FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended June 30, 1995 Commission File Number 000-17577
CENTERCORE, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-2537194
(state or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification Number)
110 Summit Drive - Suite 200, Exton, PA 19341-2838
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (610) 524-7000
Indicate by check mark whether the Registrant (1) has
filed all reports required to be filed by Section 13 or
15 (d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter
period that the registrant was required to file such
reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No _____________
Number of shares outstanding as of August 8,1995
Common Stock 10,437,326
PART I
CENTERCORE, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
----------- ------------
(unaudited)
<S> <C> <C>
Assets
Current assets
Cash $ 238,300 $ 583,600
Receivables, less allowances ($2,139,500 --1995; $2,864,700 --1994) 6,165,200 5,024,900
Costs and estimated earnings in excess of billings on uncompleted contracts 731,700 292,500
Inventories 746,900 625,700
Income taxes receivable 1,357,900
Other current assets 372,300 231,300
----------- ------------
Total current assets 8,254,400 8,115,900
Net assets of discontinued operations 6,383,800 7,157,300
Plant and equipment
Leasehold improvements 155,400 155,400
Machinery and equipment 877,500 816,900
----------- ------------
1,032,900 972,300
Less accumulated depreciation and amortization (524,700) (385,400)
----------- ------------
Net plant and equipment 508,200 586,900
Other assets
Excess of cost over net assets of businesses acquired 184,900 192,300
Other 611,600 638,300
----------- ------------
Total other assets 796,500 830,600
----------- ------------
$15,942,900 $ 16,690,700
=========== ============
See notes to consolidated financial statements
</TABLE>
CENTERCORE, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
------------ ------------
(unaudited)
<S> <C> <C>
Liabilities and Stockholders' Deficit
Current liabilities
Accounts payable $ 6,559,100 $ 5,885,500
Accrued expenses 4,905,300 3,793,500
Billings in excess of costs and estimated earnings on uncompleted contracts 1,647,400 1,419,800
Current debt 5,925,000 8,396,100
------------ ------------
Total current liabilities 19,036,800 19,494,900
Other liabilities 119,600 121,300
Redeemable convertible preferred stock issued to Safeguard Scientifics, Inc. 1,500,000 1,500,000
Stockholders' deficit
Common stock, $.01 par value; Authorized -- 20,000,000 shares;
Issued - 10,767,326 shares 107,700 107,700
Additional paid-in capital 7,923,400 7,923,400
Accumulated deficit (12,324,100) (12,036,100)
Treasury stock at cost - 330,000 shares (420,500) (420,500)
------------ ------------
Total stockholders' deficit (4,713,500) (4,425,500)
------------ ------------
$ 15,942,900 $ 16,690,700
============ ============
See notes to consolidated financial statements
</TABLE>
CENTERCORE, INC.
Consolidated Statements of Operations
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
-----------------------------
1995 1994
----------- -----------
<S> <C> <C>
Net sales $ 5,755,600 $ 7,999,800
Cost of goods sold 4,384,300 7,218,600
----------- -----------
Gross profit 1,371,300 781,200
Expenses
Sales and marketing 415,100 857,100
General and administrative 633,600 953,200
Interest 206,700 138,800
1,255,400 1,949,100
----------- -----------
Income (loss) from continuing operations before income taxes 115,900 (1,167,900)
Benefit of income taxes (490,000)
----------- -----------
Earnings (loss) from continuing operations 115,900 (677,900)
Loss from discontinued operations (560,100)
----------- -----------
Net earnings (loss) $ 115,900 $(1,238,000)
=========== ===========
Earnings (loss) per share
Continuing operations $ .01 $ (.07)
Discontinued operations .00 (.05)
--- ----
Net earnings (loss) $ .01 $ (.12)
=========== ===========
Weighted average shares outstanding 10,437,000 10,437,000
=========== ===========
See notes to consolidated financial statements
</TABLE>
CENTERCORE, INC.
Consolidated Statements of Operations
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------------
1995 1994
----------- -----------
<S> <C> <C>
Net sales $ 9,943,400 $18,859,700
Cost of goods sold 7,706,800 16,384,300
----------- -----------
Gross profit 2,236,600 2,475,400
Expenses
Sales and marketing 933,400 1,756,000
General and administrative 1,213,000 1,889,000
Interest 378,200 234,900
2,524,600 3,879,900
----------- -----------
Income (loss) from continuing operations before income taxes (288,000) (1,404,500)
Benefit of income taxes (728,100)
----------- -----------
Earnings (loss) from continuing operations (288,000) (676,400)
Loss from discontinued operations (1,069,100)
----------- -----------
Net earnings (loss) $ (288,000) $(1,745,500)
=========== ===========
Earnings (loss) per share
Continuing operations $ (.03) $ (.07)
Discontinued operations .00 $ (.10)
--- ----
Net earnings (loss) $ (.03) $ (.17)
------ ------
Weighted average shares outstanding 10,437,000 10,437,000
See notes to consolidated financial statements
</TABLE>
CENTERCORE, INC.
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-----------------------------
1995 1994
----------- -----------
<S> <C> <C>
Operations
Net loss $ (288,000) $(1,745,500)
Loss from discontinued operations 1,069,100
Adjustments to reconcile net loss to cash from operations
Depreciation and amortization 163,300 217,500
Decrease in deferred taxes (100)
Cash from discontinued operations 773,500 2,738,600
Cash provided by (used in) changes in working capital items
Receivables (1,140,300) 1,454,400
Inventories (121,200) 37,400
Contracts in progress (211,600) (1,456,000)
Other current assets (130,900) (191,100)
Accounts payable 673,600 (2,042,700)
Accrued expenses 1,111,800 (237,200)
Taxes on income 1,357,900 (947,100)
----------- -----------
Cash provided (used) by operations 2,188,100 (1,102,700)
----------- -----------
Financing activities
Borrowings (repayments) of debt (2,472,800) 1,418,600
Cash provided (used) by financing activities (2,472,800) 1,418,600
Investing activities
Expenditures for plant and equipment (60,600) (83,900)
Other, net (90,000)
----------- -----------
Cash (used) in investing activities (60,600) (173,900)
----------- -----------
Increase (decrease) in cash (345,300) 142,000
Cash beginning of year 583,600 376,900
----------- -----------
Cash end of period $ 238,300 $ 518,900
=========== ===========
See notes to consolidated financial statements
</TABLE>
CENTERCORE, INC.
Notes to Consolidated Financial Statements
June 30, 1995
1. Organization and Business Operations
The accompanying unaudited interim consolidated financial
statements were prepared in accordance with generally
accepted accounting principles for interim financial
information. Accordingly, they do not include all of the
information and footnotes required by generally accepted
accounting principles for complete financial statements.
The Summary of Accounting Policies and Notes to Consolidated
Financial Statements included in the 1994 Annual Report
should be read in conjunction with the accompanying
statements. These statements include all adjustments
(consisting only of normal recurring adjustments) which the
Company believes are necessary for a fair presentation of
the statements. The interim operating results are not
necessarily indicative of the results for a full year.
2. Current Debt
Due to the losses incurred in the second half of 1994, the
Company is not in compliance with certain financial
covenants under its bank agreements. The Company has not
been successful in restructuring these covenants, therefore
the formerly long-term bank borrowings has been reflected as
a current obligation as the bank has the ability to request
immediate loan repayment. By mutual agreement with the bank
availability under credit facility has been reduced to $7.7
million in May 1995. As of August 8, 1995 outstanding
borrowings under the credit facility were $6.7 million.
The Company will use the proceeds from the sale of the
furnishings business (estimated to be approximately $2.5
million at closing plus $4.0 million over five years) and
cash generated from the discontinued operation prior to its
sale to reduce the outstanding bank debt. The remaining
bank debt will be supported by working capital of the
Company augmented by guarantees and letters of credit from
Safeguard.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
In 1995 the Company decided to significantly downsize the Maris
business by concentrating on the low voltage security and fire alarm
business and selected smart highway applications. The majority of net
sales in the second quarter of 1994 represented bonded correctional
facility and airport projects that the Company has not pursued in 1995.
Due to declining furniture sales, particularly to the federal
government, the Company has decided to dispose of the furnishings
segment. The Company has agreed to sell the assets of the domestic
furnishings segment including Corel for cash and notes receivable. The
Company will apply the proceeds of the sale, which is expected to close
in August 1995, to pay down its bank debt. The UK furnishings business
will be sold to local management in return for notes receivable. The
Canadian operation was sold to Safeguard Scientifics, Inc. in April
1995. Due to these plans, the furnishings segment has been presented as
a discontinued operation.
Continuing operations reflect the results of the on-going
businesses of Maris Equipment Company ("Maris") and Airo Clean. Due to
the disposition of the furnishings segment and the change in the focus
of the business, comparisons from year to year are not necessarily
meaningful.
Review of continuing operations
Net sales excluding large bonded correctional facility and airport
projects were $5.8 million for the second quarter of 1995 compared to
$3.8 million for the comparable period in 1994. Maris had large bonded
correctional facility and airport projects sales of $4.2 million in the
second quarter of 1994. The Company reported net income from continuing
operations of $115,900 or $.01 a share, versus a net loss of $677,900 or
$.07 a share in 1994. The Company also reported a net loss from
discontinued operations of $560,100 or $.05 a share in 1994.
For the six months ended June 30, 1995, CenterCore had net sales
excluding large bonded correctional facility and airport projects of
$9.9 million compared to $7.6 million for the same period in 1994.
Maris had large bonded correctional facility and airport projects sales
of $11.2 million for the six months ended June 30, 1994. The net loss
from continuing operations was $288,000 or $.03 a share, compared to a
loss of $676,400 or $.07 a share in 1994. The Company also reported a
net loss from discontinued operations of $1,069,100 or $.10 a share for
the six months ended June 30, 1994.
Second quarter 1995 Maris sales excluding large bonded correctional
facility and airport projects were $4.4 million compared to $3.1 million
in 1994. Maris had large bonded correctional facility and airport
projects sales in of $4.2 million in 1994. Maris sales for the six
month period ending June 30, 1995 excluding large bonded correctional
facility and airport projects were $7.2 million compared to $5.7 million
for the same period in 1994. Maris 1994 sales included $11.2 million of
large bonded correctional facility and airport projects for the same six
month period in 1994. Maris gross profits excluding large bonded
correctional facility
and airport projects as a percentage of sales increased to 20.6% in the
second quarter of 1995 from 19.6% in the same period in 1994. Including
large bonded correctional facility and airport projects Maris' gross
profits as a percentage of sales were 8.3% for the second quarter of
1994. For six months ending June 30, 1995, Maris' gross margin
excluding large bonded correctional facility and airport projects was
19.9% compared to 18.3% in 1994. Including large bonded correctional
facility and airport projects Maris' gross margin was 12.3% for six
months ending June 30, 1994.
Second quarter 1995 Airo Clean sales were $1.4 million compared to
$.7 million in 1994. For six months ended June 30, 1995, Airo Clean
sales were $2.7 million compared to $2.0 million in 1994. Airo Clean
gross profits as a percentage of sales increased to 33.9% in the second
quarter of 1995 from 26.6% in the same period in 1994. For the six
month period ending June 30, 1995, Airo Clean's gross margin as a
percentage of sales was 29.3% compared to 20.3% in 1994. Airo Clean's
improved margins can be attributed to selectively increasing its selling
prices, improved manufacturing efficiencies and obtaining price
concessions from its vendors.
Sales and marketing expenses decreased in the second quarter of
1995 by $442,000 compared to 1994 due to cost reductions implemented at
Maris and Airo Clean. Sales efforts at Maris are being concentrated in
expanding the electronic security systems business, which typically has
had higher gross profits than the correctional facility and airport
hardware construction business. The competitive environment and the
difficulty in estimating costs and collecting revenues had adversely
impacted Maris' gross margins on long-term correctional facility and
airport construction projects. The shorter completion cycle coupled
with a less competitive environment has enabled Maris to achieve higher
gross margins in the electronic security systems business. The Company
has elected to concentrate on the electronic security systems business
due to the Company's expertise and the higher potential profits
resulting from the relatively high gross margins.
Marketing efforts at Airo Clean have been focused on promoting the
BioShield and Ultraguard products which are air scrubbing devices for
controlling airborne pathogens and targeted for the health care
industry. Second quarter 1995 general and administrative expenses
decreased $319,600 compared to 1994 due principally to staff reductions
and salary freezes implemented at Maris and Airo Clean. The Company
continues to closely monitor and control costs and recognizes that a
significantly downsized business in 1995 is necessary for survival. As
a percentage of net sales, sales and marketing and general and
administrative expenses decreased slightly in the second quarter of 1995
compare to the second quarter of 1994, as a result of decreased
expenses. The Company believes that additional sales can be achieved
without a proportional increase in business infrastructure. However, it
may be difficult for the Company to increase its sales due to the
Company's recent difficulties and its constrained financial resources.
Interest expense in the second quarter of 1995 was $206,700
compared to $138,800 for the comparable period in 1994. The increase in
1995 reflects additional debt incurred to satisfy working capital
requirements and higher interest rates.
The Company currently is not able to utilize any tax benefits from
the losses incurred. The Company has generated an unrecorded loss carry
forward of approximately $3 million which is available to off-set future
income until the year 2010.
Liquidity and Capital Resources
As a result of significant operating difficulties, the Company has
a severe liquidity problem. The Company is in default of its loan
facility ($5.9 million at June 30, 1995). These defaults cause the debt
to be due upon demand, and, should the lender demand payment, the
Company does not have the resources to satisfy the debt. The Company
has withdrawn from the correctional facility security business and is
undertaking to significantly downsize the business which includes the
sale of the furnishings business unit. The Company applied a $1.6
million tax refund received in the second quarter of 1995 to reduce
outstanding bank debt, and will apply proceeds from the sale of the
furnishings business to further reduce bank debt. As a result, the bank
continues to extend credit to the Company under the existing borrowing
base formula. Except for a $3.9 million guarantee of bank debt,
Safeguard is not contractually obligated to satisfy any of the Company's
obligations at June 30,1995. The Company believes that the combination
of cash received from the sale of the furnishings business, the tax
refund, the guarantee of Safeguard and the working capital assets of the
ongoing business will be sufficient to satisfy/support all of the bank
debt.
The Company has entered into an agreement with the parties from
whom it acquired Maris, to significantly restructure the original
purchase transaction. Under this agreement the seller has agreed to
offset its $3.6 million note receivable from the Company in exchange for
releases from its indemnification liabilities to the Company under the
original asset purchase agreement. The principal sureties have agreed to
release the Company from its indemnity obligations under certain
construction projects in return for 300,000 shares of CenterCore stock,
cash payments of $495,000 and additional payments equal to 20% of Maris'
net earnings in 1998-2002 up to $1 million in the aggregate. The
Company has negotiated with principal vendors and is continuing to
arrange repayment schedules with its vendors to supply the Company with
materials needed to meet current requirements.
Safeguard has agreed to contribute 2 million shares of its
CenterCore common stock to the Company, sell 2.5 million shares of its
CenterCore common stock to CenterCore management, and provide up to $3
million in advances to the Company to address current funding
requirements of the downsized business which will be substantially
utilized by the Company in 1995. Safeguard has funded approximately $2
million of this advance and plans to fund approximately $.4 million to
cover the closings costs of the sale of the furniture division in
August, leaving a balance of $.6 million available to the Company.
As a result of the restructuring, the Company has emerged as a
significantly downsized company. Availability of bonding on jobs will,
at least in the near term, be limited. Bank financing may be available
for limited working capital requirements to augment any advances from
Safeguard. If these sources of funds prove to be inadequate or in the
case of bank financing, unavailable, then the Company will have to seek
additional funds from other investors in order to continue operations.
There can be no assurance that new sources of funds, if required, will
be available. Although the Company believes it will be able to continue
to operate in this new downsized mode, continuation is contingent on the
Company's ability to adequately reduce its cost structure to a point
where it is supported by the new downsized operations.
Item 3 Defaults Upon Senior Securities
The Company has a revolving credit line under a secured bank
credit agreement that expires on May 30, 1996. Availability of
the credit line is subject to borrowing base requirements and
compliance with loan covenants reduced to a maximum of $7.7
million as May 26, 1995. Due to the losses incurred, the Company
is not in compliance with certain financial covenants under its
bank credit agreement. The Company anticipates that it will
continue to be in violation of the provision of the bank debt
agreement unless it is successful in negotiating revised
covenants at a level acceptable to the bank and one that the
Company can realistically maintain which consider the anticipated
future operating results. Since there can be no assurance that
the Company will be successful in restructuring these covenants,
the $5.9 million of formerly long-term bank borrowings have been
reflected as a current obligation as the bank has the ability to
request immediate loan repayment. However, if the bank exercises
its ability to request immediate repayment and does not extend
credit, the Company may be unable to continue to maintain
operations. As of this time, however, the bank continues to
extend credit to the Company under the existing borrowing base
formula.
Item 6. Exhibits
(a) Exhibits
Number Description
27 Financial Data Schedule (electronic filing only)
(b) No reports on Form 8-K have been filed by the Registrant
during the quarter ended June 30, 1995.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
CENTERCORE, INC.
(Registrant)
Date: August 14, 1995 /S/ George E. Mitchell
George E. Mitchell,
President and Chief Executive Officer
Date: August 14, 1995 /S/ Frederick B. Franks III
Frederick B. Franks III,
Vice-President Finance and Treasurer
( Principal Financial and Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
SAFEGUARD SCIENTIFIC, INC.
Exhibit 27 - FINANCIAL DATA SCHEDULE
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1995
AND THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE
MONTHS ENDED JUNE 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<CASH> 283,300
<SECURITIES> 0
<RECEIVABLES> 8,304,700
<ALLOWANCES> 2,139,500
<INVENTORY> 746,900
<CURRENT-ASSETS> 8,254,400
<PP&E> 1,032,900
<DEPRECIATION> 524,700
<TOTAL-ASSETS> 15,942,900
<CURRENT-LIABILITIES> 19,036,800
<BONDS> 0
<COMMON> 107,700
1,500,000
0
<OTHER-SE> (4,821,200)
<TOTAL-LIABILITY-AND-EQUITY> 15,942,900
<SALES> 9,943,400
<TOTAL-REVENUES> 9,943,400
<CGS> 7,706,800
<TOTAL-COSTS> 7,706,800
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 378,200
<INCOME-PRETAX> (288,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> 288,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (288,000)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
