
is primarily associated with its new corporate headquarters and operations
campus, which was fully occupied in the second half of 1997, and enhancements to
CompuCom's information systems. Depreciation and amortization increased in 1996
primarily due to an increase at CompuCom related to facility and warehouse
improvements for its new eastern distribution facility, enhancements to its
information systems, and other capital expenditures to support increased
business activity.
Interest and financing expense decreased slightly in 1997 compared to
1996 primarily as a result of the conversion of approximately $24 million of
the Company's Convertible Subordinated Notes in the fourth quarter of 1996
and the first quarter of 1997 into the Company's Common Stock, and the
elimination of interest resulting from the sale of Premier and Pioneer in
1997 and the Company's commercial real estate operations in 1996, partially
offset by increased borrowings by the Company. CompuCom's borrowing levels,
including the Securitization Facility (see Note 3), were slightly higher in
1997 when compared to 1996; however, this was offset by a lower effective
rate for 1997 due primarily to changes in CompCom's financing arrangements.
Interest expense increased in 1996 compared to 1995 primarily as a result of
the issuance of the Company's Convertible Subordinated Notes in February 1996
and higher working capital required to support the sales growth at CompuCom.
These increases were partially offset by the repayment of all of the
outstanding indebtedness under the Company's bank revolving credit facility,
the lower interest rate on the Company's Convertible Subordinated Notes
compared to the bank revolving credit facility, CompuCom's lower effective
interest rate, and the conversion of CompuCom's convertible subordinated
notes in October 1995.
LIQUIDITY AND CAPITAL RESOURCES
In February 1996, the Company issued $115 million of 6% Convertible
Subordinated Notes ("Notes") due February 1, 2006. The Notes are convertible
into the Company's Common Stock at $28.985 per share. The Company used
approximately $67 million of the net proceeds to repay all of its outstanding
indebtedness under its bank revolving credit facility. Through March 1998,
approximately $42.7 million of Notes were converted into 1,471,619 shares of the
Company's Common Stock.
In June 1997, the Company amended its bank revolving credit facility
which increased the borrowing availability under the facility from $100
million to $150 million, reduced the rate of borrowings on LIBOR traunches by
.5% to LIBOR plus 1.25%, and extended the maturity to May 2001. The bank
revolving credit facility is secured by certain 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 revolving credit facility. There was $6.1 million outstanding under
this facility at December 31, 1997. The Company is increasing the
availability under the bank revolving credit facility to $200 million in the
first half of 1998.
In 1997, the Company entered into revolving credit facilities with certain
partnership companies whereby the Company may borrow up to $17 million from
these partnership companies on a revolving basis at a rate that varies with the
Company's effective borrowing rate. At December 31, 1997, $16.1 million was
outstanding under these agreements.
Availability under the Company's revolving credit facilities, proceeds from
the sales from time to time of selected publicly-traded securities, and other
internal sources of cash flow should be sufficient to fund the Company's cash
requirements through 1998, including investments in new or existing partnership
companies, general corporate requirements, and the repurchase of the Company's
Common Stock from time to time in the open market. In connection with certain
investments, the Company is contingently obligated for approximately $140
million of possible future commit-
31
ments, including committed capital to various venture funds and private
equity partnerships, to be funded over the next several years.
CompuCom maintains separate, independent financing arrangements, which
are non-recourse to the Company and are secured by certain assets of
CompuCom. During recent years, CompuCom has utilized operating earnings, bank
financing arrangements, long-term subordinated notes, and internally
generated funds to fund its cash requirements. CompuCom's financing
arrangements were amended in 1997 such that at December 31, 1997 they
consisted of a $125 million working capital facility, a $175 million
revolving Securitization Facility, and a $25 million real estate loan
(collectively, the "credit agreements"). The credit agreements prohibit the
payment of common stock dividends by CompuCom while the agreements remain
outstanding. At December 31, 1997, approximately $97.4 million was
outstanding under the working capital facility and the real estate loan, and
the Securitization Facility was fully utilized. The credit agreements mature
in November 2002, except for the real estate loan which is due in quarterly
installments beginning April 1999. CompuCom is currently evaluating other
permanent financing options for the real estate loan.
Cash flow provided by operating activities increased significantly in 1997
primarily from the effect of CompuCom's Securitization Facility in which $175
million of accounts receivable were sold with the proceeds used to pay down
long-term debt.
The Company's operations are not capital intensive, and capital expenditures
in any year normally would not be significant in relation to the overall
financial position of the Company. Capital asset requirements are generally
funded through bank credit facilities, internally generated funds, or other
financing sources. Capital expenditures during 1997 were primarily related to
preparing CompuCom's new headquarters and operations campus for full occupancy.
The Company expects capital expenditures to decline in 1998 as this project is
significantly complete as of December 31, 1997. There are no material capital
asset purchase commitments at December 31, 1997.
YEAR 2000 ISSUE
The Company is currently addressing the Year 2000 issue, which results
from the fact that many computer programs were previously written using two
digits rather than four to define the applicable year. Programs written in
this way may recognize a date ending in "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations. The Company has conducted an assessment of its
computer information systems and believes that it will not need to incur any
material extraordinary expense to correct its systems which are not Year 2000
compliant on a timely basis. The Company has also surveyed its majority-owned
and equity investee partnership companies regarding this issue. The Company's
most significant consolidated subsidiary, CompuCom, has completed initial
assessment of its computer information systems, and has plans in place to
complete remediation and begin testing during 1998. The rest of the Company's
partnership companies are in varying stages of assessing, remediating, and
testing for internal Year 2000 compliance and assessing Year 2000 compliance
of their vendors, business partners, and customers. Most of the partnership
companies are in the business of providing software products, information
technology consulting, or outsourcing services. Those partnership companies
which produce software or products with embedded programming believe that the
current version of their products either are Year 2000 compliant or will be
revised to be compliant in 1998. Certain partnership companies are continuing
to determine the extent to which previously sold software products and
services were non-compliant. The total cost and time which will be incurred
by the partnership companies on the Year 2000 issue cannot presently be
determined. There can be no assurance that all necessary work will be
completed in time, or that such costs and liabilities will not materially
adversely impact one or more of such partnership companies. In addition,
required spending on the Year 2000 effort will cause customers of most of the
Company's partnership companies to reallocate at least part of their
information systems budgets. Although several partnership companies have
offerings which may be useful in such efforts, such reallocations could
materially adversely affect the results of operations of many partnership
companies.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In 1997, the Financial Accounting Standards Board (FASB) issued
pronouncements relating to the presentation and disclosure of information
related to comprehensive income (SFAS 130) and segment data (SFAS 131). In 1998,
the FASB issued a pronouncement relating to the disclosure of information about
pensions and other postretirement benefits (SFAS 132). The Company is required
to adopt the provisions of these pronouncements, if applicable, for the year
ending December 31, 1998. The adoption of these pronouncements will not have an
impact on the Company's financial position and results of operations, but may
change the presentation of certain of the Company's financial statements and
related notes and data thereto.
Also in 1997, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued a Statement of Position (SOP)
on software revenue recognition (SOP 97-2) that supersedes SOP 91-1. SOP 97-2 is
effective for transactions entered into in fiscal years beginning after December
15, 1997. The adoption of SOP 97-2 is not expected to have a material effect on
the Company's financial position or results of operations.
32
SAFEGUARD SCIENTIFICS, INC.
FINANCIAL INFORMATION--INDUSTRY SEGMENTS
(IN THOUSANDS)
1997 1996 1995
------------ ------------ ------------
NET SALES
Information Technology
Microcomputer Systems and Services............... $ 1,949,802 $ 1,995,190 $ 1,441,597
Information Solutions............................ 14,074 11,142 12,538
------------ ------------ ------------
1,963,876 2,006,332 1,454,135
Other.............................................. 21,349 56,477 63,605
------------ ------------ ------------
$ 1,985,225 $ 2,062,809 $ 1,517,740
------------ ------------ ------------
OPERATING PROFIT (LOSS)
Information Technology
Microcomputer Systems and Services............... $ 66,933 $ 55,704 $ 46,567
Information Solutions............................ (2,256) (625) (897)
------------ ------------ ------------
64,677 55,079 45,670
Other.............................................. 1,584 (1,268) 2,563
------------ ------------ ------------
66,261 53,811 48,233
Securities and other gains, net.................... 26,857 30,373 18,925
Income from equity investments, net................ 417 1,539 2,731
Interest and financing............................. (22,359) (23,916) (19,538)
General corporate expense, net..................... (9,612) (8,661) (6,111)
Minority interest.................................. (25,727) (19,934) (13,853)
------------ ------------ ------------
Earnings before taxes on income.................... $ 35,837 $ 33,212 $ 30,387
------------ ------------ ------------
DEPRECIATION AND AMORTIZATION
Information Technology
Microcomputer Systems and Services............... $ 12,507 $ 9,600 $ 6,866
Information Solutions............................ 2,534 2,993 2,879
------------ ------------ ------------
15,041 12,593 9,745
Other............................................. 1,782 7,051 6,392
General Corporate................................. 1,309 1,001 790
------------ ------------ ------------
$ 18,132 $ 20,645 $ 16,927
------------ ------------ ------------
CAPITAL EXPENDITURES
Information Technology
Microcomputer Systems and Services............... $ 22,418 $ 42,135 $ 5,999
Information Solutions............................ 955 492 178
------------ ------------ ------------
23,373 42,627 6,177
Other............................................. 3,921 4,922 4,573
General Corporate................................. 4,020 2,435 541
------------ ------------ ------------
$ 31,314 $ 49,984 $ 11,291
ASSETS EMPLOYED
Information Technology
Microcomputer Systems and Services.............. $ 470,782 $ 700,773 $ 514,674
Information Solutions.......................... 14,077 12,946 12,828
------------ ------------ ------------
484,859 713,719 527,502
Other............................................ 49,570 61,583
General Corporate................................ 229,682 172,781 153,789
------------ ------------ ------------
$ 714,541 $ 936,070 $ 742,874
------------ ------------ ------------
------------ ------------ ------------
- ------------------------
Information Technology consists of the delivery of personal computer services,
including procurement and configuration of personal computers, application
software and related products, network integration, and technical support;
and the design, development, sale and implementation of enterprise-wide
asset tracking software management solutions.
Other includes Pioneer Metal Finishing and Premier Solutions which were sold
during 1997 and Commercial Real Estate which was sold during 1996.
33
SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
DECEMBER 31 1997 1996
- -------------------------------------------------------------------------------- ---------- ----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents.................................................. $ 5,382 $ 12,881
Receivables less allowances ($2,872-1997; $3,088-1996)..................... 187,385 399,403
Inventories................................................................ 198,053 234,543
Other current assets....................................................... 6,459 7,239
---------- ----------
Total current assets..................................................... 397,279 654,066
PROPERTY, PLANT, AND EQUIPMENT................................................. 105,188 118,394
Less accumulated depreciation and amortization............................... (28,221) (39,525)
---------- ----------
Total property, plant, and equipment, net.................................. 76,967 78,869
OTHER ASSETS
Investments................................................................ 185,111 134,844
Notes and other receivables................................................ 21,035 9,038
Excess of cost over net assets of businesses acquired, net................. 26,168 30,286
Other...................................................................... 7,981 28,967
---------- ----------
Total other assets....................................................... 240,295 203,135
---------- ----------
TOTAL ASSETS............................................................. $ 714,541 $ 936,070
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current debt obligations................................................... $ 3,396 $ 8,640
Accounts payable........................................................... 74,025 221,992
Accrued expenses........................................................... 91,857 77,904
---------- ----------
Total current liabilities................................................ 169,278 308,536
LONG-TERM DEBT................................................................. 127,089 252,725
DEFERRED TAXES................................................................. 20,044 18,311
MINORITY INTEREST AND OTHER.................................................... 100,179 85,356
CONVERTIBLE SUBORDINATED NOTES................................................. 90,881 102,131
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.................................................... 49,952 35,566
Retained earnings............................................................ 151,471 129,970
Treasury stock, at cost (1997-1,563,626 shares; 1996-2,231,829 shares)....... (13,339) (7,165)
Net unrealized appreciation on investments................................... 15,706 7,360
---------- ----------
Total shareholders' equity................................................. 207,070 169,011
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................................... $ 714,541 $ 936,070
---------- ----------
---------- ----------
- ------------------------
See notes to consolidated financial statements.
34
SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31 1997 1996 1995
- ----------------------------------------------- ------------ ------------ ------------
REVENUES
Net sales
Product................................... $ 1,724,220 $ 1,856,889 $ 1,380,371
Services.................................. 261,005 205,920 137,369
------------ ------------ ------------
Total net sales............................. 1,985,225 2,062,809 1,517,740
Securities and other gains, net............. 26,857 30,373 18,925
Other income................................ 12,932 8,646 9,132
------------ ------------ ------------
Total revenues............................ 2,025,014 2,101,828 1,545,797
COSTS AND EXPENSES
Cost of sales--product...................... 1,534,310 1,655,893 1,219,055
Cost of sales--services..................... 164,882 137,065 92,277
Selling and service......................... 136,646 128,467 92,998
General and administrative.................. 87,538 84,235 63,493
Depreciation and amortization............... 18,132 20,645 16,927
Interest and financing...................... 22,359 23,916 19,538
Income from equity investments, net......... (417) (1,539) (2,731)
------------ ------------ ------------
Total costs and expenses.................. 1,963,450 2,048,682 1,501,557
------------ ------------ ------------
EARNINGS BEFORE MINORITY INTEREST
AND TAXES ON INCOME........................... 61,564 53,146 44,240
Minority interest........................... (25,727) (19,934) (13,853)
------------ ------------ ------------
EARNINGS BEFORE TAXES ON INCOME................ 35,837 33,212 30,387
Provision for taxes on income............... 14,336 13,285 12,124
------------ ------------ ------------
NET EARNINGS.................................. $ 21,501 $ 19,927 $ 18,263
------------ ------------ ------------
------------ ------------ ------------
EARNINGS PER SHARE
Basic....................................... $ .69 $ .67 $ .63
Diluted..................................... $ .66 $ .61 $ .53
AVERAGE COMMON SHARES OUTSTANDING
Basic....................................... 31,249 29,900 29,052
Diluted..................................... 31,996 31,348 30,734
- ------------------------
See notes to consolidated financial statements.
35
SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31 1997 1996 1995
- -------------------------------------------------------------- ---------- ---------- ---------
OPERATING ACTIVITIES
Net earnings............................................... $ 21,501 $ 19,927 $ 18,263
Adjustments to reconcile net earnings to cash
provided (used) by operating activities
Depreciation and amortization............................ 18,132 20,645 16,927
Deferred income taxes.................................... (2,566) 1,910 7,968
Income from equity investments, net...................... (417) (1,539) (2,731)
Securities and other gains, net.......................... (26,857) (30,373) (18,925)
Minority interest, net................................... 15,436 11,960 8,419
Cash provided (used) by changes in working
capital items
Receivables.............................................. 210,578 (113,719) (30,113)
Inventories.............................................. 35,498 (36,595) (41,298)
Accounts payable, accrued expenses, and other............ (123,759) 38,454 36,310
---------- ---------- ---------
Cash provided (used) by operating activities............... 147,546 (89,330) (5,180)
Proceeds from securities and other gains, net.............. 71,318 53,350 24,952
---------- ---------- ---------
Cash provided (used) by operating activities and
securities and other gains, net............................. 218,864 (35,980) 19,772
OTHER INVESTING ACTIVITIES
Investments and notes acquired, net........................ (78,412) (59,270) (25,707)
Business acquisitions, net of cash acquired................ (6,937) (2,310)
Capital expenditures....................................... (31,314) (49,984) (11,291)
Other, net................................................. 449 (14,197) (8,250)
---------- ---------- ---------
Cash (used) by other investing activities.................... (109,277) (130,388) (47,558)
FINANCING ACTIVITIES
Net borrowings (repayments) on revolving
credit facilities.......................................... (117,766) 27,131 22,934
Net borrowings (repayments) on term debt................... (168) 24,165 (1,576)
Issuance of convertible subordinated notes, net............ 112,109
Repurchase of company common stock......................... (9,488) (33)
Issuance of company common stock........................... 5,819 5,210 3,771
Issuance of subsidiary common stock........................ 4,517 3,367 2,097
---------- ---------- ---------
Cash provided (used) by financing activities................. (117,086) 171,982 27,193
---------- ---------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.............. (7,499) 5,614 (593)
Cash and cash equivalents--beginning of year................. 12,881 7,267 7,860
---------- ---------- ---------
CASH AND CASH EQUIVALENTS--END OF YEAR....................... $ 5,382 $ 12,881 $ 7,267
---------- ---------- ---------
---------- ---------- ---------
- ------------------------
See notes to consolidated financial statements.
36
SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
NET
COMMON STOCK ADDITIONAL TREASURY STOCK UNREALIZED
---------------------- PAID-IN RETAINED --------------------- APPRECIATION ON
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT INVESTMENTS
---------- ---------- --------- --------- ---------- --------- ---------------
BALANCE--DECEMBER 31, 1994............... 32,799,342 $ 3,280 $ 23,482 $ 91,780 4,348,788 $ (13,228) $ 5,233
Net earnings........................... 18,263
Stock options exercised, net........... 981 (918,160) 2,790
Repurchase of common stock............. 4,200 (33)
Subsidiaries' equity transactions...... (3,754)
Net change in unrealized
appreciation on investments.......... 25,515
---------- ---------- --------- --------- ---------- --------- ---------
BALANCE--DECEMBER 31, 1995............... 32,799,342 3,280 20,709 110,043 3,434,828 (10,471) 30,748
Net earnings........................... 19,927
Stock options exercised, net........... 3,323 (759,011) 1,887
Conversion of convertible 11,364 (443,988) 1,419
subordinated notes...................
Subsidiaries' equity transactions...... 170
Net change in unrealized
appreciation on investments.......... (23,388)
---------- ---------- --------- --------- ---------- --------- ---------
BALANCE--DECEMBER 31, 1996............... 32,799,342 3,280 35,566 129,970 2,231,829 (7,165) 7,360
Net earnings........................... 21,501
Stock options exercised, net........... 3,784 (670,649) 2,035
Repurchase of common stock............. 390,577 (9,488)
Conversion of convertible
subordinated notes................... 9,371 (388,131) 1,279
Subsidiaries' equity transactions...... 871
Net change in unrealized
appreciation on investments.......... 8,346
---------- ---------- --------- --------- ---------- --------- ---------
BALANCE--DECEMBER 31, 1997.............. 32,799,342 $ 3,280 $ 49,952 $ 151,471 1,563,626 $ (13,339) $ 15,706
---------- ---------- --------- --------- ---------- --------- ---------
- ------------------------
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE COMPANY-The Company is engaged in the business of
identifying, acquiring interests in, and developing partnership companies,
most of which are engaged in information technology businesses, broadly
defined to include all activities related to the acquisition, processing, and
dissemination of information and related technology and services to improve
business and personal productivity. The most significant of the Company's
partnership companies are engaged in the delivery of personal computer
services, including procurement and configuration of personal computers,
application software and related products, network integration, and technical
support. In addition, partnership companies in the information technology
industry are engaged in outsourcing and the development, sale, and
implementation of strategic business software and services, imaging equipment
and software, multimedia technology and services, and telecommunications
technology.
PRINCIPLES OF CONSOLIDATION-The Consolidated Financial Statements include the
accounts of the Company and its majority-owned subsidiaries, primarily
CompuCom Systems, Inc. and Tangram Enterprise Solutions, Inc. The effect of
adjustments to the Company's carrying values of these subsidiaries resulting
from their underlying equity transactions is included in the Company's
Additional Paid-in Capital. Investments in companies owned 50% or less, in
which significant influence is exercised, are accounted for on the equity
method of accounting. Significant influence is presumed at a 20% ownership
level; however, the Company applies the equity method for certain companies
in which it owns less than 20% because it exerts significant influence
through representation on those companies' Boards of Directors and other
means. Certain investments accounted for on the cost method are classified as
available-for-sale and are recorded at fair value. The related net unrealized
appreciation of these investments of $15.7 million and $7.4 million, which is
net of
37
taxes of $8.1 million and $3.8 million, is recorded as a separate component
of Shareholders' Equity at December 31, 1997 and 1996, respectively. All
other investments are stated at the lower of cost or net realizable value.
The Company continually evaluates investments for indications of impairment
based on the market value of each investment relative to cost, financial
condition, near-term prospects of the investment, and other relative factors.
All material intercompany accounts and transactions have been eliminated.
In 1997, the Company sold its Pioneer Metal Finishing division and all of
the assets of Premier Solutions Ltd. and, in 1996, the Company sold its
commercial real estate operations. As a result, these entities are only included
in the Company's Consolidated Financial Statements through their respective sale
dates.
ACCOUNTING ESTIMATES-The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS-The Company considers all highly liquid
instruments with an original maturity of 90 days or less at the time of
purchase to be cash equivalents. Included in cash and cash equivalents at
December 31, 1996 is approximately $7.1 million of investments in
institutional money market accounts.
ACCOUNTS RECEIVABLE SECURITIZATIONS-In 1997, CompuCom adopted Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS 125),
which establishes accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based on
consistent application of a financial components approach that focuses on
control. (See Note 3)
INVENTORIES, primarily finished goods, are stated at the lower of average
cost or market. The Company continually assesses the appropriateness of the
inventory valuations considering obsolete, slow-moving, and non-salable
inventory.
PROPERTY, PLANT, AND EQUIPMENT are carried at cost less accumulated
depreciation and amortization. Included in property, plant, and equipment was
$57.7 million and $56.1 million of land, buildings, and improvements and $47.5
million and $62.3 million of machinery and equipment at December 31, 1997 and
1996, respectively. The provision for depreciation and amortization is based
on the estimated useful lives of the assets (buildings and improvements-3 to
33 years; machinery and equipment-3 to 12 years) and is computed primarily
on the straight-line method.
EXCESS OF COST OVER NET ASSETS OF BUSINESSES ACQUIRED is amortized on a
straight-line basis primarily over 7 to 10 years. Accumulated amortization at
December 31, 1997 and 1996 was $24.0 million and $17.8 million, respectively.
The Company continually evaluates goodwill for indications of impairment
based on the forecasted undiscounted cash flow from the related business
activity (including possible proceeds from a sale of the business). The
amount by which the Company's carrying value exceeds its share of the
underlying net assets of equity investees is amortized on a straight-line
basis which adjusts the Company's share of the investees' earnings or losses.
TAXES ON INCOME are reduced by allowable tax credits. Deferred taxes are
accounted for using the asset and liability method of accounting for income
taxes. Under this method, deferred taxes are recognized for the tax
consequences of "temporary differences" by applying enacted statutory tax
rates applicable to future years to differences between the financial
statement carrying amounts and the tax basis of existing assets and
liabilities.
FINANCIAL INSTRUMENTS-The Company's financial instruments, principally cash,
accounts receivable, accounts payable, and accrued expenses, are carried at
cost which approximates fair value due to the short-term maturity of these
instruments. The Company's long-term debt is carried at cost which
approximates fair value as the debt bears interest at rates approximating
current market rates. At December 31, 1997, the market value of the Company's
Convertible Subordinated Notes was approximately $104 million based on quoted
market prices.
EARNINGS PER SHARE-At December 31, 1997, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128), which
supersedes Accounting Principles Board Opinion No. 15, "Earnings Per Share"
(APB 15), and requires companies to present basic and diluted earnings per
share (EPS), instead of primary and fully diluted EPS previously
required. All EPS amounts have been restated in accordance with SFAS 128.
(See Note 7)
EPS is computed on net earnings using the weighted-average number of
common shares outstanding during each year. Dilutive EPS includes common
stock equivalents (unless anti-dilutive) which would arise from exercise of
stock options and conversion of other convertible securities and is adjusted,
if applicable, for the effect on net earnings of such transactions. Dilutive
EPS calculations adjust net earnings for the dilutive effect of common stock
equivalents and convertible securities issued by the Company's public
investees.
REVENUE RECOGNITION--Product sales are generally recognized upon shipment
with provisions made for anticipated returns, which historically have been
immaterial. Services sales are generally recognized when the service is
rendered or ratably if performed over a service contract period.
VENDOR PROGRAMS--CompuCom receives volume incentives and rebates from certain
manufacturers related to sales of certain products which are recorded as a
reduction of cost of sales when earned. CompuCom also receives manufacturer
reimbursements for certain training, promotional, and marketing activities
that offset the expenses incurred by CompuCom.
STOCK-BASED COMPENSATION--The Company applies Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) for stock
options and other stock-based awards while disclosing pro forma net earnings
and net earnings per share as if the fair value method had been applied in
accordance with Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123). (See Note 8)
38
2. INVESTMENTS
The following summarizes the Company's investments at December 31, 1997
and 1996 (in thousands). Investments are classified according to the
applicable accounting method at December 31, 1997. Market value reflects the
price of publicly-traded securities at the close of business on December 31
of each year. Unrealized appreciation reflects the net excess of market value
over carrying value of publicly-traded securities classified as
available-for-sale.
1997 1996
----------------------- ----------------------
CARRYING MARKET CARRYING MARKET
DECEMBER 31 VALUE VALUE VALUE VALUE
- ----------------------------------------- ----------- ---------- ---------- ----------
Equity Investees (voting %)
Cambridge (16%)........................... $ 24,679 $ 371,394 $ 15,340 $ 316,620
ChromaVision (20%)........................ 4,689 30,044 3,056
Coherent (32%)............................ 14,799 135,008 10,206 94,445
OAO (29%)................................. 13,887 43,716 10,132
Sanchez (25%)............................. 7,196 89,068 4,346 22,799
USDATA (24%).............................. 7,194 13,325 6,664 14,410
Non-public companies...................... 45,339 24,644
----------- ----------
117,783 74,388
Brandywine Realty Trust................... 8,519 13,851 8,519 9,695
Diamond................................... 1,526 14,717 1,769
Integrated Systems Consulting Group....... 1,891 7,785 1,891 9,770
National Media............................ 2,035 1,563 2,035 7,790
Sybase.................................... 4,407 2,967 13,733 9,059
Other public companies.................... 432 1,723 989 2,005
Unrealized appreciation................... 23,796 11,152
Non-public companies...................... 24,722 20,368
----------- ----------
$ 185,111 $ 134,844
----------- ----------
----------- ----------
The following summarized financial information for investees accounted for
on the equity method of accounting at December 31, 1997 has been compiled from
the financial statements of the respective investees and reflects certain
historical adjustments (in thousands):
BALANCE SHEETS
DECEMBER 31 1997 1996
- -------------------------------------------- ---------- ----------
Current assets.............................. $ 409,867 $ 265,771
Non-current assets.......................... 157,278 101,639
---------- ----------
Total assets................................ $ 567,145 $ 367,410
---------- ----------
---------- ----------
Current liabilities......................... $ 179,691 $ 131,030
Non-current liabilities..................... 27,388 17,480
Shareholders' equity........................ 360,066 218,900
---------- ----------
Total liabilities and equity................ $ 567,145 $ 367,410
---------- ----------
---------- ----------
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31 1997 1996 1995
- -------------------------------------------- ---------- ---------- ----------
Net Sales
Public companies.......................... $ 615,716 $ 426,800 $ 302,974
Non-public companies
RMS................................... 90,946 83,811 93,688
DocuCorp.............................. 40,834 32,171 24,570
MultiGen.............................. 11,205 8,071 7,860
Other................................. 46,481 28,188 22,411
---------- ---------- ----------
$ 805,182 $ 579,041 $ 451,503
---------- ---------- ----------
---------- ---------- ----------
Net Income.................................. $ 30,365 $ 23,911 $ 21,080
---------- ---------- ----------
---------- ---------- ----------
39
Average cost is generally used to compute securities and other gains.
Securities and other gains are net of related costs, charges incurred in the
disposition of the investments, and provisions for other investments and
notes. The following summarizes significant pre-tax gains from securities and
other gains (in millions):
YEAR ENDED DECEMBER 31 1997 1996 1995
- -------------------------------------------- --------- --------- ---------
Cambridge................................... $ 18.8 $ 18.6 $ 0.7
Coherent.................................... 15.1 5.5
Premier..................................... 6.3
Diamond..................................... 5.4
ChromaVision................................ 3.9
Pioneer..................................... 3.4
Venture Funds............................... 2.3 .2 3.4
Sanchez..................................... 5.3
Sybase...................................... (3.0) (4.5)
Other....................................... (10.2) (4.3) 9.3
--------- --------- ---------
$ 26.9 $ 30.4 $ 18.9
--------- --------- ---------
--------- --------- ---------
Securities and other gains in 1997 include the results of the open market
sales of a portion of the Company's interest in Cambridge, the sale of shares
of Diamond and ChromaVision in rights offerings to the Company's
shareholders, distributions from the Company's associated venture funds, and
the sale of Premier. Also in 1997, the Company sold its Pioneer Metal
Finishing division to the management group at Pioneer for a combination of
cash, subordinated notes and assumed obligations. The Company recorded a gain
of $3.4 million and deferred an additional gain pending collection of the
notes from the management group and resolution of certain ongoing obligations
of the Company with respect to Pioneer. Partially offsetting these 1997 gains
was a write-down of the Company's holdings in Sybase due to the other than
temporary decline in the market price of that stock, charges incurred in the
disposition of investments, and provisions for other investments and notes.
Securities and other gains in 1996 included the results of the open
market sales of a portion of the Company's interests in Coherent and
Cambridge and the sale of shares of Integrated Systems Consulting Group and
Sanchez in rights offerings to the Company's shareholders. Securities and
other gains in 1996 also included the sale of the Company's remaining
interest in Gandalf, the Company's share of CompuCom's gain from the sale of
substantially all of its holdings in PC Service Source, and the sale of the
Company's commercial real estate operations. Partially offsetting these gains
was a write-down of the Company's holdings in Sybase due to the other than
temporary decline in the market price of that stock. Securities and other
gains in 1995 included the open market sales of the Company's remaining
interest in Novell, the open market sales of a portion of its interests in
Coherent and Gandalf, and distributions from the Company's associated venture
funds. Partially offsetting the 1996 and 1995 securities and other gains were
charges incurred in the disposition of investments and provisions for other
investments and notes.
3. DEBT
The following is a summary of long-term debt (in thousands):
DECEMBER 31 1997 1996
- ---------------------------------------------------- ---------- -----------
Parent Company and Other Recourse Debt
Revolving credit facilities......................... $ 22,200
Pioneer Metal Finishing............................. $ 11,870
Other............................................... 7,822 4,281
---------- ----------
30,022 16,151
Subsidiary Debt (Non-Recourse to Parent)
CompuCom............................................ 100,425 239,946
Premier Solutions................................... 4,912
Other............................................... 38 356
---------- ----------
100,463 245,214
---------- ----------
Total debt.......................................... 130,485 261,365
Current debt obligations............................ (3,396) (8,640)
---------- ----------
Long-term debt...................................... $ 127,089 $ 252,725
---------- ----------
---------- ----------
In 1997, the Company amended its bank revolving credit facility which
increased the borrowing availability under this facility from $100 million to
$150 million, reduced the interest rate of borrowings on LIBOR traunches by .5%
to LIBOR plus 1.25%, and extended the maturity to May 2001. The bank revolving
credit facility is secured by certain equity securities the Company holds of its
publicly-traded partnership companies, including CompuCom. The bank revolving
credit facility bears interest at the prime rate and/or, at the Company's
option, at LIBOR (approximately 5.7% at December 31, 1997) plus 1.25% and is
subject to a commitment fee of .25% on the unused portion. At December 31, 1997,
$6.1 million is outstanding under the bank revolving credit facility. The
Company borrowed a maximum of $15.8 million and $67.5 million during 1997 and
1996, respectively. The Company is increasing the availability under the bank
revolving credit facility to $200 million in the first half of 1998.
The Company had aggregate indebtedness of $16.1 million under revolving
credit facilities to certain partnership companies as of December 31, 1997.
These facilities are payable on demand, and bear interest at the Company's
effective borrowing rate less .75%. The Company has the intent and ability, if
necessary, to repay these facilities with proceeds from its bank revolving
credit facility; accordingly, they are classified as long-term.
40
CompuCom has $325 million of separate, independent financing arrangements
which are secured by certain assets of CompuCom and consist of a $125 million
working capital facility, a $175 million Receivables Securitization Facility
("Securitization Facility"), and a $25 million real estate loan (collectively,
the "credit agreements"). In 1997, CompuCom amended its credit agreements,
increasing the availability under its Securitization Facility to $175 million
from $100 million and reducing the working capital facility to $125 million
from $200 million. The interest rate on the working capital facility and the
real estate loan is LIBOR plus .75%, subject to adjustment based on certain
performance criteria.
Under the terms of CompuCom's Securitization Facility, CompuCom sells, on a
revolving basis, an interest in a portion of its accounts receivable. During
1997, the Securitization Facility was amended such that the sale of its
receivables is required to be accounted for in accordance with SFAS 125.
CompuCom is retained as servicer of the receivables; however, the cost to
service the receivables is not material. The interest rate applicable to the
Securitization Facility is based upon the bank's commercial paper rate (4.95% at
December 31, 1997) plus 55 basis points. Discounts associated with the sale of
receivables totaled $4.7 million for 1997 and are included in "Interest and
financing" in the Consolidated Statements of Operations.
In 1997, CompuCom extended the maturity of its credit agreements to November
2002, except for the $25 million real estate loan which is due in quarterly
installments beginning April 1999. CompuCom is currently evaluating other
permanent financing options for the real estate loan. Of the $325 million of
availability, $272 million was utilized at December 31, 1997 (including $175
million under the off-balance sheet Securitization Facility).
The credit facilities of the Company and CompuCom generally require some or
all of the following: the maintenance of specified levels of tangible net worth,
debt to tangible net worth and net earnings, specified interest coverage ratios,
and limitations on the amount available for dividends, capital expenditures,
investments, and third party guarantees. The aggregate net assets of
subsidiaries which are restricted and unavailable for dividends at December 31,
1997 is approximately $107 million.
Aggregate maturities of long-term debt during future years are (in
millions): $3.4-1998; $1.9-1999; $4.3-2000; $30.5-2001; $84.4-2002 and
$6.0-thereafter.
Interest paid in 1997, 1996, and 1995 was $21.9 million, $22.0 million, and
$19.2 million, respectively, of which $5.8 million and $3.4 million in 1997 and
1996, respectively, related to the Company's Convertible Subordinated Notes and
$1.1 million and $2.0 million in 1996 and 1995, respectively, related to
commercial real estate debt.
4. CONVERTIBLE SUBORDINATED NOTES
In February 1996, the Company issued $115 million of 6% Convertible
Subordinated Notes ("Notes") due February 1, 2006. The Notes are convertible
into the Company's Common Stock at $28.985 per share. Interest is payable
semi-annually. The Notes are redeemable in whole or in part at the option of the
Company on or after February 2, 1999 for a maximum of 104% of face value
depending on the date of redemption and subject to certain restrictions.
In November 1996 and February 1997, approximately $12.9 million and $11.3
million of Notes, respectively, were converted into 443,988 and 388,131
shares, respectively, of the Company's Common Stock. The Company recorded in
Shareholders' Equity the principal amount of the converted debt along with
forfeited interest and a proportionate share of the related unamortized
deferred charges. In February 1998, approximately $18.5 million of Notes were
converted into 639,500 shares of the Company's Common Stock.
5. LEASES
The Company conducts a portion of its operations in leased facilities and
leases machinery and equipment under leases expiring at various dates to 2004.
Future minimum lease payments under non-cancelable operating leases with
initial or remaining terms of one year or more at December 31, 1997 are (in
millions): $8.8-1998; $7.8-1999; $5.7-2000; $3.7-2001; $2.0-2002 and
$3.1-thereafter.
Total rental expense under operating leases was $10.2 million, $14.5
million, and $8.9 million in 1997, 1996, and 1995, respectively.
6. INCOME TAXES
The provision for income taxes is comprised of the following (in thousands):
YEAR ENDED DECEMBER 31 1997 1996 1995
- ------------------------------------------------------- --------- --------- ---------
Current................................................. $ 16,902 $ 11,375 $ 4,156
Deferred............................................... (2,566) 1,910 7,968
--------- --------- ---------
--------- --------- ---------
$ 14,336 $ 13,285 $ 12,124
State taxes on income included above................... $ 2,235 $ 1,607 $ 1,248
--------- --------- ---------
--------- --------- ---------
Total income tax expense differed from the amounts computed by applying the
U.S. Federal income tax rate of 35% to earnings before income taxes as a result
of the following:
YEAR ENDED DECEMBER 31 1997 1996 1995
- -------------------------------------------------------- --------- --------- ---------
Statutory tax provision................................. 35.0% 35.0% 35.0%
Increase (decrease) in taxes resulting from:
Non-deductible goodwill amortization................. 3.4 4.1 3.9
Book/tax basis difference on securities sold......... (.9) (.2)
State taxes, net of federal tax benefit.............. 4.1 3.1 2.7
Income taxed at rates other than statutory rate...... (2.5) (1.3) (1.5)
---- ---- ----
40.0% 40.0% 39.9%
---- ---- ----
---- ---- ----
41
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are
presented below (in thousands):
1997 1996
- ----------------------------------------------------------- ---------- ----------
Deferred tax assets:
Subsidiary/investee carrying values..................... $ 3,539 $ 1,292
Accounts receivable allowances.......................... 1,034 806
Inventories, reserves, and tax capitalized costs........ 5,141 6,694
Other................................................... 2,522 1,768
---------- ---------
Gross deferred tax assets................................. 12,236 10,560
Less valuation allowance................................ (1,600) (1,600)
---------- ---------
Deferred tax assets....................................... 10,636 8,960
---------- ---------
---------- ---------
Deferred tax liabilities:
Subsidiary/investee carrying values..................... (11,522) (9,371)
Accelerated depreciation................................ (4,521) (4,760)
Unrealized appreciation on investments.................. (8,091) (3,792)
Other................................................... (6,546) (9,348)
---------- ---------
Deferred tax liabilities.................................. (30,680) (27,271)
---------- ---------
Net deferred tax liabilities.............................. $ (20,044) $ (18,311)
---------- ---------
---------- ---------
The valuation allowance relates to the uncertainty surrounding the
realization of tax benefits attributable to the difference between the book
basis and tax basis of certain of the Company's investments. Tax benefits
recognized in the future relating to the valuation allowance for deferred tax
assets as of December 31, 1997 will be reported as an income tax benefit in the
Consolidated Statements of Operations.
Income taxes paid were $13.5 million, $18.4 million, and $10.9 million in
1997, 1996, and 1995, respectively.
The Company has not recognized a deferred tax liability for the difference
between the book basis and tax basis of its investment in the common stock of
certain of its subsidiaries (such difference relates primarily to unremitted
earnings of the subsidiaries) because the Company does not expect this basis
difference to become subject to tax at the parent level. The Company believes it
can implement certain tax strategies to recover its investment in these
subsidiaries tax-free.
7. EARNINGS PER SHARE
The calculations of earnings per share (EPS) were (in
thousands except per share amounts):
YEAR ENDED DECEMBER 31 1997 1996 1995
- ----------------------------------------------------------- ---------- --------- ---------
Basic EPS
Net earnings.............................................. $ 21,501 $ 19,927 $ 18,263
Average common shares outstanding....................... 31,249 29,900 29,052
Basic EPS................................................. $ .69 $ .67 $ .63
--------- --------- ---------
Diluted EPS
Net earnings.............................................. $ 21,501 $ 19,927 $ 18,263
Adjustment (a)............................................ (328) (779) (1,937)
--------- --------- ---------
Adjusted net earnings..................................... 21,173 19,148 16,326
Average common shares outstanding......................... 31,249 29,900 29,052
Effect of dilutive options................................ 747 1,448 1,682
--------- --------- ---------
Average number of common shares assuming dilution......... 31,996 31,348 30,734
Diluted EPS............................................... $ .66 $ .61 $ .53
--------- --------- ---------
- ------------------------
(a) Net earnings are adjusted for the dilutive effect of public investee common
stock equivalents and convertible securities.
Options to purchase approximately 502,000, 91,000, and 527,000 shares of
Common Stock at an average price of $32.56, $35.07, and $22.71 per share at
December 31, 1997, 1996, and 1995, respectively, were anti-dilutive and are not
included in the calculations of diluted EPS because the options' exercise price
was greater than the average market price of common shares for each respective
period. Shares issuable upon the conversion of the Company's Convertible
Subordinated Notes (See Note 4) at December 31, 1997 and 1996 were anti-dilutive
and are not included in the calculations of diluted EPS.
From March 1997 through February 1998, the Company repurchased $10.3 million
of its Common Stock in the open market at prices ranging from $17.69 to $31.63
and is authorized to purchase up to an additional $20 million.
8. STOCK-BASED COMPENSATION
Options may be granted to Company employees, directors, and consultants
under various stock option plans. Generally, outstanding options vest over
periods not exceeding four years after the date of grant and expire eight years
after the date of grant. To the extent allowable, all grants are incentive stock
options. All options granted under the plans to date have been at prices which
have been equal to the fair market value at the date of grant. At December 31,
1997, the Company reserved approximately 2.5 million shares of Common Stock for
possible future issuance under its stock option plans. Several subsidiaries also
maintain stock option plans for their employees and directors.
42
Option activity under the Company's plans is summarized below (in thousands
except per share amounts):
1997 1996 1995
-------------------------- ------------------------ -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
----------- ------------- ----------- ----------- -------- ----------
Outstanding at beginning of year......... 2,078 $ 10.82 2,702 $ 7.11 3,104 $ 3.16
Options granted.......................... 350 31.59 190 32.96 527 22.71
Options exercised........................ (673) 4.56 (774) 2.86 (919) 2.73
Options canceled......................... (18) 22.88 (40) 19.24 (10) 3.93
----- ------ ----- ----------- -------- ---------
Outstanding at end of year............... 1,737 $ 17.58 2,078 $ 10.82 2,702 $ 7.11
----- ------ ----- ----------- -------- ---------
Options exercisable at year-end.......... 867 1,150 1,220
Shares available for future grant........ 807 1,139 1,255
----- ------ ----- -------
The following summarizes information about the Company's stock options
outstanding at December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- ----------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE EXERCISABLE EXERCISE
(IN THOUSANDS) (IN YEARS) PRICE (IN THOUSANDS) PRICE
- ---------------------------- -------------- ------------------- ----------- ---------------- ------------
$ 2.04 -- $ 3.58 305 2.9 $ 2.71 305 $ 2.71
3.92 -- 5.75 426 4.2 4.40 269 4.38
21.00 -- 22.00 228 5.8 21.63 130 21.64
23.50 -- 26.13 276 6.2 23.79 125 23.50
29.25 -- 39.88 502 7.5 32.56 38 33.66
--
--------- ----- --- ------ --- ------
$ 2.04 -- $ 39.88 1,737 5.4 $ 17.58 867 $ 10.43
-- --------- ----- --- ------ --- ------
-- --------- ----- --- ------ --- ------
The Company, its subsidiaries, and its investees accounted for on the equity
method apply APB 25 and related interpretations in accounting for stock
option plans. Had compensation cost been recognized consistent with SFAS 123,
the Company's consolidated net earnings and earnings per share would have
been reduced to the pro forma amounts indicated below (in thousands except
per share amounts):
YEAR ENDED DECEMBER 31 1997 1996 1995
- ----------------------------------------- --------- --------- ----------
Consolidated net earnings
As reported........................ $ 21,501 $ 19,927 $ 18,263
Pro forma.......................... $ 17,314 $ 15,986 $ 16,799
Earnings per share
Basic
As reported........................ $ .69 $ .67 $ .63
Pro forma.......................... $ .55 $ .53 $ .58
Diluted
As reported........................ $ .66 $ .61 $ .53
Pro forma.......................... $ .53 $ .48 $ .48
Per share weighted-average fair
value of stock options issued on
date of grant............................ $ 14.97 $ 14.64 $ 9.83
--------- --------- ---------
--------- --------- ---------
The following range of assumptions were used by the Company, its
subsidiaries, and its investees accounted for on the equity method to
determine the fair value of stock options granted in 1997, 1996, and 1995
using the Black-Scholes option-pricing model:
SUBSIDIARIES
AND
COMPANY INVESTEES
- --------------------------------------- --------------- ---------------
Dividend yield.......................... 0% 0%
Expected volatility.................... 40% to 45% 30% to 64%
Average expected option life........... 5 years 3-1/2 to 6 years
Risk-free interest rate................ 5.4% to 6.8% 5.4% to 7.1%
--------------- ---------------
The full impact of calculating compensation cost for stock options under
SFAS 123 is not reflected in the pro forma consolidated net earnings amounts
presented above because compensation cost is reflected over an option's vesting
period and compensation cost for options granted prior to January 1, 1995 is not
considered.
43
9. PARENT COMPANY FINANCIAL INFORMATION
Condensed Financial Information is provided to reflect the results of
operations and financial position of the "Parent Company", or the Company
without the effect of consolidating its less than wholly-owned subsidiaries. The
Company presents complete Condensed Financial Information in Schedule I to its
Form 10- K.
The following summarizes the Parent Company Balance Sheets of Safeguard
Scientifics, Inc. and its wholly-owned subsidiaries (in thousands). These Parent
Company Balance Sheets differ from the Consolidated Balance Sheets due to the
exclusion of the assets and liabilities of the Company's less than wholly-owned
subsidiaries, primarily CompuCom and Tangram, with the carrying values of these
companies included in "Investments".
BALANCE SHEETS
DECEMBER 31 1997 1996
- ----------------------------------------------------- ---------- ----------
Assets
Current assets..................................... $ 11,710 $ 30,681
Investments........................................ 310,877 241,490
Other.............................................. 37,567 45,542
---------- ----------
Total assets......................................... $ 360,154 $ 317,713
---------- ----------
---------- ----------
Liabilities & Shareholders' Equity
Current liabilities................................ $ 18,525 $ 21,992
Long-term debt..................................... 29,689 12,591
Other liabilities.................................. 13,989 11,988
Convertible subordinated notes..................... 90,881 102,131
Shareholders' equity............................... 207,070 169,011
---------- ----------
Total liabilities & shareholders' equity............. $ 360,154 $ 317,713
---------- ----------
---------- ----------
The following summarizes the Company's investments in less than wholly-owned
subsidiaries (in thousands). Market value reflects the price of publicly-traded
securities at the close of business on December 31 of each year.
1997 1996
----------------------- -----------------------
CARRYING MARKET CARRYING MARKET
DECEMBER 31 VALUE VALUE VALUE VALUE
- ----------------------------- ----------- ---------- ----------- ----------
CompuCom..................... $ 122,613 $ 211,504 $ 101,664 $ 267,862
Tangram..................... 3,153 68,570 5,907 62,692
Cambridge................... 24,679 371,394 15,340 316,620
Coherent.................... 14,799 135,008 10,206 94,445
Other public................ 75,572 218,759 64,286 75,528
Other....................... 70,061 44,087
----------- -----------
$ 310,877 $ 241,490
----------- -----------
----------- -----------
The following summarizes the Parent Company Statements of Operations of
Safeguard Scientifics, Inc. and its wholly-owned subsidiaries (in thousands).
1997 includes net sales and cost of sales and operating expenses of $16.0
million and $14.6 million, respectively, related to Pioneer which was sold in
mid-1997. These Parent Company Statements of Operations differ from the
Consolidated Statements of Operations by excluding the revenues and related
costs and expenses of the Company's less than wholly-owned subsidiaries,
primarily CompuCom and Tangram, with the Company's share of the earnings or
losses of these companies reflected in the caption "Equity income, net".
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31 1997 1996 1995
- --------------------------------------------------- --------- --------- ---------
Revenues
Net sales....................................... $ 15,982 $ 30,286 $ 35,628
Securities and other gains, net................. 24,025 26,011 17,464
Other income.................................... 14,223 10,273 9,210
--------- --------- ---------
Total revenues................................ 54,230 66,570 62,302
--------- --------- ---------
--------- --------- ---------
Costs and Expenses
Cost of sales and operating expenses............ 45,389 54,376 54,139
Equity income, net.............................. (14,873) (12,345) (12,655)
--------- --------- ---------
Total costs and expenses...................... 30,516 42,031 41,484
--------- --------- ---------
--------- --------- ---------
Earnings Before Taxes on Income................... 23,714 24,539 20,818
Provision for taxes on income..................... 2,213 4,612 2,555
--------- --------- ---------
Net Earnings...................................... $ 21,501 $ 19,927 $ 18,263
--------- --------- ---------
--------- --------- ---------
10. PREFERRED STOCK
Shares of Preferred Stock, par value $10 a share, are voting and are
issuable in one or more series with rights and preferences as to dividends,
redemption, liquidation, sinking funds, and conversion determined by the Board
of Directors. At December 31, 1997 and 1996, there were 55,423 shares authorized
and none outstanding.
11. COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries are involved in various claims and legal
actions arising in the ordinary course of business. In the opinion of
management, the ultimate disposition of these matters will not have a material
adverse effect on the Company's consolidated financial position or results of
operations.
In connection with certain investments, the Company is contingently
obligated for approximately $40 million in bank loan and other guarantees and
approximately $100 million for possible future investments, including committed
capital to various venture funds and private equity partnerships.
44
The Board of Directors and Shareholders
Safeguard Scientifics, Inc.
Wayne, Pennsylvania
We have audited the accompanying consolidated balance sheets of Safeguard
Scientifics, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, cash flows and shareholders'
equity for each of the years in the three-year period ended December 31, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We did not audit the financial
statements of certain nonsubsidiary investee companies. The Company's investment
in these nonsubsidiary investee companies at December 31, 1997 was $75.8 million
and its equity in earnings of these nonsubsidiary investee companies was $6.0
million for the year ended December 31, 1997. The financial statements of these
nonsubsidiary investee companies were audited by other auditors whose reports
have been furnished to us, and our opinion, insofar as it relates to the amounts
included for these nonsubsidiary investee companies, is based solely on the
reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Safeguard Scientifics, Inc. and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
February 7, 1998
STATEMENT OF MANAGEMENT'S FINANCIAL RESPONSIBILITY
Management has prepared and is responsible for the integrity and objectivity
of the consolidated financial statements and related financial information in
this Annual Report. The statements are prepared in conformity with generally
accepted accounting principles. The financial statements reflect management's
informed judgment and estimation as to the effect of events and transactions
that are accounted for or disclosed.
Management maintains a system of internal control at each business unit.
This system, which undergoes continual evaluation, is designed to provide
reasonable assurance that assets are safeguarded and records are adequate for
the preparation of reliable financial data. In determining the extent of the
system of internal control, management recognizes that the cost should not
exceed the benefits derived. The evaluation of these factors requires estimates
and judgment by management.
KPMG Peat Marwick LLP is engaged to render an opinion as to whether
management's financial statements present fairly, in all material respects,
Safeguard Scientifics, Inc.'s financial condition and operating results in
accordance with generally accepted accounting principles. The scope of their
engagement included a review of the internal control system, tests of the
accounting records, and other auditing procedures to the extent deemed
necessary to render their opinion on the financial statements. Their report
is presented above.
The Audit Committee of the Board of Directors meets with the independent
auditors and management to satisfy itself that they are properly discharging
their responsibilities. The auditors have direct access to the Audit Committee.
Safeguard Scientifics, Inc.
/s/ Michael W. Miles
Michael W. Miles
Senior Vice President and Chief Financial Officer
45
SAFEGUARD SCIENTIFICS, INC.
QUARTERLY FINANCIAL DATA
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
In the opinion of the Company, the following unaudited quarterly data
includes all adjustments (consisting of only normal recurring adjustments)
necessary for a fair presentation of operations for such periods.
QUARTER ENDED
----------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
---------- ---------- ---------- ----------
Net Sales....................................... $ 447,576 $ 502,706 $ 505,312 $ 529,631
After-tax Operating Earnings*................... 2,559 5,437 5,476 7,351
After-tax Securities and Other Gains, Net....... 4,321 4,103 4,010 3,680
Net Earnings.................................... 4,492 5,636 5,265 6,108
Earnings Per Share
Basic......................................... .14 .18 .17 .20
Diluted....................................... .14 .17 .16 .19
1996
Net Sales....................................... $ 430,097 $ 527,442 $ 515,338 $ 589,932
After-tax Operating Earnings*................... 3,308 5,140 2,176 3,040
After-tax Securities and Other Gains, Net....... 3,408 3,767 4,882 6,166
Net Earnings.................................... 3,980 5,408 4,745 5,794
Earnings Per Share
Basic......................................... .13 .18 .16 .19
Diluted....................................... .12 .16 .15 .18
- ------------------------
* Before securities and other gains, net and minority interest.
Net securities and other gains of varying magnitude have been realized in recent
years; prior gains are not necessarily indicative of gains which may be realized
in the future.
Earnings per share calculations for each of the quarters are based on the
weighted average number of shares outstanding in each period. Diluted earnings
per share calculations adjust net earnings for the dilutive effect of public
investee common stock equivalents and convertible securities. Therefore, the sum
of the quarters may not necessarily equal the year-to-date earnings per share.
Sales are typically higher in the fourth quarter of each year, reflecting the
historically stronger fourth quarter results at CompuCom, the Company's largest
subsidiary.
COMMON STOCK DATA
The Company's Common Stock is listed on the New York Stock Exchange (Symbol:
SFE). As of March 9, 1998, there were approximately 24,000 beneficial holders of
the Company's Common Stock. The high and low sale prices reported within each
quarter for the years ended December 31, 1997 and 1996 are as follows:
1997 1996
-------------------- -----------------------
HIGH LOW HIGH LOW
--------- --------- --------- ------------
First Quarter................... $ 32.63 $ 16.88 $ 29.69 $ 21.00
Second Quarter................. 33.00 19.75 47.44 29.56
Third Quarter.................. 32.06 25.00 39.88 26.00
Fourth Quarter................. 36.50 27.50 43.50 27.25
------------------------
The high and low sale prices reported in 1998 through March 9 were $37.44 and
$30.13, respectively, and the last sale price reported on March 9, 1998 was
$36.75.
No cash dividends have been declared in any of the years presented and the
Company has no present intention to declare cash dividends.
46