FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended March 31, 1994 Commission File Number 1-5620
SAFEGUARD SCIENTIFICS, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1609753
(state or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
800 The Safeguard Building,435 Devon Park Drive Wayne, PA 19087
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code
(215) 293-0600
Indicate by check mark whether the Registrant (1) has
filed all reports required to be filed by Section 13 or
15 (d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter
period that the registrant was required to file such
reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Number of shares outstanding as of May 13, 1994
Common Stock 4,718,649
PAGE 1 OF PAGES.
EXHIBIT INDEX ON PAGE .
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SAFEGUARD SCIENTIFICS, INC.
QUARTERLY REPORT FORM 10-Q
INDEX
Page
PART I
Financial Statements:
Consolidated Balance Sheets -
March 31, 1994 and December 31, 1993 3
Consolidated Statements of Operations -
Three Months Ended March 31, 1994 and 1993 5
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1994 and 1993 6
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II
Other Information:
Item 4 - Submission of Matters to a Vote of
Security Holders 12
Item 5 - Other Information 12
Item 6 - Exhibits 12
Signatures 13
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SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED BALANCE SHEETS
(000 omitted)
<CAPTION>
March 31 Dec. 31
1994 1993
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets
Cash $ 10,701 $ 9,796
Receivables less allowances
($5,590 - 1994; $5,480 - 1993) 234,984 258,734
Inventories 153,413 131,263
Other current assets 6,016 4,377
Total current assets 405,114 404,170
Property, Plant and Equipment 77,481 79,789
Less accumulated depreciation
and amortization 31,491 33,429
45,990 46,360
Commercial Real Estate 42,435 47,460
Less accumulated depreciation 10,308 11,037
32,127 36,423
Other Assets
Investments 24,102 16,663
Notes and other receivables 4,016 3,329
Excess of cost over net assets of
businesses acquired 24,627 25,434
Other 10,454 10,445
63,199 55,871
$ 546,430 $ 542,824
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SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED BALANCE SHEETS
(000 omitted except shares)
<CAPTION>
March 31 Dec. 31
1994 1993
(UNAUDITED)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current commercial real estate debt $ 11,009 $ 11,038
Current debt obligations 5,634 5,461
Accounts payable 163,629 168,836
Accrued expenses 42,866 50,261
Taxes on income 2,660 3,078
Total current liabilities 225,798 238,674
Long-Term Debt 164,617 156,482
Commercial Real Estate Debt 25,126 29,630
Deferred Taxes 3,343 2,141
Other Liabilities 1,193 1,305
Minority Interest 29,157 25,825
Shareholders' Equity
Common stock, par value $.10 a share
Authorized - 20,000,000 shares
Issued - 5,466,557 shares 547 547
Additional paid-in capital 26,149 26,177
Retained earnings 79,323 76,040
Treasury stock, at cost
779,348 shares-1994 (13,717)
795,348 shares-1993 (13,997)
Net unrealized appreciation on investments 4,894
97,196 88,767
$ 546,430 $ 542,824
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SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(000 omitted)
<CAPTION>
Three Months Ended
March 31
1994 1993
(UNAUDITED)
<S> <C> <C>
Revenues
Information Technology
Microcomputer Systems $ 280,857 $ 200,856
Information Solutions 17,530 14,394
Workstation and Security Systems 17,784 8,810
316,171 224,060
Metal Finishing 7,260 7,051
Commerical Real Estate 1,215 1,232
Net sales 324,646 232,343
Gains on sales of securities, net 2,307 4,630
Other income 1,731 682
Total revenues 328,684 237,655
Costs and Expenses
Cost of sales 267,358 185,449
Selling 29,147 23,532
General and administrative 17,367 13,843
Depreciation and amortization 4,210 4,474
Interest 3,698 3,256
(Income) loss from equity investments (142) 302
Total costs and expenses 321,638 230,856
Earnings Before Minority Interest
and Taxes 7,046 6,799
Minority interest (1,386) (868)
Earnings Before Taxes On Income 5,660 5,931
Provision for taxes on income 2,377 2,595
Net Earnings $ 3,283 $ 3,336
Earnings Per Share
Primary $ .64 $ .63
Fully Diluted .60 .60
Average Common Shares Outstanding
Primary 4,894 5,151
Fully Diluted 4,894 5,172
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SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000 omitted)
<CAPTION>
Three Months Ended
March 31
1994 1993
(UNAUDITED)
<S> <C> <C>
Operating Activities
Net earnings $ 3,283 $ 3,336
Adjustments to reconcile net earnings to
cash from operating activities
Depreciation and amortization 4,210 4,474
Increase in deferred taxes 1,358 2,653
(Income) loss from equity investments (142) 302
Gains on sales of securities, net (2,307) (4,630)
Other, net 811 580
7,213 6,715
Cash provided (used) by changes in working
capital items
Receivables 22,759 12,407
Inventories (26,098) 4,254
Other current assets (1,412) (486)
Accounts payable and accrued expenses (11,180) (26,734)
Taxes on income 236 212
(15,695) (10,347)
Cash (used) by operating activities (8,482) (3,632)
Proceeds from sales of securities, net 2,480 7,786
Cash (used) provided by operating activities
and sales of securities, net (6,002) 4,154
Other Investing Activities
Businesses acquired (1,388)
Investments and notes acquired, net 99 (2,407)
Expenditures for property, plant &
equipment (2,742) (4,196)
Commercial real estate costs (47)
Other, net (1,418) (584)
Cash (used) by other investing activities (4,061) (8,622)
Financing Activities
Net borrowings on revolving credit
facilities 10,998 8,733
Net (repayments) on term debt (2,872) (392)
Stock issued by subsidiary 2,590
Stock options exercised 252 1,013
Cash provided by financing activities 10,968 9,354
Increase in Cash 905 4,886
Cash - beginning of year 9,796 8,903
Cash - End of Period $ 10,701 $ 13,789
</TABLE>
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SAFEGUARD SCIENTIFICS, INC.
Notes to Consolidated Financial Statements
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 1993 Form 10-K should be
read in conjunction with the accompanying statements.
These statements included all adjustments (consisting
only of normal recurring accruals) 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. Inventories, primarily finished goods, are stated
primarily at the lower of average cost or market.
3. Statement of Financial Accounting Standard No. 115,
"Accounting for Certain Investments in Debt and Equity
Securities" is effective for fiscal year 1994. Certain
investments accounted for under the cost method of
accounting are classified as available-for-sale and
recorded at fair value with unrealized holding gains
and losses recorded as a separate component of
shareholders' equity net of tax. The Company adopted
the new accounting rules as of January 1, 1994 and
increased investments and shareholders' equity by
$4.9 million.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Operations Overview
Net sales for the first quarter of 1994 increased 40%
to $324.6 million compared to $232.3 million for the
same period in 1993. After-tax operating earnings
before security gains and minority interest more than
doubled to $2.74 million, or $.56 a share, compared to
$1.22 million, or $.24 a share in the first quarter of
1993. Net income for the first quarter of 1994 was
$3.28 million, or $.64 a share, which approximated 1993
first quarter net income of $3.34 million, or $.63 a
share due to lower discretionary security gains in
1994.
Three Months Ended
March 31
1994 1993
(000's omitted)
[CAPTION]
[S] [C] [C]
Operating earnings before
security gains and minority
interest 2,749 1,220
Security gains 1,338 2,604
Minority interest (804) (488)
Net earnings $3,283 $3,336
The higher sales reflect increases at most of the
operating units with CompuCom accounting for a
majority of the increase. CompuCom's net sales for
the quarter ended March 31, 1994 increased 40% from
the same period in 1993 to $280.9 million. CompuCom's
sales performance reflects an increase in demand by
corporate customers for personal computers,
particularly 486-based machines. As these customers
evaluate their information needs, more and more are
opting for networked personal computer platforms
instead of continuing their mainframe and mini-computer
environments. CompuCom's customer order backlog at
March 31, 1994 increased over 50% compared to
December 31, 1993, primarily as a result of product
availability issues resulting from more frequent
introductions of new products and shortened product
cycles, as well as CompuCom's overall increase in
sales activity. In addition, the weakening financial
condition of certain competitors had a favorable
impact on the CompuCom's net sales. Also contributing
to the sales increase were increased workstation and
security systems sales due to the Maris acquisition.
Operating earnings more than doubled compared to the first
quarter of 1993. CompuCom again accounted for most of
the increase. In addition, the Company recorded a net
gain of $651,000 on the sale of one of its commercial
real estate properties in March.
<PAGE>
Cambridge Technology Partners continued its increase in
sales and earnings by recording an 124% increase in net
earnings on an 84% sales increase compared to the first
quarter of 1993. The Company uses the equity method in
accounting for its approximately 23% ownership interest
of Cambridge.
First quarter 1994 security gains represents a
distribution from the Company's venture capital
fund investments in excess of carrying cost.
Security 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.
The relationship from quarter to quarter of certain
expenses to sales has fluctuated due to CompuCom's
microcomputer sales growth, changes in the sales mix of
the Company's diversified units and the fixed nature of
certain expenses. Because of the relative size and
significance of CompuCom in the consolidated results,
fluctuations in the other business units have tended to
have a minimal impact on the relationship of expenses
to sales. The gross margin percentage was 17.6% for
the first quarter of 1994 compared to 20.2% for the
same period of 1993. This decrease is primarily due to
the significant increase in microcomputer sales. An
increase in microcomputer sales tends to reduce
consolidated margins since microcomputer margins are
lower than margins of other operating units. The gross
margin percentage on microcomputer sales was 12.9% in
the first quarter of 1994 and 14.7% in the first
quarter of 1993. The decrease is due primarily to a
decline in product margins, resulting from pricing
pressures created by intense competition. Future
product margins will be influenced by manufacturers
pricing strategies together with pressures from competition.
However, CompuCom historically has been able to offset
the margin decline (on a percentage of net sales basis)
through the control of operating expenses. Also
contributing to the lower gross margins was the late
1993 Maris acquisition which realized margins of 15.4%
which are comparable to margins realized in the
electrical contracting industry.
Selling expenses for the first quarter of 1994
decreased as a percentage of sales from 10.1% in 1993
to 9.0%. This trend primarily reflects additional
efficiencies in CompuCom's sales process resulting from
increased productivity of its sales force. General and
administrative expenses for the first quarter of 1994
decreased as a percentage of sales from 6.0% in 1993 to
5.3% reflecting improved efficiencies and the fixed
expense components being spread over a larger sales
base.
<PAGE>
Interest expense increased in the first quarter of 1994
compared to the same period in 1993, reflecting
increased working capital needs at CompuCom needed to
support their significant revenue growth partially
offset by lower expense on commercial real estate debt
as a result of refinancing certain properties at more
favorable rates.
Liquidity and Capital Resources
The Company and its two largest majority-owned public
company, operating subsidiaries - CompuCom and
CenterCore - each maintain separate, independent bank
credit facilities with several banks. The subsidiaries
credit facilities are non-recourse to the Company,
except that the Company has provided two separate
guarantees of CenterCore's bank debt, one of which is
limited to a maximum amount of $940,000. The other
guarantee is limited to a maximum amount of $3,700,000.
The subsidiaries bank debt prohibit the payment
of dividends while the credit lines remain outstanding.
The combination of a satisfactory relationship with
several banks, proceeds from the sale of securities,
internally generated funds and in the case of CompuCom,
the equity of the business and the subordinated debt
financing, have been available to satisfy cash
requirements to fund business activities.
On March 31, 1994, the Company purchased $5 million of
newly issued convertible preferred stock from CompuCom
and has committed to purchase an additional $15 million
in 1994 in three quarterly purchases of $5 million
each. In March 1994, CompuCom increased its bank
revolving credit facility from $125 million to $150
million to support the revenue growth. In addition, a
portion of the outstanding principal balance is subject
to a fixed rate of interest at 7.16%; for the remainder
of the unpaid principal CompuCom may elect an interest
rate of LIBOR plus 2.75% per annum subject to
limitations and/or 0.5% above the prime rate per annum.
The maturity was extended to August 1996.
The commitment to purchase the CompuCom preferred stock
together with other projected cash requirements will
require the Company to increase availability under its
line of credit and/or generate cash from sale of
securities. The Company expects its future corporate
liquidity to be generated through internal cash flow,
the sale, as required, of selected minority-owned,
publicly traded securities and increased availability
under the credit facility, which is currently being
negotiated.
<PAGE>
In March 1994, CenterCore entered into a $10 million
revolving credit agreement with a new bank and repaid
the prior credit facilities. Borrowings bear interest
at prime plus 3/4%, with a LIBOR rate option on up to
50% of the outstanding loan balance. All outstanding
principal is due on May 16, 1996, unless renegotiated.
Outstanding borrowings under the revolving credit
facility were $7.1 million at March 31, 1994 compared
to $5.2 million at December 31, 1993. Availability
under the facility was $1.6 million at March 31, 1994.
Total and excess borrowing availability under the credit
facility has decreased, and CenterCore recognizes the
need to conserve cash through efficient management of
both receivables and payables. In an effort to conserve
cash CenterCore has delayed payment of certain payables.
The extension of payables has begun to have an adverse
effect on the supply of materials for Maris to complete
projects, which also has affected Maris' ability to
generate new revenues and collect receivables on projects
in process. CenterCore is not currently in default of its
credit agreement; however, if losses continue at their
current level during the second quarter or if additional
working capital financing to reduce Maris' payables is
not obatined or if cash flow from operations continues to
be insufficient to fund operating needs, CenterCore will
become in default of its credit agreement. The Company
has indicated its willingness, subject to the satisfaction
of certain conditions, to provide up to $1 million of
additional financing to CenterCore, and to provide a
guarantee of up to $3 million of additional third party
financing.
Capital expenditures were $2.7 million for the first
quarter of 1994 and are expected to be in $9.8 million
range for the year with CompuCom representing approximately
$5 million of 1994 expenditures.
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Shareholders on
May 12, 1994. At the meeting, the shareholders voted in
favor of electing as directors the eleven nominees
named in the Proxy Statement dated April 8, 1994. The
number of votes cast for or withheld, were as follows:
I. ELECTION OF DIRECTORS
FOR WITHHELD
Warren V. Musser 3,740,060 47,151
Vincent G. Bell, Jr. 3,717,844 69,367
Robert A. Fox 3,740,460 46,751
Delbert W. Johnson 3,740,460 46,751
Peter Likins, Ph.D. 3,740,260 46,951
Jack L. Messman 3,738,260 48,951
Russell E. Palmer 3,720,544 66,667
John W. Poduska, Sr., Ph.D. 3,740,260 46,951
Heinz Schimmelbusch, Ph.D. 3,739,660 47,551
Hubert J.P. Schoemaker, Ph.D. 3,738,760 48,451
Jean C. Tempel 3,740,260 46,951
Item 5. Other Information
The Company sold its controlling interest in Micro
Decisionware, Inc. to Sybase, Inc. in April, 1994.
Under the terms of the agreement, Micro Decisionware
shareholders, including Safeguard which owned approximately
55% on a fully diluted basis, received shares of Sybase
common stock valued at $25 million. Safeguard also entered
into a consulting and non-compete agreement with Sybase and
received $1.6 million at closing with the potential to
receive an additional $11.9 million based upon the future
performance of Micro Decisionware.
Item 6. Exhibits
(a) Exhibits
Number Description
11 Computation of Primary Earnings Per Share - page 14
(b) No reports on Form 8-K have been filed by the
Registrant during the quarter ended March 31,
1994.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto
duly authorized.
SAFEGUARD SCIENTIFICS, INC.
(Registrant)
Date: May 16, 1994 /s/ Warren V. Musser
Warren V. Musser, Chairman,
President and Chief Executive
Officer
Date: May 16, 1994 /s/ Gerald M. Wilk
Gerald M. Wilk
Vice President
(Principal Financial and
Principal Accounting Officer)
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SAFEGUARD SCIENTIFICS, INC.
EXHIBIT 11 - CALCULATION OF PER SHARE EARNINGS
<CAPTION>
Three Months Ended
March 31
1994 1993
<S> <C> <C>
Primary earnings per common share
Net earnings 3,283 3,336
Adjustment(1) (157) (112)
3,126 3,224
Average common shares outstanding 4,681 5,031
Average common share equivalents 213 120
Average number of common shares and
common share equivalents outstanding 4,894 5,151
Primary earnings per common share $ .64 $ .63
Fully diluted earnings per common share
Primary net earnings 3,283 3,336
Adjustment(1) (344) (251)
2,939 3,085
Average number of common shares
assuming full dilution 4,894 5,172
Fully diluted earnings per common share $ .60 $ .60
(1) Net earnings are adjusted (unless anti-dilutive) for the affect
of options, warrants (primary earnings) and convertible securities
(fully diluted) issued by the Company's public subsidiaries.
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