SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
Commission File Number 1-5620
SAFEGUARD SCIENTIFICS, INC.
| 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) |
(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.
Number of shares outstanding as of November 14, 2002
SAFEGUARD SCIENTIFICS, INC.
PART I — FINANCIAL INFORMATION
| Page | |||||
Item 1 - Financial Statements: |
|||||
Consolidated Balance Sheets – September 30, 2002 (unaudited) and December
31, 2001 |
3 | ||||
Consolidated Statements of Operations (unaudited) — Three and Nine Months Ended
September 30, 2002 and 2001 |
4 | ||||
Consolidated Statements of Cash Flows (unaudited) — Nine Months Ended September 30,
2002 and 2001 |
5 | ||||
Notes to Consolidated Financial Statements |
6 | ||||
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations |
28 | ||||
Item 3 - Quantitative and Qualitative Disclosures About Market Risk |
37 | ||||
Item 4 - Controls and Procedures |
37 | ||||
PART II — OTHER INFORMATION |
|||||
Item 1 - Legal Proceedings |
38 | ||||
Item 6 - Exhibits and Reports on Form 8-K |
38 | ||||
Signatures |
39 | ||||
Certifications |
40 | ||||
2
SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED BALANCE SHEETS
| September 30, | December 31, | |||||||||||
| 2002 | 2001 | |||||||||||
| (in thousands except per share data) | ||||||||||||
| (unaudited) | ||||||||||||
ASSETS |
||||||||||||
Current Assets |
||||||||||||
Cash and cash equivalents |
$ | 314,999 | $ | 298,095 | ||||||||
Restricted cash |
3,615 | 8,033 | ||||||||||
Short-term investments |
9,986 | — | ||||||||||
Trading securities |
1,030 | 205,553 | ||||||||||
Accounts receivable, less allowances ($3,211-2002; $3,266-2001) |
169,380 | 157,661 | ||||||||||
Inventories |
39,084 | 32,084 | ||||||||||
Income tax receivable |
— | 62,346 | ||||||||||
Prepaid expenses and other current assets |
12,996 | 14,796 | ||||||||||
Total current assets |
551,090 | 778,568 | ||||||||||
Property and equipment, net |
57,132 | 59,320 | ||||||||||
Ownership interests in and advances to affiliates |
85,494 | 132,940 | ||||||||||
Available-for-sale securities |
3,980 | 4,822 | ||||||||||
Intangible assets, net |
9,351 | 11,670 | ||||||||||
Goodwill, net |
167,370 | 159,540 | ||||||||||
Deferred taxes |
2,756 | 3,240 | ||||||||||
Note receivable — related party |
25,337 | 25,046 | ||||||||||
Other |
17,704 | 17,117 | ||||||||||
Total Assets |
$ | 920,214 | $ | 1,192,263 | ||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||||||
Current Liabilities
|
||||||||||||
Current maturities of long-term debt |
$ | 11,101 | $ | 7,761 | ||||||||
Accounts payable |
142,097 | 125,121 | ||||||||||
Accrued expenses and deferred revenue |
110,344 | 124,438 | ||||||||||
Other current liabilities |
— | 171,804 | ||||||||||
Total current liabilities |
263,542 | 429,124 | ||||||||||
Long-term debt |
14,162 | 20,138 | ||||||||||
Minority interest |
127,610 | 112,746 | ||||||||||
Other long-term liabilities |
12,432 | 11,579 | ||||||||||
Convertible subordinated notes |
200,000 | 200,000 | ||||||||||
Commitments and contingencies
|
||||||||||||
Shareholders’ Equity
|
||||||||||||
Preferred stock, $10.00 par value; 1,000 shares authorized |
— | — | ||||||||||
Common stock, $0.10 par value; 500,000 shares authorized 119,450 and 118,154 shares issued
and outstanding in 2002 and 2001, respectively |
11,945 | 11,815 | ||||||||||
Additional paid-in capital |
738,282 | 743,885 | ||||||||||
Accumulated deficit |
(445,671 | ) | (326,384 | ) | ||||||||
Accumulated other comprehensive income |
2,153 | 1,968 | ||||||||||
Treasury stock, at cost (33 shares-2002; 381 shares-2001) |
(129 | ) | (11,528 | ) | ||||||||
Unamortized deferred compensation |
(4,112 | ) | (1,080 | ) | ||||||||
Total shareholders’ equity |
302,468 | 418,676 | ||||||||||
Total Liabilities and Shareholders’ Equity |
$ | 920,214 | $ | 1,192,263 | ||||||||
See Notes to Consolidated Financial Statements.
3
SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||
| 2002 | 2001 | 2002 | 2001 | |||||||||||||||
| (in thousands except per share data) | ||||||||||||||||||
| (unaudited) | ||||||||||||||||||
Revenue |
||||||||||||||||||
Product sales |
$ | 339,605 | $ | 334,533 | $ | 956,102 | $ | 1,246,747 | ||||||||||
Service sales |
97,233 | 91,195 | 272,793 | 258,018 | ||||||||||||||
Other |
6,218 | 6,836 | 17,817 | 19,798 | ||||||||||||||
Total revenue |
443,056 | 432,564 | 1,246,712 | 1,524,563 | ||||||||||||||
Operating Expenses |
||||||||||||||||||
Cost of sales-product |
308,881 | 301,220 | 866,898 | 1,126,009 | ||||||||||||||
Cost of sales-service |
63,292 | 57,828 | 176,589 | 167,284 | ||||||||||||||
Selling and service |
34,447 | 34,285 | 97,470 | 108,284 | ||||||||||||||
General and administrative |
36,086 | 42,797 | 106,860 | 125,602 | ||||||||||||||
Depreciation and amortization |
7,297 | 10,009 | 21,808 | 29,469 | ||||||||||||||
Total operating expenses |
450,003 | 446,139 | 1,269,625 | 1,556,648 | ||||||||||||||
| (6,947 | ) | (13,575 | ) | (22,913 | ) | (32,085 | ) | |||||||||||
Other loss, net |
(4,476 | ) | (12,860 | ) | (13,404 | ) | (50,435 | ) | ||||||||||
Interest income |
1,539 | 3,007 | 4,820 | 9,981 | ||||||||||||||
Interest and financing expense |
(7,174 | ) | (7,631 | ) | (19,151 | ) | (23,107 | ) | ||||||||||
Loss before income taxes, minority interest, equity loss
and change in accounting principle |
(17,058 | ) | (31,059 | ) | (50,648 | ) | (95,646 | ) | ||||||||||
Income taxes (expense) benefit |
(2,168 | ) | 587 | (5,230 | ) | 6,773 | ||||||||||||
Minority interest |
667 | (671 | ) | (782 | ) | (2,969 | ) | |||||||||||
Equity loss |
(4,691 | ) | (44,940 | ) | (41,237 | ) | (344,456 | ) | ||||||||||
Net loss before change in accounting principle |
(23,250 | ) | (76,083 | ) | (97,897 | ) | (436,298 | ) | ||||||||||
Cumulative effect of change in accounting principle (Note 3) |
— | — | (21,390 | ) | — | |||||||||||||
Net Loss |
$ | (23,250 | ) | $ | (76,083 | ) | $ | (119,287 | ) | $ | (436,298 | ) | ||||||
Basic Loss Per Share: |
||||||||||||||||||
Prior to cumulative effect of change in accounting principle |
$ | (0.20 | ) | $ | (0.65 | ) | $ | (0.83 | ) | $ | (3.72 | ) | ||||||
Cumulative effect of change in accounting principle |
— | — | (0.18 | ) | — | |||||||||||||
| $ | (0.20 | ) | $ | (0.65 | ) | $ | (1.01 | ) | $ | (3.72 | ) | |||||||
Diluted Loss Per Share: |
||||||||||||||||||
Prior to cumulative effect of change in accounting principle |
$ | (0.20 | ) | $ | (0.65 | ) | $ | (0.85 | ) | $ | (3.73 | ) | ||||||
Cumulative effect of change in accounting principle |
— | — | (0.18 | ) | — | |||||||||||||
| $ | (0.20 | ) | $ | (0.65 | ) | $ | (1.03 | ) | $ | (3.73 | ) | |||||||
Weighted Average Shares Outstanding — Basic and Diluted |
117,857 | 117,300 | 117,652 | 117,279 | ||||||||||||||
See Notes to Consolidated Financial Statements.
4
SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Nine Months Ended September 30, | |||||||||
| 2002 | 2001 | ||||||||
| (in thousands) | |||||||||
| (unaudited) | |||||||||
Net cash provided by operating activities |
$ | 29,948 | $ | 186,324 | |||||
Investing Activities |
|||||||||
Proceeds from sales of available-for-sale and trading securities |
13,273 | 18,489 | |||||||
Proceeds from sales of and distributions from affiliates |
18,903 | 86,795 | |||||||
Advances to affiliates |
(4,397 | ) | (13,948 | ) | |||||
Repayment of advances to affiliates |
— | 406 | |||||||
Acquisitions of ownership interests in affiliates and subsidiaries, net of cash acquired |
(23,674 | ) | (64,404 | ) | |||||
Acquisitions by subsidiaries, net of cash acquired |
— | (104,338 | ) | ||||||
Advances to related party |
(590 | ) | (26,609 | ) | |||||
Repayments of advances to related party |
1,530 | 1,940 | |||||||
Decrease (increase) in restricted cash and short-term investments |
(5,568 | ) | 86,728 | ||||||
Capital expenditures |
(8,800 | ) | (21,642 | ) | |||||
Other, net |
(1,668 | ) | (4,420 | ) | |||||
Net cash used in investing activities |
(10,991 | ) | (41,003 | ) | |||||
Financing Activities |
|||||||||
Borrowing on revolving credit facilities |
8,562 | 24,862 | |||||||
Repayments on revolving credit facilities |
(9,313 | ) | (21,983 | ) | |||||
Borrowings on long-term debt |
569 | 5,305 | |||||||
Repayments on long-term debt |
(3,092 | ) | (1,972 | ) | |||||
Issuance of Company common stock, net |
— | 139 | |||||||
Issuance of subsidiary common stock |
1,221 | 488 | |||||||
Net cash (used in) provided by financing activities |
(2,053 | ) | 6,839 | ||||||
Net Increase in Cash and Cash Equivalents |
16,904 | 152,160 | |||||||
Cash and Cash Equivalents at beginning of period |
298,095 | 133,201 | |||||||
Cash and Cash Equivalents at end of period |
$ | 314,999 | $ | 285,361 | |||||
See Notes to Consolidated Financial Statements.
5
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 1. | GENERAL |
The accompanying unaudited interim Consolidated Financial Statements were prepared in accordance with accounting principles generally accepted in the United States of America and the interim financial statements rules and regulations of the SEC. In the opinion of management, these statements include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the Consolidated Financial Statements. The interim operating results are not necessarily indicative of the results for a full year or for any interim period. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations relating to interim financial statements. The Consolidated Financial Statements included in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Company’s Consolidated Financial Statements and Notes thereto included in the Company’s 2001 Annual Report on Form 10-K.
| 2. | BASIS OF PRESENTATION |
The Consolidated Financial Statements include the accounts of the Company and all subsidiaries in which it directly or indirectly owns more than 50% of the outstanding voting securities. The Company’s wholly owned subsidiaries include aligne and Lever8 Solutions (formerly K Consultants and Palarco). The Company’s Consolidated Statements of Operations and Cash Flows also include the following majority-owned subsidiaries:
| For the three months ended September 30, | ||
| 2002 | 2001 | |
| Agari Mediaware | CompuCom Systems | |
| ChromaVision Medical Systems | Pacific Title and Arts Studio (since August 2001) | |
| CompuCom Systems | SOTAS | |
| Mantas | Tangram Enterprise Solutions | |
| Pacific Title and Arts Studio | ||
| Protura | ||
| SOTAS | ||
| Tangram Enterprise Solutions | ||
| For the nine months ended September 30, | ||
| 2002 | 2001 | |
| Agari Mediaware | CompuCom Systems | |
| Aptas (through March 2002) | Pacific Title and Arts Studio (since August 2001) | |
| ChromaVision Medical Systems (since June 2002) | SOTAS | |
| CompuCom Systems | Tangram Enterprise Solutions | |
| Mantas (since April 2002) | ||
| Pacific Title and Arts Studio | ||
| Protura (since January 2002) | ||
| SOTAS | ||
| Tangram Enterprise Solutions | ||
6
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Company’s Consolidated Balance Sheets also include the following majority-owned subsidiaries:
| September 30, 2002 | December 31, 2001 | |
| Agari Mediaware | Agari Mediaware | |
| ChromaVision Medical Systems | Aptas | |
| CompuCom Systems | CompuCom Systems | |
| Mantas | Pacific Title and Arts Studio | |
| Pacific Title and Arts Studio | SOTAS | |
| Protura | Tangram Enterprise Solutions | |
| SOTAS | ||
| Tangram Enterprise Solutions |
| 3. | GOODWILL AND OTHER INTANGIBLE ASSETS |
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets”. SFAS 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized but instead tested for impairment at least annually. SFAS 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values. These provisions of SFAS 142 were adopted by the Company as of January 1, 2002.
Under SFAS No. 142, the Company was required to test all existing goodwill and intangible assets with indefinite useful lives for impairment a