FORM 10-Q/A
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Amendment No. 1 to
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended March 31, 1995 Commission File Number 000-17577
CENTERCORE, INC.
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(Exact name of registrant as specified in its charter)
Delaware 22-2537194
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(state or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification Number)
110 Summit Drive - Suite 200, Exton, PA 19341
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (610) 524-1905
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities and
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports) and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
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Number of shares outstanding as of June 22, 1995
Common Stock 10,437,326
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<CAPTION>
PART I
CENTERCORE, INC.
Consolidated Balance Sheets
March 31, December 31,
1995 1994
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(unaudited)
<S> <C> <C>
Assets
Current assets
Cash $ 358,100 $ 583,600
Receivables, less allowances ($2,786,900 --1995; $2,865,100 --1994) 4,349,500 5,024,900
Costs and estimated earnings in excess of billings on uncompleted contracts 362,300 292,500
Inventories 827,400 625,700
Income taxes receivable 1,399,500 1,357,900
Other current assets 479,500 231,300
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Total current assets 7,776,300 8,115,900
Net assets of discontinued operations 5,791,400 7,157,300
Plant and equipment
Leasehold improvements 155,400 155,400
Machinery and equipment 847,400 816,900
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1,002,800 972,300
Less accumulated depreciation and amortization (455,100) (385,400)
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Net plant and equipment 547,700 586,900
Other assets
Excess of cost over net assets of businesses acquired 188,500 192,300
Other 630,000 638,300
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Total other assets 818,500 830,600
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$14,933,900 $16,690,700
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Liabilities and Stockholders' Deficit
Current liabilities
Accounts payable $ 5,232,000 $ 5,885,500
Accrued expenses 3,288,500 3,793,500
Billings in excess of costs and estimated earnings on uncompleted contracts 1,180,500 1,419,800
Current debt 8,442,100 8,396,100
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Total current liabilities 18,143,100 19,494,900
Other liabilities 120,200 121,300
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 (12,440,000) (12,036,100)
Treasury stock at cost - 330,000 shares (420,500) (420,500)
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Total stockholders' deficit (4,829,400) (4,425,500)
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$14,933,900 $16,690,700
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See note to consolidated financial statements
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<CAPTION>
CENTERCORE, INC.
Consolidated Statements of Operations
(UNAUDITED)
Three Months Ended
March 31,
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1995 1994
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<S> <C> <C>
Net sales $ 4,187,800 $10,859,900
Cost of goods sold 3,322,500 9,165,700
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Gross profit 865,300 1,694,200
Expenses
Sales and marketing 518,300 898,900
General and administrative 579,400 935,800
Interest 171,500 96,100
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1,269,200 1,930,800
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Loss from continuing operations before income taxes (403,900) (236,600)
Benefit of income taxes (238,100)
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(Loss) earnings from continuing operations (403,900) 1,500
Loss from discontinued operations (509,000)
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Net loss $ (403,900) $ (507,500)
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Loss per share
Continuing operations $(.04) $.00
Discontinued operations (.05)
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Net loss per share $(.04) $(.05)
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Weighted average shares outstanding $10,437,000 $10,437,000
See note to consolidated financial statements
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<CAPTION>
CENTERCORE, INC.
Consolidated Statements of Cash Flows
(unaudited)
Three Months Ended
March 31,
1995 1994
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<S> <C> <C>
Operations
Net Loss $ (403,900) $ (507,500)
Loss from discontinued operations 509,000
Adjustments to reconcile net (loss) to cash from operations
Depreciation and amortization 81,600 107,100
Decrease in deferred taxes (100)
Cash from discontinued operations 1,366,100 384,700
Cash provided by (used in) changes in working capital items
Receivables 675,400 566,400
Inventories (201,700) 62,000
Contracts in progress (309,100) (1,080,500)
Other current assets (248,200) (111,700)
Accounts payable (653,500) (284,200)
Accrued expenses (505,000) (458,100)
Taxes on Income (41,600) (605,900)
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Cash (used in) operations (239,900) (1,418,800)
Financing Activities
Borrowings of debt 44,900 1,762,100
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Cash provided by financing activities 44,900 1,762,100
Investing Activities
Expenditures for plant and equipment (30,500) (37,000)
Other, net (72,300)
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Cash (used in) investing activities (30,500) (109,300)
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Increase (decrease) in cash (225,500) 234,000
Cash beginning of period 583,600 376,900
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Cash end of period $ 358,100 $ 610,900
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See note to consolidated financial statements
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CENTERCORE, INC.
Note to Consolidated Financial Statements
March 31, 1995
1. The accompanying unaudited interim consolidated financial
statements were prepared in accordance with generally accepted
accounting principles for interim financial information.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. The Summary of Accounting Policies
and Notes to Consolidated Financial Statements included in the 1994
Form 10-K should be read in conjunction with the accompanying
statements. These statements include all adjustments (consisting
only of normal recurring adjustments) which the Company believes are
necessary for a fair presentation of the statements. The interim
operating results are not necessarily indicative of the results for
a full year.
2. Current Debt
Due to the losses incurred in the second half of 1994, the Company
is not in compliance with certain financial convenants 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 July 24, 1995 outstanding
borrowings under the credit facility were $6.5 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), a tax refund of $1.6 million received
in the second quarter of 1995 and cash generated from the discounted
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
Safegaurd.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
In 1995 the Company decided to significantly downsize the Maris
Equipment Company ("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 first 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 sale proceeds to pay down its bank debt which is
expected to close in July 1995. 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 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 for the first quarter of 1995
Net sales for the quarter ended March 31, 1995 were $4.2 million
compared to $10.9 million for the comparable period in 1994. The
Company reported a net loss of $403,900 or $.04 per share, compared to a
net loss of $507,500 in the same period in 1994. From continuing
operations the first quarter of 1995 loss was $403,900 compared to
essentially break-even for the comparable period in 1994.
First quarter 1995 Maris sales were $2.9 million compared to $9.6
million in 1994. Sales in 1994 included $7.1 million in bonded
correctional facility and airport projects which were turned over to the
bonding companies for completion. Maris gross margins as a percentage
of sales increased to 18.9% in the first quarter of 1995 from 15.4% in
the same period in 1994.
First quarter 1995 and 1994 Airo Clean sales were $1.3 million. Airo
Clean gross profits as a percentage of sales increased to 24.4% in the
first quarter of 1995 from 17.1% in the same period in 1994, due to the
Company obtaining price concessions from its vendors and selected
increases in selling prices.
Sales and marketing expenses decreased in the first quarter of 1995
by $380,600 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 has 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. First quarter 1995 general and administrative expenses
decreased $356,400 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 increased in the first quarter of 1995 compare
to the first quarter of 1994. This is the result of the decrease in
sales. 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 first quarter of 1995 was $171,500 compared
to $96,100 for the comparable period in 1994. The increase in 1995
reflects additional debt incurred to satisfy working capital
requirements, fund losses 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 ($8.3 million at March 31, 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. Proceeds from the sale, as well
as a 1995 tax refund of $1.6 million received in the second quarter of
1995, will reduce outstanding bank debt. In anticipation of these
events, the bank continues to extend credit to the Company under the
existing borrowing base formula. Except for a $2.4 million guarantee of
bank debt, Safeguard is not contractually obligated to satisfy any of
the Company's obligations at December 31,1994. 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. Because the Company did not have the required
working capital to complete certain projects it turned to its sureties
to assume and complete certain construction contracts and has extended
its payables to vendors. The principal sureties have agreed to release
the Company from its indemnity obligations to them in return for 300,000
shares of CenterCore stock, cash payments of $495,000 and additional
payments equal to 20% of the Company's net earnings in 1998-2002 up to
$1 million in the aggregate. The Company is negotiating with all
principal vendors to arrange a repayment schedule while continuing 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. Through mid-June of 1995 Safeguard has funded approximately
$500 thousand of this advance.
As a result of the restructurings, 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 $8.4 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.
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 1, 1995 /s/ George E. Mitchell
George E. Mitchell,
President and Chief Executive Officer
