<PAGE>
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 September 30, 1997 Commission File Number 1-5620
------------------ -------
SAFEGUARD SCIENTIFICS, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1609753
- -------------------------------------------------------------------------------
(state or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
800 The Safeguard Building, 435 Devon Park Drive Wayne, PA 19087
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (610) 293-0600
---------------
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the
Securities and Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
Number of shares outstanding as of November 13, 1997
Common Stock 31,267,341
<PAGE>
SAFEGUARD SCIENTIFICS, INC.
QUARTERLY REPORT FORM 10-Q
INDEX
PART I--FINANCIAL INFORMATION
-----------------------------
<TABLE>
<CAPTION>
Page
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Item 1--Financial Statements:
<S> <C>
Consolidated Balance Sheets--
September 30, 1997 (unaudited) and December 31, 1996................................. 3
Consolidated Statements of Operations (unaudited)--
Three and Nine Months Ended September 30, 1997 and 1996.............................. 4
Consolidated Statements of Cash Flows (unaudited)--
Nine Months Ended September 30, 1997 and 1996........................................ 5
Notes to Consolidated Financial Statements........................................... 6
Item 2--Management's Discussion and Analysis of
Financial Condition and Results of Operations.................................. 11
PART II--OTHER INFORMATION
--------------------------
Item 5--Other Information.............................................................. 18
Item 6--Exhibits and Reports on Form 8-K.............................................. 19
Signatures............................................................................. 20
</TABLE>
2
<PAGE>
SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1997 1996
-------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents........................................................... $ 5,378 $ 12,881
Receivables less allowances ($2,786-1997; $3,088-1996).............................. 240,726 399,403
Inventories......................................................................... 169,840 234,543
Other current assets................................................................ 18,538 7,239
-------------- ------------
Total current assets............................................................ 434,482 654,066
Property, Plant and Equipment....................................................... 108,833 118,394
Less accumulated depreciation and amortization.................................... (30,142) (39,525)
-------------- ------------
78,691 78,869
Other Assets
Investments......................................................................... 166,241 134,844
Notes and other receivables......................................................... 16,361 9,038
Excess of cost over net assets of businesses acquired............................... 27,436 30,286
Other............................................................................... 9,015 28,967
-------------- ------------
219,053 203,135
-------------- ------------
$ 732,226 $ 936,070
-------------- ------------
-------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current debt obligations............................................................ $ 954 $ 8,640
Accounts payable.................................................................... 79,395 221,992
Accrued expenses.................................................................... 89,530 77,904
-------------- ------------
Total current liabilities....................................................... 169,879 308,536
Long Term Debt...................................................................... 157,534 252,725
Deferred Taxes...................................................................... 22,856 18,311
Minority Interest and Other......................................................... 92,698 85,356
Convertible Subordinated Notes...................................................... 90,881 102,131
Shareholders' Equity
Common stock........................................................................ 3,280 3,280
Additional paid-in capital.......................................................... 45,133 35,566
Retained earnings................................................................... 145,363 129,970
Treasury stock, at cost............................................................. (11,619) (7,165)
Net unrealized appreciation on investments.......................................... 16,221 7,360
-------------- ------------
198,378 169,011
-------------- ------------
$ 732,226 $ 936,070
-------------- ------------
-------------- ------------
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------- --------------------------
1997 1996 1997 1996
---------- ---------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues
Net Sales
Product.................................................. $ 439,528 $ 459,379 $ 1,263,196 $ 1,326,516
Services................................................. 65,784 55,959 192,398 146,361
---------- ---------- ------------ ------------
Total net sales.............................................. 505,312 515,338 1,455,594 1,472,877
Securities and other gains, net.............................. 6,683 8,137 20,722 20,096
Other income................................................. 3,206 2,591 8,746 6,429
---------- ---------- ------------ ------------
Total revenues........................................... 515,201 526,066 1,485,062 1,499,402
Costs and Expenses
Cost of sales- product..................................... 393,160 408,622 1,128,157 1,179,057
Cost of sales- services.................................... 40,708 38,281 120,382 98,307
Selling.................................................... 33,637 34,266 99,316 93,567
General and administrative................................. 22,174 21,442 64,859 60,302
Depreciation and amortization.............................. 4,205 5,035 13,760 14,519
Interest and financing..................................... 5,998 6,398 16,321 17,556
(Income) loss from equity investments...................... (491) 258 (909) (1,708)
---------- ---------- ------------ ------------
Total costs and expenses................................. 499,391 514,302 1,441,886 1,461,600
---------- ---------- ------------ ------------
Earnings Before Minority Interest and Taxes.................. 15,810 11,764 43,176 37,802
Minority interest.......................................... (7,035) (3,856) (17,519) (14,247)
---------- ---------- ------------ ------------
Earnings Before Taxes On Income.............................. 8,775 7,908 25,657 23,555
Provision for taxes on income.............................. 3,510 3,163 10,264 9,422
---------- ---------- ------------ ------------
Net Earnings................................................. $ 5,265 $ 4,745 $ 15,393 $ 14,133
---------- ---------- ------------ ------------
---------- ---------- ------------ ------------
Earnings Per Share
Primary.................................................... $ .16 $ .15 $ .47 $ .43
Fully diluted.............................................. $ .16 $ .15 $ .47 $ .43
Average Common Shares Outstanding
Primary.................................................... 31,971 31,284 32,007 31,245
Fully diluted.............................................. 31,971 31,358 32,039 31,343
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
---------------------
<S> <C> <C>
1997 1996
---------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C>
Operating Activities
Net earnings............................................................................... $ 15,393 $ 14,133
Adjustments to reconcile net earnings to cash provided (used) by operating activities
Depreciation and amortization............................................................ 13,760 14,519
Deferred income taxes.................................................................... 2,767 (395)
Income from equity investments........................................................... (909) (1,708)
Securities and other gains, net.......................................................... (20,722) (20,096)
Minority interest, net................................................................... 10,511 8,458
Cash provided (used) by changes in working capital items
Receivables.............................................................................. 149,104 (73,227)
Inventories.............................................................................. 63,711 (57,135)
Accounts payable, accrued expenses and other............................................. (128,084) 34,130
---------- ---------
Cash provided (used) by operating activities............................................... 105,531 (81,321)
Proceeds from securities and other gains, net.............................................. 50,347 45,220
---------- ---------
Cash provided (used) by operating activities and securities and other gains, net........... 155,878 (36,101)
Other Investing Activities
Investments and notes acquired, net........................................................ (50,414) (36,197)
Capital expenditures....................................................................... (26,019) (42,779)
Business acquisitions, net of cash acquired................................................ -- (5,972)
Other, net................................................................................. 1,036 (6,313)
---------- ---------
Cash (used) by other investing activities.................................................. (75,397) (91,261)
Financing Activities
Issuance of subordinated notes, net........................................................ -- 112,109
Net borrowings (repayments) on revolving credit facilities................................. (86,191) 22,114
Net borrowings on term debt................................................................ 685 16,223
Repurchase of Company and subsidiary common stock.......................................... (6,652) --
Issuance of Company and subsidiary common stock............................................ 4,174 2,604
---------- ---------
Cash provided (used) by financing activities............................................... (87,984) 153,050
---------- ---------
(Decrease) Increase in Cash and Cash Equivalents........................................... (7,503) 25,688
Cash and Cash Equivalents--Beginning of Year............................................... 12,881 7,267
---------- ---------
Cash and Cash Equivalents--End of Period................................................... $ 5,378 $ 32,955
---------- ---------
---------- ---------
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
SAFEGUARD SCIENTIFICS, INC.
Notes to Consolidated Financial Statements
September 30, 1997
1. GENERAL
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 1996
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. RECENTLY ISSUED PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard No. 128, Earnings Per Share
(Statement 128). Statement 128 supersedes Accounting Principles Board Opinion
No. 15, Earnings Per Share (APB 15), and specifies the computation,
presentation, and disclosure requirements for earnings per share (EPS) for
entities with publicly held common stock or potential common stock. Statement
128 replaces the presentation of primary and fully diluted EPS with a
presentation of basic and diluted EPS, respectively. Statement 128 is
effective for financial statements for both interim and annual periods ending
after December 15, 1997.
The calculation of EPS under APB 15 and Statement 128 for the three and nine
months ended September 30, 1997 and 1996 was:
<TABLE>
<CAPTION>
APB 15 STATEMENT 128
---------------------------- ------------------------
PRIMARY FULLY DILUTED BASIC DILUTED
----------- --------------- ----- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Three months ended September 30, 1997.......... $ .16 $ .16 $ .17 $ .16
Nine months ended September 30, 1997........... $ .47 $ .47 $ .49 $ .47
Three months ended September 30, 1996.......... $ .15 $ .15 $ .16 $ .15
Nine months ended September 30, 1996........... $ .43 $ .43 $ .48 $ .44
</TABLE>
Also during 1997, the FASB issued pronouncements relating to the
presentation and disclosure of information related to the Company's
capital structure, comprehensive income and segment data. The Company is
required to adopt the provisions relating to capital structure for the year
ending December 31, 1997, if applicable, and the provisions of the other
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.
6
<PAGE>
In October 1997, the Accounting Standards Executive Committee issued a
statement of position 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 Company has reviewed the
statement of position and believes its adoption will not have a material
effect on the Company's financial position or results of operations.
3. SALE OF PREMIER SOLUTIONS LTD. AND PIONEER METAL FINISHING
During the second quarter of 1997, all of the assets of Premier Solutions
Ltd. were sold. Accordingly, Premier is no longer included in the
Company's consolidated operating results and financial position.
In October 1997, the Company completed the sale of the Pioneer Metal
Finishing division to the management group at Pioneer. The total purchase
price was $37 million in cash, subordinated notes and assumed obligations.
This business was transferred to and operated by the management of Pioneer
effective July 1, 1997. Accordingly, Pioneer's results of operations are not
included in the consolidated statement of operations effective July 1, 1997.
At September 30, 1997, the carrying value of Pioneer of approximately $11
million is included in other current assets in the Consolidated Balance
Sheet. The Company expects to record a gain of approximately $3.4 million in
the fourth quarter of 1997.
4. INVESTMENTS
The following summarizes (in thousands) the Company's investments as
of September 30, 1997 and December 31, 1996. Market value reflects the price
of minority-owned publicly-traded securities at the close of business at the
respective date. Unrealized appreciation reflects the net excess of market
value over carrying value of publicly-traded securities classified as
available-for-sale.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31, 1996
---------------------- ---------------------
CARRYING MARKET CARRYING MARKET
VALUE VALUE VALUE VALUE
---------- ---------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Equity Investees
Cambridge Technology................ $ 21,206 $ 317,733 $ 15,340 $ 316,620
ChromaVision........................ 4,582 34,167
Coherent Communications............. 13,306 137,430 10,206 94,445
Sanchez Computer.................... 6,897 48,320 4,346 22,799
USDATA.............................. 5,771 12,546 6,664 14,410
Non-public companies................ 53,157 40,333
---------- ---------
104,919 76,889
Brandywine Realty Trust............... 8,519 12,974 8,519 9,695
Diamond Technology.................... 1,509 14,305
Integrated Systems Consulting Group... 1,891 7,975 1,891 9,770
National Media........................ 2,035 3,043 2,035 7,790
Sybase................................ 4,802 4,372 13,733 9,059
Other public companies................ 1,111 1,776 989 2,005
Unrealized appreciation............... 24,578 11,152
Non-public companies.................. 16,877 19,636
---------- ---------
$ 166,241 $ 134,844
---------- ---------
---------- ---------
</TABLE>
7
<PAGE>
The following summarized financial information for the three and nine
months ended September 30, 1997 and 1996 for investees accounted for on the
equity method of accounting at September 30, 1997 has been compiled from the
financial statements of the respective investees (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
---------------------- ----------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net Sales:
Public companies.................. $ 130,628 $ 92,199 $ 349,840 $ 248,963
---------- ---------- ---------- ----------
Non-public companies:
DocuCorp (a)...................... 10,892 9,255 26,599 22,995
Multigen.......................... 3,023 1,189 8,190 5,601
OAO Technology Solutions (b)...... 20,618 15,948 59,956 40,839
RMS Information Systems........... 20,786 21,103 64,959 62,846
The Sentry Group (c).............. 4,657 4,212 13,782 12,385
All other non-public companies.... 9,397 3,165 23,064 12,467
---------- ---------- ---------- ----------
69,373 54,872 196,550 157,133
---------- ---------- ---------- ----------
$ 200,001 $ 147,071 $ 546,390 $ 406,096
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
- ------------------------
(a) Represents pro forma combined results for DocuCorp, Inc. (formerly Image
Sciences, Inc.) and FormMaker Software, Inc.
(b) OAO Technology Solutions became a public company on October 21, 1997.
(c) Represents pro forma combined results for The Sentry Group, Inc. and Value
Sourcing Group, Inc.
5. DEBT
In June 1997, the Company amended its revolving credit facility,
increasing the borrowing availability under the facility to $150 million from
$100 million, reducing the rate of borrowings on LIBOR traunches by .5% to
LIBOR plus 1.25%, and extending the maturity to May 2001.
Under the terms of CompuCom's $100 million accounts receivable
securitization facility ("Securitization Facility"), CompuCom sells, on a
revolving basis, an interest in a portion of its accounts receivable
("receivables"). During the second quarter, the Securitization Facility was
amended such that the sale, on a revolving basis, of a portion of its
receivables is required to be accounted for as a sale of receivables in
accordance with Statement of Financial Accounting Standard No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". CompuCom is retained as servicer of the
receivables; however, the cost to service the receivables is not material.
The net proceeds resulting from the sale of receivables totaled nearly $100
million which is included in net cash provided by operating activities in the
Consolidated Statements of Cash Flows. These proceeds were used to pay down
long-term debt. Discounts associated with the sale of receivables totaling
$1.7 million and $3.2 million are included in Interest and Financing on the
Consolidated Statements of Operations for the three and nine months ended
September 30, 1997, respectively.
8
<PAGE>
The following summarizes (in thousands) long-term debt at September 30,
1997 and December 31, 1996.
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
<S> <C> <C>
Parent Company and Other Recourse Debt
Notes Payable to Equity Investee Companies....... $ 14,600
Pioneer Metal Finishing.......................... -- $ 11,870
Other............................................ 6,116 4,281
---------- ------------
20,716 16,151
---------- ------------
Subsidiary Debt (Non-Recourse to Parent)
CompuCom......................................... 137,625 239,946
Premier.......................................... -- 4,912
Other............................................ 147 356
---------- ------------
137,772 245,214
---------- ------------
158,488 261,365
Current debt obligations......................... (954) (8,640)
---------- ------------
Long-term debt................................... $157,534 $ 252,725
---------- ------------
---------- ------------
</TABLE>
The Company's notes payable of $14.6 million at September 30, 1997 to
equity investee companies are payable on demand and bear interest at a rate
that varies with the Company's effective borrowing rate. The Company has
the intent and ability, if necessary, to repay these notes with proceeds from
its revolving credit facility; accordingly, they are classified as long-term.
6. CONDENSED FINANCIAL INFORMATION
The following summarizes (in thousands) the condensed consolidated
balance sheets of Safeguard Scientifics, Inc. and its wholly-owned
subsidiaries as of September 30, 1997 and December 31, 1996. These balance
sheets differ from the Consolidated Balance Sheets due to excluding the
assets and liabilities of the Company's less than wholly-owned subsidiaries,
primarily CompuCom and Tangram. The carrying values of these companies, are
included in "Investments in unconsolidated subsidiaries and affiliates."
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets................................................. $ 30,177 $ 30,681
Property, plant and equipment, net............................. 11,402 20,707
Investments in unconsolidated subsidiaries and affiliates...... 284,724 241,490
Notes and other receivables.................................... 21,746 24,835
------------ ------------
$ 348,049 $ 317,713
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities............................................ $ 20,762 $ 21,992
Long term debt................................................. 20,336 12,591
Deferred taxes and other liabilities........................... 17,692 11,988
Convertible subordinated notes................................. 90,881 102,131
Shareholders' equity........................................... 198,378 169,011
------------ ------------
$ 348,049 $ 317,713
------------ ------------
------------ ------------
</TABLE>
* The aggregate market value of the Company's publicly-traded securities
included in "Investments in unconsolidated subsidiaries and affiliates" was
$927 million at September 30, 1997.
9
<PAGE>
The following summarizes (in thousands) the condensed consolidated
statements of operations of Safeguard Scientifics, Inc. and its wholly-owned
subsidiaries for the nine months ended September 30, 1997 and 1996,
respectively. These statements of operations differ from the Consolidated
Statements of Operations due to excluding the revenues and expenses of the
Company's less than wholly-owned subsidiaries. The Company's share of the
earnings or losses of these companies is reflected in the caption "Equity in
income of unconsolidated subsidiaries and affiliates, net of taxes."
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
--------------------
1997 1996
--------- ---------
(UNAUDITED)
<S> <C> <C>
Revenues
Net Sales.......................................... $ 15,982 $ 22,392
Securities and other gains, net.................... 19,869 15,734
Other income....................................... 9,745 7,614
--------- ---------
Total revenues................................... 45,596 45,740
Costs and Expenses
Cost of sales and operating expenses............... 36,614 40,600
Equity in income of unconsolidated subsidiaries
and affiliates, net of taxes..................... (8,587) (10,522)
--------- ---------
Total costs and expenses......................... 28,027 30,078
--------- ---------
Earnings Before Taxes On Income...................... 17,569 15,662
Provision for taxes on income...................... 2,176 1,529
--------- ---------
Net Earnings......................................... $ 15,393 $ 14,133
--------- ---------
--------- ---------
</TABLE>
10
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
GENERAL
The Company's business strategy is the development of information
technology-oriented, entrepreneurially-driven partnership companies to
achieve maximum 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 significantly increases or reduces its investment in any
of the partnership companies, the Company's consolidated net sales and
earnings may fluctuate primarily due to the applicable accounting method used
for recognizing its participation in the operating results of that company.
The net sales 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 Statement of Operations which
adjusts consolidated earnings to reflect only the Company's share of the
earnings or losses of the partnership company. The partnership companies that
are consolidated in 1997 are CompuCom Systems, Inc., Tangram Enterprise
Solutions, Inc., Premier Solutions Ltd. and Pioneer Metal Finishing. Premier
was sold during the second quarter of 1997 and the sale of Pioneer was
completed on October 1, 1997, with an effective date of July 1, 1997. As a
result, Premier and Pioneer are no longer included in the Company's
consolidated operating results.
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. Under the equity method of accounting, a
partnership company's net sales 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" in the Consolidated
Statement of Operations. The number of partnership companies accounted for on
the equity method has increased significantly over the last several years. In
addition, the Company's current strategy is to invest in larger, more mature
companies. Net sales from the Company's equity investments, which are not
included in the Consolidated Statements of Operations, are presented in Note 4
to the consolidated financial statements.
11
<PAGE>
Under either consolidation accounting or the equity method of accounting,
only the Company's share of the earnings or losses of a partnership
company is included in the Consolidated Statement of Operations.
OPERATIONS OVERVIEW
Net sales by industry segment were (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ----------------------
1997 1996 1997 1996
--------- --------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Information Technology
Microcomputer Systems and Services... $501,504 $498,480 $1,424,613 $1,420,569
Information Solutions................ 3,808 9,346 14,999 29,916
--------- --------- ---------- ----------
505,312 507,826 1,439,612 1,450,485
Metal Finishing and Other.............. 7,512 15,982 22,392
--------- --------- ---------- ----------
$505,312 $515,338 $1,455,594 $1,472,877
--------- --------- ---------- ----------
--------- --------- ---------- ----------
</TABLE>
Microcomputer Systems and Services sales increased modestly for the three
months ended September 30, 1997 compared to the same period in 1996 as
CompuCom's 30% increase in services sales more than offset a 3% decrease in
product sales. The increase in services sales reflects CompuCom's continued
focus on expanding this portion of the business by hiring additional service
personnel and growing its higher-end service offerings. Also contributing to
the increase in services sales has been the increase in unit volume of
products sold such as desktops and laptops, many of which create demand for
services such as configuration and installation. Although CompuCom shipped
more desktop, laptop, and server units relative to comparable 1996 periods,
product sales declined slightly for the three ended September 30, 1997
compared to the comparable periods in 1996. This decline was due to certain
manufacturer price reductions, which resulted in a lower average sales price
per unit. Also, CompuCom believes the decrease in product sales can be
attributed to an increase in direct marketers' market share.
Comparability of Information Solutions 1997 net sales and earnings to
1996 is impacted by the sale of Premier during the second quarter of 1997.
Excluding Premier's sales, Information Solutions sales increased for the
three months ended September 30, 1997 compared to the same periods in 1996
due to increased sales at Tangram. Tangram's sales increased 56% for the
months ended September 30, 1997, compared to the same period in 1996
principally due to the signing of two major contracts during the third
quarter of 1997 for the purchase of Tangram's Asset Insight-TM-product.
The Company's increased net earnings in 1997 resulted primarily from
increased operating earnings at CompuCom, and the elimination of losses from
Premier due to its sale, partially offset by increased losses at Tangram and
the elimination of income from Pioneer due to its sale and a decrease in
securities and other gains. Tangram's losses increased in 1997 as a
12
<PAGE>
result of the substantial investment in marketing its Asset Insight-TM-
products and personnel increases to support the Asset Insight-TM- product
rollout Tangram expects to continue to devote substantial resources to
developing sales of Asset Insight-TM-. Despite the lack of growth in
CompuCom's product sales and its continued investment in the service business
and overall infrastructure of the company, CompuCom's net earnings from
operations increased for the three months ended September 30, 1997 compared
to the same periods in 1996 due to the higher margins on services sales and
the results of CompuCom's efforts to control operating expenses. Future
improved profitability at CompuCom will depend on its ability to retain and
hire quality service personnel while effectively managing the utilization of
such personnel, increased focus on providing technical service and support to
customers, product demand, competition, manufacturer product availability and
pricing changes, effective utilization of vendor programs, and control of
operating expenses.
The following summarizes significant pre-tax securities and other gains
(in millions):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ----------------------
1997 1996 1997 1996
--------- --------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Cambridge Technology........................ $6.1 $8.3 $18.1 $18.0
ChromaVision................................ 3.9 3.9
Premier Solutions........................... 6.3
Diamond Technology.......................... 1.1 5.4
Coherent Communications..................... 1.8 11.1
PC Service Source........................... .9 4.4 .9 4.4
Sybase...................................... (4.5) (3.0) (4.5)
Other....................................... (5.3) (1.9) (10.9) (8.9)
--------- --------- ---------- ----------
$6.7 $8.1 $20.7 $20.1
--------- --------- ---------- ----------
--------- --------- ---------- ----------
</TABLE>
Securities and other gains in 1997 included the results of the open
market sales of a portion of the Company's interest in Cambridge, the Diamond
and ChromaVision rights offerings, and the sale of all of the assets of
Premier Solutions Ltd. 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 results of the open market sales of a
portion of the Company's interest in Coherent and Cambridge and the
Integrated Systems Consulting Group rights offering. Securities and other
gains in 1996 also included the Company's share of CompuCom's gain from the
sale of substantially all of its holdings in PC Service Source. Partially
offsetting these 1996 gains was a write-down of Sybase, charges incurred in
the disposition of investments, and provisions for other investments and
notes.
Income from equity investments fluctuates with the Company's ownership
percentage and the operating results of investees accounted for on the equity
method. For the three months ended September 30, 1997, a decrease in the
Company's share of losses of certain private, early stage equity investments,
coupled with continued overall strong performance of the Company's
13
<PAGE>
public equity investments, resulted in improved equity income. The Company's
public equity investments include Cambridge, ChromaVision, Coherent, Sanchez
and USDATA.
Cambridge's earnings increased 69% on 50% revenue growth compared to
the same period in 1996. Demand remains very strong for its services, both
domestically and internationally, as evidenced by 228 new engagements during
the quarter. Cambridge also continued to build its delivery capabilities
through the addition of new staff and offices. Headcount increased by 258
employees in the quarter to 2,521 worldwide, and three offices were added
bringing Cambridge to 41 locations worldwide. Safeguard owns approximately
16% of Cambridge's common stock at September 30, 1997.
ChromaVision reported a net loss of $1.5 million for the three months
ended September 30, 1997, primarily due to relocation costs incurred in
moving ChromaVision to California, the increase in the number of personnel
necessary to support its growth and increased expenditures for research and
development related to clinical trial costs for prenatal screening for Down
syndrome and cancer. ChromaVision completed the rights offering of its common
stock to the Company's shareholders in August 1997. As part of the rights
offering, the Company converted its non-voting preferred shares into
ChromaVision common stock and sold a portion of its common stock holdings.
The Company owns approximately 20% of ChromaVision's common stock at
September 30, 1997.
Coherent's revenues and earnings increased 36% and 46%, respectively,
compared to the same quarter of 1996. All regions showed positive growth, and
the company continued to see growing demand for its new echo canceler product
for the wireless industry, EC-Duo. Also during the quarter, British Telecom
adopted c/mor, Coherent's full featured network management system for echo
cancelers, and Cable and Wireless renewed its worldwide echo canceler supply
contract with Coherent. Safeguard owns approximately 32% of Coherent's common
stock at September 30, 1997.
Diamond reported record revenue and earnings for the quarter, with
revenue increasing 72% over the comparable quarter in 1996. Annualized
revenue per professional reached a record high $375,000 per professional
compared with $256,000 for the same quarter in 1996. In addition, thirty
clients were served during the quarter compared with twenty-five in 1996, and
revenue concentration from its top five clients was reduced from 53% in 1996
to 43% in the current quarter. During the first quarter of 1997, Diamond
completed the rights offering of its common stock to the Company's
shareholders. As a result of the rights offering, the Company owns less than
9% of Diamond's common stock at September 30, 1997. Accordingly, the Company
discontinued accounting for its investment in Diamond on the equity method
subsequent to the first quarter.
Sanchez's reported outstanding operating results during the quarter, with
an 81% increase in revenues. Sanchez continues to see strong interest in its
product around the globe, with current installations in Canada, Malaysia,
Indonesia and Portugal. Safeguard owns approximately 25% of Sanchez's common
stock at September 30, 1997.
14
<PAGE>
USDATA reported a net loss of $1.3 million for the three months ended
September 30, 1997. USDATA continues to make progress in implementing its new
strategy designed to restore profitability and resume revenue growth, and is
currently evaluating each of its business lines and how they fit with its new
strategic direction. Earnings will continue to be impacted by investment
spending required to implement the new strategy. Safeguard owns approximately
21% of USDATA's common stock at September 30, 1997.
The Company's overall gross margin was 14.1% in the three months ended
September 30, 1997, compared to 13.3% for the comparable period in 1996. The
increase is attributable to the increased services sales at CompuCom which
generate higher gross margins relative to product sales. CompuCom's services
gross margin for the three months ended September 30, 1997 was 36.3%, up from
31.1% for the comparable periods in 1996, due to improved utilization of
service personnel. CompuCom's product gross margin for the three months ended
September 30, 1997 was 10.1%, down slightly from 10.2% for the comparable
periods in 1996, due to aggressive pricing to win new business and increased
pricing pressures from competitors. Future product margins at CompuCom will
be influenced by manufacturers' pricing strategies together with competitive
pressures from other resellers and direct marketers in the industry. CompuCom
participates in certain manufacturer-sponsored programs designed to increase
sales of specific products. These programs, excluding volume rebates, are not
material when compared to CompuCom's overall financial results.
Selling and general and administrative expense remained flat for the three
months ended September 30, 1997 compared to 1996 primarily due to the sale of
Pioneer and decreased selling expenses at CompuCom related to decreased
product revenue, partially offset by increased corporate expenses incurred to
support the growing activities of the partnership companies. Selling and
general and administrative expense, in absolute dollars and as a percentage of
sales, increased for the nine months ended September 30, 1997 compared to 1996
primarily due to the costs to manage and expand the growing services business
and maintain the overall infrastructure at CompuCom and increased corporate
expenses incurred to support the growing activities of the partnership
companies. 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.
Interest and financing expense decreased for the three months ended
September 30, l997 compared to the same period in 1996 primarily as a result
of the elimination of interest resulting from the sale of Premier and Pioneer
in 1997 and the Company's commercial real estate operations in 1996, and 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.
Depreciation and amortization expense decreased for the three months
ended September 30, 1997 when compared to the same periods in 1996 primarily
as a result of 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 and enhancements to CompuCom's
information systems.
15
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
In June 1997, the Company amended its 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 credit facility
is secured by the 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 revolving credit
facility. There were no outstanding borrowings under this facility at
September 30, 1997.
In 1997, the Company entered into revolving note agreements with two
equity investee companies whereby the Company may borrow up to $17 million
from the equity investee companies on a revolving basis at the Company's
effective borrowing rate less .75%. At September 30, 1997, $14.6 million was
outstanding under these agreements.
Availability under the Company's $150 million revolving credit facility
and the $17 million equity investee revolving note agreements, proceeds from
the sales from time to time of selected minority-owned 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 up to $20 million of the Company's common stock from time
to time in the open market as authorized by the Company's Board of Directors,
of which $8.3 million was repurchased as of November 13, 1997. In connection
with certain investments, the Company is contingently obligated for
approximately $92 mmillion for possible future commitments including
committed capital to various venture funds and private equity partnerships,
to be funded over the next several years.
CompuCom maintains separate, independent bank credit facilities, which
are nonrecourse to the Company and are secured by substantially all of the
assets of CompuCom. During recent years, CompuCom has utilized operating
earnings, bank credit facilities, equity financing and long-term subordinated
notes to fund its significant sales growth and related operating asset
requirements. At September 30, 1997, CompuCom's financing arrangements
consisted of a $200 million working capital facility, a $100 million
revolving Securitization Facility, and a $25 million real estate loan
(collectively, the credit facilities). At September 30, 1997, approximately
$107 million was outstanding under the working capital facility and the real
estate loan and the Securitization Facility were fully utilized. In November
1997, CompuCom amended its credit facilities, increasing the availability
under its Securitization Facility to $175 million and reducing the working
capital facility to $125 million. The amendment also extended the maturity of
the credit facilities to October 2002, except for the $25 million real estate
loan which was amended to be 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
$100 million of accounts receivable were sold with the proceeds used to pay
down long- term debt.
16
<PAGE>
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 the nine months ended
September 30, 1997 were primarily related to preparing CompuCom's new
headquarters and operations campus for full occupancy. The Company expects
capital expenditures to decline in the fourth quarter as this construction
project is significantly complete. Compucom has entered into an agreement to
sell its former headquarters building. Although the sale is contingent on
certain conditions. Compucom expects the sale to be completed within the next
six months. Upon completion of the sale, Compucom expects to recognize a gain
in the range of $4 to $5 million. Based on the Company's current ownership,
the Company's share of this gain would be in the range of $2 to $2.5 million.
There were no material capital asset purchase commitments at September 30,
1997.
17
<PAGE>
ITEM 5. OTHER INFORMATION
A Rights Offering to the Company's shareholders of 6,720,000 shares of
ChromaVision Medical Systems (ChromaVision) was completed on August 5, 1997.
The Company, which sold approximately 731,000 shares of ChromaVision stock as
part of the offering, owns approximately 20% of ChromaVision's common
stock at September 30, 1997.
A Rights Offering to the Company's shareholders of 6,720,000 shares of
OAO Technology Solutions, Inc. (OAO) common stock commenced on October 21,
1997. The Company will own approximately 29% of OAO's common stock at the
completion of the offering.
18
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Number Description
10.1 Asset Acquisition Agreement dated April 15, 1997
for the sale of certain assets of Premier Solutions
Ltd. to a subsidiary of Sungard Data Systems Inc.
(exhibits omitted) (1)
10.2 Amendment to Safeguard Scientifics, Inc. 1990 Stock
Option Plan dated October 25, 1996 (1)
10.3 Amendment No. 3 to Transfer and Administration
Agreement, dated as of February 1, 1997, among CSI
Funding, Inc., CompuCom Systems, Inc., Enterprise
Funding Corporation and NationsBank N.A. (1)
10.4 First amendment to Credit Agreement, dated
September 19, 1997, between Safeguard Scientifics,
Inc., Safeguard Scientifics (Delaware), Inc. and PNC
Bank, N.A. (exhibits omitted) (2)
10.5 Amendment No. 4 to Transfer and Administration
Agreement, dated as of April 1, 1997, among CSI
Funding, Inc., CompuCom Systems, Inc., Enterprise
Funding Corporation and NationsBank, N.A.
(exhibits omitted) (2)
10.6 Amendment No. 2 to Receivables Purchase Agreement,
dated as of April 1, 1997, among CSI Funding, Inc.,
CompuCom Systems, Inc., Enterprise Funding Corporation
and NationsBank, N.A. (exhibits omitted) (2)
11 Computation of Per Share Earnings *
27 Financial Data Schedule (electronic filing only) *
- ------------------------
* filed herewith
(1) Incorporated by reference from registrant's form 10-Q for the quarter
ended March 31, 1997 dated May 15, 1997 and made a part hereof by such
reference
(2) Incorporated by reference from registrant's form 10-Q for the quarter
ended June 30, 1997 dated August 14, 1997 and made a part hereof by such
reference
(b) On October 1, 1997, the Company filed a Form 8-K disclosing under
Item 5 the sale of its Pioneer Metal Finishing Division to the management
group at Pioneer.
19
<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: November 14, 1997 /s/ Donald R. Caldwell
-------------------------------
Donald R. Caldwell
President and Chief Operating
Officer
Date: November 14, 1997 /s/ Michael W. Miles
-------------------------------
Michael W. Miles
Vice President and Chief
Financial Officer
(Principal Financial and
Principal Accounting Officer)
20
<PAGE>
SAFEGUARD SCIENTIFICS, INC. AND SUBSIDIARIES
EXHIBIT 11--COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------- --------------------
<S> <C> <C> <C> <C>
1997 1996 1997 1996
--------- --------- --------- ---------
Primary earnings per common share.....................................
Net earnings.......................................................... $ 5,265 $ 4,745 $ 15,393 $ 14,133
Adjustment (1)........................................................ (98) (132) (311) (643)
--------- --------- --------- ---------
$ 5,167 $ 4,613 $ 15,082 $ 13,490
--------- --------- --------- ---------
--------- --------- --------- ---------
Average common shares outstanding..................................... 31,291 29,971 31,247 29,744
Average common share equivalents...................................... 680 1,313 760 1,501
--------- --------- --------- ---------
Average number of common shares and common share equivalents
outstanding......................................................... 31,971 31,284 32,007 31,245
--------- --------- --------- ---------
--------- --------- --------- ---------
Primary earnings per common share..................................... $ .16 $ .15 $ .47 $ .43
--------- --------- --------- ---------
--------- --------- --------- ---------
Fully diluted earnings per common share
Net earnings.......................................................... $ 5,265 $ 4,745 $ 15,393 $ 14,133
Adjustment (1)........................................................ (98) (141) (311) (643)
--------- --------- --------- ---------
$ 5,167 $ 4,604 $ 15,082 $ 13,490
--------- --------- --------- ---------
--------- --------- --------- ---------
Average common shares outstanding..................................... 31,291 29,971 31,247 29,744
Average common share equivalents...................................... 680 1,387 792 1,599
--------- --------- --------- ---------
Average number of common shares assuming full dilution................ 31,971 31,358 32,039 31,343
--------- --------- --------- ---------
--------- --------- --------- ---------
Fully diluted earning per common share................................ $ .16 $ .15 $ .47 $ .43
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
- ------------------------
(1) Net earnings are adjusted for the dilutive effect of public subsidiary
common stock equivalents (primary) and convertible securities (fully
diluted).
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet as of September 30, 1997 and the consolidated
statement of operations for the nine months ended September 30, 1997.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 5,378
<SECURITIES> 0
<RECEIVABLES> 243,512
<ALLOWANCES> 2,786
<INVENTORY> 169,840
<CURRENT-ASSETS> 434,482
<PP&E> 108,833
<DEPRECIATION> 30,142
<TOTAL-ASSETS> 732,226
<CURRENT-LIABILITIES> 169,879
<BONDS> 248,415
0
0
<COMMON> 3,280
<OTHER-SE> 195,098
<TOTAL-LIABILITY-AND-EQUITY> 732,226
<SALES> 1,263,196
<TOTAL-REVENUES> 1,485,062
<CGS> 1,128,157
<TOTAL-COSTS> 1,248,539
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,321
<INCOME-PRETAX> 44,085
<INCOME-TAX> 10,264
<INCOME-CONTINUING> 15,393
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,393
<EPS-PRIMARY> .47
<EPS-DILUTED> .47
</TABLE>
