Safeguard Scientifics 10Q 2002 Q3 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For Quarter Ended September 30, 2002

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)

(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 [X] No [ ]

Number of shares outstanding as of November 14, 2002

Common Stock 119,417,222

TABLE OF CONTENTS


		CONSOLIDATED BALANCE SHEETS
		CONSOLIDATED STATEMENTS OF OPERATIONS
		CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4. Controls and Procedures
PART II OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
CERTIFICATION
CERTIFICATION CHIEF EXECUTIVE OFFICER
CERTIFICATION CHIEF FINANCIAL OFFICER

SAFEGUARD SCIENTIFICS, INC.

QUARTERLY REPORT FORM 10-Q

INDEX

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

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.

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.

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.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2002

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.

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

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

SEPTEMBER 30, 2002

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

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 as of January 1, 2002, on a “reporting unit” basis. A reporting unit is generally the same as an operating segment, unless discrete financial information is prepared and regularly reviewed by management at a “component” level, generally one level below the operating segment level. In this case, the component is the reporting unit. A fair value approach was used to test goodwill for impairment. Under the fair value approach, an impairment charge would be recognized for the amount, if any, by which the carrying amount of goodwill exceeds its fair value. Fair values were determined primarily using discounted cash flows and when available, comparative market multiples. The Company completed the required testing during the second quarter 2002.

In accordance with SFAS 142, approximately $1.3 million of negative goodwill associated with a CompuCom acquisition was written off as of January 1, 2002. The Company’s share of this adjustment, net of income taxes, was $0.4 million and was recognized in the Consolidated Statements of Operations as a cumulative effect of a change in accounting principle in the first quarter of 2002 as well as the nine months ended September 30, 2002.

Additionally, in connection with the transitional impairment tests performed upon the adoption of SFAS 142, the Company reported a $21.8 million goodwill impairment loss in the Business and IT services reporting unit (a component of the Company’s Strategic Private Companies segment). 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. In accordance with SFAS 142, this loss recognized in the Consolidated Statements of Operations as a cumulative effect of a change in accounting principle in the first quarter of 2002 as well as the nine months ended September 30, 2002.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

SEPTEMBER 30, 2002

The following table provides comparative earnings and earnings per share had the non-amortization provisions of SFAS 142 been adopted for all periods presented:


		Three Months Ended September 30,						Nine Months Ended September 30,

		2002			2001			2002			2001

		(in thousands except per share data)
					(unaudited)
Impact on Statements of Operations:




Net loss before change in accounting principle		$	(23,250	)	$	(76,083	)	$	(97,897	)	$	(436,298	)




Add back goodwill amortization
	— consolidated companies		—			3,072			—			9,092




	— equity method companies		—			5,473			—			19,968

Adjusted net loss before change in accounting principle			(23,250	)		(67,538	)		(97,897	)		(407,238	)




Cumulative effect of change in accounting principle			—			—			(21,390	)		—

Adjusted net loss		$	(23,250	)	$	(67,538	)	$	(119,287	)	$	(407,238	)

Impact on Basic Earnings Per Share:




Net loss before change in accounting principle		$	(0.20	)	$	(0.65	)	$	(0.83	)	$	(3.72	)




Add back goodwill amortization
	— consolidated companies		—			0.02			—			0.08




	— equity method companies		—			0.05			—			0.17

Adjusted net loss before change in accounting principle			(0.20	)		(0.58	)		(0.83	)		(3.47	)




Cumulative effect of change in accounting principle			—			—			(0.18	)		—

Adjusted net loss		$	(0.20	)	$	(0.58	)	$	(1.01	)	$	(3.47	)

Impact on Fully Diluted Earnings Per Share:




Net loss before change in accounting principle		$	(0.20	)	$	(0.65	)	$	(0.85	)	$	(3.73	)




Add back goodwill amortization
	— consolidated companies		—			0.02			—			0.08




	— equity method companies		—			0.05			—			0.17

Adjusted net loss before change in accounting principle			(0.20	)		(0.58	)		(0.85	)		(3.48	)




Cumulative effect of change in accounting principle			—			—			(0.18	)		—

Adjusted net loss		$	(0.20	)	$	(0.58	)	$	(1.03	)	$	(3.48	)

The following is a summary of changes in the carrying amount of goodwill by segment:


				Other			Public
	Strategic			Private			Companies
	Private			Companies			(excluding				Total
	Companies			and Funds			CompuCom)		CompuCom		Segments

							(in thousands)
							(unaudited)
Balance at December 31, 2001	$	53,344		$	2,502		$	1,415	$	102,279	$	159,540




Cumulative change in accounting principle — negative goodwill		—			—			—		1,253		1,253




Cumulative change in accounting principle — impairment test		(21,815	)		—			—		—		(21,815	)




Additions		17,525			—			16,690		1,071		35,286




Deconsolidation		—			(2,173	)		—		—		(2,173	)




Impairment charges		(4,392	)		(329	)		—		—		(4,721	)

Balance at September 30, 2002	$	44,662		$	—		$	18,105	$	104,603	$	167,370

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

SEPTEMBER 30, 2002

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, 2002

		Gross
	Amortization	Carrying		Accumulated
	Period	Value		Amortization		Net

				(in thousands)
				(unaudited)
Customer-related	6-11 years	$	15,467	$	8,513	$	6,954




Contract-related	2-3 years		2,840		1,080		1,760




Technology-related	2-17 years		924		287		637

Total		$	19,231	$	9,880	$	9,351


				December 31, 2001

		Gross
	Amortization	Carrying		Accumulated
	Period	Value		Amortization		Net

				(in thousands)
Customer-related	6-11 years	$	15,467	$	6,690	$	8,777




Contract-related	2-3 years		2,840		171		2,669




Technology-related	2-17 years		373		149		224

Total		$	18,680	$	7,010	$	11,670

Amortization expense related to intangible assets was $0.9 million and $2.9 million for the three and nine months ended September 30, 2002 and $0.5 million and $1.6 million for the three and nine months ended September 30, 2001, respectively. The following table provides estimated future amortization expense related to intangible assets:


	Total

	(in thousands)
	(unaudited)
Remainder of 2002	$	972




2003		3,217




2004		2,528




2005		613




2006 and thereafter		2,021

	$	9,351

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

SEPTEMBER 30, 2002

OTHER NEW ACCOUNTING PRONOUNCEMENTS

In August 2001, the FASB issued Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations”. SFAS 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. The Company will adopt SFAS 143 in fiscal year 2003. The Company does not expect the provisions of SFAS 143 to have any significant impact on its financial statements.

In October 2001, the FASB issued Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, which supercedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of”. The Company has adopted SFAS 144 in fiscal year 2002. The adoption of SFAS 144 did not have a significant impact on the Company’s financial statements.

In April 2002, the FASB issued SFAS No. 145, “Recission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections”. Generally, SFAS 145 is effective for transactions occurring after May 15, 2002. The adoption of SFAS 145 did not have a significant impact on the Company’s financial statements.

In July 2002, the FASB issued SFAS No, 146 “Accounting for Costs Associated with Exit or Disposal Activities”. Under SFAS 146, companies will record exit or disposal costs when they are “incurred” and can be measured at fair value, and they will subsequently adjust the recorded liability for changes in estimated cash flow. SFAS 146 is effective prospectively for exit or disposal activities initiated after December 31, 2002.

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 source of comprehensive loss is from net unrealized appreciation (depreciation) on its holdings classified as available-for-sale. Reclassification adjustments result from the recognition in net loss of unrealized gains or losses that were included in comprehensive loss in prior periods.

The following summarizes the components of comprehensive loss, net of income taxes:


		Three Months Ended September 30,						Nine Months Ended September 30,

		2002			2001			2002			2001

					(in thousands)
					(unaudited)
Net Loss		$	(23,250	)	$	(76,083	)	$	(119,287	)	$	(436,298	)

Other Comprehensive Income (Loss), Before Taxes:




	Unrealized holding losses in available-for-sale securities		(422	)		(3,481	)		(766	)		(8,372	)




	Reclassification adjustments		422			6,095			1,051			10,666




Related Tax (Expense) Benefit:




	Unrealized holding losses in available-for-sale securities		148			1,218			268			2,930




	Reclassification adjustments		(148	)		(2,133	)		(368	)		(3,733	)

Other Comprehensive Income			—			1,699			185			1,491

Comprehensive Loss		$	(23,250	)	$	(74,384	)	$	(119,102	)	$	(434,807	)

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
SEPTEMBER 30, 2002

6. RECLASSIFICATIONS

Certain prior year amounts have been reclassified to conform to the current year presentation. In accordance with EITF Topic No. D-103, “Income Statement Characterization of Reimbursements Received for ‘Out-of-Pocket’ Expenses Incurred”, the Company reclassified out-of-pocket expenses reimbursed by clients as revenue and reported the related costs in general and administrative expense in the Consolidated Statements of Operations. This reclassification had no effect on net income or loss. In addition, in accordance with SFAS 141, “Business Combinations”, identifiable intangible assets have been presented apart from goodwill.

7. FINANCIAL INSTRUMENTS

In 1999, the Company entered into two forward sale contracts related to 3.4 million shares of its holdings in Tellabs common stock. The Company pledged these shares of Tellabs under contracts that expire in March and August 2002 and, in return, received cash. At maturity, the Company was required to deliver cash or Tellabs stock with a value determined by the stock price of Tellabs at maturity. In March 2002, the Company settled $91 million of the liability entered into in connection with the first hedge of its Tellabs holdings by delivering 2.0 million shares of Tellabs. In August 2002, the Company settled the remaining $87 million by delivering 1.4 million shares of Tellabs. These settlements resulted in a reduction of Trading Securities and Other Current Liabilities of $178 million, and had no impact on the Company’s cash balances.

The net gain recognized during the three and nine months ended September 30, 2002 was $0.3 million and $1.5 million. This amount reflects a $1.0 million gain on the change in the fair value of the hedging contract, reduced by a $0.7 million loss on the change in fair value of the Tellabs holdings for the three months ended September 30, 2002 and $23.3 million gain on the fair value of the hedging contract, reduced by a $21.8 million loss on the fair value of the Tellabs holdings for the nine months ended September 30, 2002. These gains are reflected in Other Loss, Net in the Consolidated Statements of Operations.

8. OWNERSHIP INTERESTS IN AND ADVANCES TO AFFILIATES

The following summarizes the carrying value of the Company’s ownership interests in and advances to affiliates accounted for under the equity method or cost method of accounting. The ownership interests are classified according to applicable accounting methods at September 30, 2002 and December 31, 2001.


	September 30,		December 31,
	2002		2001

	(in thousands)
	(unaudited)
Equity Method
Public Companies	$	22,434	$	32,178




Non-Public Companies		5,147		23,923




Private Equity Funds		44,927		62,168

		72,508		118,269




Cost Method
Non-Public Companies		6,419		7,950




Private Equity Funds		6,567		6,221




Advances to Affiliates		—		500

	$	85,494	$	132,940

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
SEPTEMBER 30, 2002

The market value of the Company’s public companies accounted for under the equity method was $58 million at September 30, 2002 and $161 million at December 31, 2001. Of the total decline in market value, $28 million relates to ChromaVision, which is not included in the equity ownership balance at September 30, 2002, as it was consolidated effective in June 2002. The remaining decline is due to an overall decline in market valuations as a result of current economic conditions.

9. DEBT

In May 2002, the Company entered into a revolving credit facility providing for borrowings, issuances of letters of credit and guarantees of up to $25 million. This credit facility matures in May 2003 and bears interest at the prime rate (4.75% at September 30, 2002) for outstanding borrowings. The credit facility is subject to an unused commitment fee of 0.125% which is subject to reduction based on deposits maintained at the bank. The facility requires cash collateral equal to two times any outstanding amounts under the facility. This facility provides the Company additional flexibility to implement its strategy and support its partner companies. As of September 30, 2002, a guarantee totaling $5 million related to a partner company credit facility was outstanding. The Company’s prior credit facility provided for the issuances of letters of credit up to $10 million.

Parent company and other recourse debt includes primarily mortgage obligations ($16.9 million), bank credit facilities ($4.6 million) and capital lease obligations ($0.5 million). These obligations bear interest at fixed rates between 7.75% to 9.75%, and variable rates between prime plus 0.5% (4.75% at September 30, 2002) and prime plus 1%.

At September 30, 2002, CompuCom has a $25 million working capital facility and a $100 million receivables securitization facility. Consistent with its financing requirements, CompuCom reduced the working capital facility from $50 million to $25 million in May 2002 and the receivables securitization facility from $125 million to $100 million in August 2002. The working capital facility, which initially had a May 2002 maturity date but was extended to a December 2002 maturity date, is secured by a lien on Compucom’s assets. CompuCom expects the working capital facility to be renewed prior to its maturity date. As of September 30, 2002, availability under the working capital facility was $25 million. No amounts were outstanding under the working capital facility as of September 30, 2002 and December 31, 2001. Terms of the working capital facility limit the amounts available for capital expenditures and dividends. Within the context of the securitization facility, each certificate is issued from a separate facility, each facility set at $50 million. Amounts outstanding as sold receivables as of September 30, 2002, consisted of two certificates totaling $60 million, one certificate for $10 million which initially had an April 2002 maturity date but has been renewed for three years with an October 2005 maturity date, and one certificate for $50 million with an October 2003 maturity date.

Subsidiary debt includes bank credit facilities ($0.2 million), term loans ($2.2 million) and capital lease obligations ($0.8 million) of consolidated partner companies. These obligations bear interest at fixed rates ranging between 7% and 12% and variable rates consisting of the prime rate plus 1%.

10. STOCK-BASED COMPENSATION

The Company made an offer to its employees to exchange stock options held by these employees for restricted shares of the Company’s stock. Under the exchange program, each employee with an outstanding stock option with an exercise price in excess of $15.00 per share was offered the opportunity to exchange the options for shares of restricted stock. In order to participate in the exchange, a participant had to exchange all eligible options held. The shares of restricted stock were issued on January 22, 2002, and vest on the later of July 22, 2002, or the date on which the unvested eligible option exchanged for the restricted shares would have vested. Vesting will be accelerated upon certain circumstances. Until the restricted stock vests, the shares are generally subject to forfeiture in the event an employee leaves the Company for a reason other than a termination for cause. As a result of the exchange, the Company issued 537,878 shares of restricted stock in January 2002 in return for 2,038,071 stock options that were canceled.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
SEPTEMBER 30, 2002

Approximately $2.0 million of non-cash deferred compensation associated with this restricted stock will be expensed as the restricted stock vests, and will be reduced to the extent that a participant forfeits his or her shares of restricted stock received in the exchange prior to vesting. The deferred compensation charge is unaffected by future changes in the price of the common stock.

Option activity during 2002 is summarized below:


				Weighted
				Average
	Shares			Exercise Price

	(in thousands)
Outstanding at December 31, 2001		12,472		$	15.80




Options granted		2,503			2.25




Options canceled — option exchange program		(2,038	)		36.94




Other options canceled/forfeited		(1,941	)		15.95

Outstanding at September 30, 2002		10,996		$	8.78

Shares available for future grant		2,916

The following summarizes information about the Company’s stock options outstanding at September 30, 2002:


Options Outstanding								Options Exercisable

				Weighted Average		Weighted				Weighted
		Number		Remaining		Average				Average
Range of		Outstanding		Contractual Life		Exercise		Exercisable		Exercise
Exercise Prices		(in thousands)		(in years)		Price		(in thousands)		Price

$1.25 - $2.12			2,237		7.3	$	1.71		45	$	1.92




	2.17 - 4.79		2,369		6.7		3.66		434		4.63




	5.28 - 7.00		2,694		5.1		5.35		1,973		5.33




	7.10 - 14.84		2,628		2.3		11.13		2,537		11.24




20.00 - 30.47			424		3.9		28.22		328		28.27




30.98 - 50.98			644		2.7		44.07		561		43.42

$1.25 - $50.98			10,996		5.0	$	8.78		5,878	$	12.72

In addition to shares issued under the option exchange program, the Company issued shares of restricted stock to employees in 2001 and 2002. During the first nine months of 2002, the Company issued 1.3 million shares of restricted stock to employees with a value on the date of grant of $4.5 million, which was recorded as deferred compensation. The restricted stock is subject to pro-rata vesting over periods ranging from two to four years. Compensation expense is recognized on a straight-line basis over the vesting period and is reduced to the extent that a participant forfeits shares of restricted stock received prior to vesting. The deferred compensation charge is unaffected by future changes in the price of the common stock.

�� Total compensation expense for restricted stock issuances was $0.9 million and $2.8 million for the three and nine months ended September 30, 2002. Unamortized compensation expense related to restricted stock issuances at September 30, 2002 is $4.1 million.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
SEPTEMBER 30, 2002

Pro Forma Disclosures – Stock Options Issued to Employees and Directors

The Company, its subsidiaries and its partner companies that are accounted for under the equity method apply APB 25 and related interpretations in accounting for stock option plans. The Company provides pro forma disclosures on an annual basis to reflect what the Company’s consolidated net loss and loss per share would have been reduced to if compensation cost related to options have been recorded under SFAS 123. At December 31, 2001, the Company’s unamortized compensation expense related to options it issued to employees was $36.5 million. At September 30, 2002, this amount was reduced to $12 million, primarily as a result of the Company’s January 2002 option exchange program.

11. INCOME TAXES

The Company’s consolidated income tax expense recorded for the three and nine months ended September 30, 2002 was $2.2 million and $5.2 million, net of a recorded valuation allowance of $9.2 million and $36.8 million. The Company recorded a valuation allowance against its deferred tax assets since it is more likely than not that these assets will not be realized in future years.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
SEPTEMBER 30, 2002

12. NET LOSS PER SHARE

The calculations of net loss per share were:


	Three Months Ended						Nine Months Ended

	September 30,						September 30,

	2002			2001			2002			2001

	(in thousands except per share data)
	(unaudited)
Basic:




Net loss prior to cumulative effect of change in accounting principle	$	(23,250	)	$	(76,083	)	$	(97,897	)	$	(436,298	)




Cumulative effect of change in accounting principle		—			—			(21,390	)		—

Net loss after cumulative effect of change in accounting principle	$	(23,250	)	$	(76,083	)	$	(119,287	)	$	(436,298	)

Average common shares outstanding		117,857			117,300			117,652			117,279

Basic 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	)		—

Basic after cumulative effect of change in accounting principle	$	(0.20	)	$	(0.65	)	$	(1.01	)	$	(3.72	)

Diluted:




Net loss prior to cumulative effect of change in accounting principle	$	(23,250	)	$	(76,083	)	$	(97,897	)	$	(436,298	)




Effect of public holdings		(858	)		(328	)		(2,022	)		(1,076	)

Adjusted net loss	$	(24,108	)	$	(76,411	)	$	(99,919	)	$	(437,374	)

Average common shares outstanding		117,857			117,300			117,652			117,279

Diluted prior to cumulative effect of change in accounting principle	$	(0.20	)	$	(0.65	)	$	(0.85	)	$	(3.73	)

Net loss after cumulative effect of change in accounting principle	$	(23,250	)	$	(76,083	)	$	(119,287	)	$	(436,298	)




Effect of public holdings		(858	)		(328	)		(2,101	)		(1,076	)

Adjusted net loss	$	(24,108	)	$	(76,411	)	$	(121,388	)	$	(437,374	)

Average common shares outstanding		117,857			117,300			117,652			117,279

Diluted after cumulative effect of change in accounting principle	$	(0.20	)	$	(0.65	)	$	(1.03	)	$	(3.73	)

If a consolidated or equity method public company has dilutive options or securities outstanding, diluted net loss per share is computed first by deducting from net loss the income attributable to the potential exercise of the dilutive options or securities of the company. This impact is shown as an adjustment to net loss for purposes of calculating diluted net loss per share.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
SEPTEMBER 30, 2002

The computation of average common shares outstanding for the three and nine months ended September 30, 2002, excludes 1.6 million and 1.7 million shares of non-vested restricted stock. The computation of average common shares outstanding for the three months ended September 30, 2001 excludes 0.4 million shares of non-invested restricted stock.

Approximately 0.1 million and 0.2 million weighted average common stock equivalents related to stock options were excluded from the denominator in the calculation of diluted loss per share for the three and nine months ended September 30, 2002 and 0.1 million and 0.3 million for the three and nine months ended September 30, 2001 because their effect was anti-dilutive. Approximately 8.3 million shares representing the weighted average effect of assumed conversion of the convertible subordinated notes were excluded in all periods presented from the denominator in the calculation of diluted loss per share because their effect was anti-dilutive.

13. PARENT COMPANY FINANCIAL INFORMATION

The Company’s Consolidated Financial Statements reflect all wholly-owned subsidiaries, including aligne and Lever8 Solutions, which are accounted for under the consolidation method of accounting.

Parent company financial information is provided to present the financial position and results of operations of the Company as if the less than wholly owned consolidated companies (see Note 2) were accounted for under the equity method of accounting for all periods presented during which the Company owned its interest in these companies. Parent company financial statements include the results of the Company’s wholly owned subsidiaries, including aligne and Lever8 Solutions.

Parent Company Balance Sheets


			September 30,		December 31,
			2002		2001

			(in thousands)
			(unaudited)
Assets




	Cash and cash equivalents		$	172,062	$	171,531




	Restricted cash			3,615		8,033




	Short-term investments			9,986		—




	Trading securities			1,030		205,553




	Income tax receivable			—		62,647




	Other current assets			11,579		18,299

		Total current assets		198,272		466,063




	Ownership interests in and advances to affiliates			271,170		274,389




	Available-for-sale securities			3,980		4,822




	Note receivable — related party			25,337		25,046




	Other			47,584		71,009

		Total Assets	$	546,343	$	841,329

Liabilities and Shareholders’ Equity




	Current liabilities		$	19,622	$	23,632




	Other current liabilities			—		171,804

		Total current liabilities		19,622		195,436




	Long-term debt			12,777		16,676




	Other long-term liabilities			11,476		10,541




	Convertible subordinated notes			200,000		200,000




	Shareholders’ equity			302,468		418,676

		Total Liabilities and Shareholders’ Equity	$	546,343	$	841,329

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
SEPTEMBER 30, 2002

Parent Company Statements of Operations


		Three Months Ended September 30,						Nine Months Ended September 30,

		2002			2001			2002			2001

		(in thousands)						(in thousands)
		(unaudited)						(unaudited)
Revenue		$	11,768		$	18,450		$	38,055		$	53,800

Operating expenses:




	Cost of sales		4,188			8,208			15,324			23,788




	Selling		512			467			1,915			1,339




	General and administrative		13,868			19,039			41,006			54,373




	Depreciation and amortization		303			2,270			1,222			6,606

			18,871			29,984			59,467			86,106

			(7,103	)		(11,534	)		(21,412	)		(32,306	)




Other loss, net			(115	)		(12,860	)		(7,028	)		(50,435	)




Interest and financing expense, net			(2,475	)		(3,929	)		(9,990	)		(9,541	)

Loss before income taxes and equity loss			(9,693	)		(28,323	)		(38,430	)		(92,282	)




Income taxes			(5	)		1,108			(14	)		8,934




Equity loss			(13,552	)		(48,868	)		(59,028	)		(352,950	)

Net loss prior to cumulative change in accounting principle			(23,250	)		(76,083	)		(97,472	)		(436,298	)




Cumulative effect of change in accounting principle			—			—			(21,815	)		—

Net loss		$	(23,250	)	$	(76,083	)	$	(119,287	)	$	(436,298	)

The Company’s share of income or losses of its less than wholly owned consolidated subsidiaries is reflected in Equity Loss.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
SEPTEMBER 30, 2002

Parent Company Statements of Cash Flows


			Nine Months Ended September 30,

			2002			2001

			(in thousands)
			(unaudited)
Net cash provided by (used in) operating activities			$	39,167		$	(15,861	)




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			(4,897	)		(13,948	)




	Repayment of advances to affiliates			—			1,006




	Acquisitions of ownership interests in affiliates and subsidiaries, net of cash acquired			(60,266	)		(68,154	)




	Capital expenditures			(935	)		(4,146	)




	Advances to related party, net			(590	)		(26,609	)




	Repayments of advances to related party, net			1,530			1,940




	(Increase) decrease in restricted cash and short-term investments			(5,568	)		86,728




	Other, net			353			(3,045	)

	Net cash provided by (used in) investing activities			(38,197	)		79,056




Financing Activities




	Borrowings on long-term debt			—			3,939




	Repayments on long-term debt			(439	)		(1,272	)




	Issuance of Company common stock, net			—			139

		Net cash (used in) provided by financing activities		(439	)		2,806

Net Increase in Cash and Cash Equivalents				531			66,001




Cash and Cash Equivalents at beginning of year				171,531			117,774

Cash and Cash Equivalents at end of year			$	172,062		$	183,775

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
SEPTEMBER 30, 2002

14. OPERATING SEGMENTS

Our reportable segments include i) Strategic Private Companies, which includes those companies that we focus on with the goal of accelerating value creation; ii) Public Companies (excluding CompuCom), which includes the results of operations of our publicly-traded companies (excluding CompuCom); iii) CompuCom, which represents the results of our subsidiary, CompuCom; and iv) Other Private Companies and Funds, which represents other private companies and private equity funds in which we hold an equity interest.

In periods prior to 2002, our reportable segments were General Safeguard Operations, Partner Company Operations and CompuCom Operations. All prior periods have been restated to conform to the current-year presentation. The development of the current segments corresponds to the implementation of our shift in strategic focus announced in early 2002, and represents management’s view of the Company’s operations.

The following tables reflect our consolidated operating data by reportable segments. Each segment includes the results of the consolidated companies and records our share of income or losses for entities accounted for under the equity method. Segment results also include impairment charges, gains or losses related to the disposition of partner companies and the mark to market of trading securities. All significant intersegment activity has been eliminated. Accordingly, segment results reported exclude the effect of transactions between us and our subsidiaries.

Other items, which include corporate expenses, results of operations of disposed companies, goodwill amortization and income taxes, are reviewed by management independent of segment results.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
SEPTEMBER 30, 2002

Three Months Ended September 30, 2002


						Other			Public
			Strategic			Private			Companies
			Private			Companies			(excluding						Total						Consolidated
			Companies			and Funds			CompuCom)			CompuCom			Segments			Other Items			Results

			(in thousands)
			(unaudited)
Revenue




	Product sales		$	4,261		$	604		$	1,673		$	333,067		$	339,605		$	—		$	339,605




	Service sales			7,578			4,685			3,971			80,999			97,233			—			97,233




	Other			—			6,204			—			—			6,204			14			6,218

				11,839			11,493			5,644			414,066			443,042			14			443,056




Operating expenses




	Cost of sales — product			1,219			631			76			306,955			308,881			—			308,881




	Cost of sales — service			5,357			2,975			386			54,574			63,292			—			63,292




	Selling and service			7,769			804			4,365			21,509			34,447			—			34,447




	General and administrative			3,990			6,771			1,512			17,744			30,017			6,069			36,086




	Depreciation and amortization			826			662			1,239			4,380			7,107			190			7,297

		Total operating expenses		19,161			11,843			7,578			405,162			443,744			6,259			450,003

				(7,322	)		(350	)		(1,934	)		8,904			(702	)		(6,245	)		(6,947	)




	Other income (loss), net			(4,392	)		817			(901	)		—			(4,476	)		—			(4,476	)




	Interest and financing expense, net			(149	)		(305	)		(3,010	)		27			(3,437	)		(2,198	)		(5,635	)

Net income (loss) before equity loss, minority interest, income taxes and change in accounting principle				(11,863	)		162			(5,845	)		8,931			(8,615	)		(8,443	)		(17,058	)




Income taxes				—			—			—			—			—			(2,168	)		(2,168	)




Minority interest				1,913			54			2,172			(3,472	)		667			—			667




Equity income (loss)				—			(5,352	)		675			—			(4,677	)		(14	)		(4,691	)

Net Income (Loss)			$	(9,950	)	$	(5,136	)	$	(2,998	)	$	5,459		$	(12,625	)	$	(10,625	)	$	(23,250	)

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
SEPTEMBER 30, 2002


Three Months Ended September 30, 2001

					Other			Public
		Strategic			Private			Companies
		Private			Companies			(excluding						Total						Consolidated
		Companies			and Funds			CompuCom)			CompuCom			Segments			Other Items			Results

											(in thousands)
											(unaudited)

Revenue




	Product sales	$	(103	)	$	—		$	1,759		$	332,877		$	334,533		$	—		$	334,533




	Service sales		12,836			4,496			1,980			71,883			91,195			—			91,195




	Other		—			6,831			—			—			6,831			5			6,836

			12,733			11,327			3,739			404,760			432,559			5			432,564




Operating expenses




	Cost of sales — product		610			—			818			299,792			301,220			—			301,220




	Cost of sales — service		8,568			3,181			441			45,638			57,828			—			57,828




	Selling and service		2,955			527			1,517			29,286			34,285			—			34,285




	General and administrative		2,502			6,816			543			22,415			32,276			10,521			42,797




	Depreciation and amortization		862			378			1,083			5,205			7,528			2,481			10,009

	Total operating expenses		15,497			10,902			4,402			402,336			433,137			13,002			446,139

			(2,764	)		425			(663	)		2,424			(578	)		(12,997	)		(13,575	)




	Other income (loss), net		—			(7,924	)		(3,426	)		—			(11,350	)		(1,510	)		(12,860	)




	Interest and financing expense, net		(51	)		(24	)		(47	)		(455	)		(577	)		(4,047	)		(4,624	)

Net income (loss) before equity loss, minority interest and income taxes			(2,815	)		(7,523	)		(4,136	)		1,969			(12,505	)		(18,554	)		(31,059	)




	Income taxes		—			—			—			—			—			587			587




	Minority interest		—			(35	)		—			(636	)		(671	)		—			(671	)




	Equity loss		(290	)		(15,506	)		(13,098	)		—			(28,894	)		(16,046	)		(44,940	)

Net Income (Loss)		$	(3,105	)	$	(23,064	)	$	(17,234	)	$	1,333		$	(42,070	)	$	(34,013	)	$	(76,083	)

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
SEPTEMBER 30, 2002


Nine Months Ended September 30, 2002

						Other			Public
			Strategic			Private			Companies
			Private			Companies			(excluding						Total						Consolidated
			Companies			and Funds			CompuCom)			CompuCom			Segments			Other Items			Results

												(in thousands)
												(unaudited)

Revenue




	Product sales		$	7,126		$	2,552		$	3,798		$	942,626		$	956,102		$	—		$	956,102




	Service sales			25,131			15,279			7,853			224,530			272,793			—			272,793




	Other			—			17,766			—			—			17,766			51			17,817

				32,257			35,597			11,651			1,167,156			1,246,661			51			1,246,712




	Operating expenses




	Cost of sales — product			1,676			1,610			108			863,504			866,898			—			866,898




	Cost of sales — service			18,364			10,422			1,216			146,587			176,589			—			176,589




	Selling and service			18,920			2,482			8,824			67,244			97,470			—			97,470




	General and administrative			11,383			20,876			2,657			54,022			88,938			17,922			106,860




	Depreciation and amortization			2,040			2,424			2,622			13,854			20,940			868			21,808

		Total operating expenses		52,383			37,814			15,427			1,145,211			1,250,835			18,790			1,269,625

				(20,126	)		(2,217	)		(3,776	)		21,945			(4,174	)		(18,739	)		(22,913	)




	Other loss, net			(4,408	)		6,045			(15,166	)		—			(13,529	)		125			(13,404	)




	Interest and financing expense, net			(299	)		(440	)		(3,353	)		(523	)		(4,615	)		(9,716	)		(14,331	)

Net income (loss) before equity loss, minority interest and income taxes				(24,833	)		3,388			(22,295	)		21,422			(22,318	)		(28,330	)		(50,648	)




	Income taxes			—			—			—			—			—			(5,230	)		(5,230	)




	Minority interest			4,187			189			2,937			(8,095	)		(782	)		—			(782	)




	Equity loss			(1,958	)		(32,810	)		(6,324	)		—			(41,092	)		(145	)		(41,237	)

Net income (loss) before cumulative effect of change in accounting principle				(22,604	)		(29,233	)		(25,682	)		13,327			(64,192	)		(33,705	)		(97,897	)




Cumulative effect of change in accounting principle				(21,815	)		—			—			425			(21,390	)		—			(21,390	)

Net Income (Loss)			$	(44,419	)	$	(29,233	)	$	(25,682	)	$	13,752		$	(85,582	)	$	(33,705	)	$	(119,287	)

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
SEPTEMBER 30, 2002


Nine Months Ended September 30, 2001

					Other			Public
		Strategic			Private			Companies
		Private			Companies			(excluding						Total						Consolidated
		Companies			and Funds			CompuCom)			CompuCom			Segments			Other Items			Results

											(in thousands)
											(unaudited)

Revenue




	Product sales	$	7,104		$	—		$	4,687		$	1,234,956		$	1,246,747		$	—		$	1,246,747




	Service sales		35,009			4,496			5,712			212,801			258,018			—			258,018




	Other		—			19,632			—			—			19,632			166			19,798

			42,113			24,128			10,399			1,447,757			1,524,397			166			1,524,563




Operating expenses




	Cost of sales — product		2,345			—			1,777			1,121,887			1,126,009			—			1,126,009




	Cost of sales — service		25,448			3,181			1,273			137,382			167,284			—			167,284




	Selling and service		9,279			527			4,775			93,703			108,284			—			108,284




	General and administrative		8,438			19,555			1,978			66,675			96,646			28,956			125,602




	Depreciation and amortization		2,366			554			2,543			16,594			22,057			7,412			29,469

	Total operating expenses		47,876			23,817			12,346			1,436,241			1,520,280			36,368			1,556,648

			(5,763	)		311			(1,947	)		11,516			(4,117	)		(36,202	)		(32,085	)




	Other loss, net		—			(21,253	)		(21,134	)		—			(42,387	)		(8,048	)		(50,435	)




	Interest and financing expense, net		(156	)		(4	)		(130	)		(2,932	)		(3,222	)		(9,904	)		(13,126	)

Net income (loss) before equity loss, minority interest and income taxes			(5,919	)		(20,946	)		(23,211	)		8,584			(41,492	)		(54,154	)		(95,646	)




	Income taxes		—			—			—			—			—			6,773			6,773




	Minority interest		—			(35	)		—			(2,934	)		(2,969	)		—			(2,969	)




	Equity loss		(290	)		(82,582	)		(164,022	)		—			(246,894	)		(97,562	)		(344,456	)

Net Income (Loss)		$	(6,209	)	$	(103,563	)	$	(187,233	)	$	5,650		$	(291,355	)	$	(144,943	)	$	(436,298	)

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
SEPTEMBER 30, 2002


		Three Months Ended September 30,						Nine Months Ended September 30,

		2002			2001			2002			2001

		(in thousands)						(in thousands)
		(unaudited)						(unaudited)
Other Items




Corporate




	Corporate operations	$	(8,457	)	$	(16,899	)	$	(28,475	)	$	(42,443	)




	Results of operations — dispositions		—			(10,340	)		—			(83,753	)




	Goodwill amortization		—			(7,361	)		—			(25,520	)




Income tax (expense) benefit			(2,168	)		587			(5,230	)		6,773

		$	(10,625	)	$	(34,013	)	$	(33,705	)	$	(144,943	)

15. BUSINESS COMBINATIONS

Acquisitions by the Company

In June 2002, the Company acquired a majority ownership interest in ChromaVision Medical Systems for $16.2 million in cash, including $9.8 million to purchase shares of preferred stock from existing shareholders. In July and August 2002, the Company acquired additional shares of ChromaVision for $1.7 million. ChromaVision’s product, Automated Cellular Imaging Systems, substantially improves the accuracy, sensitivity and reproducibility of cell imaging.

In April 2002, the Company acquired a majority ownership interest in Mantas for $14.5 million in cash. Mantas provides comprehensive monitoring and analysis of every transaction to detect and discover behaviors of interest through its software products.

The Company has not completed the allocation of the purchase price of these acquisitions. Therefore, the allocation of the purchase price could be adjusted once the valuation of assets acquired and liabilities assumed is completed.

In January 2002, the Company acquired a majority ownership interest in Protura Wireless for $4 million in cash. Protura has developed patent-pending technology that makes it possible for cellular manufacturers to switch from cumbersome external antennas to Protura internal antennas without losing performance.

In October 2001, the Company acquired a majority ownership interest in Agari Mediaware for $5 million in cash. Agari provides middleware software that makes it possible to quickly integrate disparate applications that store and process rich media, documents or any digital content.

The Company believes that these acquisitions are consistent with its strategy of creating long-term value by acquiring technology-related companies.

These transactions were accounted for as purchases and, accordingly, the Consolidated Financial Statements reflect the operations of these companies from the respective acquisition dates.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
SEPTEMBER 30, 2002

Acquisitions by Subsidiaries

During 2001, CompuCom consummated four business combinations (collectively, “the 2001 acquisitions”). The 2001 acquisitions have been accounted for as purchases and, accordingly, the Consolidated Financial Statements reflect the operations of these companies from the respective acquisition dates. The aggregate purchase price of the 2001 acquisitions, net of cash acquired, was approximately $121 million. CompuCom’s allocation of the aggregate purchase price for the 2001 acquisitions consisted of approximately $93 million to current assets, $1 million to non-current assets, $31 million to goodwill, $6 million to intangible assets with definite useful lives, and $10 million to current liabilities. CompuCom used available cash to finance the 2001 acquisitions.

Pro Forma Financial Information

The following unaudited pro forma financial information presents the combined results of operations of the Company as if the acquisitions had occurred as of January 1, 2001, after giving effect to certain adjustments, including amortization of intangibles with definite useful lives, increased interest and financing expense on debt related to the acquisitions and related income tax effects. The pro forma results of operations are not indicative of the actual results that would have occurred had the acquisitions been consummated at the beginning of the period presented and are not intended to be a projection of future results.


	Three Months Ended			Nine Months Ended
	September 30,			September 30,

	2001			2002			2001

	(in thousands except per share data)
	(unaudited)
Total revenues	$	443,982		$	1,253,394		$	1,583,336




Net loss	$	(78,999	)	$	(122,397	)	$	(443,778	)




Diluted loss per share	$	(0.68	)	$	(1.06	)	$	(3.79	)

16. RELATED PARTY TRANSACTIONS

In May 2001, we consummated a definitive agreement with our former Chairman and CEO, Mr. Musser, under which we loaned him $26.5 million. The loan bears interest at an annual rate of 7% and is payable on demand at any time after January 1, 2003. Mr. Musser granted us security interests in securities and real estate as collateral. Until April 30, 2006, we will have recourse only against the collateral. After April 30, 2006, we will have recourse against Mr. Musser personally, except with respect to certain ongoing compensation to be received by Mr. Musser. We have the right to sell the collateral at any time and apply the net after-tax proceeds from the sales of collateral against amounts outstanding on the loan. The outstanding balance of the loan at September 30, 2002 was approximately $25.3 million. Proceeds received from dispositions of the collateral may not be sufficient to repay the loan in full.

17. COMMITMENTS AND CONTINGENCIES

Litigation Arising Out Of The Initial Public Offering of Opus360 Corporation

Beginning in April 2001, the Company, CompuCom and a former officer of the Company who served as a Director of Opus360 Corporation, were named in putative class actions filed in federal court in New York. The plaintiffs allege material misrepresentations and/or omissions in connection with the initial public offering of Opus360 Corporation stock on April 7, 2000.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
SEPTEMBER 30, 2002

The cases are brought against Opus360, its officers and directors (including the former Company officer), the Company, CompuCom, and Opus360’s underwriters. Plaintiffs seek damages in an amount in excess of $70 million. The cases have been consolidated into a single proceeding and the court has approved the designation of a lead plaintiff and the retention of lead plaintiffs’ counsel. Plaintiffs have filed a consolidated and amended complaint. Safeguard and the other defendants have moved to dismiss this complaint for failure to state a claim upon which relief may be granted. On October 2, 2002, the court granted the motion to dismiss filed by Safeguard and CompuCom with respect to the claims under Section 11 and 12 of the Securities Act of 1933. The court also granted the motion to dismiss filed by all defendants due to the absence of any material misstatement or omission in the prospectus and registration statement (without prejudice to repleading within 30 days). On October 30, 2002, plaintiffs served their second amended consolidated class action complaint. The amended complaint does not name Safeguard or CompuCom as defendants and thus there is no pending actions against Safeguard or CompuCom.

Safeguard Scientifics Securities Litigation

On September 26, 2001, the Company and Warren V. Musser, the Company’s former Chairman, were named as defendants in a putative class action filed in federal court in Philadelphia. Plaintiffs allege that defendants failed to disclose that Mr. Musser had pledged some or all of his Safeguard stock as collateral to secure margin trading in his personal brokerage accounts. Plaintiffs allege that defendants’ failure to disclose the pledge, along with their failure to disclose several margin calls , the loan to Mr. Musser, the guarantee of certain margin debt and the consequences thereof on Safeguard’s stock price, violated the federal securities laws. Plaintiffs allege claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934.

On August 17, 2001, a second putative class action was filed against the Company and Mr. Musser asserting claims similar to those brought in the first proceeding. In addition, plaintiffs in the second case allege that the defendants failed to disclose possible or actual manipulative aftermarket trading in the securities of the Company’s partner companies, the impact of competition on prospects for one or more of the Company’s partner companies and the Company’s lack of a superior business plan.

These two cases have been consolidated for further proceedings under the name “In Re: Safeguard Scientifics Securities Litigation” and the Court has approved the designation of a lead plaintiff and the retention of lead plaintiffs’ counsel. The plaintiffs have filed a consolidated and amended complaint. On May 23, 2002, the defendants filed a motion to dismiss the consolidated and amended complaint for failure to state claim upon which relief may be granted. On October 24, 2002, the court denied the defendants’ motions to dismiss, holding that, based on the allegations of plaintiffs’ consolidated and amended complaint, dismissal would be inappropriate at this juncture. While the outcome of this litigation is uncertain, the Company believes that it has valid defenses to plaintiffs’ claims and intends to defend the lawsuit vigorously.

Other

The Company and its subsidiaries are involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position or results of operations.

In connection with its ownership interests in certain affiliates, the Company has guaranteed $7 million of bank loans and other commitments, and has committed capital of approximately $52 million to various affiliates, to be funded over the next several years, including approximately $16 million which is expected to be funded in the next twelve months. The Company also has committed to guarantee an additional $3 million of bank loans.

The Company has received distributions as both a general partner and a limited partner from certain private equity funds. Under certain circumstances, the Company may be required to return a portion or all the distributions it received as a general partner to the fund for a further distribution to the fund’s limited partners.

In the fourth quarter of 1998 and the first quarter of 2000, CompuCom effected restructuring plans designed to reduce its cost structure. At September 30, 2002, $1.5 million related to leases is included in Accrued Expenses and Deferred Revenue on the Consolidated Balance Sheets.

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

The statements contained in this Quarterly Report that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve certain risks, uncertainties and other factors that could cause actual results to be materially different from those contemplated by these statements. These risks and uncertainties include the factors described elsewhere in this report and in our filings with the SEC. We do not assume any obligation to update any forward-looking statements or other information contained in this Quarterly Report.

Although we refer in this report to the companies in which we have acquired an equity ownership interest as our “partner companies” and that we indicate that we have a “partnership” with these companies, we are not a “partner” in a legal sense, and do not act as an agent or legal representative for any of our partner companies, we do not have the power or authority to legally bind any of our partner companies and we do not have the types of liabilities in relation to our partner companies that a general partner of a partnership would have.

Certain amounts for prior periods in the Consolidated Financial Statements, and in the discussion below, have been reclassified to conform with current period presentations.

General

We are an operating company that seeks to create long-term value by acquiring technology-related companies that we develop by providing superior operations and management support. We also develop and operate emerging technology companies through our extensive network of partner companies and private equity funds (collectively, affiliates). We provide the resources to address the challenges facing our partner companies and enable these companies to capitalize on their potential opportunities. These resources include capital, management and operational expertise. We believe that our experience in developing and operating technology companies enables us to identify and attract companies with the greatest potential for success and to assist these companies to become market leaders and create value for us.

Because we acquire significant interests in technology-related companies, many of which generate net losses, we have experienced, and expect to continue to experience, significant volatility in our quarterly results. While some of our affiliates have consistently reported losses, we have recorded net income in certain periods and experienced significant volatility from period to period due, in part, to one-time transactions and other events incidental to our ownership interests in and advances to affiliates. These transactions and events include dispositions of, and changes to, our affiliate ownership interests and impairment charges. We do not know if we will report net income in any period.

Many of our partner companies that we account for under the equity method or consolidation method are technology-related companies with limited operating histories that have not generated significant revenues and have incurred substantial losses in prior periods. We expect these losses to continue for the remainder of 2002. In addition, we expect to continue to acquire interests in more technology-related companies that may have operating losses when we acquire them. Additionally, we expect certain of our existing partner companies to continue to invest in their products and services and to recognize operating losses related to those activities. As a result, equity losses could continue to be significant. It is reasonably possible that the impairment factors evaluated by management will change in subsequent periods, given that we operate in a volatile business environment. This could result in additional material impairment charges in future periods.

Net Results of Operations

At September 30, 2002, we had ownership in 23 partner companies, which were classified into the following segments:


	Strategic Private	Other Private Companies	Public Companies
	Companies	and Funds	(excluding CompuCom)	CompuCom

Consolidated	Agari Mediaware (70%) aligne (100%) Lever8 Solutions (100%) Mantas (63%) Protura (56%) SOTAS (75%)	Pacific Title and Arts Studio (83%)	Tangram (58%) ChromaVision Medical Systems (56%)	CompuCom (59%)
















Equity		Aptas (39%) Kanbay (30%) Nextone (30%) Persona (31%) QuestOne (31%) Zer0to5ive (33%)	DocuCorp (21%) eMerge Interactive (16%) Internet Capital Group (13%) Sanchez (24%) USDATA (31%)
















Cost		RealTime Media (9%)	Pac-West Telecomm (7%)

The percentages above reflect our voting ownership at September 30, 2002. Although we own less than 20% of the voting stock of some of these companies, we accounted for these companies on the equity method as we believe we have the ability to exercise significant influence based on our representation of each company’s board of directors and other factors.

Each segment includes the results of the consolidated companies and records our share of income or losses for entities accounted for under the equity method. Segment results also include impairment charges, gains or losses related to the disposition of partner companies and the mark to market of trading securities. All significant intersegment activity has been eliminated. Accordingly, segment results reported exclude the effect of transactions between us and our subsidiaries.

Other items, which include corporate expenses, results of operations of disposed companies, goodwill amortization and income taxes, are reviewed by management independent of segment results. Corporate expenses include the costs of providing operations and management support to our partner companies. Results of operations — dispositions includes the results for partner companies which were disposed of prior to the new segments being developed. Goodwill is no longer amortized as a result of the adoption of SFAS 142 effective January 2002.


Strategic Private Companies

	Three Months Ended September 30,						Nine Months Ended September 30,

	2002			2001			2002			2001

	(in thousands)						(in thousands)
	(unaudited)						(unaudited)
Revenue	$	11,839		$	12,733		$	32,257		$	42,113




Total operating expenses		19,161			15,497			52,383			47,876

		(7,322	)		(2,764	)		(20,126	)		(5,763	)




Other loss, net		(4,392	)		—			(4,408	)		—




Interest expense, net		(149	)		(51	)		(299	)		(156	)




Minority interest		1,913			—			4,187			—




Equity loss		—			(290	)		(1,958	)		(290	)

		(9,950	)		(3,105	)		(22,604	)		(6,209	)




Cumulative effect of change in accounting principle		—			—			(21,815	)		—

	$	(9,950	)	$	(3,105	)	$	(44,419	)	$	(6,209	)

Revenue. Revenue consists of sales by aligne, Lever8 Solutions, SOTAS, and, for 2002, sales by Agari, Mantas and Protura. Revenue decreased $0.9 million and $9.9 million for the three and nine months ended September 30, 2002 compared to the prior year periods. Of this decrease, $6.0 million and $13.5 million relate to a decline in consulting revenue at aligne and Lever8 for the three and nine months ended September 30, 2002 compared to the prior year period. The decrease is due to reduced demand for IT services and continued market softness. During the first quarter, we integrated two existing partner companies, Palarco, a provider of global IT solutions, and aligne Solutions (formerly K Consultants), an IT management organization, to create a full service IT solutions company, Lever8 Solutions. Lever8 provides tailored software, staffing and infrastructure outsourcing solutions to fit the needs of its clients, which span multiple industries, including pharmaceuticals, consumer packaged goods, manufacturing, healthcare, financial services and technology. For the three months ended September 30, 2002, the decrease was partially offset by an increase in revenue at SOTAS and the inclusion of revenue for Mantas subsequent to consolidating its results in April 2002. For the nine month period, the decrease was partially offset by the inclusion of revenue for Mantas in 2002.

Operating Expenses. Operating expenses increased $3.7 million and $4.5 million for the three and nine months ended September 30, 2002 compared to the prior year periods. Of the increases, $8.7 million and $19.6 million of operating expenses related to Agari, Mantas and Protura subsequent to consolidating their results in 2002. Excluding these companies, total operating expenses decreased $5.0 million and $15.1 million for the three and nine months ended September 30, 2002 compared to the prior year period. This is due to a $0.3 million and $5.7 million decrease in costs at SOTAS and a $4.6 million and $9.4 million decrease in costs at aligne and Lever8 Solutions for the three and nine months ended September 30, 2002 compared to the prior year period. During the second half of 2001 and the first half of 2002, these companies took steps to reduce their costs to better align their overall cost structure and organization with anticipated demand for their products and services. These steps, including a reduction in the number of consultants and functional support personnel, were taken as a result of the continued decline in demand for technology services.

Other Loss. Other loss reflects impairment charges for holdings judged to have experienced an other than temporary decline in value.

Equity Loss. Equity loss includes our share of Mantas’ results of operations. We acquired a controlling interest in Mantas in April 2002. As a result, we consolidated Mantas’ results in the second quarter of 2002. Prior to the second quarter of 2002, we accounted for Mantas on the equity method of accounting.

Cumulative Effect of Change in Accounting Principle. In connection with the transitional impairment test performed upon the adoption of SFAS 142, we reported a goodwill impairment loss (see Note 3).

Other Private Companies and Funds


	Three Months Ended September 30,						Nine Months Ended September 30,

	2002			2001			2002			2001

	(in thousands)						(in thousands)
	(unaudited)						(unaudited)
Revenue	$	11,493		$	11,327		$	35,597		$	24,128




Operating expenses		11,843			10,902			37,814			23,817

		(350	)		425			(2,217	)		311




Other income (loss), net		817			(7,924	)		6,045			(21,253	)




Interest and financing expense, net		(305	)		(24	)		(440	)		(4	)




Minority interest		54			(35	)		189			(35	)




Equity loss		(5,352	)		(15,506	)		(32,810	)		(82,582	)

	$	(5,136	)	$	(23,064	)	$	(29,233	)	$	(103,563	)

Revenue. Revenue includes management fees charged to private equity funds for operations and management services and sales by Pacific Title subsequent to consolidating its results in the August 2001. Revenue also includes sales by Aptas for the first quarter of 2002. Revenue increased $0.2 million and $11.5 million for the three and nine months ended September 30, 2002 compared to the prior year period. The increase for the three month period is due to an increase in revenue at Pacific Title, partially offset by a decrease in management fees charged to private equity funds. The increase for the nine months ended is due to the inclusion of revenue related to the operations of Pacific Title and Aptas subsequent to consolidating their results in the third quarter of 2001 and the first quarter of 2002, respectively, partially offset by reduced management fees.

Operating Expenses. Operating expenses increased $0.9 million and $14.0 million for the three months and nine months ended September 30, 2002 compared to the prior year period. The increase for the three month period is due to an additional $1.3 million of costs related to the operations of Pacific Title subsequent to consolidating their results, partially offset by reduced costs to manage certain private equity funds. The increase for the nine months period is due the inclusion of expenses related to the operations of Pacific Title and Aptas subsequent to consolidating their results, partially offset by reduced costs to manage certain private equity funds.

Other Income (Loss), Net. Other income (loss), net includes $9.0 million for the nine months ended September 30, 2002 related to the release of escrowed proceeds from the sale of a partner company in 2000. Other income (loss), net also includes $0.5 million and $4.1 million of impairment charges for the three and nine months ended September 30, 2002 and $8.0 million and $23.0 million for the three and nine months ended September 30, 2001. Impairment charges reflect certain holdings judged to have experienced an other than temporary decline in value. Other income (loss), net also includes $1.2 million for the three and nine months ended September 30, 2002 related to the collection of a note receivable from the sale of a partner company.

Equity Loss. Equity loss fluctuates with the number of companies accounted for under the equity method, our voting ownership percentage in these companies and the net results of operations of these companies. Equity loss decreased $10.2 million and $49.8 million for the three and nine months ended September 30, 2002 compared to the prior year periods. Of the total decrease, $5.4 million for the three months ended and $17.1 million for the nine months ended relate to our share of losses of private equity funds. For the three months ended September 30, 2002 as compared to the prior year period, there was an increase of $0.6 million relating to impairment charges on affiliates accounted for under the equity method, and a decrease of $9.4 million for the nine months ended September 30, 2002 as compared to the prior year period. A total of $1.0 million and $6.5 million of the decrease is due to discontinuing the recording of equity losses of partner companies whose carrying value was reduced to $0 during 2001. We recognize our share of losses to extent we have a cost basis in the equity investee, or we have outstanding commitments or guarantees. The remaining decline is due to reduced operating losses at certain companies.

Certain amounts recorded to reflect our share of the income or losses of our partner companies accounted for under the equity method are based on estimates and on unaudited results of operations of those partner companies and may require adjustments in the future when audits of these entities are made final.

Public Companies (excluding CompuCom)


	Three Months Ended September 30,						Nine Months Ended September 30,

	2002			2001			2002			2001

	(in thousands)						(in thousands)
	(unaudited)						(unaudited)
Revenue	$	5,644		$	3,739		$	11,651		$	10,399




Operating expenses		7,578			4,402			15,427			12,346

		(1,934	)		(663	)		(3,776	)		(1,947	)




Other loss, net		(901	)		(3,426	)		(15,166	)		(21,134	)




Interest and financing expense, net		(3,010	)		(47	)		(3,353	)		(130	)




Minority interest		2,172			—			2,937			—




Equity loss		675			(13,098	)		(6,324	)		(164,022	)

	$	(2,998	)	$	(17,234	)	$	(25,682	)	$	(187,233	)

Revenue and Operating Expenses. Revenue increased $1.9 million and $1.3 million for the three and nine months ended September 30, 2002 compared to the prior year periods. Of the total increase, $2.6 million and $3.0 million relates to ChromaVision, which was consolidated effective June 2002, partially offset by a $0.7 million and $1.7 million decrease related to the operations of Tangram for the three and nine months ended September 30, 2002 compared to the prior year periods. Operating expenses increased $3.2 million and $3.1 million for the three and nine months ended September 30, 2002 as compared to the prior year periods. Of the total increase, $4.6 million and $5.4 million relates to ChromaVision, partially offset by a $1.4 million and $2.3 million decrease related to the operations of Tangram for the three and nine months ended September 30, 2002 compared to the prior year periods. During 2002, Tangram has taken steps to reduce its cost structure to better align their expenses and organization with their revenue projections. These steps were taken as a result of the continued decline in demand for technology services.

Other Loss, Net.


	Three Months Ended September 30,						Nine Months Ended September 30,

	2002			2001			2002			2001

	(in thousands)						(in thousands)
	(unaudited)						(unaudited)
Gain (loss) on sale of companies	$	(62	)	$	520		$	(1,245	)	$	1,735




Unrealized gain (loss) on Tellabs and related forward sale contracts, net		267			3,257			1,509			(13,271	)




Unrealized loss on other trading securities		(686	)		(675	)		(14,404	)		(1,801	)




Impairment charges		(420	)		(6,528	)		(1,026	)		(7,797	)

	$	(901	)	$	(3,426	)	$	(15,166	)	$	(21,134	)

During the first quarter of 2002, we sold shares of public holdings, primarily Palm, for aggregate net cash proceeds of $13.1 million, and recorded losses of $1.2 million.

We recognized a net gain of $0.3 million and $1.5 million for the three and nine months ended September 30, 2002 related to our holdings in Tellabs. This amount reflects a $1.0 million gain on the change in the fair value of the hedging contract, reduced by a $0.7 million loss on the change in fair value of the Tellabs holdings for the three months ended September 30, 2002 and $23.3 million gain on the fair value of the hedging contract, reduced by a $21.8 million loss on the fair value of the Tellabs holdings for the nine months ended September 30, 2002.

Unrealized loss on other trading securities in 2002 reflects the decline in value of our shares of VerticalNet.

Impairment charges reflect certain equity holdings judged to have experienced an other than temporary decline in value.

Equity Loss.Equity loss for the nine months ended September 30, 2001 includes $136.5 million related to Internet Capital Group. As of September 30, 2001, as a result of recording our share of Internet Capital Group’s losses, our carrying value was reduced to $0. As a result, we no longer record our share of Internet Capital Group’s operating results in our Consolidated Statements of Operations.

Excluding equity loss attributable to Internet Capital Group, equity income was $0.7 million for the three months ended September 30, 2002, and equity loss was $6.3 million for the nine months ended September 30, 2002 and $13.1 million and $27.5 million for the three and nine months ended September 30, 2001. The decrease is primarily due to discontinuing the recording of equity losses of partner companies whose carrying value was reduced to $0 during 2002.

CompuCom


	Three Months Ended September 30,						Nine Months Ended September 30,

	2002			2001			2002			2001

	(in thousands)						(in thousands)
	(unaudited)						(unaudited)
Revenue	$	414,066		$	404,760		$	1,167,156		$	1,447,757




Cost of Sales		361,529			345,430			1,010,091			1,259,269

		52,537			59,330			157,065			188,488




Other operating expenses		43,633			56,906			135,120			176,972

		8,904			2,424			21,945			11,516




Interest and financing expense, net		27			(455	)		(523	)		(2,932	)




Minority interest		(3,472	)		(636	)		(8,095	)		(2,934	)

		5,459			1,333			13,327			5,650




Cumulative effect of change in accounting principle		—			—			425			—

	$	5,459		$	1,333		$	13,752		$	5,650

In November 2001, CompuCom purchased certain assets and assumed certain liabilities associated with ClientLink, which provides high-end technical consulting, development, deployment and maintenance services. In November 2001, CompuCom acquired Northern NEF, Inc. (NNEF), a federal systems integrator and solutions provider, whose services include systems engineering, equipment procurement, software development, integration, test and training as well as related program management support services to various defense and civilian agencies of the federal and state governments and commercial accounts. In July 2001, CompuCom purchased certain assets and assumed certain liabilities of Excell Data Corporation. The net assets acquired were used by Excell primarily in its business of high-end technical applications development, network infrastructure design and deployment and worldwide event technical planning and support.

Revenue.Revenue, which consists of product revenue and service revenue, increased $9.3 million or 2.3% for the three months ended September 30, 2002 and decreased $280.6 million or 19.4% for the nine months ended September 30, 2002 as compared to the same periods in 2001. Of the total increase for the three months ended September 30, 2002, $0.2 million was attributable to product revenue and $9.1 million attributable to service revenue. Of the total decrease for the nine months ended September 30, 2002, $292.3 million was attributable to product revenue which was partially offset by an increase in service revenue of $11.7 million as compared to the same period in 2001. CompuCom believes demand for its products continues to be hampered by general economic conditions that have resulted in lower demand for personal computer products mainly from its Fortune 1000 client base. Product revenue was negatively impacted by certain clients electing to purchase product directly from manufacturers as well as by increased competition from other direct marketers. The increase in service revenue was primarily due to services directly related to the 2001 acquisitions, partially offset by a decline in field engineering and product-related services.

Cost of Sales/Gross Margin.Product gross margin for the three and nine months ended September 30, 2002 was 7.8% and 8.4% compared to 9.9% and 9.2% for the same period in 2001. CompuCom believes this decrease is due to an

increase in the proportion of lower margin software revenue relative to total product revenue, lower volume incentive dollars from suppliers as well as more aggressive pricing in certain circumstances for both hardware and software revenue. Service gross margin remained decreased for the three and nine months ended September 30, 2002 to 32.6% and 34.7% from 36.5% and 35.4% for the same period in 2001. Compucom attributes this decline primarily as a result of the increase in lower margin services to the federal government.

Due to economic competitive conditions, CompuCom expects to experience continued pressure on both revenue and gross margin, the result of which may be lower revenue and related gross margin when compared to the comparable prior year period or previous quarter.

Other Operating Expenses.Other operating expenses decreased 23.3% and 23.6% for the three and nine months ended September 30, 2002 as compared to the same periods in 2001. CompuCom attributes this decrease to its own cost management efforts related to selling and service expenses and general administrative expenses, including personnel related costs and infrastructure costs.

Interest and Financing Expense, Net.Interest and financing expense decreased for the three and nine months ended September 30, 2002 as compared to the prior year periods. The decrease is primarily due to CompuCom’s continued improvement in management of working capital, lower financing requirements due to the decline in product revenues and the effect of lower effective interest rates.

Reconciling Items

Corporate Operations


	Three Months Ended September 30,				Nine Months Ended September 30,

	2002		2001		2002		2001

	(in thousands)				(in thousands)
	(unaudited)				(unaudited)
General and administrative costs, net	$	5,202	$	10,309	$	15,097	$	28,562




Stock-based compensation		853		207		2,774		228




Depreciation and amortization		190		593		868		1,860




Interest expense, net		2,198		4,047		9,716		9,904




Other		14		1,743		20		1,889

	$	8,457	$	16,899	$	28,475	$	42,443

Our general and administrative expenses consist primarily of employee compensation, outside services such as legal, accounting and consulting, and travel-related costs. General and administrative expenses decreased $5.1 million and $13.5 million for the three and nine months ended September 30, 2002 when compared to 2001. The decrease is due to certain cost reduction efforts undertaken during 2001, including reduced compensation and travel-related costs as a result of a reduction in headcount and the reduction in the use of outside consulting services.

As discussed in Note 10, we issued shares of restricted stock to employees in 2001 and 2002. The value of these shares is recorded as deferred compensation and is recognized as expense on a straight-line basis over the vesting period.

Interest expense, net, decreased $1.8 million and $0.2 million for the three and nine months ended September 30, 2002 compared to 2001. The decrease is due to the elimination of accretion of the obligation and amortization of the cost of our initial Tellabs forward sale contracts which were settled in March and August 2002, and costs incurred in 2001 associated with our line of credit, partially offset by lower interest rates earned on invested balances.

Income Taxes.Our consolidated income tax expense recorded for the three and nine months ended September 30, 2002, was $2.2 million and $5.2 million, net of recorded valuation allowance of $9.2 million and $36.8 million. We have recorded a valuation allowance to reduce our deferred tax asset to an amount that is more likely than not to be realized in future years. Our consolidated effective tax rate before valuation allowance increased to 33.8% for the three months ended September 30, 2002 compared to 29.9% for the prior year period. For the nine months ended September 30, 2002 our

consolidated effective tax rate before valuation allowance increased to 34.2% compared to 32.7% for the prior year period. This rate differs from the federal statutory rate due to miscellaneous non-deductible expenses.

Liquidity And Capital Resources

We have funded our operations with proceeds from the issuance of equity securities and convertible notes, proceeds from forward sale contracts, proceeds from sales of affiliates, distributions from private equity funds and operating cash flow from our wholly owned business and IT service companies. Our ability to raise proceeds could be adversely affected by market declines and other factors.

Proceeds from sales of and distributions from affiliates and sales of available-for-sale and trading securities for the nine months ended September 30, 2002 were $32 million.

In May 2002, we entered into a credit agreement providing for borrowings, issuances of letters of credit and guarantees of up to $25 million. We occasionally use letters of credit to provide transactional support to our partner companies. This credit facility matures in May 2003 and bears interest at the prime rate for outstanding borrowings. The credit facility is subject to an unused commitment fee of 0.125% which is subject to reduction based on deposits maintained at the bank. The facility requires cash collateral equal to two times any outstanding amounts under the facility. This facility provides us additional flexibility to implement our strategy and support our partner companies. As of September 30, 2002, a guarantee totaling $5 million related to a partner company credit facility was outstanding.

In August 1999, in order to mitigate our market exposure and generate cash, we entered into a forward sale contract related to 3.4 million shares of our holdings in Tellabs common stock. We pledged these shares of Tellabs under a contract that expires in August 2002 and, in return, received cash. In March 2002, we settled $91 million of the liability entered into in connection with our first hedge of our Tellabs holdings by delivering 2.0 million shares of Tellabs. We settled the remaining liability of $87 million in August 2002 by delivering the remaining 1.4 million shares. These settlements had no impact on our cash balances.

The transactions we enter into in pursuit of our strategy could impact our liquidity at any point in time. As we seek to acquire technology-related companies, we may be required to expend our cash or incur debt which will decrease our liquidity. Conversely, as we dispose of our interests in companies that are no longer strategic, we may receive proceeds from such sales which could increase our liquidity. From time to time we are engaged in discussions concerning acquisitions and dispositions which, if consummated, could impact our liquidity, perhaps significantly.

Our cash and cash equivalents at September 30, 2002 and other internal sources of cash flow are expected to be sufficient to fund our cash requirements for at least the next twelve months, including commitments to our existing affiliates, our current operating plan to acquire interests in new affiliates and our general corporate requirements.

At September 30, 2002 we have guaranteed $7 million of bank loans and other commitments. We also have committed to guarantee an additional $3 million of bank loans. Additionally, we have committed capital of approximately $52 million, including commitments made in prior years to various affiliates, to be funded over the next several years, including approximately $16 million which is expected to be funded in the next twelve months.

CompuCom maintains separate, independent financing arrangements, which are non-recourse to us and are secured by certain assets of CompuCom. During recent years, CompuCom has utilized bank financing arrangements and internally generated funds to fund its cash requirements.

outstanding under the working capital facility as of September 30, 2002 and December 31, 2001. Terms of the working capital facility limit the amounts available for capital expenditures and dividends. Within the context of the securitization facility, each certificate is issued from a separate facility, each facility set at $50 million. Amounts outstanding as sold receivables as of September 30, 2002, consisted of two certificates totaling $60 million, one certificate for $10 million which initially had an April 2002 maturity date but has been renewed for three years with an October 2005 maturity date, and one certificate for $50 million with an October 2003 maturity date.

CompuCom’s liquidity is impacted by the dollar volume of certain manufacturers’ rebate programs. As of September 30, 2002, CompuCom was owed approximately $16 million under these vendor rebate programs as compared to approximately $14 million at December 31, 2001.

CompuCom’s ability to make distributions to its shareholders is limited by restrictions in CompuCom’s financing agreements and CompuCom’s working capital needs. We do not consider CompuCom’s liquidity to be a source of liquidity to us.

Net cash provided from operating activities was $30 million for the nine months ended September 30, 2002 compared to $186 million during the same prior year period. The decrease was due to a $202 million decline in cash provided by operating activities at CompuCom, primarily due to changes in accounts receivable and inventory when compared to the prior year periods. This decrease was partially offset by a $63 million tax refund received by the Company in 2002.

Consolidated working capital decreased to $288 million at September 30, 2002 compared to $349 million at December 31, 2001. This decrease is primarily due to the sale of Palm shares and the decline in the market value of VerticalNet.

We are involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on our consolidated financial position or results of operations.

Our general operations are not capital intensive, and capital expenditures in any year normally will not be significant in relation to our overall financial position. There were no material capital asset purchase commitments at September 30, 2002.

Recent Accounting Pronouncements

See Note 4 to the Consolidated Financial Statements.

Factors That May Affect Future Results

Forward-looking statements in this report and those made from time to time by us through our senior management team are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Factors that could cause actual results to differ materially from results anticipated in forward-looking statements are described in our SEC filings, including our Annual Report on Form 10-K for the year ended December 31, 2001. These factors include, but are not limited to, the following:

	•		The performance of our affiliates, which face risks such as intense competition, rapid changes in technology and customer demands, frequent new product introductions and shifting distribution channels.

	•		Many of our affiliates are early-stage companies with limited operating histories, no historical profits and financing requirements that they may not be able to satisfy. These affiliates may not have operating income or net income in the future and their financial results may vary dramatically from quarter to quarter.

	•		We may have problems raising money we need in the future to fund the needs of our affiliates and to make acquisitions of affiliates.

	•		We may incur significant costs to avoid investment company status and may suffer adverse consequences if deemed to be an investment company.

	•		Our strategy of creating value for our shareholders and the owners of our partner companies by helping our partner companies grow, and, if and when appropriate, monetizing our interests in certain of the developed partner companies, is dependent on the strength of the public and private capital markets for technology related companies and on the level of activity in the mergers and acquisitions market in the partner companies industry, as well as on the requirements of the Federal securities laws regulating the sale of securities.

	•		Our financial results are likely to vary dramatically from quarter to quarter depending upon various events. These events include the financial results of our affiliates and the way that the partner companies are reflected in our consolidated financial statements, sales of partner companies or our interests in partner companies and distributions from private equity funds which we manage or in which we have an interest.

	•		Our ability to execute our strategy.

	•		Our stock price may be subject to significant fluctuation because the value of some of our partner companies fluctuates and because of market conditions generally.

Item 3.Quantitative and Qualitative Disclosures About Market Risk

We are exposed to equity price risks on the marketable portion of our securities. These securities include equity positions in companies in the technology industry, many of which have experienced significant volatility in their stock prices. Historically, we have not attempted to reduce or eliminate our market exposure on securities (except the Tellabs transactions as described in Note 7 to the Consolidated Financial Statements). Based on closing market prices at September 30, 2002, the fair market value of our holdings in public securities was approximately $247 million. A 20% decrease in equity prices would result in an approximate $49 million decrease in the fair value of our publicly traded securities.

CompuCom is exposed to interest rate risk primarily through its receivables securitization and working capital facilities. CompuCom utilizes these facilities to meet its working capital and other financing needs. At September 30, 2002, the securitization facility had borrowings of approximately $60 million, and there were no borrowings on the working capital facility. If CompuCom’s effective interest rate were to increase by 100 basis points, or 1.00%, CompuCom’s annual interest and financing expense would increase by approximately $0.6 million based on CompuCom’s average balances utilized under its facilities during the nine months ended September 30, 2002. Our share of this increase would be approximately $0.4 million after deduction for minority interest but before income taxes.

Item 4.Controls and Procedures

	(a)		Evaluation of disclosure controls and procedures: The Company’s Chief Executive Officer and its Chief Financial Officer, after evaluating the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15-d-14(c)) as of a date within 90 days of filing date of the quarterly report (the “Evaluation Date”), have concluded that as of the Evaluation Date, the Company’s disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company would be made known to them by others within the Company, particularly during the period in which this quarterly report was being prepared.

	(b)		Changes in internal controls: There were no significant changes in the Company’s internal controls or in other factors that could significantly affect the Company’s internal controls and procedures subsequent to the Evaluation Date, nor any significant deficiencies or material weaknesses in such internal controls and procedures requiring corrective actions.

PART II

OTHER INFORMATION

Item 1.Legal Proceedings

Litigation Arising Out Of The Initial Public Offering of Opus360 Corporation.On September 24, 2001, plaintiffs filed a consolidated and amended complaint in this litigation described in Item 3 of Safeguard’s Annual Report on Form 10-K for the year ended December 31, 2001 (the “2001 Form 10-K”). On October 24, 2001, Safeguard and the other defendants moved to dismiss this complaint for failure to state a claim upon which relief may be granted. On October 2, 2002, the court granted the motion to dismiss filed by Safeguard and CompuCom with respect to the claims under Section 11 and 12 of the Securities Act of 1933. The court also granted the motion to dismiss filed by all defendants due to the absence of any material misstatement or omission in the prospectus and registration statement (without prejudice to repleading within 30 days). On October 30, 2002, plaintiffs served their second amended consolidated class action complaint. The amended complaint does not name Safeguard or CompuCom as defendants and thus there is no pending actions against Safeguard or CompuCom.

Safeguard Scientifics Securities Litigation.On April 5, 2002, plaintiffs filed a consolidated and amended complaint in this litigation described in Item 3 of Safeguard’s Annual Report on Form 10-K for the year ended December 31, 2001 (the “2001 Form 10-K”). On May 23, 2002, the defendants filed a motion to dismiss the consolidated and amended complaint for failure to state claim upon which relief may be granted. On October 24, 2002, the court denied the defendants’ motions to dismiss, holding that, based on the allegations of plaintiffs’ consolidated and amended complaint, dismissal would be inappropriate at this juncture. While the outcome of this litigation is uncertain, we believe that it has valid defenses to plaintiffs’ claims and intends to defend the lawsuit vigorously.

Except in the case of the Safeguard Scientifics Securities Litigation, there have been no material developments during the quarter in litigation disclosed in the 2001 Form 10-K. The Company and its subsidiaries are involved in various other claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position or results of operations.

Item 6.Exhibits and Reports on Form 8-K


(a)	Exhibits.




	10.1(1)	Loan Agreement dated May 10, 2002 by and among Comerica Bank – California, Safeguard Delaware, Inc. and Safeguard Scientifics (Delaware), Inc. (exhibits omitted)









	99.1(*)	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002









	99.2(*)	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002









	* Filed herewith









	(1) Filed on August 14, 2002 as an Exhibit to Form 10-Q and incorporated herein by reference









(b)	Reports on Form 8-K.









	On August 14, 2002, the Company filed a Current Report on Form 8-K to provide the Statements Under Oath of the Principal Executive Officer and the Principal Financial Officer Regarding Facts and Circumstances Relating to Exchange Act Filings.

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, 2002		/s/ Anthony L. Craig

		Anthony L. Craig Chief Executive Officer and President









Date: November 14, 2002		/s/ Christopher J. Davis

		Christopher J. Davis Managing Director and Chief Financial Officer

CERTIFICATION

I, Anthony L. Craig, certify that:

1.		I have reviewed this quarterly report on Form 10-Q of Safeguard Scientifics, Inc.;

2.		Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.		Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.		The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

	a)		designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

	b)		evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

	c)		presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

	a)		all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

	b)		any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


SAFEGUARD SCIENTIFICS, INC.









Date: November 14, 2002		/s/ Anthony L. Craig

		Anthony L. Craig Chief Executive Officer

CERTIFICATION

I, Christopher J. Davis, certify that:

1.		I have reviewed this quarterly report on Form 10-Q of Safeguard Scientifics, Inc.;

2.		Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.		Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.		The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

	a.		designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

	b.		evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

	c.		presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

	a.		all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

	b.		any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and


SAFEGUARD SCIENTIFICS, INC









Date: November 14, 2002		/s/ Christopher J. Davis

		Christopher J. Davis Chief Financial Officer

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Safeguard Scientifics (SFES) 10-Q2002 Q3 Quarterly report

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