SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended September 30, 2003
Commission File Number 1-5620
SAFEGUARD SCIENTIFICS, INC.
| Pennsylvania (State or other jurisdiction of incorporation or organization) |
23-1609753 (I.R.S. Employer Identification Number) |
|
| 800 The Safeguard Building, 435 Devon Park Drive Wayne, PA (Address of principal executive offices) |
19087 (Zip Code) |
(610) 293-0600
Registrant’s telephone number, including area code
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 þ | No o |
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).
| Yes þ | No o |
Number of shares outstanding as of November 4, 2003
Common Stock 119,333,297
SAFEGUARD SCIENTIFICS, INC.
QUARTERLY REPORT FORM 10-Q
INDEX
| Page | |||||
PART I - FINANCIAL INFORMATION |
|||||
Item 1 - Financial Statements: |
|||||
Consolidated Balance Sheets – September 30, 2003 (unaudited) and December 31, 2002 |
3 | ||||
Consolidated Statements of Operations (unaudited) - Three and Nine Months Ended September 30, 2003
and 2002 |
4 | ||||
Consolidated Statements of Cash Flows (unaudited) - Nine Months Ended September 30, 2003 and 2002 |
5 | ||||
Notes to Consolidated Financial Statements |
6 | ||||
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations |
27 | ||||
Item 3 - Quantitative and Qualitative Disclosures About Market Risk |
38 | ||||
Item 4 - Controls and Procedures |
38 | ||||
PART II - OTHER INFORMATION |
|||||
Item 1 - Legal Proceedings |
39 | ||||
Item 6 - Exhibits and Reports on Form 8-K |
39 | ||||
Signatures |
40 | ||||
2
SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED BALANCE SHEETS
| September 30, | December 31, | |||||||||||
| 2003 | 2002 | |||||||||||
| (in thousands except per share data) | ||||||||||||
| (unaudited) | ||||||||||||
ASSETS |
||||||||||||
Current Assets |
||||||||||||
Cash and cash equivalents |
$ | 292,501 | $ | 254,779 | ||||||||
Restricted cash |
1,019 | 3,634 | ||||||||||
Short-term investments |
5,089 | 9,986 | ||||||||||
Accounts receivable, less allowances ($3,065-2003; $3,523 - 2002) |
135,477 | 179,668 | ||||||||||
Inventories |
36,341 | 30,181 | ||||||||||
Trading securities |
— | 832 | ||||||||||
Prepaid expenses and other current assets |
12,452 | 13,045 | ||||||||||
Total current assets |
482,879 | 492,125 | ||||||||||
Property and equipment, net |
34,674 | 38,610 | ||||||||||
Ownership interests in and advances to affiliates |
56,271 | 74,859 | ||||||||||
Available-for-sale securities |
— | 4,548 | ||||||||||
Intangible assets, net |
13,023 | 18,580 | ||||||||||
Goodwill |
215,019 | 206,815 | ||||||||||
Deferred taxes |
215 | 1,210 | ||||||||||
Note receivable - related party |
12,216 | 14,482 | ||||||||||
Other |
10,711 | 17,437 | ||||||||||
Total Assets |
$ | 825,008 | $ | 868,666 | ||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||||||
Current Liabilities |
||||||||||||
Current maturities of long-term debt |
$ | 14,141 | $ | 11,517 | ||||||||
Accounts payable |
87,506 | 121,793 | ||||||||||
Accrued expenses and deferred revenue |
97,602 | 116,669 | ||||||||||
Total current liabilities |
199,249 | 249,979 | ||||||||||
Long-term debt |
2,771 | 1,998 | ||||||||||
Minority interest |
137,261 | 130,384 | ||||||||||
Other long-term liabilities |
14,723 | 14,032 | ||||||||||
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 shares issued
and outstanding in 2003 and 2002 |
11,945 | 11,945 | ||||||||||
Additional paid-in capital |
738,079 | 738,282 | ||||||||||
Accumulated deficit |
(477,314 | ) | (476,867 | ) | ||||||||
Accumulated other comprehensive income (loss) |
(89 | ) | 2,522 | |||||||||
Treasury stock, at cost (115 shares-2003, 33 shares-2002) |
(399 | ) | (129 | ) | ||||||||
Unamortized deferred compensation |
(1,218 | ) | (3,480 | ) | ||||||||
Total shareholders’ equity |
271,004 | 272,273 | ||||||||||
Total Liabilities and Shareholders’ Equity |
$ | 825,008 | $ | 868,666 | ||||||||
See Notes to Consolidated Financial Statements.
3
SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
| Three Months Ended | Nine Months Ended | ||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||||||||||||
| (in thousands except per share data) | |||||||||||||||||||
| (unaudited) | |||||||||||||||||||
Revenue |
|||||||||||||||||||
Product sales |
$ | 264,376 | $ | 339,605 | $ | 834,491 | $ | 956,102 | |||||||||||
Service sales |
108,774 | 97,233 | 326,782 | 272,793 | |||||||||||||||
Other |
590 | 6,218 | 2,378 | 17,817 | |||||||||||||||
Total revenue |
373,740 | 443,056 | 1,163,651 | 1,246,712 | |||||||||||||||
Operating Expenses |
|||||||||||||||||||
Cost of sales-product |
241,470 | 308,881 | 765,622 | 866,898 | |||||||||||||||
Cost of sales-service |
71,731 | 63,523 | 214,230 | 176,850 | |||||||||||||||
Selling and service |
33,059 | 34,216 | 101,837 | 97,209 | |||||||||||||||
General and administrative |
25,427 | 36,086 | 84,923 | 106,860 | |||||||||||||||
Depreciation and amortization |
7,069 | 7,297 | 23,202 | 21,808 | |||||||||||||||
Total operating expenses |
378,756 | 450,003 | 1,189,814 | 1,269,625 | |||||||||||||||
| (5,016 | ) | (6,947 | ) | (26,163 | ) | (22,913 | ) | ||||||||||||
Other income (loss), net |
31,205 | (4,476 | ) | 48,277 | (13,404 | ) | |||||||||||||
Impairment – related party |
— | — | (659 | ) | — | ||||||||||||||
Interest income |
881 | 2,022 | 2,766 | 6,349 | |||||||||||||||
Interest and financing expense |
(3,429 | ) | (7,657 | ) | (10,350 | ) | (20,680 | ) | |||||||||||
Income (loss) before income taxes, minority interest, equity loss
and change in accounting principle |
23,641 | (17,058 | ) | 13,871 | (50,648 | ) | |||||||||||||
Income taxes |
(1,060 | ) | (2,168 | ) | (3,917 | ) | (5,230 | ) | |||||||||||
Minority interest |
(726 | ) | 667 | (629 | ) | (782 | ) | ||||||||||||
Equity loss |
(3,613 | ) | (4,691 | ) | (9,772 | ) | (41,237 | ) | |||||||||||
Net income (loss) before change in accounting principle |
18,242 | (23,250 | ) | (447 | ) | (97,897 | ) | ||||||||||||
Cumulative effect of change in accounting principle |
— | — | — | (21,390 | ) | ||||||||||||||
Net Income (Loss) |
$ | 18,242 | $ | (23,250 | ) | $ | (447 | ) | $ | (119,287 | ) | ||||||||
Basic Income (Loss) Per Share: |
|||||||||||||||||||
Prior to cumulative effect of change in accounting principle |
$ | 0.15 | $ | (0.20 | ) | $ | 0.00 | $ | (0.83 | ) | |||||||||
Cumulative effect of change in accounting principle |
— | — | — | (0.18 | ) | ||||||||||||||
| $ | 0.15 | $ | (0.20 | ) | $ | 0.00 | $ | (1.01 | ) | ||||||||||
Diluted Income (Loss) Per Share: |
|||||||||||||||||||
Prior to cumulative effect of change in accounting principle |
$ | 0.15 | $ | (0.20 | ) | $ | (0.02 | ) | $ | (0.85 | ) | ||||||||
Cumulative effect of change in accounting principle |
— | — | — | (0.18 | ) | ||||||||||||||
| $ | 0.15 | $ | (0.20 | ) | $ | (0.02 | ) | $ | (1.03 | ) | |||||||||
Weighted Average Shares Outstanding - Basic |
118,580 | 117,857 | 118,365 | 117,652 | |||||||||||||||
- Diluted |
120,622 | 117,857 | 118,365 | 117,652 | |||||||||||||||
See Notes to Consolidated Financial Statements.
4
SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Nine Months Ended September 30, | |||||||||
| 2003 | 2002 | ||||||||
| (in thousands) | |||||||||
| (unaudited) | |||||||||
Net cash (used in) provided by operating activities |
$ | (30,828 | ) | $ | 29,948 | ||||
Investing Activities |
|||||||||
Proceeds from sales of available-for-sale and trading securities |
38,981 | 13,273 | |||||||
Proceeds from sales of and distributions from affiliates |
38,666 | 18,903 | |||||||
Advances to affiliates |
(139 | ) | (4,397 | ) | |||||
Repayment of advances to affiliates |
753 | — | |||||||
Acquisitions of ownership interests in affiliates and subsidiaries, net of cash acquired |
(14,327 | ) | (23,674 | ) | |||||
Advances to related party |
— | (590 | ) | ||||||
Repayments of advances to related party |
1,668 | 1,530 | |||||||
Increase in restricted cash and short-term investments |
(13,073 | ) | (11,598 | ) | |||||
Decrease in restricted cash and short-term investments |
20,585 | 6,030 | |||||||
Capital expenditures |
(10,038 | ) | (8,800 | ) | |||||
Other, net |
(918 | ) | (1,668 | ) | |||||
Net cash provided by (used in) investing activities |
62,158 | (10,991 | ) | ||||||
Financing Activities |
|||||||||
Borrowings on revolving credit facilities |
80,927 | 8,562 | |||||||
Repayments on revolving credit facilities |
(78,296 | ) | (9,313 | ) | |||||
Borrowings on term debt |
3,390 | 569 | |||||||
Repayments on term debt |
(1,614 | ) | (3,092 | ) | |||||
Issuance of Company common stock |
235 | — | |||||||
Issuance of subsidiary common stock |
1,750 | 1,221 | |||||||
Net cash provided by (used in) financing activities |
6,392 | (2,053 | ) | ||||||
Net Increase in Cash and Cash Equivalents |
37,722 | 16,904 | |||||||
Cash and Cash Equivalents at beginning of period |
254,779 | 298,095 | |||||||
Cash and Cash Equivalents at end of period |
$ | 292,501 | $ | 314,999 | |||||
See Notes to Consolidated Financial Statements.
5
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
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 2002 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 Alliance Consulting Group Associates, Inc. (“Alliance Consulting”). Alliance operates on a 51 or 53 – week period ending on the Saturday closest to December 31. The Company and all other subsidiaries operate on a calendar year. Alliance’s third quarter ended on September 27, 2003. The Company’s Consolidated Statements of Operations and Cash Flows also include the following majority-owned subsidiaries:
| For the three months ended September 30, | ||
| 2003 | 2002 | |
| ChromaVision Medical Systems CompuCom Systems Mantas Pacific Title and Arts Studio SOTAS Tangram Enterprise Solutions |
Agari Mediaware ChromaVision Medical Systems CompuCom Systems Mantas Pacific Title and Arts Studio Protura Wireless SOTAS Tangram Enterprise Solutions |
|
| For the nine months ended September 30, | ||
| 2003 | 2002 | |
| Agari Mediaware (Through June 2003) ChromaVision Medical Systems CompuCom Systems Mantas Pacific Title and Arts Studio Protura Wireless (Through June 2003) SOTAS Tangram Enterprise Solutions |
Agari Mediaware Aptas (through March 2002) ChromaVision Medical Systems (Since June 2002) CompuCom Systems Mantas (Since April 2002) Pacific Title and Arts Studio Protura Wireless SOTAS Tangram Enterprise Solutions |
|
6
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
SEPTEMBER 30, 2003
The Company’s Consolidated Balance Sheets also include the following majority-owned subsidiaries at September 30, 2003 and December 31, 2002:
| September 30, 2003 | December 31, 2002 | |
| ChromaVision Medical Systems CompuCom Systems Mantas Pacific Title and Arts Studio SOTAS Tangram Enterprise Solutions |
Agari Mediaware ChromaVision Medical Systems CompuCom Systems Mantas Pacific Title and Arts Studio Protura Wireless SOTAS Tangram Enterprise Solutions |
3. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year presentation.
4. GOODWILL AND OTHER INTANGIBLE ASSETS
Under the transition provisions of SFAS 142, the Company was required to test existing goodwill and intangible assets with indefinite useful lives for impairment as of January 1, 2002. The Company completed the required testing during the second quarter of 2002. As a result, the Company reported a $21.8 million goodwill impairment loss in the Business and IT services reporting unit (a component of the Strategic Initiative segment), arising from the initial application of SFAS 142, which required the carrying amount of goodwill be compared to the fair value. The fair value of that reporting unit was determined by estimating the present value of future cash flows and by reviewing the valuations of comparable public companies.
SFAS 142 requires that goodwill be tested for impairment at least annually. The Company will complete its annual impairment testing in the fourth quarter. Additionally, goodwill is tested on an interim basis if an event or circumstance indicates that it is more likely than not that an impairment loss has been incurred.
The following is a summary of changes in the carrying amount of goodwill by segment:
| Strategic | ||||||||||||||||
| Initiative | Legacy | Total | ||||||||||||||
| Companies | Companies | CompuCom | Segments | |||||||||||||
| (in thousands) | ||||||||||||||||
| (unaudited) | ||||||||||||||||
Balance at December 31, 2002 |
$ | 100,590 | $ | 1,336 | $ | 104,889 | $ | 206,815 | ||||||||
Additions |
3,053 | — | — | 3,053 | ||||||||||||
Purchase Price Adjustments(1) |
5,790 | — | — | 5,790 | ||||||||||||
Deconsolidation |
(718 | ) | 79 | — | (639 | ) | ||||||||||
Balance at September 30, 2003 |
$ | 108,715 | $ | 1,415 | $ | 104,889 | $ | 215,019 | ||||||||
| (1) | As discussed in Note 14, certain purchase price adjustments are not final. The above purchase price adjustments represent activity to complete the final purchase price allocation. |
7
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
SEPTEMBER 30, 2003
Intangible assets with definite useful lives are amortized over their respective estimated useful lives to their estimated residual values. The following table provides a summary of the Company’s intangible assets with definite useful lives:
| September 30, 2003 | ||||||||||||||||
| Gross | ||||||||||||||||
| Amortization | Carrying | Accumulated | ||||||||||||||
| Period | Value | Amortization | Net | |||||||||||||