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 March 31, 2005
Commission File Number 1-5620
SAFEGUARD SCIENTIFICS, INC.
(Exact name of registrant as specified in its charter)
| 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 May 6, 2005:
Common Stock 119,890,738
SAFEGUARD SCIENTIFICS, INC.
QUARTERLY REPORT FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION
2
SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED BALANCE SHEETS
| March 31, | December 31, | |||||||
| 2005 | 2004 | |||||||
| (in thousands except per share data) | ||||||||
| (unaudited) | ||||||||
ASSETS
|
||||||||
Current Assets |
||||||||
Cash and cash equivalents |
$ | 123,096 | $ | 146,874 | ||||
Restricted cash |
605 | 1,119 | ||||||
Marketable securities |
41,001 | 33,555 | ||||||
Restricted marketable securities |
3,744 | 3,771 | ||||||
Accounts receivable, less allowances ($922 - 2005; $1,078 - 2004) |
37,943 | 37,677 | ||||||
Prepaid expenses and other current assets |
9,225 | 8,974 | ||||||
Total current assets |
215,614 | 231,970 | ||||||
Property and equipment, net |
45,817 | 45,135 | ||||||
Ownership interests in and advances to companies |
34,145 | 35,311 | ||||||
Long-term marketable securities |
6,396 | 11,964 | ||||||
Long-term restricted marketable securities |
11,226 | 13,045 | ||||||
Intangible assets, net |
9,809 | 10,855 | ||||||
Goodwill |
93,196 | 93,049 | ||||||
Note receivable — related party |
1,243 | 1,384 | ||||||
Other |
10,984 | 11,099 | ||||||
Total Assets |
$ | 428,430 | $ | 453,812 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||
Current Liabilities |
||||||||
Current
portion of credit line borrowings |
$ | 10,735 | $ | 11,636 | ||||
Current maturities of long-term debt |
3,866 | 3,820 | ||||||
Accounts payable |
8,145 | 6,370 | ||||||
Accrued compensation and benefits |
11,139 | 12,480 | ||||||
Accrued expenses and other current liabilities |
17,178 | 20,909 | ||||||
Deferred revenue |
9,890 | 7,267 | ||||||
Total current liabilities |
60,953 | 62,482 | ||||||
Long-term debt |
9,132 | 11,210 | ||||||
Other long-term liabilities |
12,531 | 11,785 | ||||||
Convertible senior debentures |
150,000 | 150,000 | ||||||
Deferred taxes |
1,195 | 880 | ||||||
Minority interest |
10,017 | 11,652 | ||||||
Commitments and contingencies |
||||||||
Shareholders’ Equity |
||||||||
Preferred stock, $0.10 par value; 1,000 shares authorized |
— | — | ||||||
Common
stock, $0.10 par value; 500,000 shares authorized; 119,893 shares
issued and outstanding in 2005 and 2004 |
11,989 | 11,989 | ||||||
Additional paid-in capital |
750,515 | 750,564 | ||||||
Accumulated deficit |
(581,111 | ) | (565,018 | ) | ||||
Accumulated other comprehensive income |
6,192 | 11,786 | ||||||
Treasury stock, at cost (2 shares-2005) |
(9 | ) | — | |||||
Unamortized deferred compensation |
(2,974 | ) | (3,518 | ) | ||||
Total shareholders’ equity |
184,602 | 205,803 | ||||||
Total Liabilities and Shareholders’ Equity |
$ | 428,430 | $ | 453,812 | ||||
See Notes to Consolidated Financial Statements.
3
SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
| Three Months Ended March 31, | ||||||||
| 2005 | 2004 | |||||||
| (in thousands, except per share data) | ||||||||
| (unaudited) | ||||||||
Revenue Product sales |
$ | 2,031 | $ | 2,241 | ||||
Service sales |
40,813 | 36,756 | ||||||
Total revenue |
42,844 | 38,997 | ||||||
Operating
Expenses Cost of sales — product |
167 | 732 | ||||||
Cost of sales — service |
30,163 | 24,059 | ||||||
Selling, general and administrative |
21,402 | 22,440 | ||||||
Research and development |
2,889 | 3,653 | ||||||
Amortization of intangibles |
1,510 | 1,565 | ||||||
Total operating expenses |
56,131 | 52,449 | ||||||
Operating loss |
(13,287 | ) | (13,452 | ) | ||||
Other income (loss), net |
(9 | ) | 10,479 | |||||
Impairment — related party |
(158 | ) | — | |||||
Interest income |
1,131 | 452 | ||||||
Interest expense |
(1,536 | ) | (3,178 | ) | ||||
Equity loss |
(4,031 | ) | (2,374 | ) | ||||
Minority interest |
1,636 | 2,371 | ||||||
Net loss from continuing operations before income taxes |
(16,254 | ) | (5,702 | ) | ||||
Income tax benefit (expense) |
161 | (40 | ) | |||||
Net loss from continuing operations |
(16,093 | ) | (5,742 | ) | ||||
Net income from discontinued operations |
— | 1,108 | ||||||
Net Loss |
$ | (16,093 | ) | $ | (4,634 | ) | ||
Basic Income (Loss) Per Share: |
||||||||
Loss from continuing operations |
$ | (0.13 | ) | $ | (0.05 | ) | ||
Net income from discontinued operations |
— | 0.01 | ||||||
Net Loss Per Share |
$ | (0.13 | ) | $ | (0.04 | ) | ||
Diluted Income (Loss) Per Share: |
||||||||
Loss from continuing operations |
$ | (0.13 | ) | $ | (0.05 | ) | ||
Net income from discontinued operations |
— | 0.01 | ||||||
Net Loss Per Share |
$ | (0.13 | ) | $ | (0.04 | ) | ||
Shares Used in Computing — Basic and Diluted Income (Loss) Per Share |
120,652 | 119,616 | ||||||
See Notes to Consolidated Financial Statements.
4
SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Three Months Ended March 31, | ||||||||
| 2005 | 2004 | |||||||
| (in thousands) | ||||||||
| (unaudited) | ||||||||
Net cash used in operating activities of continuing operations |
$ | (9,186 | ) | $ | (11,619 | ) | ||
Cash Flows from Investing Activities of Continuing Operations |
||||||||
Proceeds from sales of available-for-sale and trading securities |
— | 4,052 | ||||||
Proceeds from sales of and distributions from companies and funds |
381 | 5,139 | ||||||
Acquisitions of ownership interests in companies, funds and subsidiaries, net of cash acquired |
(2,110 | ) | (120 | ) | ||||
Repayments of advances to related party |
2 | 460 | ||||||
Increase in restricted cash and short-term investments |
(12,015 | ) | (4,095 | ) | ||||
Decrease in restricted cash and short-term investments |
4,575 | 4,191 | ||||||
Capital expenditures |
(2,920 | ) | (2,591 | ) | ||||
Capitalized software costs |
— | (2,188 | ) | |||||
Reduction in cash due to deconsolidation of consolidated company |
— | (954 | ) | |||||
Other, net |
23 | (69 | ) | |||||
Net cash provided by (used in) investing activities of continuing operations |
(12,064 | ) | 3,825 | |||||
Cash Flows from Financing Activities of Continuing Operations |
||||||||
Proceeds from convertible senior debentures |
— | 150,000 | ||||||
Payments of offering costs on convertible senior debentures |
— | (4,812 | ) | |||||
Repurchase of convertible subordinated notes |
— | (86,500 | ) | |||||
Payments of costs to repurchase convertible subordinated notes |
— | (438 | ) | |||||
Borrowings on revolving credit facilities |
20,306 | 15,344 | ||||||
Repayments on revolving credit facilities |
(22,701 | ) | (12,962 | ) | ||||
Borrowings on term debt |
442 | 518 | ||||||
Repayments on term debt |
(980 | ) | (1,330 | ) | ||||
Decrease in restricted cash |
508 | — | ||||||
Issuance of Company common stock, net |
— | 1,221 | ||||||
Issuance of subsidiary common stock, net |
60 | 5,455 | ||||||
Purchase of subsidiary common stock, net |
(163 | ) | — | |||||
Offering costs on issuance of subsidiary common stock |
— | (541 | ) | |||||
Net cash provided by (used in) financing activities of continuing operations |
(2,528 | ) | 65,955 | |||||
Net Increase (Decrease) in Cash and Cash Equivalents |
(23,778 | ) | 58,161 | |||||
Cash and Cash Equivalents at beginning of period |
146,874 | 136,715 | ||||||
Cash and Cash Equivalents at end of period |
$ | 123,096 | $ | 194,876 | ||||
See Notes to Consolidated Financial Statements.
5
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
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 included elsewhere in this Form 10-Q and included together with the Company’s Consolidated Financial Statements and Notes thereto included in the Company’s 2004 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 Consolidated Statements of Operations, Comprehensive Loss and Cash Flows include the following subsidiaries:
| Three Months Ended March 31, | ||||||
| 2005 | 2004 | |||||
| Alliance Consulting Group Associates | Alliance Consulting Group Associates | |||||
| Clarient (formerly known as | Clarient | |||||
| ChromaVision Medical Systems) | Mantas | |||||
| Laureate Pharma | Pacific Title and Arts Studio | |||||
| Mantas | Tangram Enterprise Solutions | |||||
| Pacific Title and Arts Studio | (through February 2004) | |||||
The Company’s Consolidated Balance Sheets include the following majority-owned subsidiaries:
| March 31, 2005 | December 31, 2004 | |||||
Alliance Consulting Group Associates
|
Alliance Consulting Group Associates | |||||
Clarient
|
Clarient | |||||
Laureate Pharma
|
Laureate Pharma | |||||
Mantas
|
Mantas | |||||
Pacific Title and Arts Studio
|
Pacific Title and Arts Studio |
Alliance operates on a 52 or 53-week fiscal year, ending on the Saturday closest to the end of the fiscal period. The Company and all other subsidiaries operate on a calendar year. Alliance’s first quarter ended on April 2, 2005, a period of 13 weeks, and April 3, 2004, a period of 14 weeks.
CompuCom Systems, Inc., previously a majority-owned subsidiary, is accounted for as a discontinued operation (see Note 3). Accordingly, for financial statement purposes, the assets, liabilities, results of operations and cash flows of this business have been segregated from those of continuing operations for all periods presented.
6
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
MARCH 31, 2005
Tangram was consolidated through February 20, 2004 at which time it was sold to Opsware, Inc. in a stock and debt for stock exchange. The Company recorded an $8.5 million gain on the transaction, which is included in Other Income (Loss), Net on the Consolidated Statements of Operations for the three months ended March 31, 2004.
Certain prior year amounts have been reclassified to conform to the current year presentation including the reclassification of CompuCom, previously a majority owned subsidiary, as discontinued operations as a result of the sale of the Company’s interest in October 2004. The impact of these changes did not affect the Company’s net loss.
3. DISCONTINUED OPERATIONS
On October 1, 2004, the Company completed the sale of its interest in CompuCom.
Results of the discontinued operation are as follows:
| Three Months Ended | ||||||||
| March 31, 2004 | ||||||||
| (in thousands) | ||||||||
| (unaudited) | ||||||||
Revenue |
$ | 299,656 | ||||||
Operating expenses |
(296,862 | ) | ||||||
Other |
79 | |||||||
Income before income taxes and minority interest |
2,873 | |||||||
Income tax expense |
(728 | ) | ||||||
Income before minority interest |
2,145 | |||||||
Minority interest |
(1,037 | ) | ||||||
Discontinued operations, net of income taxes |
$ | 1,108 | ||||||
4. MARKETABLE SECURITIES
Marketable securities include the following:
| Current | Long-term | |||||||||||||||
| March 31, | December 31, | March 31, | December 31, | |||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
| (in thousands) | ||||||||||||||||
| (unaudited) | (unaudited) | |||||||||||||||
Held-to-maturity: |
||||||||||||||||
Certificates of deposit |
$ | 20,071 | $ | 17,471 | $ | — | $ | — | ||||||||
U.S. Treasury securities |
15,806 | 15,342 | — | — | ||||||||||||
Mortgage and asset-backed securities |
2,809 | 742 | — | — | ||||||||||||
Commercial paper |
2,315 | — | — | — | ||||||||||||
| 41,001 | 33,555 | — | — | |||||||||||||
Restricted U.S. Treasury securities |
3,744 | 3,771 | 11,226 | 13,045 | ||||||||||||
| 44,745 | 37,326 | 11,226 | 13,045 | |||||||||||||
Available-for-sale: |
||||||||||||||||
Equity securities |
— | — | 6,396 | 11,964 | ||||||||||||
| $ | 44,745 | $ | 37,326 | $ | 17,622 | $ | 25,009 | |||||||||
7
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
MARCH 31, 2005
As of March 31, 2005, the contractual maturities of securities are as follows:
| Years to Maturity | ||||||||||||||||
| (in thousands) (unaudited) | ||||||||||||||||
| Less Than | One to | No Single | ||||||||||||||
| One Year | Five Years | Maturity Date | Total | |||||||||||||
Held-to-maturity |
$ | 44,745 | $ | 11,226 | $ | — | $ | 55,971 | ||||||||
Available-for-sale |
— | — | 6,396 | 6,396 | ||||||||||||
| $ | 44,745 | $ | 11,226 | $ | 6,396 | $ | 62,367 | |||||||||
As of March 31, 2005 and December 31, 2004, the Company’s investment in available-for-sale securities had a carrying value of zero and unrealized gains of $6.4 million and $ 12.0 million, respectively, which are reflected in Accumulated Other Comprehensive Income on the Consolidated Balance Sheets.
5. GOODWILL AND OTHER INTANGIBLE ASSETS
The following is a summary of changes in the carrying amount of goodwill by segment:
| Alliance | Clarient | Mantas | Total | |||||||||||||
| (in thousands) (unaudited) | ||||||||||||||||
Balance at December 31, 2004 |
$ | 54,634 | $ | 18,555 | $ | 19,860 | $ | 93,049 | ||||||||
Purchase price adjustments |
147 | — | — | 147 | ||||||||||||
Balance at March 31, 2005 |
$ | 54,781 | $ | 18,555 | $ | 19,860 | $ | 93,196 | ||||||||
As discussed in Note 18, certain purchase price adjustments are not final.
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 and indefinite useful lives:
| March 31, 2005 | ||||||||||||||||
| Gross | ||||||||||||||||
| Amortization | Carrying | Accumulated | ||||||||||||||
| Period | Value | Amortization | Net | |||||||||||||
| (In thousands) | ||||||||||||||||
| (unaudited) | ||||||||||||||||
Customer-related |
7 years | $ | 3,633 | $ | 1,192 | $ | 2,441 | |||||||||
Technology-related |
4 - 10 years | 11,428 | 7,826 | 3,602 | ||||||||||||
Process-related |
3 years | 1,363 | 208 | 1,155 | ||||||||||||
| 16,424 | 9,226 | 7,198 | ||||||||||||||
Trade Names |
Indefinite | 2,611 | — | 2,611 | ||||||||||||
Total |
$ | 19,035 | $ | 9,226 | $ | 9,809 | ||||||||||
8
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
MARCH 31, 2005
| December 31, 2004 | ||||||||||||||||
| Gross | ||||||||||||||||
| Amortization | Carrying | Accumulated | ||||||||||||||
| Period | Value | Amortization | Net | |||||||||||||
| (In thousands) | ||||||||||||||||
Customer-related |
7 years | $ | 3,633 | $ | 1,062 | $ | 2,571 | |||||||||
Technology-related |
4 - 10 years | 11,422 | 7,143 | 4,279 | ||||||||||||
Process-related |
3 years | 1,500 | 83 | 1,417 | ||||||||||||
| 16,555 | 8,288 | 8,267 | ||||||||||||||
Trade Names |
Indefinite | 2,588 | — | 2,588 | ||||||||||||
Total |
$ | 19,143 | $ | 8,288 | $ | 10,855 | ||||||||||
Amortization expense related to intangible assets was $0.9 million and $0.8 million for the three months ended March 31, 2005, and 2004, respectively. The following table provides estimated future amortization expense related to intangible assets:
| Total | ||||
| (In thousands) | ||||
| (unaudited) | ||||
Remainder of 2005 |
$ | 2,741 | ||
2006 |
2,070 | |||
2007 |
996 | |||
2008 |
639 | |||
2009 and thereafter |
752 | |||
| $ | 7,198 | |||
6. RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), “Share-Based Payment” (“SFAS No.123(R)”). SFAS No. 123(R) will require companies to measure all employee stock-based compensation awards using a fair value method and record such expense in its consolidated financial statements. In addition, the adoption of SFAS No. 123(R) requires additional accounting and disclosure related to the income tax and cash flow effects resulting from share-based payment arrangements. SFAS No. 123(R) is effective beginning as of the first annual reporting period beginning after June 15, 2005. The Company is required to adopt SFAS No. 123 (R) on January 1, 2006. This new standard may be adopted in one of two ways – the modified prospective transition method or the modified retrospective transition method. The Company is in the process of determining the impact of the requirements of SFAS No. 123(R), which will have a material impact on its consolidated financial statements. See the pro forma disclosures currently provided under SFAS No. 123 in Note 10.
In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets,” an amendment of Accounting Principles Board (APB) Opinion No. 29, “Accounting for Nonmonetary Transactions.” SFAS No. 153 addresses the measurement of exchanges of nonmonetary assets and redefines the scope of transactions that should be measured based on the fair value of the assets exchanged. SFAS No. 153 is effective for nonmonetary asset exchanges beginning in our third quarter of 2005. We do not believe adoption of SFAS No. 153 will have a material effect on our consolidated financial position, results of operations or cash flows.
9
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
MARCH 31, 2005
7. COMPREHENSIVE LOSS
Comprehensive loss is the change in equity of a business enterprise from transactions and other events and circumstances from non-owner sources. Excluding net loss, the Company’s sources of comprehensive loss are from net unrealized depreciation on its holdings classified as available-for-sale and foreign currency translation adjustments, which have been negligible to date.
The following summarizes the components of comprehensive loss:
| Three Months Ended March 31, | ||||||||