FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended September 30, 2000 Commission File Number 1-5620
------------------ ------
SAFEGUARD SCIENTIFICS, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1609753
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(state or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
800 The Safeguard Building, 435 Devon Park Drive Wayne, PA 19087
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (610) 293-0600
--------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities and Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports) and (2) has been subject
to such filing requirements for the past 90 days.
Yes X No
--- ---
Number of shares outstanding as of November 13, 2000
Common Stock 116,876,533
1
SAFEGUARD SCIENTIFICS, INC.
QUARTERLY REPORT FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION Page
------------------------------ ----
Item 1 - Financial Statements:
Consolidated Balance Sheets -
September 30, 2000 (unaudited) and December 31, 1999................... 4
Consolidated Statements of Operations (unaudited) -
Three and Nine Months Ended September 30, 2000 and 1999................ 5
Consolidated Statements of Cash Flows (unaudited) -
Nine Months Ended September 30, 2000 and 1999.......................... 6
Notes to Consolidated Financial Statements............................. 7
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations.................. 20
Item 3 - Quantitative and Qualitative Disclosures About Market Risk..... 34
PART II - OTHER INFORMATION
----------------------------
Item 6 - Exhibits and Reports on Form 8-K............................... 35
Signatures.............................................................. 36
2
This Quarterly Report on Form 10-Q includes forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act, as amended. We have based these
forward-looking statements on our current expectations and projections about
future events. These forward-looking statements are subject to known and unknown
risks, uncertainties and assumptions about us and our partner companies, that
may cause our actual results, levels of activity, performance, or achievements
to be materially different from any future results, levels of activity,
performance, or achievements expressed or implied by such forward-looking
statements. In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "could," "would," "expect," "plan,"
"anticipate," "believe," "estimate," "continue," or the negative of such terms
or other similar expressions. Factors that might cause or contribute to such a
discrepancy include, but are not limited to, those discussed elsewhere in this
Report and the risks discussed in our other Securities and Exchange Commission
(SEC) filings, including our Registration on Form S-3 dated April 6, 2000.
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 do not act as an agent or legal
representative for any of our partner companies, and 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.
3
SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, December 31,
2000 1999
---------- ----------
(unaudited)
Assets
Current Assets
Cash and cash equivalents.................................. $ 246,122 $ 49,813
Accounts receivable, less allowances....................... 303,820 259,383
Inventories................................................ 91,790 129,826
Prepaid expenses and other current assets.................. 14,682 16,488
---------- ----------
Total current assets........................................ 656,414 455,510
Property and equipment, net................................. 51,620 56,234
Ownership interests in and advances to partner companies.... 850,352 529,381
Available-for-sale securities............................... 206,226 302,940
Excess of cost over net assets of businesses acquired, net.. 126,762 119,288
Other....................................................... 37,361 36,526
---------- ----------
Total Assets................................................ $1,928,735 $1,499,879
========== ==========
Liabilities and Shareholders' Equity
Current Liabilities
Current maturities of long-term debt....................... $ 5,878 $ 11,019
Accounts payable........................................... 126,742 183,781
Accrued expenses........................................... 123,632 126,871
---------- ----------
Total current liabilities................................... 256,252 321,671
Long-term debt.............................................. 48,258 14,532
Deferred taxes.............................................. 64,592 110,556
Minority interest........................................... 103,071 102,808
Other long-term liabilities................................. 140,866 175,611
Convertible subordinated notes.............................. 200,000 200,000
Commitments and Contingencies
Shareholders' Equity
Common stock................................................ 11,815 10,475
Additional paid-in capital.................................. 756,778 133,969
Retained earnings........................................... 391,700 385,120
Accumulated other comprehensive income (loss)............... (5,759) 45,137
Treasury stock, at cost..................................... (38,838) --
---------- ----------
Total Shareholders' Equity.................................. 1,115,696 574,701
---------- ----------
Total Liabilities and Shareholders' Equity.................. $1,928,735 $1,499,879
========== ==========
See notes to consolidated financial statements.
4
SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share data)
Three Months Ended, Nine Months Ended,
September 30 September 30
--------------------- -----------------------
2000 1999 2000 1999
-------- -------- ---------- ----------
(unaudited) (unaudited)
Revenue
Product sales................................... $651,795 $809,683 $1,788,183 $1,965,287
Service sales................................... 73,925 87,973 210,392 241,637
Other........................................... 4,630 3,002 12,719 9,208
-------- -------- ---------- ----------
Total revenue.................................... 730,350 900,658 2,011,294 2,216,132
Operating Expenses
Cost of sales--product.......................... 597,235 740,898 1,645,872 1,800,806
Cost of sales--service.......................... 43,701 55,138 136,322 154,260
Selling and service............................. 36,797 48,578 110,046 127,520
General and administrative...................... 49,957 38,443 143,811 99,927
Depreciation and amortization................... 8,032 8,121 24,391 22,103
Restructuring................................... -- -- 5,169 --
-------- -------- ---------- ----------
Total operating expenses......................... 735,722 891,178 2,065,611 2,204,616
-------- -------- ---------- ----------
(5,372) 9,480 (54,317) 11,516
Gains on issuance of stock by partner companies.. -- 35,379 -- 35,705
Other income (loss), net......................... 34,457 (4,327) 114,792 77,793
Interest and dividend income..................... 7,543 1,552 16,190 3,095
Interest expense................................. (10,762) (12,057) (31,512) (29,940)
-------- -------- ---------- ----------
Income Before Income Taxes, Minority
Interest and Equity Loss........................ 25,866 30,027 45,153 98,169
Income taxes..................................... 13,865 (5,017) (3,241) (24,219)
Minority interest................................ (3,884) (4,847) 2,985 (5,170)
Equity loss...................................... (61,035) (10,846) (38,317) (23,802)
-------- -------- ---------- ----------
Net Income (Loss)................................ $(25,188) $ 9,317 $ 6,580 $ 44,978
======== ======== ========== ==========
Net Income (Loss) Per Share
Basic........................................... $(0.22) $0.09 $0.06 $0.45
Diluted......................................... $(0.22) $0.09 $0.06 $0.43
Weighted Average Shares Outstanding
Basic........................................... 117,095 104,283 113,131 100,017
Diluted......................................... 117,095 106,527 115,958 106,140
See notes to consolidated financial statements.
5
SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine Months Ended September 30,
-------------------------------
2000 1999
--------- --------
(unaudited)
Operating Activities
Net income........................................................ $ 6,580 $ 44,978
Adjustments to reconcile to net cash provided by (used in)
operating activities:
Depreciation and amortization.................................... 24,391 22,103
Deferred income taxes............................................ (18,643) 10,252
Equity loss...................................................... 38,317 23,802
Gain on issuance of stock by partner companies................... -- (35,705)
Other income, net................................................ (114,792) (77,793)
Minority interest, net of taxes.................................. (1,791) 3,102
Changes in assets and liabilities, net of effect of acquisitions
and dispositions:
Accounts receivable, net......................................... (41,291) (63,068)
Inventories...................................................... 38,036 76,972
Accounts payable, accrued expenses and other..................... (26,986) (6,196)
--------- ---------
Net cash used in operating activities........................... (96,179) (1,553)
Investing Activities
Proceeds from sales of available-for-sale securities.............. 85,658 16,913
Proceeds from sales of partner company ownership interests........ 74,474 63,991
Advances to partner companies..................................... (30,793) (42,587)
Repayment of advances to partner companies........................ 15,550 4,894
Acquisitions of ownership interests in partner companies and
subsidiaries, net of cash acquired............................... (442,440) (160,042)
Acquisitions by subsidiaries, net of cash acquired................ (750) (137,235)
Proceeds from sale of building.................................... 617 39,791
Capital expenditures.............................................. (9,265) (8,398)
Other, net........................................................ (3,090) (7,353)
--------- ---------
Net cash used in investing activities........................... (310,039) (230,026)
Financing Activities
Borrowings on revolving credit facilities......................... 963,216 927,565
Repayments on revolving credit facilities......................... (928,637) (943,691)
Borrowings on long-term debt...................................... 2,151 2,470
Repayments on long-term debt...................................... (7,426) (25,763)
Proceeds from issuance of convertible subordinated notes, net..... -- 193,852
Proceeds from financial instruments............................... -- 139,309
Repurchase of Company common stock................................ (43,611) (2,695)
Issuance of Company common stock, net............................. 614,940 4,580
Issuance of subsidiary common stock............................... 1,894 1,233
--------- ---------
Net cash provided by financing activities....................... 602,527 296,860
--------- ---------
Net Increase in Cash and Cash Equivalents......................... 196,309 65,281
Cash and cash equivalents at beginning of period.................. 49,813 6,257
--------- ---------
Cash and Cash Equivalents at End of Period........................ $ 246,122 $ 71,538
========= =========
See notes to consolidated financial statements.
6
SAFEGUARD SCIENTIFICS, INC.
Notes to Consolidated Financial Statements
September 30, 2000
1. General
-------
The accompanying unaudited interim consolidated financial statements were
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information. Accordingly,
they do not include all of the information and footnotes required by
accounting principles generally accepted in the United States of America
for complete financial statements. The 1999 Form 10-K, as amended, should
be read in conjunction with the accompanying statements. These statements
include all adjustments (consisting only of normal recurring adjustments)
which the Company believes are necessary for a fair presentation of the
statements. The interim operating results are not necessarily indicative of
the results for a full year.
2. Comprehensive Income (Loss)
---------------------------
Comprehensive income (loss) is the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
non-owner sources. Excluding net income (loss), the Company's source of
comprehensive income (loss) is from net unrealized appreciation
(depreciation) on its holdings classified as available-for-sale.
Reclassification adjustments result from the recognition in net income of
unrealized gains or losses that were included in comprehensive income in
prior periods. The following summarizes the components of comprehensive
income (loss), net of income taxes, (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30
--------------------- ---------------------
2000 1999 2000 1999
-------- -------- -------- --------
(Unaudited)
Net Income (Loss)................................. $(25,188) $ 9,317 $ 6,580 $ 44,978
-------- -------- -------- --------
Other Comprehensive Income (Loss), Before Taxes:..
Unrealized holding gains (losses)................. (69,461) (13,448) (23,713) (24,430)
Reclassification adjustments................. (1,999) (1,524) (54,587) (10,026)
Related Tax Benefit:..............................
Unrealized holding (gains) losses............ 24,311 4,707 8,300 8,551
Reclassification adjustments................. 700 533 19,104 3,509
-------- -------- -------- --------
Other Comprehensive Income (Loss)................. (46,449) (9,732) (50,896) (22,396)
-------- -------- -------- --------
Comprehensive Income (Loss)....................... $(71,637) $ (415) $(44,316) $ 22,582
======== ======== ======== ========
3. Reclassifications
-----------------
Certain prior year amounts have been reclassified to conform to the current
year presentation.
4. Stock Split
-----------
On February 28, 2000, the Board of Directors approved a three-for-one split
to the Company's shareholders of record on March 13, 2000. All share and per
share data have been restated to reflect a three-for-one split of the
Company's common stock as if the stock split occurred as of January 1, 1999.
7
5. Financial Investments
---------------------
In 1999, in order to mitigate the Company's market exposure and generate
cash from holdings in Tellabs, the Company entered into two forward sale
contracts related to 3.4 million shares of its holdings in Tellabs. The
Company pledged these shares of Tellabs under contracts that expire in 2002
and in return received approximately $139 million of cash. At maturity, the
Company is required to deliver cash or Tellabs stock with a value determined
by the stock price of Tellabs at maturity. The number of Tellabs shares to
be delivered at maturity will range between 2.7 million to 3.4 million
depending on the price of Tellabs stock at that date.
The Company's liability of $141 million in connection with these
transactions is included in other long-term liabilities as of September 30,
2000. These liabilities are carried at fair value, based on quoted market
prices, with the unrealized gains and losses, net of tax, reported as a
separate component of shareholders' equity. The initial cost of the
transaction ($4.3 million) is being amortized as an adjustment of yield over
the life of the agreement through the statement of operations.
The Company's holdings in Tellabs are included in non-current assets under
the caption "available-for-sale securities." These securities are carried at
fair value, based on quoted market prices, with the unrealized gains and
losses, net of tax, reported as a separate component of shareholders'
equity.
The Company has only limited involvement with derivative financial
instruments and does not use them for trading purposes. The risk of loss to
the Company in the event of nonperformance by the counterpart under the
forward sales contract is not considered to be significant. Although the
forward sales contracts expose the Company to market risk, fluctuations in
the fair value of these contracts are mitigated by expected offsetting
fluctuations in the pledged securities.
8
6. Ownership Interests in and Advances to Partner Companies
--------------------------------------------------------
The following summarizes the Company's ownership interests in and advances to
partner companies accounted for under the equity method or cost method of
accounting (in thousands). The ownership interests are classified according
to applicable accounting methods at September 30, 2000 and December 31, 1999.
Market value reflects the price of publicly traded holdings at the close of
business at the respective date, and excludes warrants that are not currently
exercisable.
September 30, 2000 December 31, 1999
--------------------------------------- ------------------------------
Carrying Market Voting Carrying Market
Value Value Interest Value Value
----------- ------------- ----------- -------- --------------------
(Unaudited)
Equity Method
Cambridge Technology Partners.. $ 51,310 $ 45,051 17% $ 49,181 $ 254,556
ChromaVision Medical Systems... 14,945 54,389 29% 13,626 81,201
DocuCorp International......... 10,296 11,915 18% 9,995 22,249
eMerge Interactive............. 28,893 107,504 16% 7,201 --(a)
Internet Capital Group......... 213,870 642,315 14% 189,068 6,169,208
LifeF/X........................ -- 20,214 12% -- 86,823
OAO Technology Solutions....... 17,251 22,201 31% 16,448 42,853
Pac-West Telecomm.............. --(b) --(b) --(b) 7,613 62,943
Sanchez Computer Associates.... 9,849 97,467 25% 11,686 258,995
USDATA Corporation............. 5,083 25,888 41% 15,920 82,406
US Interactive................. --(b) --(b) --(b) 9,769 107,795
Non-public companies........... 448,772 162,130
-------- --------
800,269 492,637
Cost Method
Non-public companies........... 41,553 16,266
Advances to Partner Companies.. 8,530 20,478
-------- --------
$850,352 $529,381
======== ========
(a) eMerge Interactive was not publicly traded until 2000.
(b) Pac-West Telecomm and US Interactive are now accounted for as available-
for-sale securities as a result of a decrease in the Company's ownership
during 2000.
Technology-related stocks have experienced significant volatility. For
example, at September 30, 2000, the market value of the Company's holdings in
Internet Capital Group was $642 million. Based on the high and low stock
prices from January 1, 2000 through November 10, 2000, the market value of the
Company's holdings in Internet Capital Group has ranged from $7.3 billion to
$332 million.
At September 30, 2000, the Company's carrying value in its partner companies
accounted for under the equity method exceeded its share of the underlying
equity in the net assets of such companies by $255 million which is included
in "Ownership Interest in and Advances to Partner Companies" on the
consolidated balance sheets. This excess relates to ownership interests
acquired through September 30, 2000, and is being amortized generally over a
three to ten-year period. Amortization expense of $10 million and $17.2
million for the three and nine months ended September 30, 2000 and $1.6
million and $5.9 million for the three and nine months ended September 30,
1999, is included in "Equity Loss" in the accompanying consolidated statements
of operations.
As of September 30, 2000, the Company had advances to partner companies that
mature on various dates through May 2004 and bear interest at fixed rates
between 5.3% and 9.0% and variable rates consisting of the prime rate (9.5% at
September 30, 2000) plus 1%. The Company also has short-term advances to
partner companies of $5 million at September 30, 2000, which is included in
"accounts receivable, less allowances" on the consolidated balance sheets.
7. Available-for-Sale Securities
-----------------------------
9
Available-for-sale securities consisted of the following (in thousands):
September 30, 2000 December 31, 1999
--------------------------------- ------------------------
Carrying Market Carrying Market
Value Value Value Value
------------------- ------------ ----------- -----------
(Unaudited)
Tellabs...................... $212,731 $161,128(c) $212,731 $216,595
Diamond Technology Partners.. -- -- 710 57,436
US Interactive............... 10,919 6,479 --(a) --(a)
Pac-West..................... 9,982 22,470 --(a) --(a)
Opus360...................... 9,494 7,213 --(b) --(b)
Brandywine Realty Trust...... 8,561 10,293 8,561 8,177
Other public companies....... (3,851) 2,120 17,052 20,732
Unrealized appreciation
(depreciation).............. (41,610) 63,886
-------- --------
$206,226 $302,940
======== ========
(a) These holdings were included in "Ownership Interests in and Advances to
Partner Companies" at December 31, 1999 since they were accounted for on
the equity method.
(b) Opus 360 was not publicly traded until 2000.
(c) As discussed in Note 5, the Company entered into forward sale contracts on
its Tellabs holdings in 1999.
8. Debt
----
The following is a summary of long-term debt (in thousands):
September 30, December 31,
2000 1999
---- ----
(Unaudited)
Parent Company and Other Recourse Debt
--------------------------------------
Other........................................... $19,109 $ 25,325
------- --------
Subsidiary Debt (Non-Recourse to Parent)
----------------------------------------
CompuCom........................................ 34,600 --
Other........................................... 427 226
------- --------
35,027 226
------- --------
Total debt...................................... 54,136 25,551
Current maturities of long-term debt............ (5,878) (11,019)
------- --------
Long-term debt.................................. $48,258 $ 14,532
======= ========
In April 2000, the Company increased the availability under the bank
revolving credit facility to $300 million from $200 million. Of the $300
million, $250 million matures in April 2005 and is secured by certain equity
securities the Company holds of its publicly traded partner companies (the
Pledged Securities). The remaining $50 million is unsecured, with
availability limited to the lesser of $50 million or 10% of the value of the
Pledged Securities. The $50 million facility matures in April 2001, and the
Company intends to extend the maturity to 2002. Availability under our bank
credit facility is determined by the market value of the publicly traded
partner companies pledged as collateral. Availability under our credit
facility at September 30, 2000 was $296 million and there were no amounts
outstanding.
Other long-term debt includes mortgage obligations and bank credit
facilities of consolidated partner companies. These obligations bear
interest rates ranging from 7.75% to 9.75%.
CompuCom has financing arrangements which total $350 million, consisting of
a $175 million receivable securitization facility and a $175 million working
capital facility. Consistent with CompuCom's financing requirements, during
the third quarter 2000, CompuCom reduced the securitization facility from
$200 million to $175 million.
The securitization facility, which matures in May 2002 and has pricing based
on a designated short-term interest rate plus an agreed-upon spread, allows
CompuCom to sell an interest in its accounts receivable on a revolving basis
and is accounted for as a sale of accounts receivable in accordance
10
with Statement of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." As of September 30, 2000, the securitization facility was
fully utilized.
The working capital facility which matures in May 2002, bears interest at
LIBOR plus an agreed-upon spread and is secured by a lien on CompuCom's
assets. Availability under the working capital facility is subject to a
borrowing base calculation. As of September 30, 2000, availability under the
working capital facility was approximately $139.1 million, of which $34.6
million was outstanding.
Both the securitization facility and the working capital facility are
subject to CompuCom's compliance with selected financial covenants and
ratios.
9. Shareholders' Equity
--------------------
Common Stock
In February 2000, the Company acquired the remaining 20% voting ownership in
aligne incorporated in exchange for 160,434 shares of the Company's common
stock with a market value of $8.2 million.
In March 2000, the Company closed the sale of 2.2 million shares of its
common stock for $100 million to Textron in a private placement. Textron and
the Company intend to work together to offer consulting services to each
other and their respective partner companies and subsidiaries and explore a
variety of potential strategic relationships with each other.
In April 2000, the Company completed a follow-on public offering, selling
8.6 million shares of its common stock, including exercise in full of the
underwriters' overallotment option, at $50 per share. Net proceeds to the
Company were approximately $414 million, net of underwriters' commission and
offering expenses.
In April 2000, the Company completed the sale of shares of its common stock
to IBM and Compaq, and formed strategic relationships with both companies.
Net proceeds to the Company from these transactions aggregated $100 million.
During the nine months ended September 30, 2000, the Company purchased 1.4
million shares of its common stock for an aggregate of $44.7 million, or
$31.33 per share.
10. Restructuring
-------------
During the first quarter of 2000, CompuCom effected a restructuring plan
designed to reduce its cost structure by closing its distribution facility
located in Houston, Texas, closing and consolidating three office
facilities, and reducing its workforce. As a result, CompuCom recorded a
restructuring charge of $5.2 million in the first quarter of 2000, the
effect of which was approximately $2.6 million to the Company's pretax
earnings after recording minority interest. The $5.2 million charge is
reflected as a separate line of operating expense in the Company's
Consolidated Statement of Operations. The following table provides a detail
of the charges and cash payments made by category as well as the amounts
accrued as of September 30, 2000 (in thousands):
Restructuring Cash Accrual at
Charge Payments Other September 30, 2000
-------------------------------------------------------
Lease termination costs...................... $ 2,904 $ (771) $ -- $ 2,133
Employee severance and related benefits...... 1,800 (1,691) -- 109
Other........................................ 465 (87) (318) 60
-------------------------------------------------------
Total........................................ $ 5,169 $(2,549) $ (318) $ 2,302
=======================================================
11
The $2.3 million accrued at September 30, 2000 is reflected in accrued
liabilities on the Company's Consolidated Balance Sheet.
Lease termination costs include the estimated cost to close the three office
facilities and represents the amount required to fulfill CompuCom's
obligations under signed lease contracts, the net expense expected to be
incurred to sublet the facilities, or the estimated amount to be paid to
terminate the lease contracts before the end of their terms. In developing the
estimated costs, CompuCom has consulted with a professional real estate firm
with knowledge of market rent rates in all applicable markets where CompuCom
has space. Assumptions have been used for market rent rates and the estimated
amount of time necessary to sublet the facilities. Payments, net of proceeds
derived from subleases, are charged against the accrual as incurred. The
remaining accrual at September 30, 2000 relates to two leases for the office
facilities that have not been sublet or terminated.
Severance is paid based on associates' years of service as well as their level
within the organization. The reduction in workforce included 308 associates,
of which one was an executive officer. The reduction in workforce included
associates from the following areas; sales, service, and general and
administrative, who were located at certain of CompuCom's locations, corporate
offices, and the Houston distribution center. The remaining accrual at
September 30, 2000 relates to severance payments which are being paid to the
former executive officer and are expected to be substantially complete by the
end of 2000.
Other restructuring charges primarily include the write-off of leasehold
improvements at the Houston distribution center.
During the fourth quarter of 1998, CompuCom recorded a $16.4 million
restructuring charge, primarily consisting of costs associated with the
closing of facilities and disposing of related fixed assets as well as
employee severance and benefits related to a reduction in workforce. The
following table provides a summary by category and rollforward of the changes
in this restructuring accrual for the nine months ended September 30, 2000 (in
thousands):
Accrual at Cash Accrual at
December 31, Payments September 30,
1999 2000
----------------------------------------------------
Lease termination costs...................... $ 1,240 $ (924) $ 316
Employee severance and related benefits...... 560 (448) 112
----------------------------------------------------
Total........................................ $ 1,800 $ (1,372) $ 428
====================================================
CompuCom expects all restructuring activities to be substantially complete by
the end of 2000 and believes the restructuring accruals are adequate.
12
11. Other Income (Loss), Net
------------------------
Other income (loss), net, consists of the following (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2000 1999 2000 1999
---- ---- ---- ----
(Unaudited)
Gain on sale of private partner companies........ $36,461 $ 221 $ 56,270 $ 640
Unrealized gain (loss) on Tellabs stock.......... -- (7,386) -- 78,163
Gain on sale of Diamond stock.................... -- -- 51,971 3,546
Gain on sale of other public holdings............ 742 10,856 10,602 16,728
Gain on distributions from private equity funds.. -- -- -- 4,590
Unrealized loss on trading securities............ (1,273) -- (2,093) --
Other, primarily impairment charges.............. (1,473) (8,018) (1,958) (25,874)
------- ------- -------- --------
$34,457 $(4,327) $114,792 $ 77,793
======= ======= ======== ========
During the third quarter of 2000, the Company sold its interest in Arista
Learning Systems in exchange for 316,884 shares of Digital Think, a portion of
which ownership is held in escrow until July 2001. The Company subsequently
sold 269,352 shares of Digital Think. The net cash proceeds of the sale was
$12.1 million. The Company recorded a net gain of $16.9 million on the Arista
sale.
During the third quarter of 2000, the Company sold its ownership interest in
Extant for total cash proceeds of $30 million, a portion of which is held in
escrow until March 2002. The Company recorded a net gain of $17.9 million on
the Extant sale.
For the three and nine months ended September 30, 2000 and the three and nine
months ended September 30, 1999, the Company recorded impairment charges of
$1.5 million $3.5 million, $4.9 million and $14.4 million respectively, for
the other than temporary decline in the carrying value of certain partner
companies.
13
12. Net Income Per Share
--------------------
The calculations of net income (loss) per share were (in thousands except
per share amounts):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2000 1999 2000 1999
---- ---- ---- ----
(Unaudited)
Basic
-----
Net income (loss)............................... $(25,188) $ 9,317 $ 6,580 $ 44,978
======== ======== ======== ========
Average common shares outstanding............... 117,095 104,283 113,131 100,017
======== ======== ======== ========
Basic........................................... $ (0.22) $ 0.09 $ 0.06 $ 0.45
======== ======== ======== ========
Diluted
-------
Net income (loss)............................... $(25,188) $ 9,317 $ 6,580 $ 44,978
Effect of: Public holdings (a)................. (232) (91) (25) (600)
Dilutive securities (b) (c)......... -- -- -- 1,090
-------- -------- -------- --------
Adjusted net income (loss)...................... $(25,420) $ 9,226 $ 6,555 $ 45,468
======== ======== ======== ========
Average common shares outstanding............... 117,095 104,283 113,131 100,017
Effect of: Dilutive options (c)................ -- 2,244 2,827 2,475
Dilutive securities (b) (c)......... -- -- -- 3,648
-------- -------- -------- --------
Average number of common shares
assuming dilution........................... 117,095 106,527 115,958 106,140
======== ======== ======== ========
Diluted......................................... $ (0.22) $ 0.09 $ 0.06 $ 0.43
======== ======== ======== ========
(a) Represents the dilutive effect of public company common stock equivalents
and convertible securities.
(b) Represents the dilutive effect of the Company's 1996 convertible
subordinated notes for the nine months ended September 30, 1999. The
Company's 1999 convertible subordinated notes were anti-dilutive for all
periods presented.
(c) Because the company reported a loss for the three months ended September
30, 2000, potentially dilutive securities have not been included in the
shares to compute net loss per share.
14
13. Parent Company Financial Information
------------------------------------
Parent Company financial information is provided to present the financial
position and results of operations of the Company as if the consolidated
companies were accounted for under the equity method of accounting for all
periods presented during which the Company owned its interest in these
companies.
Balance Sheets September 30, December 31,
2000 1999
---------- ----------
(Unaudited)
Assets
Cash and cash equivalents................................. $ 241,418 $ 33,536
Other current assets...................................... 54,518 39,204
Ownership interests in and advances to partner companies.. 990,788 687,925
Available-for-sale securities............................. 205,308 302,940
Other..................................................... 76,314 45,584
---------- ----------
Total assets.............................................. $1,568,346 $1,109,189
========== ==========
Liabilities and Shareholders' Equity
Current liabilities....................................... $ 34,339 $ 35,621
Long-term debt............................................ 13,586 14,354
Other long-term liabilities............................... 204,725 284,513
Convertible subordinated notes............................ 200,000 200,000
Shareholders' equity...................................... 1,115,696 574,701
---------- ----------
Total Liabilities and Shareholders' Equity................ $1,568,346 $1,109,189
========== ==========
The carrying value of the Company's less than wholly owned subsidiaries,
primarily CompuCom, Tangram, and SOTAS at September 30, 2000, and including
aligne and Arista at December 31, 1999, are included in "ownership interests
in and advances to partner companies."
Statements of Operations
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------------
2000 1999 2000 1999
-------- ------- -------- --------
(Unaudited)
Revenue.......................................... $ 8,810 $ 3,265 $ 22,192 $ 9,908
Operating expenses............................... 26,866 9,300 72,703 24,708
-------- ------- -------- --------
(18,056) (6,035) (50,511) (14,800)
Gains on issuance of stock by partner companies.. -- 35,379 -- 35,705
Other income, net................................ 34,457 (4,328) 112,834 77,792
Interest income (expense), net................... 1,354 (3,368) (2,379) (8,936)
-------- ------- -------- --------
Income before income taxes and equity loss....... 17,755 21,648 59,944 89,761
Income taxes..................................... 15,711 (2,364) (3,850) (21,333)
Equity loss...................................... (58,654) (9,967) (49,514) (23,450)
-------- ------- -------- --------
Net income (loss)................................ $(25,188) $ 9,317 $ 6,580 $ 44,978
======== ======= ======== ========
The Company's shares of the income or losses of its less than wholly owned
subsidiaries, primarily CompuCom, Tangram, and SOTAS for the three and nine
months ended September 30, 2000, and including aligne for the three and nine
months ended September 30, 1999, are reflected in the caption "equity loss".
Arista is included in the three and nine months ended September 30, 1999, and
the nine months ended September 30, 2000.
15
14. Operating Segments
------------------
The Company's reportable segments, determined in accordance with SFAS 131,
are General Safeguard Operations, Partner Company Operations and CompuCom
Operations. General Safeguard Operations represent the expenses of providing
strategic and operational support to the Company's partner companies, and
the related administrative costs, as well as the results of aligne as of
January 1, 2000. General Safeguard Operations also include the effect of
transactions and other events incidental to the Company's ownership
interests in its partner companies and the Company's operations in general.
Partner Company Operations reflects operations of all partner companies
other than CompuCom. CompuCom Operations reflects the results of operations
of CompuCom.
16
The following summarizes information related to the Company's segments (in
thousands). All significant intersegment activity has been eliminated.
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ----------------------
2000 1999 2000 1999
---- ---- ---- ----
(Unaudited)
Summary of Consolidated Net Income (Loss)
General Safeguard Operations.............................. $ 15,642 $ 14,715 $ 53,296 $ 58,723
Partner Company Operations................................ (43,453) (8,750) (45,841) (17,205)
CompuCom Operations....................................... 2,623 3,352 (875) 3,460
-------- -------- ---------- ----------
$(25,188) $ 9,317 $ 6,580 $ 44,978
======== ======== ========== ==========
General Safeguard Operations
Revenue................................................... $ 8,090 $ 3,002 $ 20,378 $ 9,208
Operating expenses
Cost of sales............................................ 1,696 -- 3,931 --
Selling and service...................................... 142 -- 142 --
General and administrative............................... 23,349 8,867 64,776 23,540
Depreciation and amortization............................ 1,234 433 3,409 1,168
-------- -------- ---------- ----------
Total operating expenses................................. 26,421 9,300 72,258 24,708
-------- -------- ---------- ----------
(18,331) (6,298) (51,880) (15,500)
-------- -------- ---------- ----------
Gain on issuance of stock by partner companies........... -- 35,379 -- 35,705
Other income (loss), net................................. 34,457 (4,327) 112,834 77,793
Interest, net............................................ 1,354 (3,369) (2,379) (8,937)
-------- -------- ---------- ----------
Income before income taxes and equity income............. 17,480 21,385 58,575 89,061
Income taxes............................................. (8,423) (6,670) (28,698) (30,338)
Equity income............................................ 6,585 -- 23,419 --
-------- -------- ---------- ----------
Net Income from General Safeguard Operations.............. $ 15,642 $ 14,715 $ 53,296 $ 58,723
======== ======== ========== ==========
Partner Company Operations
Revenue................................................... $ 9,680 $ 8,314 $ 20,231 $ 21,667
Operating expenses
Cost of sales............................................ 3,376 1,358 5,857 4,836
Selling and service...................................... 3,498 2,453 9,409 6,510
General and administrative............................... 1,241 4,790 9,424 8,063
Depreciation and amortization............................ 1,188 1,438 3,603 3,606
-------- -------- ---------- ----------
Total operating expenses................................. 9,303 10,039 28,293 23,015
-------- -------- ---------- ----------
377 (1,725) (8,062) (1,348)
-------- -------- ---------- ----------
Interest, net............................................ (247) (227) (1,146) (462)
-------- -------- ---------- ----------
Income (loss) before income taxes,
minority interest and equity income (loss).............. 130 (1,952) (9,208) (1,810)
Income taxes............................................. 24,037 3,796 24,874 8,331
Minority interest........................................ -- 252 229 76
Equity loss.............................................. (67,620) (10,846) (61,736) (23,802)
-------- -------- ---------- ----------
Net Loss from Partner Company Operations.................. $(43,453) $ (8,750) $ (45,841) $ (17,205)
======== ======== ========== ==========
CompuCom Operations
Revenue................................................... $712,580 $889,342 $1,970,685 $2,185,257
Operating expenses
Cost of sales............................................ 635,864 794,678 1,772,406 1,950,230
Selling and service...................................... 33,157 46,125 100,495 121,010
General and administrative............................... 25,367 24,786 69,611 68,324
Depreciation and amortization............................ 5,610 6,250 17,379 17,329
Restructuring............................................ -- -- 5,169 --
-------- -------- ---------- ----------
Total operating expenses................................. 699,998 871,839 1,965,060 2,156,893
-------- -------- ---------- ----------
12,582 17,503 5,625 28,364
-------- -------- ---------- ----------
Other income, net........................................ -- -- 1,958 --
Interest, net............................................ (4,326) (6,909) (11,797) (17,446)
-------- -------- ---------- ----------
Income (loss) before income taxes and minority interest.. 8,256 10,594 (4,214) 10,918
Income taxes............................................. (1,749) (2,143) 583 (2,212)
Minority interest........................................ (3,884) (5,099) 2,756 (5,246)
-------- -------- ---------- ----------
Net Income (Loss) from CompuCom Operations................ $ 2,623 $ 3,352 $ (875) $ 3,460
======== ======== ========== ==========
17
15. Business Combinations
----------------------
Acquisitions by the Company
In August 2000, aligne, our wholly owned subsidiary, acquired 100% of
K Consultants, Inc. for $7.5 million in cash and an additional amount which
is dependent upon the revenues of K Consultants during the first 12 months
after the acquisition. K Consultants provides eBusiness infrastructure
consulting services, including strategy, architecture, implementation and
support. The transaction was accounted for as a purchase and, accordingly,
the consolidated financial statements reflect the operations of
K Consultants since the acquisition date.
In February 2000, the Company acquired the remaining 20% voting ownership
in aligne in exchange for 160,434 shares of the Company's common stock with
a market value of $8.2 million.
In February 1999, the Company acquired an 80% voting ownership in aligne in
exchange for 1.3 million shares of the Company's common stock with a market
value of $16.5 million. In June 1999, the Company acquired 75% voting
ownership in SOTAS for $9.4 million and assumed certain liabilities.
Acquisitions by Subsidiaries
In May 1999, CompuCom purchased from ENTEX Information Services, Inc.
certain assets of its Technology Acquisition Services Division (Entex) in a
cash transaction. This acquisition was structured as an asset purchase.
Under the terms of the agreement, CompuCom paid approximately $137 million
and assumed certain liabilities for the acquired assets, which consisted
primarily of inventory, certain fixed assets and the Erlanger, Kentucky
distribution center.
The following unaudited pro forma financial information (in thousands
except per share amounts) presents the combined results of operations of
the Company as if the acquisitions completed in 1999 had occurred as of
January 1, 1999, after giving effect to certain adjustments, including
amortization of goodwill, increased interest 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 is not intended to be a projection of future results.
Nine Months Ended
September 30, 1999
------------------
Total Revenues.................... $ 2,840,061
Net Earnings...................... $ 39,652
Diluted earnings per share........ $ 0.38
Unaudited pro forma consolidated results, after giving effect to the
business acquired in 2000, would not have been materially different from
the reported amounts for either year.
Subsequent Events
In October 2000, the Company agreed to acquire a majority voting ownership
in Data Center Direct, (d/b/a Safeguard Global Services). Safeguard Global
Services will become a full-service, infrastructure services integrator.
In November 2000, the Company announced an agreement to acquire 100% of
Palarco, Inc., a provider of global information technology solutions.
Palarco provides a key services component to Safeguard's infrastructure
strategy by augmenting the breadth and depth of Safeguard's consulting and
implementation capabilities.
18
16. Commitments and Contingencies
-----------------------------
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.
During the third quarter of 2000, the Company formed a captive insurance
subsidiary for the purpose of providing insurance services to the Company
and its partner companies.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that involve risks
and uncertainties. We have based these forward-looking statements on our
current expectations and projections about future events. These forward
looking statements are subject to risks, uncertainties and assumptions about
us and our partner companies, including, among other things:
-- development of the Technology Infrastructure market;
-- our ability to identify trends in our markets and the markets of our
partner companies and to offer new solutions that address the changing
needs of these markets,
-- our ability to successfully execute our business model,
-- our partner companies' ability to compete successfully against direct
and indirect competitors and adapt effectively to technology changes,
-- our ability to acquire interests in additional companies,
-- growth in demand for technology products and services,
-- our ability to raise capital if necessary.
Our actual results could differ materially from those anticipated in these
forward-looking statements as a result of these factors.
General
We are a leading technology operating company actively engaged in the
technology infrastructure business through our extensive network of partner
companies. We acquire interests in developing technology infrastructure
companies and accelerate their growth and integrate these companies into our
network. We focus on what we believe to be the most significant market sectors
of the technology infrastructure industry: software, communications and
eServices. We believe that our experience developing technology companies, our
expertise in and focus on technology infrastructure and the reach of our
network, enable us to identify and attract companies with significant
potential for success in the technology infrastructure market. We intend to be
the premier network of technology infrastructure companies offering solutions,
seamless connectivity and eServices to businesses engaged in electronic
commerce.
Our principal mission is to promote long-term shareholder value. We believe
shareholder value is maximized by retaining and promoting the entrepreneurial
culture of the partner companies that we operate. The entrepreneurs of our
partner companies generally retain significant equity interests in their
businesses, and their interests as shareholders remain aligned with ours. We
provide a full range of operational and management services to each of our
partner companies through dedicated teams of Safeguard professionals. Each
team has expertise in the areas of business and technology strategy, sales and
marketing, operations, finance, legal and transactional support, and human
resources, and provides hands-on assistance to the management of the partner
company in support of its growth. The level of involvement varies and in some
circumstances includes the provision of full-time interim personnel. Since we
are a long-term partner, we pursue various alternatives to maximize the long-
term value of our partner companies. These alternatives include preparing our
partner companies for initial public offerings, assisting with mergers and
acquisitions, and providing additional capital. We typically retain a
significant ownership position in our partner companies after they complete
their initial public offerings.
20
We developed the Safeguard Subscription Program to give our shareholders the
opportunity to participate in the initial public offerings of our partner
companies. The offering ratio varies, but is based on the number of shares
being offered under the program by the partner company in relation to the
number of Safeguard shares outstanding at the time of an offering. We
completed Safeguard Subscription Programs in conjunction with the initial
public offerings of Internet Capital Group, Inc., US Interactive, Inc. and
Pac-West Telecomm, Inc. in 1999, and with the initial public offering of
eMerge Interactive, Inc. in February 2000 and Opus360 Corporation in April
2000.
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
partner companies have consistently reported losses, we have recorded net
income in certain periods and experienced significant volatility from period
to period due to one-time transactions and other events incidental to our
ownership interests in and advances to partner companies. We do not know if we
will report net income in any period. These transactions and events are
described in more detail under "Net Results of Operations--General Safeguard
Operations--Other Income, Net" and include dispositions of, and changes to,
our partner company ownership interests, dispositions of our holdings of
publicly-traded securities, and impairment charges. On a continuous basis, but
no less frequently than at the end of each quarterly reporting period, we
evaluate the carrying value of our ownership interests in and advances to each
of our partner companies for possible impairment based on achievement of
business plan objectives and milestones, the fair value of each ownership
interest and advance in the partner company relative to carrying value, the
financial condition and prospects of the partner company, and other relevant
factors. The business plan objectives and milestones we consider include,
among others, those related to financial performance such as achievement of
planned financial results or completion of capital raising activities, and
those that are not primarily financial in nature such as the hiring of key
employees. The fair value of our ownership interests in and advances to
privately held partner companies is generally determined based on the value at
which independent third parties have invested or have committed to invest in
our partner companies.
We operate in an industry which is rapidly evolving and extremely competitive.
It is reasonably possible that our accounting estimates with respect to the
useful life and ultimate recoverability of the carrying value could change in
the near term and that the effect of such changes on the financial statements
could be material. While we currently believe that the recorded carrying value
is not impaired, there can be no assurance that our future results will
confirm this assessment or that a significant write-down or write-off of the
carrying value will not be required in the future.
The presentation and content of our financial statements is largely a function
of the presentation and content of the financial statements of our partner
companies. To the extent our partner companies change the presentation or
content of their financial statements, as may be required upon review by the
Securities and Exchange Commission or changes in accounting literature, the
presentation and content of our financial statements may also change.
21
Effect of Various Accounting Methods on the Consolidated Financial Statements
The various interests that we acquire in our partner companies are accounted
for under three broad methods: consolidation, equity and cost. The applicable
accounting method is generally determined based on our voting interest in a
partner company.
Consolidation. Partner companies in which we directly or indirectly own more
than 50% of the outstanding voting securities are generally accounted for
under the consolidation method of accounting. Under this method, a partner
company's results of operations are included within our consolidated
statements of operations. Participation of other partner company shareholders
in the income or losses of a consolidated partner company is reflected in the
caption "minority interest" in our consolidated statements of operations.
Minority interest adjusts our consolidated net income to reflect only our
share of the income or losses of the consolidated partner company.
CompuCom Systems, Inc., Tangram Enterprise Solutions, Inc., and aligne,
incorporated were consolidated in 2000 and 1999. During the three months
ended June 30, 1999, we acquired controlling majority voting interests in
SOTAS, Inc., and Arista Knowledge Systems Inc. Each of these partner
companies was consolidated from the date we acquired directly or indirectly
more than 50% of the outstanding voting securities interest. Arista was sold
in July 2000.
Equity Method. Partner companies whose results we do not consolidate, but
over whom we exercise significant influence, are generally accounted for under
the equity method of accounting. Whether or not we exercise significant
influence with respect to a partner company depends on an evaluation of
several factors including, among others, representation on the partner
company's board of directors and ownership level, which is generally a 20% to
50% interest in the voting securities of the partner company, including voting
rights associated with our holdings in common, preferred and other convertible
instruments in the partner company. Under the equity method of accounting, a
partner company's results of operations are not reflected within our
consolidated statement of operations; however, our share of the income or
losses of the partner company is reflected in the caption "equity income
(loss)" in our consolidated statements of operations. The share of income or
losses is generally based upon our voting ownership of the partner company's
securities, which may be different from the percentage of the economic
ownership of the partner company held by us.
Our partner companies accounted for under the equity method of accounting at
September 30, 2000 and December 31, 1999 included:
Partner Voting Voting
Company Ownership Ownership
Since 9/30/00 12/31/99
------- ------- --------
Publicly Traded
Cambridge Technology Partners (Massachusetts), Inc... 1991 17% 16%
ChromaVision Medical Systems, Inc.................... 1996 29% 27%
DocuCorp International, Inc.......................... 1995 18% 17%
eMerge Interactive, Inc.............................. 1997 16% 19%
Internet Capital Group, Inc.......................... 1996 14% 14%
LifeF/X, Inc......................................... 1997 12% 13%
OAO Technology Solutions, Inc........................ 1996 31% 31%
Pac-West Telecomm, Inc............................... 1998 --(b) 7%
Sanchez Computer Associates, Inc..................... 1986 25% 26%
USDATA Corporation................................... 1994 41% 38%
US Interactive, Inc.................................. 1998 --(b) 13%
22
Partner Voting Voting
Company Ownership Ownership
Since 9/30/00 12/31/99
------- ------- --------
Privately Held
4anything.com, Inc.................................. 1999 39% 28%
AgWeb.com, Inc...................................... 2000 43% N/A
Atlas Commerce...................................... 2000 35% N/A
The Basketball Network LLC, d/b/a HoopsTV.com....... 1999 25% 24%
Buystream.com....................................... 2000 33% N/A
eonDigital.......................................... 2000 11% N/A
Ethentica (formerly Who? Vision Systems, Inc.)...... 1998 29%(a) 29%(a)
Extant, Inc......................................... 1999 N/A(c) 21%
fob.com, Inc........................................ 2000 30% N/A
iMedium, Inc........................................ 1999 31% 23%
Kanbay LLC.......................................... 1998 30% 28%
Mi8 Corporation..................................... 2000 38% N/A
NexTone Communications, Inc......................... 2000 38% N/A
Nextron Communications, Inc......................... 1995 44% 57%
Persona (formerly PrivaSeek, Inc.).................. 1999 29% 33%
Presideo (formerly Integrated Visions, Inc.)........ 1998 43%(a) 49%(a)
QuestOne Decision Sciences Corporation.............. 1997 31% 35%
RealTIME Media, Inc................................. 1999 45% 43%
Redleaf Group LLC................................... 2000 31% N/A
TechSpace LLC....................................... 2000 49% N/A
TechSpaceXchange LLC................................ 2000 67% N/A
ThinAirApps LLC..................................... 2000 34% N/A
Vitts Networks, Inc................................. 1999 42% 48%
WebTelecom, Inc..................................... 2000 42% N/A
Wireless OnLine, Inc................................ 2000 43% N/A
XL Vision, Inc...................................... 1995 42% 18%
These partner companies listed with a voting ownership of "N/A" reflects that
either these companies were accounted for under a different method at the time
or we had not acquired an interest in the partner company as of December 31,
1999.
(a) We also own non-voting convertible securities in these companies. This
percentage represents the voting ownership assuming the conversion of
these non-voting convertible securities.
(b) As of September 30, 2000, these holdings are accounted for under the cost
method.
(c) Extant, Inc. was sold on September 29, 2000.
We have representation on the board of directors of all of the above partner
companies. Although we own less than 20% of the voting stock of some of the
above companies, we believe we have the ability to exercise significant
influence based on our representation on the board of directors and other
factors. We also account for our interests in some private equity funds under
the equity method of accounting, based on our general and limited partner
interest. In addition to our holdings in voting and non-voting equity and debt
securities, we also periodically make advances to our partner companies in the
form of promissory notes. We had advances to equity method partner companies
totaling $13.5 million at September 30, 2000.
Many of our privately held equity method partner companies are technology-
related companies with limited operating histories that have not generated
significant revenues and incurred substantial losses in 2000. We expect these
losses to continue in 2001. Our equity losses may also increase as a result
of our acquisition of interests in, and operation of, additional technology-
related companies.
Cost Method. Partner companies and private equity funds that we do not
account for under either the consolidation or the equity method of accounting
are accounted for under the cost method of accounting. Under this method, our
share of the earnings or losses of these companies is not included in our
consolidated statements of operations. However, the effect of the change in
market value of cost method holdings classified as trading securities is
reflected in our results of operations during each reporting period.
23
Effect of Various Accounting Methods on the Presentation of our Financial
Statements
The presentation of our financial statements may differ from period to period
primarily due to the applicable accounting method used for recognizing our
equity interests in the operating results of a partner company. For example,
the presentation of our financial statements is significantly influenced by
the consolidated results of operations of CompuCom, which we consolidated
based on our 60% voting interest.
To understand our net results of operations and financial position without the
effect of consolidating our consolidated partner companies, please refer to
note 13 to our consolidated financial statements, which summarizes our parent
company statements of operations and balance sheets and presents our
consolidated partner companies as if they were accounted for under the equity
method of accounting for all periods presented. Our share of the income or
losses of the consolidated partner companies is included in "equity loss" in
the parent company statements of operations. The carrying value of these
companies is included in "ownership interests in and advances to partner
companies" in the parent company balance sheets.
Although the parent company statements of operations and balance sheets
presented in note 13 reflect our historical results, they are not necessarily
indicative of future parent company balance sheets and statements of
operations.
Net Results of Operations
Our reportable segments include General Safeguard Operations, Partner Company
Operations and CompuCom Operations. General Safeguard Operations represents
the expenses of providing strategic and operational support to our partner
companies, and the related administrative costs, as well as the results of
aligne as of January 1, 2000. General Safeguard Operations include the effect
of transactions and other events incidental to our ownership interests in our
partner companies and our operations in general. Partner Company Operations
reflects operations of all partner companies other than CompuCom. The partner
companies included under Partner Company Operations have been accounted for
under the consolidated, equity or cost method depending on their particular
circumstances. CompuCom Operations reflects the consolidated results of
CompuCom. All significant intersegment activity has been eliminated.
24
The following summarizes information related to the Company's segments (in
thousands). All significant intersegment activity has been eliminated.
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ----------------------
2000 1999 2000 1999
---- ---- ---- ----
(Unaudited)
Summary of Consolidated Net Income (Loss)
General Safeguard Operations.............................. $ 15,642 $ 14,715 $ 53,296 $ 58,723
Partner Company Operations................................ (43,453) (8,750) (45,841) (17,205)
CompuCom Operations....................................... 2,623 3,352 (875) 3,460
-------- -------- ---------- ----------
$(25,188) $ 9,317 $ 6,580 $ 44,978
======== ======== ========== ==========
General Safeguard Operations
Revenue................................................... $ 8,090 $ 3,002 $ 20,378 $ 9,208
Operating expenses
Cost of sales............................................ 1,696 -- 3,931 --
Selling and service...................................... 142 -- 142 --
General and administrative............................... 23,349 8,867 64,776 23,540
Depreciation and amortization............................ 1,234 433 3,409 1,168
-------- -------- ---------- ----------
Total operating expenses................................. 26,421 9,300 72,258 24,708
-------- -------- ---------- ----------
(18,331) (6,298) (51,880) (15,500)
-------- -------- ---------- ----------
Gain on issuance of stock by partner companies........... -- 35,379 -- 35,705
Other income (loss), net................................. 34,457 (4,327) 112,834 77,793
Interest, net............................................ 1,354 (3,369) (2,379) (8,937)
-------- -------- ---------- ----------
Income before income taxes and equity income............. 17,480 21,385 58,575 89,061
Income taxes............................................. (8,423) (6,670) (28,698) (30,338)
Equity income............................................ 6,585 -- 23,419 --
-------- -------- ---------- ----------
Net Income from General Safeguard Operations.............. $ 15,642 $ 14,715 $ 53,296 $ 58,723
======== ======== ========== ==========
Partner Company Operations
Revenue................................................... $ 9,680 $ 8,314 $ 20,231 $ 21,667
Operating expenses
Cost of sales............................................ 3,376 1,358 5,857 4,836
Selling and service...................................... 3,498 2,453 9,409 6,510
General and administrative............................... 1,241 4,790 9,424 8,063
Depreciation and amortization............................ 1,188 1,438 3,603 3,606
-------- -------- ---------- ----------
Total operating expenses................................. 9,303 10,039 28,293 23,015
-------- -------- ---------- ----------
377 (1,725) (8,062) (1,348)
-------- -------- ---------- ----------
Interest, net............................................ (247) (227) (1,146) (462)
-------- -------- ---------- ----------
Income (loss) before income taxes,
minority interest and equity income (loss).............. 130 (1,952) (9,208) (1,810)
Income taxes............................................. 24,037 3,796 24,874 8,331
Minority interest........................................ -- 252 229 76
Equity loss.............................................. (67,620) (10,846) (61,736) (23,802)
-------- -------- ---------- ----------
Net Loss from Partner Company Operations.................. $(43,453) $ (8,750) $ (45,841) $ (17,205)
======== ======== ========== ==========
CompuCom Operations
Revenue................................................... $712,580 $889,342 $1,970,685 $2,185,257
Operating expenses
Cost of sales............................................ 635,864 794,678 1,772,406 1,950,230
Selling and service...................................... 33,157 46,125 100,495 121,010
General and administrative............................... 25,367 24,786 69,611 68,324
Depreciation and amortization............................ 5,610 6,250 17,379 17,329
Restructuring............................................ -- -- 5,169 --
-------- -------- ---------- ----------
Total operating expenses................................. 699,998 871,839 1,965,060 2,156,893
-------- -------- ---------- ----------
12,582 17,503 5,625 28,364
-------- -------- ---------- ----------
Other income, net........................................ -- -- 1,958 --
Interest, net............................................ (4,326) (6,909) (11,797) (17,446)
-------- -------- ---------- ----------
Income (loss) before income taxes and minority interest.. 8,256 10,594 (4,214) 10,918
Income taxes............................................. (1,749) (2,143) 583 (2,212)
Minority interest........................................ (3,884) (5,099) 2,756 (5,246)
-------- -------- ---------- ----------
Net Income (Loss) from CompuCom Operations................ $ 2,623 $ 3,352 $ (875) $ 3,460
======== ======== ========== ==========
25
Net Results of Operations--General Safeguard Operations
During the three and nine months ended September 30, 1999, aligne's operating
results were included in the Partner Company Operations segment. During the
first quarter of 2000, we acquired the remaining 20% of aligne. As a result,
effective January 1, 2000, aligne's results of operations are included in the
General Safeguard Operations segment.
Revenue. Revenue consists of management fees charged to private equity funds
for operational and management services provided through a team of our
professionals, administrative service fees charged to certain partner
companies, and, effective January 1, 2000, charges for consulting services by
our wholly owned subsidiary, aligne. Additionally, revenue includes consulting
fees related to K Consultants subsequent to the acquisition of K Consultants
in August 2000. Revenue was $8.1 million and $20.4 million for the three and
nine months ended September 30, 2000, and $3.0 million and $9.2 million for
the three and nine months ended September 30, 1999. The increase was the
result of the inclusion of aligne's revenues. Effective April 1, 2000, we no
longer charge administrative service fees to our partner companies. These fees
accounted for $0.4 million of revenue for the nine months ended September 30,
2000, and $0.8 million and $2.2 million for the three and nine months ended
September 30, 1999.
General and Administrative. Our general and administrative costs consist
primarily of employee compensation, outside services such as legal, accounting
and consulting, and travel-related costs. We have increased the number of
partner companies from 33 at September 30, 1999 to 50 at September 30, 2000.
Our headcount has increased to support our operations and those of our partner
companies. Additionally, effective January 1, 2000, general and administrative
expenses include costs of aligne, primarily related to employee compensation.
As a result, general and administrative expenses increased to $23.3 million
from $8.9 million for the three months ended September 30, 2000 and 1999.
General and administrative expenses increased to $64.8 million from $23.5
million for the nine months ended September 30, 2000 and 1999. Also
included in the increase for the nine months was a $12.3 million non-cash
compensation charges related to severance packages for two former executives,
a restricted stock grant, and stock options granted to non-employee
consultants. We expect general and administrative costs to continue to be
higher compared to historical periods due to the growth of aligne and K
Consultants, and our acquisition of Palarco in November 2000.
Depreciation and Amortization. The increase in depreciation and amortization
relates to amortization of goodwill associated with our holdings in
consolidated partner companies.
26
Other Income (loss), net. Other income (loss), net, consisted of the
following (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2000 1999 2000 1999
------- ------- -------- --------
(Unaudited)
Gain on sale of private partner companies........ $36,461 $ 221 $ 56,270 $ 640
Unrealized gain (loss) on Tellabs stock.......... -- (7,386) -- 78,163
Gain on sale of Diamond stock.................... -- -- 51,971 3,546
Gain on sale of other public holdings............ 742 10,856 8,644 16,728
Gain on distributions from private equity funds.. -- -- -- 4,590
Unrealized loss on trading securities............ (1,273) -- (2,093) --
Other, primarily impairment charges.............. (1,473) (8,018) (1,958) (25,874)
------- ------- -------- --------
$34,457 $(4,327) $112,834 $ 77,793
======= ======= ======== ========
For the three and nine months ended September 30, 2000, the Company recorded
impairment charges of $1.5 million and $3.5 million, and $4.9 million and
$14.4 million for the three and nine months ended September 30, 1999, for the
other than temporary decline in the carrying value of some partner companies.
Interest, net. Interest, net, was $1.4 million of income for the three months
ended September 30, 2000 compared to $3.4 million of expense for the three
months ended September 30, 1999. Interest, net, was $2.4 million of expense
for the nine months ended September 30, 2000 compared to $8.9 million of
expense for the nine months ended September 30, 1999. The change is due to
interest income earned in 2000 from funds raised in our follow-on public
offering and from strategic investors, partially offset by increased interest
expense as a result of our subordinated notes issued in June 1999 and the
accretion of the obligation and the amortization of the cost of the two
forward sale contracts entered into during March 1999 and August 1999.
Income Taxes. Our consolidated effective tax rate for the nine months ended
September 30, 2000 was 33%. This rate differs from the federal statutory rate
due to non-deductible goodwill amortization.
Equity Income (Loss). Equity income was $6.6 million and $23.4 for the three
and nine months ended September 30, 2000. This income is attributable to our
wholly-owned subsidiaries' direct ownership interest in a private equity fund.
In November 2000, we announced the acquisition of Palarco. Palarco is a
provider of global information technology solutions, and provides a key
eServices component to Safeguard's infrastructure strategy by augmenting the
breadth and depth of Safeguard's consulting and implementation capabilities.
On a proforma basis, the cash flow generated from the combined operations of
aligne, K Consultants and Palarco is approximately $15 million on a 12-month
basis.
Net Results of Operations--Partner Company Operations
Revenue. Revenue was $9.7 million and $20.2 million for the three and nine
months ended September 30, 2000, respectively and $8.3 million and $21.7
million for the three and nine months ended September 30, 1999, respectively.
The decrease is a result of aligne no longer being included in the Partner
Company Operations segment, partially offset by the inclusion of revenue
related to SOTAS and Arista subsequent to our acquiring a majority voting
interest in the second quarter of 1999, and prior to the sale of Arista in
July 2000.
Operating Expenses. Operating expenses were $9.3 million and $28.3 million
for the three and nine months ended September 30, 2000, respectively and $10
million and $23 million for the three and nine months ended September 30,
1999, respectively. The increase in operating expenses in 2000 was primarily
the result of the inclusion of operating expenses related to SOTAS and Arista
subsequent to our acquiring a majority voting interest in the second quarter
of 1999, and prior to the sale of Arista in July 2000, partially offset by the
exclusion of aligne's expenses in 2000.
Equity Income (Loss). A significant portion of our net results of operations
is derived from companies in which we hold a significant minority ownership
interest. Equity income (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. Certain
amounts recorded to reflect our share of the income (loss) of our partner
companies accounted for under the equity method are based on estimates and on
unaudited results of operations of these partner companies and may require
adjustments in the future when audits of these entities are made final. During
the three and nine months
27
ended September 30, 2000, we accounted for 38 and 36 partner companies on the
equity method, versus 20 for the three and nine months ended September
30, 1999.
Of the $67.6 million and $61.7 million of equity loss related to our share of
the income or loss of companies accounted for on the equity method for the
three months and nine months ended September 30, 2000, ($36.4) million and
($11.6) million of loss was attributable to Internet Capital Group. We also
recorded $20.3 million and $52.4 million of equity income related to our
interests in private equity funds, and ($10) million and ($17.2) million
related to our goodwill amortization. The remaining ($41.5) million and
($85.3) million of equity loss was attributable to our share of 37 and 35
partner companies operating results, a majority of which have losses.
Our share of the equity method partner company results of operations were
impacted by various one-time transactions and other events incidental to
ownership of our partner companies. The reported results of operations of our
partner companies included restructuring charges, equity-based compensation
costs, and additional selling, general and administrative, technology,
operating and personnel costs as our partner companies continue to accelerate
and transition their business models.
Many of our partner companies accounted for under the equity method are
technology-related companies with substantial losses. We expect to continue to
acquire interests in more technology-related companies that may have operating
losses and that we may account for under the equity method. Additionally, we
expect certain of our existing partner companies to continue to invest in
their products and services and to recognize operating losses. As a result,
equity losses could continue to increase significantly.
Net Results of Operations--CompuCom Operations
CompuCom provides people, process, and technology to deliver infrastructure
solutions that optimize electronic business and enterprise applications.
CompuCom's revenues are primarily derived from sales of distributed desktop
computer products and configuration, network integration and technology
support.
Revenue. Revenue was $712.6 million and $1,970.7 million for the three and
nine months ended September 30, 2000, respectively and $889.3 million and
$2,185.3 million for the three and nine months ended September 30, 1999,
respectively. The decrease is attributable to the negative impact of
manufacturer direct selling and fulfillment strategies as well as lower
product demand when compared to last year's higher than normal spending by
CompuCom's clients as part of their preparation for the year 2000. CompuCom
expects to experience continued pressure on product and service revenue when
compared to the prior period.
28
Gross Margin. Gross margin was 10.8% and 10.1% for the three and nine months
ended September 30, 2000 and 10.6% and 10.8% for the three and nine months
ended September 30, 1999. The increase for the three months ended September
30, 2000 was due to increased service margins related to improvements in the
management and utilization of service-related resources, partially offset by
reduced product margins due to increased competition from direct marketers and
other companies who sell personal computer products. The decrease for the
nine months ended September 30, 2000 is due to reduced product margins as
described above and decreased service margins when compared to the prior year
due to lower demand for CompuCom's consulting services. CompuCom expects to
experience continued pressure on product and service gross margin.
Selling and Service Expenses. Selling and service expenses were 4.6% and 5.1%
of revenue for the three and nine months ended September 30, 2000 and 5.2% and
5.5% of revenue for the three and nine months ended September 30, 1999.
CompuCom attributes this decline to increased leverage of its infrastructure
resulting from the Entex acquisition and its own cost reduction efforts.
General and Administrative Expense. General and administrative expenses was
$25.4 million and $69.6 million for the three and nine months ended September
30, 2000, respectively and $24.8 million and $68.3 million for the three and
nine months ended September 30, 1999, respectively. As a percentage of
revenue, general and administrative expenses were 3.6% for the three and nine
months ended September 30, 2000 and 2.8% and 3.2% for the three and nine
months ended September 30, 1999.
Depreciation and Amortization. Depreciation and amortization expense was $5.6
million and $17.4 million for the three and nine months ended September 30,
2000, and $6.3 million and $17.3 million for the three and nine months ended
September 30, 1999. During the nine months ended September 30, 1999,
CompuCom recorded $0.7 million in incremental amortization as a result of
completing the allocation of the purchase price on two acquisitions. The
increase for the nine month period is also due primarily to goodwill
amortization related to the May 1999 Entex acquisition and software license
amortization.
Restructuring Expense. During the first quarter of 2000, CompuCom implemented
a restructuring plan designed to reduce CompuCom's cost structure by closing
certain facilities, consolidating one facility, and reducing its workforce.
As a result, CompuCom recorded a restructuring charge of $5.2 million in the
first quarter of 2000, primarily consisting of costs associated with the
closing and consolidation of certain facilities and disposing of related fixed
assets as well as employee severance and benefits related to the reduction in
workforce. Of the $5.2 million charged to operations, approximately $2.5
million was paid through September 30, 2000.
Interest, Net. Interest expense, net decreased for the three and nine months
ended September 30, 2000, as compared to the same period in 1999. During the
nine months ended September 30, 1999, CompuCom incurred approximately $1.0
million in charges related to the extension of its previous credit facilities
until new credit facilities were finalized. These charges, along with greater
financing requirements in the second quarter 1999 due to the TASD acquisition,
were the primary reasons for the decline in financing expenses for the three
and nine months ended September 30, 2000. These two factors were partially
offset by an increase in CompuCom's effective interest rate in 2000 relative
to 1999.
Liquidity and Capital Resources
We have funded our operations with our bank credit facility, proceeds from
issuance of convertible notes, proceeds from the issuance of equity
securities, proceeds from forward sale contracts, and proceeds from sales of
partner companies.
In April 2000, we completed a follow-on public offering, selling 8.6 million
shares of our common stock, including exercise in full of the underwriters'
overallotment option, at $50 per share. The net proceeds to us were
approximately $414 million, net of underwriters' commission and offering
expenses.
29
On March 15, 2000, we filed a Registration Statement on Form S-3 with the
Securities and Exchange Commission to sell from time to time up to $500
million of our common stock to certain strategic investors and institutional
investors. In April 2000, we completed the first tranche of this offering
with a sale to certain strategic investors. Net proceeds from these stock
sales totaled $100 million.
Sales of equity securities generated proceeds of approximately $94 million
during the nine months ended September 30, 2000 excluding CompuCom's sale of
equity securities which generated proceeds of $2 million.
We have a $300 million bank revolving credit facility. Of the $300 million,
$250 million matures in April 2005 and is secured by certain equity securities
we hold of our publicly traded partner companies (the Pledged Securities). The
remaining $50 million is unsecured, with availability limited to the lesser of
$50 million or 10% of the value of the Pledged Securities. The $50 million
facility matures in April 2001 and the Company intends to extend the maturity
to 2002. Availability under our bank credit facility is determined by the
market value of the publicly traded partner companies pledged as collateral.
Availability under our credit facility at September 30, 2000 was $296 million
and there were no amounts outstanding.
Our cash and cash equivalents at September 30, 2000, availability under our
bank credit facilities, and other internal sources of cash flow are expected
to be sufficient to fund our cash requirements through 2001, including
commitments to our existing partner companies, our current operating plan to
acquire new partner companies, our general corporate requirements, and the
repurchase of up to an additional $55 million of our common stock from time to
time in the open market as authorized by our Board of Directors in May 2000.
At September 30, 2000, we were contingently obligated for approximately $16
million of guarantee commitments. Additionally, we had committed capital of
approximately $213 million, including commitments made in prior years, to
various partner companies and private equity funds, to be funded over the next
several years, including approximately $128 million which is expected to be
funded in the next twelve months.
Availability under our bank credit facility is determined by the market value
of the publicly traded partner companies pledged as collateral. If the stock
markets experience a significant decline, availability under the credit
facilities could be reduced significantly and could have an adverse effect on
our ability to borrow under the facilities. In addition, our ability to raise
proceeds from sales of publicly traded partner companies could also be
adversely affected. As a result, our ability to acquire interests in new
partner companies and support our existing partner companies with additional
funding could be limited.
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.
As of September 30, 2000, CompuCom has financing arrangements consisting of
the $175 million receivables securitization facility and $175 million working
capital facility. Both facilities mature in May 2002. As of September 30,
2000, receivables securitization facility was fully utilized. Availability
under the working capital facility is subject to a borrowing base calculation.
As of September 30, 2000, availability under the working capital facility was
approximately $139.1 million, of which $34.6 million was outstanding. Both
receivables securitization facility and the working capital facility are
subject to CompuCom's compliance with selected financial covenants and ratios.
CompuCom's liquidity continues to be negatively impacted by the dollar volume
of certain manufactures' rebate programs. Under these programs, CompuCom is
required to pay a higher initial amount for product and claim a rebate from
the manufacturers to reduce the final cost. The collection of these rebates
can take several months. Due to these programs, CompuCom's initial cost for
the product is often higher than the sales price CompuCom obtains from its
customers. These programs
30
are a material factor in CompuCom's financing needs. As of September 30, 2000
CompuCom was owed approximately $66 million under these vendor rebate
programs.
Consolidated working capital increased to $400.2 million at September 30, 2000
from $133.8 million at December 31, 1999. The increase is a result of an
increase in cash, driven by our follow-on public offering and sale of our
stock to strategic investors.
Cash used in operating activities increased in 2000 compared to 1999 due to
reduced operating results at CompuCom and a reduction in CompuCom's
receivables securitization facility of approximately $75 million.
Cash used in investing activities reflects the acquisition of ownership
interests in and advances to new and existing partner companies. Partially
offsetting these activities during the nine months ended September 30, 2000
and 1999, were proceeds from the sales of equity securities.
31
During the first nine months of 2000, we committed approximately $259 million
to acquire interests in and make advances to 16 new partner companies,
including Atlas Commerce, Buystream.com, fob.com, K Consultants, Mi8
Corporation, Nextone Communications, TechSpace LLC, ThinAirApps,
WirelessOnLine and WebTelecom, and we committed $75 million to three new
private equity funds. During the first nine months of 2000, we funded $226
million to new partner companies, $137 million to existing partner companies,
$57 million to new and existing private equity funds. In addition, we
purchased approximately $39 million of shares of our publicly traded partner
companies in the open market. During the first nine months of 2000, we
purchased 1,428,300 shares of our common stock in the open market for a total
of $44.7 million, or $31.33 per share.
From October 1, 2000 through November 9, 2000, we funded $18 million of
commitments made prior to September 30, 2000. Additionally, from October 1,
2000 through November 9, 2000, we committed $100 million and funded $14.2
million to acquire ownership interests in or make advances to new and existing
partner companies. We also purchased 100,000 shares of our common stock for
approximately $1.7 million.
The Company's operations are not capital intensive, and capital expenditures
in any year normally would not be significant in relation to the overall
financial position of the Company. Capital asset requirements are generally
funded through bank credit facilities, internally generated funds or other
financing sources. There were no material capital asset purchase commitments
at September 30, 2000.
Recent Accounting Pronouncements
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities," which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. SFAS No. 133, as amended by SFAS No. 137, is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. We are
currently analyzing the potential impact of SFAS No. 133 on our results of
operations, financial position and cash flows upon the adoption of this
standard.
In October 1999, the Chief Accountant of the Securities and Exchange
Commission requested that the Financial Accounting Standards Board Emerging
Issues Task Force, or the EITF, address a number of accounting and financial
reporting issues that the Securities and Exchange Commission believes has
developed with respect to Internet businesses.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements". This was followed by Staff Accounting Bulletin No. 101A,
"Implementation Issues Related to SAB 101", in March 2000 and by Staff
Accounting Bulletin No. 101B, "Second Amendment: Revenue Recognition in
Financial Statements" SAB 101B", in June 2000. These bulletins summarize
certain of the SEC's views about applying generally accepted accounting
principles to revenue recognition in financial statements. The impact of SAB
101B on the Company was to delay the implementation date of SAB 101 until the
fourth quarter of 2000. The SEC is providing this guidance due, in part, to
the large number of revenue recognition issues that registrants encounter. The
Company is in the process of analyzing the implications of these bulletins.
32
Safe Harbor Statement
Certain statements in this report describing the plans, goals, strategies,
intentions, forecasts, and expectations of our partner companies or us
constitute what are sometimes termed "forward-looking statements." The
following important factors could cause actual results to differ materially
from those in such forward-looking statements.
Our business depends on the performance of our partner companies, which is
uncertain. In general, our partner companies depend on the continuing growth
of the Internet as a medium for commercial transactions, and on the growth of
the technology infrastructure market in particular. The technology
infrastructure industry is intensely competitive, characterized by rapid
changes in technology and customer demands, frequent new product
introductions, and shifting distribution channels. Many of our partner
companies are early-stage companies with limited operating history and no
historical profits, and compete against companies with greater resources and
name recognition.
Fluctuations in the price of the common stock of our publicly traded partner
companies, especially Internet Capital Group, may affect the price of our
common stock. On September 30, 2000, our equity interest in Internet Capital
Group had a market value of approximately $642 million, which was significant
compared to our market value of $2.3 billion. The price of Internet Capital
Group's common stock has been, and may continue to be, highly volatile. Our
continuing growth is also dependent on the continuing strength of the market
for securities of Internet infrastructure companies in general and initial
public offerings of those companies in particular. Competition to acquire
interests in Internet infrastructure companies is intense, which could reduce
the returns we can achieve on our acquisitions.
33
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 historical
volatility in their stock prices. We typically do not attempt to reduce or
eliminate our market exposure on securities. Based on closing market prices
at September 30, 2000, the fair value of our holdings in public securities was
approximately $1.3 billion (excluding warrants that are not exercisable).
Approximately $642 million of these equity securities at September 30, 2000
consisted of holdings in Internet Capital Group. A 20% decrease in equity
prices would result in an approximate $0.3 billion decrease in the fair values
of our publicly traded securities.
In 1999, we entered into two forward sale contracts related to our remaining
holdings in Tellabs. We pledged 3.4 million shares of Tellabs for three years
and in return received approximately $139 million in cash. At the end of the
term, we have the option to deliver cash or Tellabs shares with a value
determined by the stock price of Tellabs maturity. The number of Tellabs
shares to be delivered at maturity ranges from 2.7 million to 3.4 million
shares (or the cash value thereof).
Availability under our bank credit facilities is determined by the market
value of the publicly traded securities pledged as collateral. As of
September 30, 2000, $296 million was available under this facility. If the
market value of these facilities decreased 20%, the availability under the
facility would be reduced to $249 million. Additionally, we are exposed to
interest rate risk primarily through our bank credit facility. At September
30, 2000, there were no borrowings outstanding under these facilities.
CompuCom is exposed to interest rate risk primarily through its receivables
securitization and working capital facilities. CompuCom utilizes its
borrowings on these facilities for its working capital and other borrowing
needs. As of September 30, 2000, the securitization facility had borrowings of
$175 million and the working capital has borrowings of $34.6 million. If
CompuCom's effective interest rate were to increase by 75 basis points
(0.75%), CompuCom's annual interest expense would increase by approximately
$1.6 million based on CompuCom's average borrowings during the nine months
ended September 30, 2000. Our share of this increase would be approximately
$0.8 million after deduction for minority interest but before income taxes.
34
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
Number Description
------ -----------
10.1 Restricted Stock Grant Letter dated February 28, 2000
from Safeguard Scientifics, Inc. to a certain executive
(Exhibits Omitted)/(1)/
10.2 Term note dated April 13, 2000 from a certain executive
to Safeguard Scientifics, Inc./(1)/
10.3 Form of Promissory Notes dated April 6, 2000 given by
certain executives for advances by Safeguard of income
tax withholdings on restricted stock grants./(1)/
10.4 Amended and Restated Credit Agreement among Safeguard
Scientifics, Inc., Safeguard Scientifics (Delaware),
Inc., Safeguard Delaware, Inc., and PNC Bank, N.A.
(Exhibits Omitted)/(1)/
10.5 Executive Employment Agreement dated March 13, 2000,
between Anthony F. Pellegrini and CompuCom Systems,
Inc./(1)/
27* Financial Data Schedule (electronic filing only)
* filed herewith
(1) Incorporated by reference from registrant's Form 10-Q for the
quarter ended March 31, 2000 dated May 15, 2000 and made a part
hereof by such reference.
(b) No reports on Form 8-K have been filed by the Registrant during the
quarter ended September 30, 2000.
35
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, 2000 /s/ Harry Wallaesa
-------------------------------------------------
Harry Wallaesa
President and Chief Operating Officer
Date: November 14, 2000 /s/ Gerald A. Blitstein
-------------------------------------------------
Gerald A. Blitstein
Senior Vice President and Chief Financial Officer
(Principal Financial and Principal
Accounting Officer)
36