SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended June 30, 2003

Commission File Number 1-5620
SAFEGUARD SCIENTIFICS, INC.
(Exact name of registrant as specified in its charter)
 	 	 	
Pennsylvania	 	23-1609753	
(State or other jurisdiction of
incorporation or organization)	 	(I.R.S. Employer
Identification Number)	
 		
800 The Safeguard Building,	 	 	
435 Devon Park Drive Wayne, PA	 	19087	
(Address of principal executive offices)	 	(Zip Code)	
(610) 293-0600
Registrant’s telephone number, including area code
     Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o
     Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).
Yes þ No o
Number of shares outstanding as of August 1, 2003
Common Stock 119,258,117

  

 

SAFEGUARD SCIENTIFICS, INC.
QUARTERLY REPORT FORM 10-Q
INDEX
PART I — FINANCIAL INFORMATION

 	 	 	Page	
 	 	 		
Item 1 - Financial Statements:	 	 	 	 	
 	Consolidated Balance Sheets – June 30, 2003 (unaudited) and December 31, 2002	 	 	3	 	
 	Consolidated Statements of Operations (unaudited) — Three and Six Months Ended June 30, 2003 and 2002	 	 	4	 	
 	Consolidated Statements of Cash Flows (unaudited) — Six Months Ended June 30, 2003 and 2002	 	 	5	 	
 	Notes to Consolidated Financial Statements	 	 	6	 	
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations	 	 	27	 	
Item 3 - Quantitative and Qualitative Disclosures About Market Risk	 	 	37	 	
Item 4 - Controls and Procedures	 	 	38	 	
PART II — OTHER INFORMATION	 	 	 	 	
Item 1 - Legal Proceedings	 	 	39	 	
Item 4 - Submission of Matters to a Vote of Security Holders	 	 	39	 	
Item 5 - Other Information	 	 	40	 	
Item 6 - Exhibits and Reports on Form 8-K	 	 	40	 	
Signatures	 	 	41	 	
2 

 
SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED BALANCE SHEETS

 	 	 	 	 	 	June 30,	 	December 31,	
 	 	 	 	 	 	2003	 	2002	
 	 	 	 	 	 		 		
 	 	 	 	 	 	(in thousands except per share data)	
 	 	 	 	 	(unaudited)		
 	 	 	 	 	 		
ASSETS	
Current Assets	 	 	 	 	 	 	 	 	
 	 	Cash and cash equivalents	 	$	245,383	 	 	$	254,779	 	
 	 	Restricted cash	 	 	1,019	 	 	 	3,634	 	
 	 	Short-term investments	 	 	8,982	 	 	 	9,986	 	
 	 	Accounts receivable, less allowances ($3,519 - 2003; $3,523 - 2002)	 	 	183,764	 	 	 	179,668	 	
 	 	Inventories	 	 	29,312	 	 	 	30,181	 	
 	 	Trading securities	 	 	1,642	 	 	 	832	 	
 	 	Available-for-sale securities	 	 	11,813	 	 	 	—	 	
 	 	Prepaid expenses and other current assets	 	 	13,764	 	 	 	13,045	 	
 	 	 		 	 	 		 	
 	 	 	Total current assets	 	 	495,679	 	 	 	492,125	 	
Property and equipment, net	 	 	36,289	 	 	 	38,610	 	
Ownership interests in and advances to affiliates	 	 	66,069	 	 	 	74,859	 	
Available-for-sale securities	 	 	—	 	 	 	4,548	 	
Intangible assets, net	 	 	14,554	 	 	 	18,580	 	
Goodwill	 	 	213,672	 	 	 	206,815	 	
Deferred taxes	 	 	496	 	 	 	1,210	 	
Note receivable — related party	 	 	12,784	 	 	 	14,482	 	
Other	 	 	14,473	 	 	 	17,437	 	
 	 	 		 	 	 		 	
 	 	 	Total Assets	 	$	854,016	 	 	$	868,666	 	
 	 	 		 	 	 		 	
LIABILITIES AND SHAREHOLDERS’ EQUITY	
Current Liabilities	 	 	 	 	 	 	 	 	
 	 	Current maturities of long-term debt	 	$	12,357	 	 	$	11,517	 	
 	 	Accounts payable	 	 	137,295	 	 	 	121,793	 	
 	 	Accrued expenses and deferred revenue	 	 	88,361	 	 	 	116,669	 	
 	 	 		 	 	 		 	
 	 	 	Total current liabilities	 	 	238,013	 	 	 	249,979	 	
Long-term debt	 	 	1,976	 	 	 	1,998	 	
Minority interest	 	 	135,961	 	 	 	130,384	 	
Other long-term liabilities	 	 	14,199	 	 	 	14,032	 	
Convertible subordinated notes	 	 	200,000	 	 	 	200,000	 	
Commitments and contingencies	 	 	 	 	 	 	 	 	
Shareholders’ Equity	 	 	 	 	 	 	 	 	
 	Preferred stock, $10.00 par value; 1,000 shares authorized	 	 	—	 	 	 	—	 	
 	Common stock, $0.10 par value; 500,000 shares authorized; 119,450 shares issued and outstanding in 2003 and 2002	 	 	11,945	 	 	 	11,945	 	
 	Additional paid-in capital	 	 	738,230	 	 	 	738,282	 	
 	Accumulated deficit	 	 	(495,556	)	 	 	(476,867	)	
 	Accumulated other comprehensive income	 	 	11,674	 	 	 	2,522	 	
 	Treasury stock, at cost (192 shares - 2003, 33 shares - 2002)	 	 	(646	)	 	 	(129	)	
 	Unamortized deferred compensation	 	 	(1,780	)	 	 	(3,480	)	
 	 	 		 	 	 		 	
 	 	 	Total shareholders’ equity	 	 	263,867	 	 	 	272,273	 	
 	 	 		 	 	 		 	
 	 	 	Total Liabilities and Shareholders’ Equity	 	$	854,016	 	 	$	868,666	 	
 	 	 		 	 	 		 	
See Notes to Consolidated Financial Statements.
3 

 
SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

 	 	 	 	Three Months Ended June 30,	 	Six Months Ended June 30,	
 	 	 	 		 			
 	 	 	 	2003	 	2002	 	2003	 	2002	
 	 	 	 		 		 		 		
 	 	 	 	(in thousands except per share data)	
 	 	 	 	(unaudited)	
Revenue	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	Product sales	 	$	309,804	 	 	$	353,730	 	 	$	570,115	 	 	$	616,497	 	
 	Service sales	 	 	108,519	 	 	 	93,097	 	 	 	218,008	 	 	 	175,560	 	
 	Other	 	 	889	 	 	 	6,025	 	 	 	1,788	 	 	 	11,599	 	
 	 	 		 	 	 		 	 	 		 	 	 		 	
 	 	Total revenue	 	 	419,212	 	 	 	452,852	 	 	 	789,911	 	 	 	803,656	 	
 	 	 		 	 	 		 	 	 		 	 	 		 	
Operating Expenses	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	Cost of sales-product	 	 	288,246	 	 	 	324,759	 	 	 	524,152	 	 	 	558,017	 	
 	Cost of sales-service	 	 	69,950	 	 	 	58,407	 	 	 	142,499	 	 	 	113,327	 	
 	Selling and service	 	 	33,903	 	 	 	33,506	 	 	 	68,778	 	 	 	62,993	 	
 	General and administrative	 	 	28,772	 	 	 	36,140	 	 	 	59,496	 	 	 	70,774	 	
 	Depreciation and amortization	 	 	8,255	 	 	 	7,110	 	 	 	16,133	 	 	 	14,511	 	
 	 	 		 	 	 		 	 	 		 	 	 		 	
 	 	Total operating expenses	 	 	429,126	 	 	 	459,922	 	 	 	811,058	 	 	 	819,622	 	
 	 	 		 	 	 		 	 	 		 	 	 		 	
 	 	 	(9,914	)	 	 	(7,070	)	 	 	(21,147	)	 	 	(15,966	)	
Other income (loss), net	 	 	12,881	 	 	 	(3,397	)	 	 	17,072	 	 	 	(8,928	)	
Impairment — related party	 	 	—	 	 	 	—	 	 	 	(659	)	 	 	—	 	
Interest income	 	 	853	 	 	 	2,307	 	 	 	1,885	 	 	 	4,327	 	
Interest and financing expense	 	 	(3,477	)	 	 	(5,558	)	 	 	(6,921	)	 	 	(13,023	)	
 	 	 		 	 	 		 	 	 		 	 	 		 	
Income (loss) before income taxes, minority interest, equity loss and change in accounting principle	 	 	343	 	 	 	(13,718	)	 	 	(9,770	)	 	 	(33,590	)	
Income taxes	 	 	(1,465	)	 	 	(1,944	)	 	 	(2,857	)	 	 	(3,062	)	
Minority interest	 	 	107	 	 	 	(608	)	 	 	97	 	 	 	(1,449	)	
Equity loss	 	 	(2,135	)	 	 	(17,639	)	 	 	(6,159	)	 	 	(36,546	)	
 	 	 		 	 	 		 	 	 		 	 	 		 	
Net loss before change in accounting principle	 	 	(3,150	)	 	 	(33,909	)	 	 	(18,689	)	 	 	(74,647	)	
Cumulative effect of change in accounting principle	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(21,390	)	
 	 	 		 	 	 		 	 	 		 	 	 		 	
Net Loss	 	$	(3,150	)	 	$	(33,909	)	 	$	(18,689	)	 	$	(96,037	)	
 	 	 		 	 	 		 	 	 		 	 	 		 	
Basic Loss Per Share:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	Prior to cumulative effect of change in accounting principle	 	$	(0.03	)	 	$	(0.29	)	 	$	(0.16	)	 	$	(0.64	)	
 	Cumulative effect of change in accounting principle	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(0.18	)	
 	 	 		 	 	 		 	 	 		 	 	 		 	
 	 	$	(0.03	)	 	$	(0.29	)	 	$	(0.16	)	 	$	(0.82	)	
 	 	 		 	 	 		 	 	 		 	 	 		 	
Diluted Loss Per Share:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	Prior to cumulative effect of change in accounting principle	 	$	(0.03	)	 	$	(0.29	)	 	$	(0.17	)	 	$	(0.65	)	
 	Cumulative effect of change in accounting principle	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(0.18	)	
 	 	 		 	 	 		 	 	 		 	 	 		 	
 	 	$	(0.03	)	 	$	(0.29	)	 	$	(0.17	)	 	$	(0.83	)	
 	 	 		 	 	 		 	 	 		 	 	 		 	
Weighted Average Shares Outstanding — Basic and Diluted	 	 	118,348	 	 	 	117,572	 	 	 	118,256	 	 	 	117,548	 	
See Notes to Consolidated Financial Statements.
4 

 
SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

 	 	 	Six Months Ended June 30,	
 	 	 		
 	 	 	2003	 	2002	
 	 	 		 		
 	 	 	(in thousands)	
 	 	 	(unaudited)	
Net cash provided by (used in) operating activities	 	$	(27,456	)	 	$	29,687	 	
 	 	 		 	 	 		 	
Investing Activities	 	 	 	 	 	 	 	 	
Proceeds from sales of available-for-sale and trading securities	 	 	22,409	 	 	 	13,269	 	
Proceeds from sales of and distributions from affiliates	 	 	7,207	 	 	 	16,649	 	
Advances to affiliates	 	 	(139	)	 	 	(4,397	)	
Repayment of advances to affiliates	 	 	753	 	 	 	—	 	
Acquisitions of ownership interests in affiliates and subsidiaries, net of cash acquired	 	 	(10,810	)	 	 	(17,004	)	
Advances to related party	 	 	—	 	 	 	(588	)	
Repayments of advances to related party	 	 	1,039	 	 	 	1,459	 	
Increase in restricted cash and short-term investments	 	 	(998	)	 	 	—	 	
Decrease in restricted cash and short-term investments	 	 	4,617	 	 	 	4,421	 	
Capital expenditures	 	 	(7,195	)	 	 	(5,394	)	
Other, net	 	 	(568	)	 	 	(1,638	)	
 	 	 		 	 	 		 	
Net cash provided by investing activities	 	 	16,315	 	 	 	6,777	 	
 	 	 		 	 	 		 	
Financing Activities	 	 	 	 	 	 	 	 	
Borrowings on revolving credit facilities	 	 	51,033	 	 	 	7,829	 	
Repayments on revolving credit facilities	 	 	(49,055	)	 	 	(9,311	)	
Borrowings on long-term debt	 	 	80	 	 	 	569	 	
Repayments on long-term debt	 	 	(1,204	)	 	 	(1,786	)	
Issuance of Company common stock	 	 	34	 	 	 	—	 	
Issuance of subsidiary common stock	 	 	857	 	 	 	951	 	
 	 	 		 	 	 		 	
 	Net cash provided by (used in) financing activities	 	 	1,745	 	 	 	(1,748	)	
 	 	 		 	 	 		 	
Net Increase (Decrease) in Cash and Cash Equivalents	 	 	(9,396	)	 	 	34,716	 	
Cash and Cash Equivalents at beginning of period	 	 	254,779	 	 	 	298,095	 	
 	 	 		 	 	 		 	
Cash and Cash Equivalents at end of period	 	$	245,383	 	 	$	332,811	 	
 	 	 		 	 	 		 	
See Notes to Consolidated Financial Statements.
5 

 
SAFEGUARD SCIENTIFICS, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
1. GENERAL
     The accompanying unaudited interim Consolidated Financial Statements were prepared in accordance with accounting principles generally accepted in the United States of America and the interim financial statements rules and regulations of the SEC. In the opinion of management, these statements include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the Consolidated Financial Statements. The interim operating results are not necessarily indicative of the results for a full year or for any interim period. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations relating to interim financial statements. The Consolidated Financial Statements included in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Company’s Consolidated Financial Statements and Notes thereto included in the Company’s 2002 Annual Report on Form 10-K.
2. BASIS OF PRESENTATION
     The Consolidated Financial Statements include the accounts of the Company and all subsidiaries in which it directly or indirectly owns more than 50% of the outstanding voting securities. The Company’s wholly owned subsidiaries include Alliance Consulting Group Associates, Inc. (“Alliance Consulting”). The Company’s Consolidated Statements of Operations and Cash Flows also include the following majority-owned subsidiaries:

For the three months ended June 30,	
	
2003	 	2002	
	 		
Agari Mediaware	 	Agari Mediaware	
ChromaVision Medical Systems	 	ChromaVision Medical Systems	
CompuCom Systems	 	(Since June 2002)	
Mantas	 	CompuCom Systems	
Pacific Title and Arts Studio	 	Mantas (Since April 2002)	
Protura Wireless	 	Pacific Title and Arts Studio	
SOTAS	 	Protura Wireless	
Tangram Enterprise Solutions	 	SOTAS	
 	 	Tangram Enterprise Solutions	
 	 	 	
For the six months ended June 30,	
	
2003	 	2002	
	 		
Agari Mediaware	 	Agari Mediaware	
ChromaVision Medical Systems	 	Aptas (Through March 2002)	
CompuCom Systems	 	ChromaVision Medical Systems	
Mantas	 	(Since June 2002)	
Pacific Title and Arts Studio	 	CompuCom Systems	
Protura Wireless	 	Mantas (Since April 2002)	
SOTAS	 	Pacific Title and Arts Studio	
Tangram Enterprise Solutions	 	Protura Wireless	
 	 	SOTAS	
 	 	Tangram Enterprise Solutions	
6 

 

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
JUNE 30, 2003
The Company’s Consolidated Balance Sheets also include the following majority-owned subsidiaries at both June 30, 2003 and December 31, 2002:
                               Agari Mediaware
                               ChromaVision Medical Systems
                               CompuCom Systems
                               Mantas
                               Pacific Title and Arts Studio
                               Protura Wireless
                               SOTAS
                               Tangram Enterprise Solutions
3. RECLASSIFICATIONS
     Certain prior year amounts have been reclassified to conform to the current year presentation.
4. GOODWILL AND OTHER INTANGIBLE ASSETS
     Under the transition provisions of SFAS 142, the Company was required to test existing goodwill and intangible assets with indefinite useful lives for impairment as of January 1, 2002. The Company completed the required testing during the second quarter of 2002. As a result, the Company reported a $21.8 million goodwill impairment loss in the Business and IT services reporting unit (a component of the Strategic Initiative segment), arising from the initial application of SFAS 142 which required the carrying amount of goodwill be compared to the fair value. The fair value of that reporting unit was determined by estimating the present value of future cash flows and by reviewing the valuations of comparable public companies.
     The following is a summary of changes in the carrying amount of goodwill by segment: 

 	 	Strategic	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Initiative	 	Legacy	 	 	 	 	 	Total	
 	 	Companies	 	Companies	 	CompuCom	 	Segments	
 	 		 		 		 		
 	 	 	 	 	 	(in thousands)	 	 	 	 	
 	 	 	 	 	 	(unaudited)	 	 	 	 	
Balance at December 31, 2002	 	$	100,590	 	 	$	1,336	 	 	$	104,889	 	 	$	206,815	 	
Additions	 	 	1,157	 	 	 	—	 	 	 	—	 	 	 	1,157	 	
Purchase Price Adjustments	 	 	5,700	 	 	 	—	 	 	 	—	 	 	 	5,700	 	
 	 	 		 	 	 		 	 	 		 	 	 		 	
Balance at June 30, 2003	 	$	107,447	 	 	$	1,336	 	 	$	104,889	 	 	$	213,672	 	
 	 	 		 	 	 		 	 	 		 	 	 		 	
7 

 
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
JUNE 30, 2003
     Intangible assets with definite useful lives are amortized over their respective estimated useful lives to their estimated residual values. The following table provides a summary of the Company’s intangible assets with definite useful lives:

 	 	 	 	 	 	 	 	 	 	June 30, 2003	 	 	 	 	
 	 	 	 	 	 		
 	 	 	 	 	 	Gross	 	 	 	 	 	 	 	 	
 	 	Amortization	 	Carrying	 	Accumulated	 	 	 	 	
 	 	Period	 	Value	 	Amortization	 	Net	
 	 		 		 		 		
 	 	 	 	 	 	 	 	 	 	(in thousands)	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	(unaudited)	 	 	 	 	
Customer-related	 	6 - 11 years	 	$	15,467	 	 	$	10,293	 	 	$	5,174	 	
Contract-related	 	2 - 3 years	 	 	2,840	 	 	 	1,820	 	 	 	1,020	 	
Technology-related	 	2 - 17 years	 	 	11,677	 	 	 	3,317	 	 	 	8,360	 	
 	 	 	 	 	 	 		 	 	 		 	 	 		 	
Total	 	 	 	 	 	$	29,984	 	 	$	15,430	 	 	$	14,554	 	

 	 	 	 	 	 	December 31, 2002	
 	 	 	 	 	 		
 	 	 	 	 	 	Gross	 	 	 	 	 	 	 	 	
 	 	Amortization	 	Carrying	 	Accumulated	 	 	 	 	
 	 	Period	 	Value	 	Amortization	 	Net	
 	 		 		 		 		
 	 	 	 	 	 	 	 	 	 	(in thousands)	 	 	 	 	
Customer-related	 	6 - 11 years	 	$	15,467	 	 	$	9,107	 	 	$	6,360	 	
Contract-related	 	2 - 3 years	 	 	2,840	 	 	 	1,382	 	 	 	1,458	 	
Technology-related	 	2 - 17 years	 	 	14,071	 	 	 	3,309	 	 	 	10,762	 	
 	 	 	 	 	 	 		 	 	 		 	 	 		 	
Total	 	 	 	 	 	$	32,378	 	 	$	13,798	 	 	$	18,580	 	
 	 	 	 	 	 	 		 	 	 		 	 	 		 	
     Amortization expense related to intangible assets was $1.4 million and $3.0 million for the three and six months ended June 30, 2003 and $0.9 million and $1.9 million for the three and six months ended June 30, 2002, respectively. The following table provides estimated future amortization expense related to intangible assets: 

 	 	Total		
 	 		 	
 	 	(in thousands)		
 	 	(unaudited)		
Remainder of 2003	 	$	2,838	 		
2004	 	 	5,118	 		
2005	 	 	3,203	 		
2006	 	 	1,284	 		
2007 and thereafter	 	 	2,111	 		
 	 	 		 		
 	 	$	14,554	 		
 	 	 		 		
5. NEW ACCOUNTING PRONOUNCEMENTS
     In November 2002, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables.” This issue addresses the appropriate accounting by vendors for arrangements that will result in the delivery of multiple products, services and/or rights to assets that may occur over a period of time. The Issue is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The adoption of this consensus is not expected to have an impact on the Company’s consolidated financial statements.
     In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities”, which addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. The Interpretation applies immediately to variable interests in variable interest entities created after January 31, 2003, and to variable interest in variable interest entities obtained after January 31, 2003. The interpretation becomes effective for entities created before February 1, 2003 as of the beginning of the first period after June 15, 2003. The Company accounts for certain private
8 

 

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
JUNE 30, 2003
equity funds under the equity method. If it is ultimately determined that FIN 46 applies to private equity funds, then the amount of equity income or loss the Company records on private equity funds accounted for under the equity method may change significantly.
     In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity”. SFAS 150 establishes standards for how an issuer of financial statements classifies and measures certain financial instruments that have characteristics of both liabilities and equity. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this statement is not expected to have an impact on the Company’s financial statements.
6. COMPREHENSIVE INCOME (LOSS)
     Comprehensive income (loss) is the change in equity of a business enterprise from transactions and other events and circumstances from non-owner sources. Excluding net loss, the Company’s primary 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 loss of unrealized gains or losses that were included in comprehensive loss in prior periods.
     The following summarizes the components of comprehensive income (loss): 

 	 	 	Three Months Ended June 30,	 	Six Months Ended June 30,		
 	 	 		 			
 	 	 	2003	 	2002	 	2003	 	2002		
 	 	 		 		 		 			
 	 	(in thousands)	 	
 	 	(unaudited)	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 		
Net Loss	 	$	(3,150	)	 	$	(33,909	)	 	$	(18,689	)	 	$	(96,037	)		
 	 	 		 	 	 		 	 	 		 	 	 		 		
Other Comprehensive Income (Loss), Before Taxes:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 		
 	Unrealized holding gains (losses) in available-for-sale securities	 	 	11,961	 	 	 	(84	)	 	 	11,987	 	 	 	(344	)		
 	Reclassification adjustments	 	 	(4,093	)	 	 	74	 	 	 	(4,193	)	 	 	629	 		
Related Tax (Expense) Benefit:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 		
 	Unrealized holding gains (losses) in available-for-sale securities	 	 	(52	)	 	 	29	 	 	 	(61	)	 	 	120	 		
 	Reclassification adjustments	 	 	1,384	 	 	 	(26	)	 	 	1,419	 	 	 	(220	)		
 	 	 		 	 	 		 	 	 		 	 	 		 		
Other Comprehensive Income (Loss)	 	 	9,200	 	 	 	(7	)	 	 	9,152	 	 	 	185	 		
 	 	 		 	 	 		 	 	 		 	 	 		 		
Comprehensive Income (Loss)	 	$	6,050	 	 	$	(33,916	)	 	$	(9,537	)	 	$	(95,852	)		
 	 	 		 	 	 		 	 	 		 	 	 		 		
9 

 
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
JUNE 30, 2003
7. OWNERSHIP INTERESTS IN AND ADVANCES TO AFFILIATES
     The following summarizes the carrying value of the Company’s ownership interests in and advances to affiliates accounted for under the equity method or cost method of accounting. The ownership interests are classified according to applicable accounting methods at June 30, 2003 and December 31, 2002.

 	 	 	June 30,	 	December 31,	
 	 	 	2003	 	2002	
 	 	 		 		
 	 	 	(in thousands)	
 	 	 	(unaudited)	 	 	 	 	
Equity Method	 	 	 	 	 	 	 	 	
 	Public Companies	 	$	11,739	 	 	$	23,181	 	
 	Non-Public Companies	 	 	5,632	 	 	 	5,057	 	
 	Private Equity Funds	 	 	32,761	 	 	 	36,377	 	
 	 	 		 	 	 		 	
 	 	 	50,132	 	 	 	64,615	 	
Cost Method	 	 	 	 	 	 	 	 	
 	Non-Public Companies	 	 	12,287	 	 	 	6,420	 	
 	Private Equity Funds	 	 	3,650	 	 	 	3,824	 	
 	 	 		 	 	 		 	
 	 	$	66,069	 	 	$	74,859	 	
 	 	 		 	 	 		 	
     The market value of the Company’s public companies accounted for under the equity method was $38 million at June 30, 2003 and $53 million at December 31, 2002.
8. DEBT
     In May 2003, the Company renewed its revolving credit facility that provides for borrowings and issuances of letters of credit and guarantees of up to $25 million. This credit facility matures in May 2004 and bears interest at the prime rate (4.0% at June 30, 2003) for outstanding borrowings. The credit facility is subject to an unused commitment fee of 0.125% which is subject to reduction based on deposits maintained at the bank. The facility requires cash collateral equal to two times any amount outstanding under the facility. This facility provides the Company additional flexibility to implement its strategy and support its companies. As of June 30, 2003, guarantees totaling $8.0 million related to two strategic initiative companies’ credit facilities were outstanding.
     At June 30, 2003, CompuCom has a $25 million working capital facility and a $100 million receivables securitization facility. The working capital facility, which initially had a May 2002 maturity date but has been extended to a September 2003 maturity date, bears interest at LIBOR plus an agreed upon spread and is secured by a lien on CompuCom’s assets. CompuCom expects to renew the working capital facility during the third quarter of 2003. Availability under the facility is subject to a borrowing base calculation. As of June 30, 2003, availability under the working capital facility was $25 million with no outstanding amounts. The securitization facility’s pricing is based on a designated short-term interest rate plus an agreed upon spread. The securitization allows CompuCom to sell, on an ongoing basis, its trade accounts receivable to a consolidated, wholly owned bankruptcy-remote special purpose subsidiary (SPS). The SPS has sold and, subject to certain conditions, may from time to time sell, an undivided ownership interest in the pool of purchased receivables to financial institutions. As collections reduce receivables balances sold, CompuCom may sell interests in new receivables to bring the amount available up to the maximum allowed. These sales are reflected as reductions of Accounts Receivable on the Consolidated Balance Sheets and are included in net cash provided by operating activities on the Consolidated Statements of Cash Flows. The proceeds from the sale of receivables are used primarily to fund working capital requirements. The investors in the securitized receivables have no recourse to the Company’s or CompuCom’s assets as a result of debtor’s defaults. The Company and CompuCom account for these transactions in accordance with SFAS 140, “Accounting or Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” and meet the sales criteria stated in Paragraph 9 of SFAS 140. Amounts outstanding and removed from the Consolidated Balance Sheets as sold receivables as
10 

 

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
JUNE 30, 2003
of June 30, 2003 consisted of two certificates totaling $60 million. Within the context of the securitization, each certificate is issued from a separate facility, each facility set at $50 million. One $50 million facility, with an October 2003 maturity date, has one certificate issued for $50 million. The other $50 million facility with an October 2005 maturity date has one certificate issued for $10 million. CompuCom retains the portion of the sold receivables that are in excess of the amounts outstanding, referred to as retained. The carrying amount of CompuCom’s retained interest, which approximates fair value because of the short term nature of the receivables, is reflected in Accounts Receivable on the Consolidated Balance Sheets. Both facilities are subject to CompuCom’s compliance with selected financial covenants and ratios.
     Four consolidated companies maintain separate credit facilities which provide for aggregate borrowings of $19.0 million. These credit facilities range in maturity from September 2003 through March 2004. As of June 30, 2003 outstanding borrowings under these facilities were $6.8 million. These obligations bear interest at fixed rates of 4.75% and variable rates ranging between the prime rate plus 0.5% and the prime rate plus 1%.
     Debt also includes mortgage obligations ($3.7 million), term loans ($1.9 million), capital lease obligations ($0.9 million) and other borrowing obligations ($1.0 million) of consolidated companies. These obligations bear interest at fixed rates ranging between 4.25% and 10.9% and variable rates indexed to the prime rate plus 1%.
     Aggregate maturities of long-term debt in future years are (in millions): $11.9 — 2003; $2.0 — 2004; $0.3 — 2005; and $0.1— 2006.
9. STOCK-BASED COMPENSATION
     Incentive or non-qualified stock options, restricted stock awards, stock appreciation rights, performance units and other stock-based awards may be granted to Company employees, directors and consultants under the 2001 Associates Equity Compensation Plan and 1999 Equity Compensation Plan. Generally, outstanding options vest over four years after the date of grant and expire eight years after the date of grant. All options granted under the plans to date have been at prices which have been equal to the fair market value at the date of grant. At June 30, 2003, the Company reserved 14.3 million shares of common stock for possible future issuance under its equity compensation plans. Several subsidiaries and most of our companies also maintain equity compensation plans for their employees and directors.
     Option activity is summarized below: 

 	 	 	 	 	 	Weighted	
 	 	 	 	 	 	Average	
 	 	Shares	 	Exercise Price	
 	 		 		
 	 	(In thousands)	 	 	 	 	
Outstanding at December 31, 2002	 	 	11,404	 	 	$	8.50	 	
Options granted	 	 	400	 	 	 	1.44	 	
Options exercised	 	 	(27	)	 	 	(1.31	)	
Options canceled/forfeited	 	 	(570	)	 	 	(3.59	)	
 	 	 		 	 	 	 	 	
Outstanding at June 30, 2003	 	 	11,207	 	 	$	8.52	 	
 	 	 		 	 	 	 	 	
Options exercisable at end of period	 	 	7,024	 	 	 	 	 	
Shares available for future grant	 	 	3,070	 	 	 	 	 	
11 

 
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
JUNE 30, 2003
The following summarizes information about the Company’s stock options outstanding at June 30, 2003:

Options Outstanding	 	Options Exercisable	
	 		
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	Weighted Average	 	Weighted	 	 	 	 	 	Weighted	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	Number	 	Remaining	 	Average	 	 	 	 	 	Average	
Range of	 	Outstanding	 	Contractual Life	 	Exercise	 	Exercisable	 	Exercise	
Exercise Prices	 	(In thousands)	 	(In years)	 	Price	 	(In thousands)	 	Price	
	 		 		 		 		 		
$1.25 - $2.12	 	 	2,952	 	 	 	6.9	 	 	$	1.68	 	 	 	348	 	 	$	1.98	 	
2.17 - 4.79	 	 	2,052	 	 	 	6.1	 	 	 	3.74	 	 	 	921	 	 	 	3.96	 	
5.28 - 7.00	 	 	2,563	 	 	 	5.4	 	 	 	5.35	 	 	 	2,200	 	 	 	5.34	 	
  7.10 - 14.84	 	 	2,574	 	 	 	2.9	 	 	 	11.20	 	 	 	2,562	 	 	 	11.22	 	
20.00 - 30.98	 	 	490	 	 	 	4.7	 	 	 	28.61	 	 	 	431	 	 	 	28.57	 	
33.19 - 50.98	 	 	576	 	 	 	4.0	 	 	 	45.61	 	 	 	562	 	 	 	45.61	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 		 	 	 	 	 	 	 	 	 	 	 		 	 	 	 	 	
$1.25 - $50.98	 	 	11,207	 	 	 	5.3	 	 	$	8.52	 	 	 	7,024	 	 	$	11.78	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 		 	 	 	 	 	 	 	 	 	 	 		 	 	 	 	 	
     In January 2002, the Company issued 0.5 million shares of restricted stock in exchange for stock options that were canceled. The restricted stock had a value of $2.0 million on the date of grant and vests in accordance with the terms of the related canceled stock options. In addition, during 2001 and 2002, the Company issued 0.4 million and 1.3 million shares of restricted stock to employees with a value on the date of grant of $2.1 million and $4.5 million, respectively, which was recorded as deferred compensation. This restricted stock vests over periods ranging from two to four years. Compensation expense is recognized on a straight-line basis over the vesting period and is reduced to the extent that a participant forfeits shares of restricted stock received prior to vesting. The deferred compensation charge is unaffected by future changes in the price of the common stock.
     Total compensation expense for restricted stock issuances was $0.4 million and $1.1 million for the three and six months ended June 30, 2003 and $1.0 million and $1.9 million for the three and six months ended June 30, 2002, respectively. Unamortized compensation expense related to restricted stock issuances at June 30, 2003 is $1.8 million.
     In addition to the restricted stock grants discussed above, the Company issued 0.9 million of deferred stock units to senior executives in December 2002 . Deferred stock units are payable in stock on a one-for-one basis. Payments in respect of the deferred stock units are distributable not earlier than one year after the vesting. The value of these deferred stock units was $1.6 million based on the fair value of the stock as of the date of grant. The deferred stock units vest over four years. Total compensation expense for deferred stock units was $0.1 million and $0.2 million for the three and six months ended June 30, 2003. The related liability of $0.2 million is included in Other Long-Term Liabilities on the Consolidated Balance Sheets.
     The Company applies Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25) and related interpretations for stock options and other stock-based awards while disclosing pro forma net income and net income per share as if the fair value method had been applied in accordance with Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS 123).
12 

 

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
JUNE 30, 2003
     In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure”. SFAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS 148 also amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002 as such have been incorporated below. 

 	 	 	 	 	 	Three Months Ended June 30,	 	Six Months Ended June 30,	
 	 	 	 	 	 		 		
 	 	 	 	 	 	2003	 	2002	 	2003	 	2002	
 	 	 	 	 	 		 		 		 		
 	 	 	 	 	 	 	 	 	 	(in thousands, except per share data)	 	 	 	 	
Consolidated net loss	 	As Reported	 	$	(3,150	)	 	$	(33,909	)	 	$	(18,689	)	 	$	(96,037	)	
Deduct: Total stock based employee compensation expense determined under fair value based method for all awards, net of related tax effects	 	 	 	 	 	 	(2,601	)	 	 	1,970	 	 	 	(5,209	)	 	 	3,814	 	
 	 	 	 	 	 	 		 	 	 		 	 	 		 	 	 		 	
 	 	Pro forma	 	$	(5,751	)	 	$	(31,939	)	 	$	(23,898	)	 	$	(92,223	)	
 	 	 	 	 	 	 		 	 	 		 	 	 		 	 	 		 	
Loss Per Share	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Basic	 	As Reported	 	$	(0.03	)	 	$	(0.29	)	 	$	(0.16	)	 	$	(0.82	)	
 	 	Pro forma	 	$	(0.05	)	 	$	(0.27	)	 	$	(0.20	)	 	$	(0.78	)	
Diluted	 	As Reported	 	$	(0.03	)	 	$	(0.29	)	 	$	(0.17	)	 	$	(0.83	)	
 	 	Pro forma	 	$	(0.05	)	 	$	(0.28	)	 	$	(0.21	)	 	$	(0.80	)	
Per share weighted average fair value of stock options issued on date of grant	 	 	 	 	 	$	1.35	 	 	$	1.72	 	 	$	1.05	 	 	$	2.13	 	
 	 	 	 	 	 	 		 	 	 		 	 	 		 	 	 		 	
     The following range of assumptions were used by the Company, its subsidiaries and its companies accounted for under the equity method to determine the fair value of stock options granted during the three and six months ended June 30, 2003 and 2002 using the Black-Scholes option-pricing model: 

 	 	Three Months Ended June 30,	 	Six Months Ended June 30,	
 	 		 		
 	 	2003	 	2002	 	2003	 	2002	
 	 		 		 		 		
Company	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Dividend yield	 	 	0	%	 	 	0	%	 	 	0	%	 	 	0	%	
Expected volatility	 	 	95	%	 	 	90	%	 	 	95	%	 	 	90	%	
Average expected option life	 	5 years	 	5 years	 	5 years	 	5 years	
Risk-free interest rate	 	 	2.5	%	 	 	4.2	%	 	 	2.5	%	 	4.2% to 5.0%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended June 30,	 	Six Months Ended June 30,	
 	 		 		
 	 	2003	 	2002	 	2003	 	2002	
 	 		 		 		 		
Subsidiaries and Equity	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
     Method Companies	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Dividend yield	 	 	0	%	 	 	0	%	 	 	0	%	 	 	0	%	
Expected volatility	 	0% to 212%	 	0% to 212%	 	    0% to 212%	 	0% to 212%	
Average expected option life	 	4 to 8 years	 	4 to 8 years	 	    4 to 8 years	 	4 to 8 years	
Risk-free interest rate	 	2.1% to 3.4%	 	1.9% to 5.0%	 	    2.1% to 3.7 %	 	1.9% to 5.7%	
13 

 

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
JUNE 30, 2003
10. INCOME TAXES
     The Company’s consolidated income tax expense recorded for the three and six months ended June 30, 2003 was $1.5 million and $2.9 million, net of a recorded valuation allowance of $1.8 million and $7.8 million. The Company recorded a valuation allowance against its deferred tax assets based on management’s determination that it is more likely than not that these assets will not be realized in future years. 
11. NET LOSS PER SHARE
     The calculations of net loss per share were:

 	 	Three Months Ended June 30,	 	Six Months Ended June 30,	
 	 		 		
 	 	2003	 	2002	 	2003	 	2002	
 	 		 		 		 		
 	 	 	 	 	 	(in thousands except per share data)	 	 	 	 	
 	 	 	 	 	 	(unaudited)	 	 	 	 	
Basic:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net loss prior to cumulative effect of change in accounting principle	 	$	(3,150	)	 	$	(33,909	)	 	$	(18,689	)	 	$	(74,647	)	
Cumulative effect of change in accounting principle	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(21,390	)	
 	 	 		 	 	 		 	 	 		 	 	 		 	
Net loss after cumulative effect of change in accounting principle	 	$	(3,150	)	 	$	(33,909	)	 	$	(18,689	)	 	$	(96,037	)	
 	 	 		 	 	 		 	 	 		 	 	 		 	
Average common shares outstanding	 	 	118,348	 	 	 	117,572	 	 	 	118,256	 	 	 	117,548	 	
 	 	 		 	 	 		 	 	 		 	 	 		 	
Basic prior to cumulative effect of change in accounting principle	 	$	(0.03	)	 	$	(0.29	)	 	$	(0.16	)	 	$	(0.64	)	
Cumulative effect of change in accounting principle	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(0.18	)	
 	 	 		 	 	 		 	 	 		 	 	 		 	
Basic after cumulative effect of change in accounting principle	 	$	(0.03	)	 	$	(0.29	)	 	$	(0.16	)	 	$	(0.82	)	
 	 	 		 	 	 		 	 	 		 	 	 		 	
Diluted:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net loss prior to cumulative effect of change in accounting principle	 	$	(3,150	)	 	$	(33,909	)	 	$	(18,689	)	 	$	(74,647	)	
Effect of public holdings	 	 	(556	)	 	 	(714	)	 	 	(1,135	)	 	 	(1,170	)	
 	 	 		 	 	 		 	 	 		 	 	 		 	
Adjusted net loss	 	$	(3,706	)	 	$	(34,623	)	 	$	(19,824	)	 	$	(75,817	)	
 	 	 		 	 	 		 	 	 		 	 	 		 	
Average common shares outstanding	 	 	118,348	 	 	 	117,572	 	 	 	118,256	 	 	 	117,548	 	
 	 	 		 	 	 		 	 	 		 	 	 		 	
Diluted prior to cumulative effect of change in accounting principle	 	$	(0.03	)	 	$	(0.29	)	 	$	(0.17	)	 	$	(0.65	)	
 	 	 		 	 	 		 	 	 		 	 	 		 	
Net loss after cumulative effect of change in accounting principle	 	$	(3,150	)	 	$	(33,909	)	 	$	(18,689	)	 	$	(96,037	)	
Effect of public holdings	 	 	(556	)	 	 	(714	)	 	 	(1,135	)	 	 	(1,244	)	
 	 	 		 	 	 		 	 	 		 	 	 		 	
Adjusted net loss	 	$	(3,706	)	 	$	(34,623	)	 	$	(19,824	)	 	$	(97,281	)	
 	 	 		 	 	 		 	 	 		 	 	 		 	
Average common shares outstanding	 	 	118,348	 	 	 	117,572	 	 	 	118,256	 	 	 	117,548	 	
 	 	 		 	 	 		 	 	 		 	 	 		 	
Diluted after cumulative effect of change in accounting principle	 	$	(0.03	)	 	$	(0.29	)	 	$	(0.17	)	 	$	(0.83	)	
 	 	 		 	 	 		 	 	 		 	 	 		 	
     If a consolidated or equity method public company has dilutive options or securities outstanding, diluted net loss per share is computed first by deducting from net loss the income attributable to the potential exercise of the dilutive options or securities of the company. This impact is shown as an adjustment to net loss for purposes of calculating diluted net loss per share.
     The computation of average common shares outstanding for the three and six months ended June 30, 2003, excludes 0.9 million and 1.1 million shares of non-vested restricted stock. The computation of average common shares outstanding for the three and six months ended June 30, 2002 excludes 1.8 million and 1.7 million shares of non-vested restricted stock. These shares will be included in the computation when they vest.
14 

 

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
JUNE 30, 2003
     Approximately 0.5 million and 0.3 million weighted average common stock equivalents related to stock options were excluded from the denominator in the calculation of diluted loss per share for the three and six months ended June 30, 2003 and 0.1 million and 0.2 million for the three and six months ended June 30, 2002 because their effect was anti-dilutive. Approximately 8.3 million shares representing the weighted average effect of assumed conversion of the convertible subordinated notes were excluded in all periods presented from the denominator in the calculation of diluted loss per share because their effect was anti-dilutive. 
12. PARENT COMPANY FINANCIAL INFORMATION
     The Company’s Consolidated Financial Statements reflect certain entities accounted for under the consolidation method of accounting.
     Parent company financial information is provided to present the financial position and results of operations of the Company as if the less than wholly owned consolidated companies (see Note 2) were accounted for under the equity method of accounting for all periods presented during which the Company owned its interest in these companies. Parent company financial statements consolidate the financial statements of the Company’s wholly-owned subsidiaries, including Alliance Consulting.  
Parent Company Balance Sheets

 	 	 	 	June 30,	 	December 31,	
 	 	 	 	2003	 	2002	
 	 	 	 		 		
 	 	 	 	(in thousands)	
 	 	 	 	(unaudited)	 	 	 	 	
Assets	 	 	 	 	 	 	 	 	
 	Cash and cash equivalents	 	$	109,290	 	 	$	112,714	 	
 	Restricted cash	 	 	1,019	 	 	 	3,634	 	
 	Short-term investments	 	 	8,982	 	 	 	9,986	 	
 	Trading securities	 	 	1,642	 	 	 	832	 	
 	Available-for-sale securities	 	 	11,813	 	 	 	—	 	
 	Other current assets	 	 	25,687	 	 	 	27,520	 	
 	 	 		 	 	 		 	
 	 	Total current assets	 	 	158,433	 	 	 	154,686	 	
 	Ownership interests in and advances to affiliates	 	 	248,271	 	 	 	259,854	 	
 	Available-for-sale securities	 	 	—	 	 	 	4,548	 	
 	Note receivable — related party	 	 	12,784	 	 	 	14,482	 	
 	Goodwill, net	 	 	75,099	 	 	 	74,226	 	
 	Other	 	 	9,297	 	 	 	11,526	 	
 	 	 		 	 	 		 	
 	 	Total Assets	 	$	503,884	 	 	$	519,322	 	
 	 	 		 	 	 		 	
Liabilities and Shareholders’ Equity	 	 	 	 	 	 	 	 	
 	Current liabilities	 	$	24,380	 	 	$	32,608	 	
 	Long-term debt	 	 	287	 	 	 	538	 	
 	Other long-term liabilities	 	 	15,350	 	 	 	13,903	 	
 	Convertible subordinated notes	 	 	200,000	 	 	 	200,000	 	
 	Shareholders’ equity	 	 	263,867	 	 	 	272,273	 	
 	 	 		 	 	 		 	
 	 	Total Liabilities and Shareholders’ Equity	 	$	503,884	 	 	$	519,322	 	
 	 	 		 	 	 		 	
     Parent company and other recourse debt includes primarily mortgage obligations ($3.7 million), bank credit facilities ($2.4 million), capital lease obligations ($0.3 million) and other borrowing obligations ($0.7 million). These obligations bear interest at fixed rates between 4.25% to 4.75%, and variable rates at prime rate (4.0% at June 30, 2003) plus 0.5%.
15 

 
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
JUNE 30, 2003
Parent Company Statements of Operations

 	 	 	Three Months Ended June 30,	 	Six Months Ended June 30,	
 	 	 		 		
 	 	 	2003	 	2002	 	2003	 	2002	
 	 	 		 		 		 		
 	 	 	(in thousands)	 	(in thousands)	
 	 	 	(unaudited)	 	(unaudited)	
Revenue	 	$	21,405	 	 	$	12,744	 	 	$	45,406	 	 	$	26,287	 	
 	 	 		 	 	 		 	 	 		 	 	 		 	
Operating expenses:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	Cost of sales	 	 	14,709	 	 	 	4,487	 	 	 	31,083	 	 	 	11,136	 	
 	Selling	 	 	3,191	 	 	 	611	 	 	 	6,756	 	 	 	1,403	 	
 	General and administrative	 	 	9,806	 	 	 	14,690	 	 	 	21,710	 	 	 	27,138	 	
 	Depreciation and amortization	 	 	1,510	 	 	 	446	 	 	 	2,776	 	 	 	919	 	
 	 	 		 	 	 		 	 	 		 	 	 		 	
 	 	 	29,216	 	 	 	20,234	 	 	 	62,325	 	 	 	40,596	 	
 	 	 		 	 	 		 	 	 		 	 	 		 	
 	 	 	(7,811	)	 	 	(7,490	)	 	 	(16,919	)	 	 	(14,309	)	
Other income (loss), net	 	 	12,881	 	 	 	(3,456	)	 	 	17,072	 	 	 	(6,913	)	
Impairment – related party	 	 	—	 	 	 	—	 	 	 	(659	)	 	 	—	 	
Interest income	 	 	502	 	 	 	1,613	 	 	 	1,193	 	 	 	3,218	 	
Interest and financing expense	 	 	(2,772	)	 	 	(4,535	)	 	 	(5,538	)	 	 	(10,733	)	
 	 	 		 	 	 		 	 	 		 	 	 		 	
Income (loss) before income taxes and equity loss	 	 	2,800	 	 	 	(13,868	)	 	 	(4,851	)	 	 	(28,737	)	
Income taxes	 	 	—	 	 	 	(9	)	 	 	(1	)	 	 	(9	)	
Equity loss	 	 	(5,950	)	 	 	(20,032	)	 	 	(13,837	)	 	 	(45,476	)	
 	 	 		 	 	 		 	 	 		 	 	 		 	
Net loss prior to cumulative change in accounting principle	 	 	(3,150	)	 	 	(33,909	)	 	 	(18,689	)	 	 	(74,222	)	
Cumulative effect of change in accounting principle	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(21,815	)	
 	 	 		 	 	 		 	 	 		 	 	 		 	
Net loss	 	$	(3,150	)	 	$	(33,909	)	 	$	(18,689	)	 	$	(96,037	)	
 	 	 		 	 	 		 	 	 		 	 	 		 	
     The Company’s share of income or losses of its less than wholly owned consolidated subsidiaries is reflected in Equity Loss.
16 

 
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
JUNE 30, 2003
Parent Company Statements of Cash Flows

 	 	 	 	Six Months Ended June 30,	
 	 	 	 		
 	 	 	 	2003	 	2002	
 	 	 	 		 		
 	 	 	 	(in thousands)	
 	 	 	 	(unaudited)	
Net cash (used in) provided by operating activities	 	$	(17,597	)	 	$	43,012	 	
Investing Activities	 	 	 	 	 	 	 	 	
 	Proceeds from sales of trading securities	 	 	22,409	 	 	 	13,269	 	
 	Proceeds from sales of and distributions from affiliates	 	 	7,207	 	 	 	16,649	 	
 	Advances to affiliates	 	 	(139	)	 	 	(4,897	)	
 	Repayment of advances to affiliates	 	 	1,403	 	 	 	—	 	
 	Acquisitions of ownership interests in affiliates and subsidiaries, net of cash acquired	 	 	(18,115	)	 	 	(51,091	)	
 	Capital expenditures	 	 	(332	)	 	 	(346	)	
 	Advances to related party	 	 	—	 	 	 	(588	)	
 	Repayments of advances to related party	 	 	1,039	 	 	 	1,459	 	
 	Increase in restricted cash and short-term investments	 	 	(998	)	 	 	—	 	
 	Decrease in restricted cash and short-term investments	 	 	4,617	 	 	 	4,421	 	
 	Other, net	 	 	—	 	 	 	(683	)	
 	 	 		 	 	 		 	
 	Net cash provided by (used in) investing activities	 	 	17,091	 	 	 	(21,807	)	
Financing Activities	 	 	 	 	 	 	 	 	
 	Borrowings on revolving credit facilities	 	 	46,735	 	 	 	—	 	
 	Repayments on revolving credit facilities	 	 	(49,018	)	 	 	—	 	
 	Repayments on long-term debt	 	 	(669	)	 	 	(251	)	
 	Issuance of Company common stock, net	 	 	34	 	 	 	—	 	
 	 	 		 	 	 		 	
 	 	Net cash used in financing activities	 	 	(2,918	)	 	 	(251	)	
 	 	 		 	 	 		 	
Net (Decrease) Increase in Cash and Cash Equivalents	 	 	(3,424	)	 	 	20,954	 	
Cash and Cash Equivalents at beginning of year	 	 	112,714	 	 	 	171,531	 	
 	 	 		 	 	 		 	
Cash and Cash Equivalents at end of year	 	$	109,290	 	 	$	192,485	 	
 	 	 		 	 	 		 	
17 

 

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
JUNE 30, 2003
13. OPERATING SEGMENTS
     Our reportable segments include i) Strategic Initiative Companies, which include those companies in which we maintain controlling interest and are strategically and operationally engaged with the goal of accelerating value creation; ii) Legacy Companies in which we generally have less than a controlling interest or which do not directly fall within our strategic initiatives; and iii) CompuCom, which represents the results of our subsidiary, CompuCom.
     In periods prior to 2003, our reportable segments were Strategic Private Company Operations, Other Private Company and Funds Operations, Public Company Operations (excluding CompuCom), and CompuCom Operations. All prior periods have been restated to conform to the current-year presentation. The development of the current segments corresponds to the implementation of our refinement in strategic focus announced in early 2003, and represents management’s view of the Company’s operations.
     The following tables reflect our consolidated operating data by reportable segments. Each segment includes the results of the consolidated companies and records our share of income or losses for entities accounted for under the equity method. Segment results also include impairment charges, gains or losses related to the disposition of the companies and the mark to market of trading securities. All significant intersegment activity has been eliminated. Accordingly, segment results reported exclude the effect of transactions between us and our subsidiaries.
     Other items, which include corporate expenses and income taxes, are reviewed by management independent of segment results.
18 

 
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
JUNE 30, 2003
Three Months Ended June 30, 2003

 	 	 	 	Strategic	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	Initiative	 	Legacy	 	 	 	 	 	Total	 	 	 	 	 	Consolidated	
 	 	 	 	Companies	 	Companies	 	CompuCom	 	Segments	 	Other Items	 	Results	
 	 	 	 		 		 		 		 		 		
 	 	 	 	 	 	 	 	 	 	 	 	(in thousands)	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	(unaudited)	 	 	 	 	 	 	 	 	 	 	 	 	
Revenue	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	Product sales	 	$	524	 	 	$	4,549	 	 	$	304,731	 	 	$	309,804	 	 	$	—	 	 	$	309,804	 	
 	Service sales	 	 	26,150	 	 	 	9,372	 	 	 	72,997	 	 	 	108,519	 	 	 	—	 	 	 	108,519	 	
 	Other	 	 	46	 	 	 	757	 	 	 	—	 	 	 	803	 	 	 	86	 	 	 	889	 	
 	 	 		 	 	 		 	 	 		 	 	 		 	 	 		 	 	 		 	
Total Revenue	 	 	26,720	 	 	 	14,678	 	 	 	377,728	 	 	 	419,126	 	 	 	86	 	 	 	419,212	 	
 	 	 		 	 	 		 	 	 		 	 	 		 	 	 		 	 	 		 	
Operating expenses	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	Cost of sales — product	 	 	204	 	 	 	3,103	 	 	 	284,939	 	 	 	288,246	 	 	 	—	 	 	 	288,246	 	
 	Cost of sales — service	 	 	17,141	 	 	 	3,925	 	 	 	48,884	 	 	 	69,950	 	 	 	—	 	 	 	69,950	 	
 	Selling and service	 	 	12,808	 	 	 	1,904	 	 	 	19,191	 	 	 	33,903	 	 	 	—	 	 	 	33,903	 	
 	General and administrative	 	 	6,620	 	 	 	1,987	 	 	 	15,022	 	 	 	23,629	 	 	 	5,143	 	 	 	28,772	 	
 	Depreciation and amortization	 	 	2,767	 	 	 	1,287	 	 	 	4,138	 	 	 	8,192	 	 	 	63	 	 	 	8,255	 	
 	 	 		 	 	 		 	 	 		 	 	 		 	 	 		 	 	 		 	
 	 	Total operating expenses	 	 	39,540	 	 	 	12,206	 	 	 	372,174	 	 	 	423,920	 	 	 	5,206	 	 	 	429,126	 	
 	 	 		 	 	 		 	 	 		 	 	 		 	 	 		 	 	 		 	
 	 	 	(12,820	)	 	 	2,472	 	 	 	5,554	 	 	 	(4,794	)	 	 	(5,120	)	 	 	(9,914	)	
 	Other income (loss), net	 	 	(55	)	 	 	12,881	 	 	 	—	 	 	 	12,826	 	 	 	55	 	 	 	12,881	 	
 	Impairment – related party	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	
 	Interest income	 	 	16	 	 	 	2	 	 	 	334	 	 	 	352	 	 	 	501	 	 	 	853	 	
 	Interest and financing expense	 	 	(135	)	 	 	(34	)	 	 	(420	)	 	 	(589	)	 	 	(2,888	)	 	 	(3,477	)	
 	 	 		 	 	 		 	 	 		 	 	 		 	 	 		 	 	 		 	
Net income (loss) before income taxes, minority interest, and equity income (loss)	 	 	(12,994	)	 	 	15,321	 	 	 	5,468	 	 	 	7,795	 	 	 	(7,452	)	 	 	343	 	
Income taxes	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(1,465	)	 	 	(1,465	)	
Minority interest	 	 	2,513	 	 	 	(315	)	 	 	(2,091	)	 	 	107	 	 	 	—	 	 	 	107	 	
Equity income (loss)	 	 	—	 	 	 	(2,148	)	 	 	—	 	 	 	(2,148	)	 	 	13	 	 	 	(2,135	)	
 	 	 		 	 	 		 	 	 		 	 	 		 	 	 		 	 	 		 	
Net Income (Loss)	 	$	(10,481	)	 	$	12,858	 	 	$	3,377	 	 	$	5,754	 	 	$	(8,904	)	 	$	(3,150	)	
 	 	 		 	 	 		 	 	 		 	 	 		 	 	 		 	 	 		 	
Segment Assets	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
June 30, 2003	 	$	152,343	 	 	$	101,078	 	 	$	449,813	 	 	$	703,234	 	 	$	150,782	 	 	$	854,016	 	
 	 	 		 	 	 		 	 	 		 	 	 		 	 	 		 	 	 		 	
December 31, 2002	 	$	163,390	 	 	$	103,222	 	 	$	447,494	 	 	$	714,106	 	 	$	154,560	 	 	$	868,666	 	
 	 	 		 	 	 		 	 	 		 	 	 		 	 	 		 	 	 		 	
19 

 
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
JUNE 30, 2003
Three Months Ended June 30, 2002

 	 	 	 	Strategic	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	Initiative	 	Legacy	 	 	 	 	 	Total	 	 	 	 	 	Consolidated	
 	 	 	 	Companies	 	Companies	 	CompuCom	 	Segments	 	Other Items	 	Results	
 	 	 	 		 		 		 		 		 		
 	 	 	 	 	 	 	 	 	 	 	 	(in thousands)	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	(unaudited)	 	 	 	 	 	 	 	 	 	 	 	 	
Revenue	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	Product sales	 	$	2,449	 	 	$	991	 	 	$	350,290	 	 	$	353,730	 	 	$	—	 	 	$	353,730	 	
 	Service sales	 	 	9,550	 	 	 	7,695	 	 	 	75,852	 	 	 	93,097	 	 	 	—	 	 	 	93,097	 	
 	Other	 	 	—	 	 	 	6,033	 	 	 	—	 	 	 	6,033	 	 	 	(8	)	 	 	6,025	 	
 	 	 		 	 	 		 	 	 		 	 	 		 	 	 		 	 	 		 	
Total Revenue	 	 	11,999	 	 	 	14,719	 	 	 	426,142	 	 	 	452,860	 	 	 	(8	)	 	 	452,852	 	
 	 	 		 	 	 		 	 	 		 	 	 		 	 	 		 	 	 		 	
Operating expenses	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	Cost of sales — product	 	 	387	 	 	 	361	 	 	 	324,011	 	 	 	324,759	 	 	 	—	 	 	 	324,759	 	
 	Cost of sales — service	 	 	6,161	 	 	 	4,353	 	 	 	47,893	 	 	 	58,407	 	 	 	—	 	 	 	58,407	 	
 	Selling and service	 	 	6,669	 	 	 	4,237	 	 	 	22,600	 	 	 	33,506	 	 	 	—	 	 	 	33,506	 	
 	General and administrative	 	 	4,417	 	 	 	6,912	 	 	 	18,720	 	 	 	30,049	 	 	 	6,091	 	 	 	36,140	 	
 	Depreciation and amortization	 	 	886	 	 	 	1,200	 	 	 	4,687	 	 	 	6,773	 	 	 	337	 	 	 	7,110	 	
 	 	 		 	 	 		 	 	 		 	 	 		 	 	 		 	 	 		 	
 	 	Total operating expenses	 	 	18,520	 	 	 	17,063	 	 	 	417,911	 	 	 	453,494	 	 	 	6,428	 	 	 	459,922	 	
 	 	 		 	 	 		 	 	 		 	 	 		 	 	 		 	 	 		 	
 	 	 	(6,521	)	 	 	(2,344	)	 	 	8,231	 	 	 	(634	)	 	 	(6,436	)	 	 	(7,070	)	
 	Other income (loss), net	 	 	—	 	 	 	(3,522	)	 	 	—	 	 	 	(3,522	)	 	 	125	 	 	 	(3,397	)	
 	Interest income	 	 	43	 	 	 	9	 	 	 	479	 	 	 	531	 	 	 	1,776	 	 	 	2,307	 	
 	Interest and financing expense	 	 	(365	)	 	 	41	 	 	 	(720	)	 	 	(1,044	)	 	 	(4,514	)	 	 	(5,558	)	
 	 	 		 	 	 		 	 	 		 	 	 		 	 	 		 	 	 		 	
Net income (loss) before income taxes, minority interest, and equity income (loss)	 	 	(6,843	)	 	 	(5,816	)	 	 	7,990	 	 	 	(4,669	)	 	 	(9,049	)	 	 	(13,718	)	
Income taxes	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(1,944	)	 	 	(1,944	)	
Minority interest	 	 	1,519	 	 	 	876	 	 	 	(3,003	)	 	 	(608	)	 	 	—	 	 	 	(608	)	
Equity income (loss)	 	 	(1,658	)	 	 	(16,013	)	 	 	—	 	 	 	(17,671	)	 	 	32	 	 	 	(17,639	)	
 	 	 		 	 	 		 	 	 		 	 	 		 	 	 		 	 	 		 	
 	Net Income (Loss)	 	$	(6,982	)	 	$	(20,953	)	 	$	4,987	 	 	$	(22,948	)	 	$	(10,961	)	 	$	(33,909	)	
 	 	 		 	 	 		 	 	 		 	 	 		 	 	 		 	 	 		 	
20 

 
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
JUNE 30, 2003
Six Months Ended June 30, 2003

 	 	 	 	Strategic	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	Initiative	 	Legacy	 	 	 	 	 	Total	 	 	 	 	 	Consolidated	
 	 	 	 	Companies	 	Companies	 	CompuCom	 	Segments	 	Other Items	 	Results	
 	 	 	 		 		 		 		 		 		
 	 	 	 	 	 	 	 	 	 	 	 	(in thousands)	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	(unaudited)	 	 	 	 	 	 	 	 	 	 	 	 	
Revenue	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	Product sales	 	$	2,376	 	 	$	5,590	 	 	$	562,149	 	 	$	570,115	 	 	$	—	 	 	$	570,115	 	
 	Service sales	 	 	55,940	 	 	 	16,192	 	 	 	145,876	 	 	 	218,008	 	 	 	—	 	 	 	218,008	 	
 	Other	 	 	99	 	 	 	1,515	 	 	 	—	 	 	 	1,614	 	 	 	174	 	 	 	1,788	 	
 	 	 		 	 	 		 	 	 		 	 	 		 	 	 		 	 	 		 	
Total Revenue	 	 	58,415	 	 	 	23,297	 	 	 	708,025	 	 	 	789,737	 	 	 	174	 	 	 	789,911	 	
 	 	 		 	 	 		 	 	 		 	 	 		 	 	 		 	 	 		 	
Operating expenses	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	Cost of sales — product	 	 	442	 	 	 	3,472	 	 	 	520,238	 	 	 	524,152	 	 	 	—	 	 	 	524,152	 	
 	Cost of sales — service	 	 	36,001	 	 	 	7,286	 	 	 	99,212	 	 	 	142,499	 	 	 	—	 	 	 	142,499	 	
 	Selling and service	 	 	26,034	 	 	 	3,643	 	 	 	39,101	 	 	 	68,778	 	 	 	—	 	 	 	68,778	 	
 	General and administrative	 	 	13,025	 	 	 	3,769	 	 	 	29,957	 	 	 	46,751	 	 	 	12,745	 	 	 	59,496	 	
 	Depreciation and amortization	 	 	5,207	 	 	 	2,370	 	 	 	8,318	 	 	 	15,895	 	 	 	238	 	 	 	16,133	 	
 	 	 		 	 	 		 	 	 		 	 	 		 	 	 		 	 	 		 	
 	 	Total operating expenses	 	 	80,709	 	 	 	20,540	 	 	 	696,826	 	 	 	798,075	 	 	 	12,983	 	 	 	811,058	 	
 	 	 		 	 	 		 	 	 		 	 	 		 	 	 		 	 	 		 	
 	 	 	(22,294	)	 	 	2,757	 	 	 	11,199	 	 	 	(8,338	)	 	 	(12,809	)	 	 	(21,147	)	
 	Other income (loss), net	 	 	(55	)	 	 	17,017	 	 	 	—	 	 	 	16,962	 	 	 	110	 	 	 	17,072	 	
 	Impairment – related party	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(659	)	 	 	(659	)	
 	Interest income	 	 	39	 	 	 	3	 	 	 	652	 	 	 	694	 	 	 	1,191	 	 	 	1,885	 	
 	Interest and financing expense	 	 	(306	)	 	 	(76	)	 	 	(823	)	 	 	(1,205	)	 	 	(5,716	)	 	 	(6,921	)	
 	 	 		 	 	 		 	 	 		 	 	 		 	 	 		 	 	 		 	
Net income (loss) before income taxes, minority interest, and equity loss	 	 	(22,616	)	 	 	19,701	 	 	 	11,028	 	 	 	8,113	 	 	 	(17,883	)	 	 	(9,770	)	
Income taxes	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(2,857	)	 	 	(2,857	)	
Minority interest	 	 	4,434	 	 	 	(132	)	 	 	(4,205	)	 	 	97	 	 	 	—	 	 	 	97	 	
Equity loss	 	 	—	 	 	 	(6,136	)	 	 	—	 	 	 	(6,136	)	 	 	(23	)	 	 	(6,159	)	
 	 	 		 	 	 		 	 	 		 	 	 		 	 	 		 	 	 		 	
 	Net Income (Loss)	 	$	(18,182	)	 	$	13,433	 	 	$	6,823	 	 	$	2,074	 	 	$	(20,763	)	 	$	(18,689	)	
 	 	 		 	 	 		 	 	 		 	 	 		 	 	 		 	 	 		 	
21 

 
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
JUNE 30, 2003
Six Months Ended June 30, 2002

 	 	 	 	Strategic	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	Initiative	 	Legacy	 	 	 	 	 	Total	 	 	 	 	 	Consolidated	
 	 	 	 	Companies	 	Companies	 	CompuCom	 	Segments	 	Other Items	 	Results	
 	 	 	 		 		 		 		 		 		
 	 	 	 	 	 	 	 	 	 	 	 	(in thousands)	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	(unaudited)	 	 	 	 	 	 	 	 	 	 	 	 	
Revenue	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	Product sales	 	$	2,808	 	 	$	4,130	 	 	$	609,559	 	 	$	616,497	 	 	$	—	 	 	$	616,497	 	
 	Service sales	 	 	17,902	 	 	 	14,127	 	 	 	143,531	 	 	 	175,560	 	 	 	—	 	 	 	175,560	 	
 	Other	 	 	—	 	 	 	11,562	 	 	 	—	 	 	 	11,562	 	 	 	37	 	 	 	11,599	 	
 	 	 		 	 	 		 	 	 		 	 	 		 	 	 		 	 	 		 	
Total Revenue	 	 	20,710	 	 	 	29,819	 	 	 	753,090	 	 	 	803,619	 	 	 	37	 	 	 	803,656	 	
 	 	 		 	 	 		 	 	 		 	 	 		 	 	 		 	 	 		 	
Operating expenses	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	Cost of sales — product	 	 	429	 	 	 	1,039	 	 	 	556,549	 	 	 	558,017	 	 	 	—	 	 	 	558,017	 	
 	Cost of sales — service	 	 	13,039	 	 	 	8,275	 	 	 	92,013	 	 	 	113,327	 	 	 	—	 	 	 	113,327	 	
 	Selling and service	 	 	10,221	 	 	 	7,037	 	 	 	45,735	 	 	 	62,993	 	 	 	—	 	 	 	62,993	 	
 	General and administrative	 	 	7,092	 	 	 	15,551	 	 	 	36,278	 	 	 	58,921	 	 	 	11,853	 	 	 	70,774	 	
 	Depreciation and amortization	 	 	1,295	 	 	 	3,064	 	 	 	9,474	 	 	 	13,833	 	 	 	678	 	 	 	14,511	 	
 	 	 		 	 	 		 	 	 		 	 	 		 	 	 		 	 	 		 	
 	 	Total operating expenses	 	 	32,076	 	 	 	34,966	 	 	 	740,049	 	 	 	807,091	 	 	 	12,531	 	 	 	819,622	 	
 	 	 		 	 	 		 	 	 		 	 	 		 	 	 		 	 	 		 	
 	 	 	(11,366	)	 	 	(5,147	)	 	 	13,041	 	 	 	(3,472	)	 	 	(12,494	)	 	 	(15,966	)	
 	Other income (loss), net	 	 	(16	)	 	 	(9,037	)	 	 	—	 	 	 	(9,053	)	 	 	125	 	 	 	(8,928	)	
 	Impairment – related party	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	
 	Interest income	 	 	66	 	 	 	22	 	 	 	1,046	 	 	 	1,134	 	 	 	3,193	 	 	 	4,327	 	
 	Interest and financing expense	 	 	(471	)	 	 	(245	)	 	 	(1,596	)	 	 	(2,312	)	 	 	(10,711	)	 	 	(13,023	)	
 	 	 		 	 	 		 	 	 		 	 	 		 	 	 		 	 	 		 	
Net income (loss) before income taxes, minority interest, and equity loss	 	 	(11,787	)	 	 	(14,407	)	 	 	12,491	 	 	 	(13,703	)	 	 	(19,887	)	 	 	(33,590	)	
Income taxes	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(3,062	)	 	 	(3,062	)	
Minority interest	 	 	1,678	 	 	 	1,496	 	 	 	(4,623	)	 	 	(1,449	)	 	 	—	 	 	 	(1,449	)	
Equity loss	 	 	(3,625	)	 	 	(32,790	)	 	 	—	 	 	 	(36,415	)	 	 	(131	)	 	 	(36,546	)	
 	 	 		 	 	 		 	 	 		 	 	 		 	 	 		 	 	 		 	
Net Income (loss) before change in accounting principle	 	 	(13,734	)	 	 	(45,701	)	 	 	7,868	 	 	 	(51,567	)	 	 	(23,080	)	 	 	(74,647	)	
Cumulative effect of change in accounting principle	 	 	(21,815	)	 	 	—	 	 	 	425	 	 	 	(21,390	)	 	 	—	 	 	 	(21,390	)	
 	 	 		 	 	 		 	 	 		 	 	 		 	 	 		 	 	 		 	
 	Net Income (Loss)	 	$	(35,549	)	 	$	(45,701	)	 	$	8,293	 	 	$	(72,957	)	 	$	(23,080	)	 	$	(96,037	)	
 	 	 		 	 	 		 	 	 		 	 	 		 	 	 		 	 	 		 	
22 

 
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
JUNE 30, 2003

 	 	Three Months Ended June 30,	 	Six Months Ended June 30,	
 	 		 		
 	 	2003	 	2002	 	2003	 	2002	
 	 		 		 		 		
 	 	(in thousands)	 	(in thousands)	
 	 	(unaudited)	 	(unaudited)	
Other Items	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Corporate operations	 	$	(7,439	)	 	$	(9,017	)	 	$	(17,906	)	 	$	(20,018	)	
Income tax expense	 	 	(1,465	)	 	 	(1,944	)	 	 	(2,857	)	 	 	(3,062	)	
 	 	 		 	 	 		 	 	 		 	 	 		 	
 	 	$	(8,904	)	 	$	(10,961	)	 	$	(20,763	)	 	$	(23,080	)	
 	 	 		 	 	 		 	 	 		 	 	 		 	
14. BUSINESS COMBINATIONS
Acquisitions by the Company
     In December 2002, the Company acquired 100% of Alliance Consulting for $54.5 million in cash paid to the selling shareholders and $1.3 million in transaction related costs. Alliance Consulting is an IT consulting firm that architects and implements digital enterprise strategies for its clients by building and integrating information technology across every line of business. The Company has not completed the allocation of the purchase price of the acquisition of Alliance Consulting. Therefore, the allocation of the purchase price could be adjusted once the valuation of assets acquired and liabilities assumed is completed.
     In February 2003, the Company acquired additional shares of ChromaVision Medical Systems for $5 million. As a result of this purchase of additional shares, the Company increased its ownership in ChromaVision by 6% to 62%.
     In June 2002, the Company acquired a majority ownership interest in ChromaVision Medical Systems for $16.2 million in cash, including $9.8 million used to purchase shares of preferred stock from existing shareholders. In July and August 2002, the Company acquired additional shares of ChromaVision for $1.7 million. ChromaVision’s product, Automated Cellular Imaging Systems, substantially improves the accuracy, sensitivity and reproducibility of cell imaging. The Company’s allocations of aggregate purchase prices for these acquisitions is summarized in the table below: 

 	 	2003	 	2002	
 	 		 		
 	 	(in millions)	
Working Capital (including cash acquired)	 	$	3.5	 	 	$	5.8	 	
Property and Equipment	 	 	0.1	 	 	 	0.5	 	
Identifiable Intangibles	 	 	—	 	 	 	5.4	 	
Goodwill	 	 	1.1	 	 	 	5.1	 	
In-process Research and Development	 	 	0.3	 	 	 	1.1	 	
 	 	 		 	 	 		 	
 	 	$	5.0	 	 	$	17.9	 	
 	 	 		 	 	 		 	
     The total identifiable intangible assets will be amortized and the total fixed assets will be depreciated over their weighted average useful lives (4 years). The acquired in-process research and development costs were charged to earnings in the second quarter of 2003 and the fourth quarter of 2002, respectively. The amount was determined by identifying research projects for which technological feasibility has not been established and for which there is no alternative future use. In-Process R&D represented several projects in process at ChromaVision relating to software and hardware improvements and related applications development which, by definition, may not have an alternative future use.
23 

 
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
JUNE 30, 2003
     In April 2002, the Company acquired a majority ownership interest in Mantas for $14.5 million in cash. Mantas provides comprehensive monitoring and analysis of financial transactions to detect and discover behaviors of interest through its software products. The Company’s allocation of the aggregate purchase price for the acquisition was as follows:

Working Capital (including cash acquired)	 	$	9.3	 	
Identifiable Intangibles	 	 	4.9	 	
Goodwill	 	 	0.3	 	
 	 	 		 	
 	 	$	14.5	 	
 	 	 		 	
     In January 2002, the Company acquired a majority ownership interest in Protura Wireless for $4 million in cash. Protura has developed patent-pending technology that makes it possible for cellular manufacturers to switch from cumbersome external antennas to Protura internal antennas without losing performance. The Company did not complete an allocation of purchase price of the acquisition of Protura Wireless due to the reduction of carrying value to zero within the first year of majority ownership.
     These transactions were accounted for as purchases and, accordingly, the Consolidated Financial Statements reflect the operations of these companies from the respective acquisition dates.
Pro Forma Financial Information
     The following unaudited pro forma financial information presents the combined results of operations of the Company as if the acquisitions had occurred as of the beginning of the periods presented, after giving effect to certain adjustments, including amortization of intangibles with definite useful lives, increased interest and financing expense on debt related to the CompuCom acquisitions and related income tax effects. The pro forma results of operations are not indicative of the actual results that would have occurred had the acquisitions been consummated at the beginning of the period presented and are not intended to be a projection of future results. 

 	 	Three Months Ended June 30,	 	Six Months Ended June 30,	
 	 		 		
 	 	2002	 	2002	
 	 		 		
 	 	(in thousands except per share data)	
 	 	(unaudited)	
Total revenues	 	$	475,920	 	 	$	852,760	 	
Net loss	 	$	(35,939	)	 	$	(100,341	)	
Diluted loss per share	 	$	(0.31	)	 	$	(0.86	)	
The effect of acquisitions in 2003 is not material to the Company’s 2003 operating results.
15. RELATED PARTY TRANSACTIONS
     In October 2000, the Company guaranteed certain margin loans advanced by a third party to Mr. Musser, then the Chief Executive Officer of the Company. The securities subject to the margin account included shares of the Company’s common stock. The Company entered into this guarantee arrangement to maintain an orderly trading market for its equity securities, to maintain its compliance posture with the Investment Company Act of 1940, and to avoid diversion of the attention of a key executive from the performance of his responsibilities to the Company. In May 2001, the Company entered into a $26.5 million loan agreement with Mr. Musser, the former CEO. The proceeds of the loan were used to repay the margin loans guaranteed by Safeguard in October 2000. The purpose of the May 2001 loan agreement was to eliminate the guarantee obligations and to provide for direct and senior access to Mr. Musser’s assets as collateral for the loan.
24 

 

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
JUNE 30, 2003
     The loan bears interest at the default annual rate of 9% and became payable on a limited basis on January 1, 2003. Safeguard sent Mr. Musser a demand notice in January 2003 and, when no payment was received, a default notice. In conjunction with the original loan, Mr. Musser granted the Company security interests in securities and real estate as collateral. Based on the information available to us, the Company also concluded that Mr. Musser may not have sufficient personal assets to satisfy the outstanding balance due under the loan when the loan becomes full recourse against Mr. Musser on April 30, 2006. In the first quarter of 2003, the Company impaired the loan by $0.7 million to the estimated value of the collateral that the Company held at that date. The Company’s carrying value of the loan at June 30, 2003 is $12.8 million. The Company will continue to evaluate the value of the collateral to the carrying value of the note on a quarterly basis.
16. COMMITMENTS AND CONTINGENCIES
Safeguard Scientifics Securities Litigation
     On June 26, 2001, the Company and Warren V. Musser, the Company’s former Chairman, were named as defendants in a putative class action filed in federal court in Philadelphia. Plaintiffs allege that defendants failed to disclose that Mr. Musser had pledged some or all of his Safeguard stock as collateral to secure margin trading in his personal brokerage accounts. Plaintiffs allege that defendants’ failure to disclose the pledge, along with their failure to disclose several margin calls, a loan to Mr. Musser, the guarantee of certain margin debt and the consequences thereof on Safeguard’s stock price, violated the federal securities laws. Plaintiffs allege claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934.
     On August 17, 2001, a second putative class action was filed against the Company and Mr. Musser asserting claims similar to those brought in the first proceeding. In addition, plaintiffs in the second case allege that the defendants failed to disclose possible or actual manipulative aftermarket trading in the securities of Safeguard’s companies, the impact of competition on prospects for one or more of Safeguard’s companies and the Company’s lack of a superior business plan.
     These two cases have been consolidated for further proceedings under the name “In Re: Safeguard Scientifics Securities Litigation” and the Court has approved the designation of a lead plaintiff and the retention of lead plaintiffs’ counsel. The plaintiffs have filed a consolidated and amended complaint. On May 23, 2002, the defendants filed a motion to dismiss the consolidated and amended complaint for failure to state claim upon which relief may be granted. On October 24, 2002, the Court denied the defendants’ motions to dismiss, holding that, based on the allegations of plaintiffs’ consolidated and amended complaint, dismissal would be inappropriate at this juncture. On December 20, 2002, plaintiffs filed with the Court a motion for class certification. On March 14, 2003, the defendants filed briefs with the Court opposing class certification. The Court has not yet ruled on plaintiffs’ motion.
     While the outcome of this litigation is uncertain, the Company believes that it has valid defenses to plaintiffs’ claims and intends to defend the lawsuit vigorously.
Other
     The Company and its subsidiaries are involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position or results of operations.
     In connection with its ownership interests in certain affiliates, the Company has guarantees of $23 million at June 30, 2003, of which $19 million relates to guarantees of our consolidated companies. A total of $8.4 million of debt associated with its guarantees have been recorded on the consolidated companies’ Balance Sheets, and are therefore reflected in the Company’s Consolidated Balance Sheet at June 30, 2003. Additionally, we have committed capital of approximately $34 million, including commitments made in prior years to various affiliates, to be funded over the next several years, including approximately $12 million which is expected to be funded during the next twelve months.
25 

 

SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
JUNE 30, 2003
     We have received distributions as both a general partner and a limited partner from certain private equity funds. Under certain circumstances, we may be required to return a portion or all the distributions it received as a general partner to the fund for further distribution to the fund’s limited partners (the “clawback”). Assuming the Funds in which we are a general partner are liquidated or dissolved on June 30, 2003 and assuming for these purposes the only distributions from the funds are equal to the carrying value of the funds on the June 30, 2003 financial statements, the maximum clawback we would be required to return for our general partner interest is approximately $6 million. Management estimates its liability to be approximately $5.5 million. This amount is reflected in “Other Long-Term Liabilities” on the Consolidated Balance Sheets.
     Our ownership in the general partner of the funds which have potential clawback liabilities range from 19-30%. The clawback liability is joint and several, such that we may be required to fund the clawback for other general partners should they default. The Funds have taken several steps to reduce the potential liabilities should other general partners default, including withholding all general partner distributions in escrow and adding rights of set-off among certain funds. We believe our liability due to the default of other general partners is remote.
26 

 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
     The statements contained in this Quarterly Report that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve certain risks, uncertainties and other factors that could cause actual results to be materially different than those contemplated by these statements. These risks and uncertainties include the factors described elsewhere in this report and in our filings with the SEC. We do not assume any obligation to update any forward-looking statements or other information contained in this Quarterly Report.
     Certain amounts for prior periods in the Consolidated Financial Statements, and in the discussion below, have been reclassified to conform with current period presentations.
General
     We are an operating company that seeks to create long-term value by taking controlling interests in and developing our companies through superior operations and management. Currently, we have acquired and operate businesses that provide business decision and life science software-based product and service solutions that have reached the “time-to-volume” stage of development. Time-to-volume is the process of building an efficient company around a commercially viable product with distribution channels, sales and marketing organization, and a corporate infrastructure that has the capability to grow rapidly and achieve market success. We provide the resources to address the challenges facing our companies and enable these companies to capitalize on their potential opportunities. These resources include capital, management and operational expertise. We believe that our experience in developing and operating technology companies enables us to identify and attract companies with the greatest potential for success and to assist these companies to become market leaders and create value for us and our shareholders. Our existing strategic subsidiaries focus on one or more of the following vertical markets: financial services, healthcare and pharmaceutical, manufacturing, retail and distribution, and telecommunications. We may acquire other time-to-volume technology companies complementary to our companies and markets. We also own a number of legacy companies.
     Many of our companies that we account for under the equity method or consolidation method are technology-related companies with limited operating histories that have not generated significant revenues and have incurred substantial losses in prior periods. We expect these losses to continue in 2003. In addition, we expect to continue to acquire interests in more technology-related companies that may have operating losses when we acquire them. We also expect certain of our existing companies to continue to invest in their products and services and to recognize operating losses related to those activities. As a result, Safeguard’s operating losses attributable to its corporate operations, its equity accounted subsidiaries and its consolidated subsidiaries could continue to be significant. It is reasonably possible that the impairment factors evaluated by management will change in subsequent periods, given that we operate in a volatile business environment. This could result in additional material impairment charges in future periods. Our financial results are also affected by acquisitions or dispositions of our subsidiaries or equity or debt interests in our subsidiaries. These transactions have resulted in significant volatility in our financial results which we expect will continue during 2003.
Net Results of Operations
     Our reportable segments include i) Strategic Initiative Companies, which includes those companies in which we maintain controlling interest and are strategically and operationally engaged with the goal of accelerating value creation; ii) Legacy Companies in which we generally have less than a controlling interest or which do not directly fall within our strategic initiatives; and iii) CompuCom, which represents the results of our subsidiary, CompuCom.
27 

 

     At June 30, 2003, we had ownership in 18 companies, which were classified into the following segments: 

 	 	Strategic Initiative	 	Legacy	 	 	
 	 	Companies	 	Companies	 	CompuCom	
 	 		 		 		
Consolidated	 	Agari Mediaware (70%)	 	Pacific Title and	 	CompuCom (59%)	
 	 	Alliance Consulting (100%)(a)	 	   Arts Studio (84%)	 	 	
 	 	ChromaVision (62%)	 	Protura (56%)	 	 	
 	 	Mantas (63%)	 	Tangram (58%)	 	 	
 	 	SOTAS (75%)	 	 	 	 	
 	 	 	 	 	 	 	
Equity	 	 	 	eMerge (16%)	 	 	
 	 	 	 	Kanbay (30%)	 	 	
 	 	 	 	Nextone (30%)	 	 	
 	 	 	 	QuestOne (33%)	 	 	
 	 	 	 	Sanchez (24%)	 	 	
 	 	 	 	Zer0to5ive (33%)	 	 	
 	 	 	 	 	 	 	
Cost	 	 	 	BatellePharma (12%)	 	 	
 	 	 	 	Internet Capital Group (9%)	 	 	
 	 	 	 	Realtime Media (9%)	 	 	
(a)  On January 1, 2003, aligne and Lever8 Solutions were merged into Alliance Consulting.
     The percentages above reflect our voting ownership at June 30, 2003. Although we own less than 20% of the voting stock of some of these companies, we accounted for these companies on the equity method as we believe we have the ability to exercise significant influence based on our representation of each company’s board of directors and other factors.
     In periods prior to 2003, our reportable segments were Strategic Private Companies, Other Private Companies and Funds, Public Companies (excluding CompuCom) and CompuCom. All prior periods have been restated to conform to the current-year presentation. The development of the current segments corresponds to the implementation of the refinement of our strategic focus announced in early 2003, and represents management’s view of our operations.
     Each segment includes the results of the consolidated companies and records our share of income or losses for entities accounted for under the equity method. Segment results also include impairment charges, gains or losses related to the disposition of our companies and the mark to market of trading securities. All significant intersegment activity has been eliminated. Accordingly, segment results reported exclude the effect of transactions between us and our subsidiaries.
     Other items, which include corporate operations and income taxes, are reviewed by management independent of segment results. Corporate expenses include the costs of providing operations and management support to our companies.
The Company’s operating results by segment are as follows: 

 	 	Three Months Ended June 30,	 	Six Months Ended June 30,	
 	 		 		
 	 	2003	 	2002	 	2003	 	2002	
 	 		 		 		 		
 	 	(in thousands)	 	(in thousands)	
 	 	(unaudited)	 	(unaudited)	
Strategic initiative companies	 	$	(10,481	)	 	$	(6,982	)	 	$	(18,182	)	 	$	(13,734	)	
Legacy companies	 	 	12,858	 	 	 	(20,953	)	 	 	13,433	 	 	 	(45,701	)	
CompuCom	 	 	3,377	 	 	 	4,987	 	 	 	6,823	 	 	 	7,868	 	
 	 	 		 	 	 		 	 	 		 	 	 		 	
Total segments	 	 	5,754	 	 	 	(22,948	)	 	 	2,074	 	 	 	(51,567	)	
Corporate operations	 	 	(7,439	)	 	 	(9,017	)	 	 	(17,906	)	 	 	(20,018	)	
Income tax expense	 	 	(1,465	)	 	 	(1,944	)	 	 	(2,857	)	 	 	(3,062	)	
 	 	 		 	 	 		 	 	 		 	 	 		 	
 	 	 	(3,150	)	 	 	(33,909	)	 	 	(18,689	)	 	 	(74,647	)	
Cumulative effect of change in accounting principle	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(21,390	)	
 	 	 		 	 	 		 	 	 		 	 	 		 	
 	 	$	(3,150	)	 	$	(33,909	)	 	$	(18,689	)	 	$	(96,037	)	
 	 	 		 	 	 		 	 	 		 	 	 		 	
28 

 
Strategic Initiative Companies

 	 	Three Months Ended June 30,	 	Six Months Ended June 30,	
 	 		 		
 	 	2003	 	2002	 	2003	 	2002	
 	 		 		 		 		
 	 	(in thousands)	 	(in thousands)	
 	 	(unaudited)	 	(unaudited)	
Revenue	 	$	26,720	 	 	$	11,999	 	 	$	58,415	 	 	$	20,710	 	
Total operating expenses	 	 	39,540	 	 	 	18,520	 	 	 	80,709	 	 	 	32,076	 	
 	 	 		 	 	 		 	 	 		 	 	 		 	
 	 	 	(12,820	)	 	 	(6,521	)	 	 	(22,294	)	 	 	(11,366	)	
Other loss, net	 	 	(55	)	 	 	—	 	 	 	(55	)	 	 	(16	)	
Interest income	 	 	16	 	 	 	43	 	 	 	39	 	 	 	66	 	
Interest and financing expense	 	 	(135	)	 	 	(365	)	 	 	(306	)	 	 	(471	)	
Minority interest	 	 	2,513	 	 	 	1,519	 	 	 	4,434	 	 	 	1,678	 	
Equity loss	 	 	—	 	 	 	(1,658	)	 	 	—	 	 	 	(3,625	)	
 	 	 		 	 	 		 	 	 		 	 	 		 	
 	 	 	(10,481	)	 	 	(6,982	)	 	 	(18,182	)	 	 	(13,734	)	
Cumulative effect of change in accounting principle	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(21,815	)	
 	 	 		 	 	 		 	 	 		 	 	 		 	
 	 	$	(10,481	)	 	$	(6,982	)	 	$	(18,182	)	 	$	(35,549	)	
 	 	 		 	 	 		 	 	 		 	 	 		 	
     Revenue for the software and service companies including Mantas, SOTAS and Alliance is derived from software license sales (including proprietary software developed by the companies which is customized to meet the client’s needs), software maintenance contracts, post-contract customer support and business and IT consulting services. Revenue for ChromaVision, which is included as a life science company, is primarily derived from fees charged each time their ACIS® proprietary automated cellular imaging system is used and, occasionally, upon the sale of an ACIS® system.
      Revenue . Revenue increased $14.7 million for the three months ended June 30, 2003 compared to the prior year period. In January 2003, aligne and Lever8 Solutions, two wholly owned subsidiaries, were integrated into Alliance Consulting, a strategic initiative company acquired in December 2002. The net impact of consolidating Alliance Consulting’s revenues subsequent to its acquisition, partially offset by a decline in revenue at aligne and Lever8 in 2003 compared to the 2002 period, accounted for $13.8 million of the increase. A total of $2.5 million relates to sales by ChromaVision subsequent to consolidating their results in June 2002. The increase was partially offset by a decrease in revenue at SOTAS. Revenue increased $37.7 million for the six months ended June 30, 2003 compared to the prior year period. The net impact of consolidating Alliance Consulting’s revenues subsequent to its acquisition, partially offset by a decline in revenue at aligne and Lever8 in 2003 compared to the 2002 period, accounted for $29.0 million of the increase. The decline in revenue at aligne and Lever8 is due to reduced demand for IT services and continued market softness. A total of $5.3 million relates to sales by ChromaVision subsequent to consolidating their results in June 2002.
      Operating Expenses . Operating expenses increased $21.0 million for the three months ended June 30, 2003 compared to the prior year period. Of this increase, $14.6 million relates to the net impact of consolidating Alliance Consulting’s subsequent to its acquisition in December 2002. A total of $5.0 million relates to ChromaVision subsequent to consolidating their results in June 2002. Operating expenses increased $48.6 million for the six months ended June 30, 2003 compared to the prior year period. Of this increase, $29.5 million relates to the net impact of consolidating Alliance Consulting’s subsequent to its acquisition in December 2002. A total of $10.5 million is related to operating expenses at ChromaVision subsequent to consolidating their results in June 2002. Also included in the increase is $7.2 million related to Mantas, which was consolidated effective April 2002 when we acquired majority ownership.
      Equity Loss . Equity loss for the three and six months ended June 30, 2002 includes our share of ChromaVision’s and Mantas’ results of operations. We acquired a controlling interest in ChromaVision in June 2002 and Mantas in April 2002. As a result, we consolidated ChromaVision’s and Mantas’ results starting in the second quarter of 2002.
      Cumulative Effect of Change in Accounting Principle . In connection with the transitional impairment test performed upon adoption of SFAS 142, we were required to test existing goodwill and intangible assets with indefinite useful lives for impairment as of January 1, 2002. We completed the required testing during the second quarter of 2002. As a result, we recorded a $21.8 million goodwill impairment loss shown as a cumulative effect of change in accounting principle.
      Net Loss. Included in net loss for the three and six months ended June 30, 2003 was $1.0 million and $2.4 million related to the operations of Agari, which was shutdown in July 2003.
29 

 
Legacy Companies

 	 	Three Months Ended June 30,	 	Six Months Ended June 30,	
 	 		 		
 	 	2003	 	2002	 	2003	 	2002	
 	 		 		 		 		
 	 	(in thousands)	 	(in thousands)	
 	 	(unaudited)	 	(unaudited)	
Revenue	 	$	14,678	 	 	$	14,719	 	 	$	23,297	 	 	$	29,819	 	
Total operating expenses	 	 	12,206	 	 	 	17,063	 	 	 	20,540	 	 	 	34,966	 	
 	 	 		 	 	 		 	 	 		 	 	 		 	
 	 	 	2,472	 	 	 	(2,334	)	 	 	2,757	 	 	 	(5,147	)	
Other income (loss), net	 	 	12,881	 	 	 	(3,522	)	 	 	17,017	 	 	 	(9,037	)	
Interest income	 	 	2	 	 	 	9	 	 	 	3	 	 	 	22	 	
Interest and financing expense	 	 	(34	)	 	 	41	 	 	 	(76	)	 	 	(245	)	
Minority interest	 	 	(315	)	 	 	876	 	 	 	(132	)	 	 	1,496	 	
Equity loss	 	 	(2,148	)	 	 	(16,013	)	 	 	(6,136	)	 	 	(32,790	)	
 	 	 		 	 	 		 	 	 		 	 	 		 	
 	 	$	12,858	 	 	$	(20,953	)	 	$	13,433	 	 	$	(45,701	)	
 	 	 		 	 	 		 	 	 		 	 	 		 	
     Revenue for the legacy segment, which includes Pacific Title and Arts Studio and Tangram, is derived from software license sales of Tangram’s asset tracking software, software maintenance contracts, post-contract customer support, consulting services, film title and special effects services. The legacy segment also includes management companies of private equity funds which derive revenue from management fees.
      Revenue . Revenue remained constant for the three months ended June 30, 2003 as compared to the prior period. This includes an increase of $5.2 million of revenues at Pacific Title and Arts Studio offset by a decrease of $5.2 million relating to the sale of our interest in a private equity fund management company in December 2002. The increase in revenue at Pacific Title is primarily attributable to increased capacity for film title and special effects services and increased demand for its services. Revenue decreased $6.5 million for the six months ended June 30, 2003 as compared to the prior period. The decrease is primarily due to a decrease of $10.1 million relating to the sale of our interest in a private equity fund management company in December 2002 and $1.1 million related to Aptas, whose results were consolidated through March 2002. Partially offsetting the decline is an increase in revenue of $5.5 million at Pacific Title and Arts Studio, primarily attributable to increased capacity for film title and special effects services and increased demand for its services.
      Operating Expenses. Operating expenses decreased by $4.9 million for the three months ended June 30, 2003 as compared to the prior period. Of the total decrease, $5.3 million relates to the sale of our interest in a private equity fund management company in December 2002. A decrease of $1.1 million relates to operations at Tangram and is the result of restructuring and cost containment measures implemented in 2002. Partially offsetting the decline is an increase related to operations at Pacific Title and Arts Studio primarily related to an increase in direct costs as a result of the revenue increase. Operating expenses decreased $14.4 million for the six months ended June 30, 2003 as compared to the prior period. Of the total decrease, $10.0 million relates to the sale of our interest in a private equity fund management company in December 2002 and $2.1 million related to Aptas, whose results were consolidated through March 2002. The remaining decline is primarily related to operations at Tangram and is the result of restructuring and cost containment measures implemented in 2002. 
      Other Income (Loss), Net.

 	 	Three Months Ended June 30,	 	Six Months Ended June 30,	
 	 		 		
 	 	2003	 	2002	 	2003	 	2002	
 	 		 		 		 		
 	 	(in thousands)	 	(in thousands)	
 	 	(unaudited)	 	(unaudited)	
Gain on sale of companies, net	 	$	12,884	 	 	$	4,584	 	 	$	17,088	 	 	$	9,215	 	
Distribution from private equity funds	 	 	—	 	 	 	—	 	 	 	—	 	 	 	486	 	
Unrealized gain on Tellabs and related forward sale contracts, net	 	 	—	 	 	 	527	 	 	 	—	 	 	 	1,242	 	
Unrealized gains (losses) on other trading securities	 	 	874	 	 	 	(6,015	)	 	 	810	 	 	 	(13,718	)	
Impairment charges	 	 	(489	)	 	 	(2,770	)	 	 	(489	)	 	 	(6,430	)	
Other	 	 	(388	)	 	 	152	 	 	 	(392	)	 	 	168	 	
 	 	 		 	 	 		 	 	 		 	 	 		 	
 	 	$	12,881	 	 	$	(3,522	)	 	$	17,017	 	 	$	(9,037	)	
 	 	 		 	 	 		 	 	 		 	 	 		 	
30 

 

     Gain on sale of companies for the three months ended June 30, 2003 includes $5.9 million related to the sale of DocuCorp and $6.4 million related to the sale of Internet Capital Group. Gain on sale of companies for the six months ended June 30, 2003 includes the second quarter sales of DocuCorp and Internet Capital Group, a $3.0 million gain related to proceeds received in 2003 for a company sold by us in 1997 and a $0.9 million gain related to the sale of a portion of our interest in a legacy company. Gain on sale of companies for the three months ended June 30, 2002 includes a $3.0 million gain related to the release of escrowed proceeds from the sale of a private company in 2000. Gain on sale of companies for the six months ended June 30, 2002 includes a $9.0 million gain related to the release of escrowed proceeds from the sale of a private company in 2000, partially offset by $1.2 million in losses associated with sales of certain public holdings, primarily Palm.
     The net gains recognized during the three and six months ended June 30, 2002 related to the Company’s holdings in Tellabs were $0.5 million and $1.2 million. These amounts reflect a $6.4 million gain on the change in the fair value of the hedging contract, reduced by a $5.9 million loss on the change in fair value of the Tellabs holdings for the three months ended June 30, 2002 and a $22.3 million gain on the fair value of the hedging contract, reduced by a $21.1 million loss on the fair value of the Tellabs holdings for the six months ended June 30, 2002. These gains are reflected in Other Income (Loss), Net in the Consolidated Statements of Operations.
     Unrealized gains (losses) on other trading securities primarily reflect the adjustment to fair value of our holdings in VerticalNet, which are classified as trading securities.
     Impairment charges reflect certain equity holdings judged to have experienced an other than temporary decline in value. We also have recorded impairment charges for certain holdings accounted for under the cost method determined to have experienced an other than temporary decline in value in accordance with our existing policy regarding impairment of long-lived assets.
      Equity Loss. Equity loss fluctuates with the number of companies accounted for under the equity method, our voting ownership percentage in these companies and the net results of operations of these companies. Equity loss consisted of the following: 

 	 	Three Months Ended June 30,	 	Six Months Ended June 30,	
 	 		 		
 	 	2003	 	2002	 	2003	 	2002	
 	 		 		 		 		
 	 	(in thousands)	 	(in thousands)	
 	 	(unaudited)	 	(unaudited)	
Share of our legacy companies results of operations	 	$	795	 	 	$	(3,552	)	 	$	1,199	 	 	$	(7,680	)	
Share of our private equity funds results of operations	 	 	(2,665	)	 	 	(8,032	)	 	 	(7,057	)	 	 	(12,384	)	
Impairment charges	 	 	(278	)	 	 	(4,429	)	 	 	(278	)	 	 	(12,726	)	
 	 	 		 	 	 		 	 	 		 	 	 		 	
 	 	$	(2,148	)	 	$	(16,013	)	 	$	(6,136	)	 	$	(32,790	)	
 	 	 		 	 	 		 	 	 		 	 	 		 	
     Equity loss decreased $13.9 million for the three months ended June 30, 2003 as compared to the prior year period. Of the total decrease, $4.2 million relates to impairment charges on affiliates accounted for under the equity method. A total of $5.4 million of the decrease relates to our share of income or loss of private equity funds, $2.1 million of the decrease is due to discontinuing the recording of equity losses of companies where we no longer have ownership interests and $1.9 million of the decrease is due to discontinuing the recording of equity losses of companies whose carrying value was reduced to $0. We recognize our share of losses to the extent we have a cost basis in the equity investee, or we have outstanding commitments or guarantees. The remaining decline is due to improved results at certain companies.
     Equity loss decreased $26.7 million for the six months ended June 30, 2003 as compared to the prior year period. Of the total decrease, $12.4 million relates to impairment charges on affiliates accounted for under the equity method. A total of $5.3 million of the decrease relates to our share of income or loss of private equity funds, $5.5 million is due to discontinuing the recording of equity losses of companies where we no longer have ownership interests and $2.6 million is due to discontinuing the recording of equity losses of companies whose carrying value was reduced to $0. The remaining decline is due to improved results at certain companies.
31 

 

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

 	 	Three Months Ended June 30,	 	Six Months Ended June 30,	
 	 		 		
 	 	2003	 	2002	 	2003	 	2002	
 	 		 		 		 		
 	 	(in thousands)	 	(in thousands)	
 	 	(unaudited)	 	(unaudited)	
Revenue	 	$	377,728	 	 	$	426,142	 	 	$	708,025	 	 	$	753,090	 	
Total operating expenses	 	 	372,174	 	 	 	417,911	 	 	 	696,826	 	 	 	740,049	 	
 	 	 		 	 	 		 	 	 		 	 	 		 	
 	 	 	5,554	 	 	 	8,231	 	 	 	11,199	 	 	 	13,041	 	
Interest income	 	 	334	 	 	 	479	 	 	 	652	 	 	 	1,046	 	
Interest and financing expense	 	 	(420	)	 	 	(720	)	 	 	(823	)	 	 	(1,596	)	
Minority interest	 	 	(2,091	)	 	 	(3,003	)	 	 	(4,205	)	 	 	(4,623	)	
 	 	 		 	 	 		 	 	 		 	 	 		 	
 	 	 	3,377	 	 	 	4,987	 	 	 	6,823	 	 	 	7,868	 	
Cumulative effect of change in accounting principle	 	 	—	 	 	 	—	 	 	 	—	 	 	 	425	 	
 	 	 		 	 	 		 	 	 		 	 	 		 	
 	 	$	3,377	 	 	 	4,987	 	 	$	6,823	 	 	 	8,293	 	
 	 	 		 	 	 		 	 	 		 	 	 		 	
     Revenue for CompuCom is derived from product sales, which include sales of technology products, peripherals and software-related products and licenses as well as service revenues, which are directly related to the sale of product, IT outsourcing services, application development, systems integration and contract and other consulting services.
      Revenue. Revenue, which consists of product revenue and service revenue, decreased $48.4 million or 11.4% and $45.1 million or 6.0 % for the three and six months ended June 30, 2003 as compared to the same period in 2002. Of the total decrease, $45.5 million or 13.0% was attributable to product revenue and $2.9 million or 3.4% was attributable to service revenue for the three months ended June 30, 2003 as compared to the prior period. Of the total decrease for the six months ended June 30, 2003 as compared to the prior period, $47.4 million or 7.8% was attributable to product revenue partially offset by an increase of $2.3 million or 1.6% related to service revenue. CompuCom believes economic conditions relative to technology procurement continue to hamper demand for the product they sell, mainly to their Fortune 1000 client base. As a result of this economic slowdown, product purchases and IT projects continue to be delayed, downsized or cancelled. CompuCom believes the decrease in service revenue for the three months ended June 30, 2003 as compared to the prior year period was primarily due to lower IT outsourcing services revenue and services directly related to the sale of product. CompuCom believes the increase in service revenue for the six months ended June 30, 2003 as compared to the prior year period was primarily due to increases in certain contract consulting services and services to the federal government, partially offset by decreases in field engineering services and services directly related to the sale of product.
      Cost of Sales/Gross Margin. Product gross margin for the three months ended June 30, 2003 was 6.5% compared to 7.5% for the same period in 2002. Product gross margin for the six months ended June 30, 2003 was 7.5% compared to 8.7% for the same period in 2002. CompuCom believes the decrease is primarily due to an increase in the mix of lower margin software revenue relative to total product revenue, as well as a decrease in volume incentive dollars received from suppliers. Service gross margin for the three months ended June 30, 2003 was 33.0% compared to 36.9% for the same period in 2002. The decrease was primarily due to lower field engineering service revenue and service revenue directly related to the sale of product. Service gross margin for the six months ended June 30, 2003 was 32.0% compared to 35.9% for the same period in 2002. The decrease was primarily the result of lower higher-margin IT outsourcing services revenues and product-related services and an increase in relatively lower margin services to the federal government and certain contract consulting services.
     Due to economic and competitive conditions, CompuCom expects to experience continued pressure on both revenue and gross margin, the result of which may be lower revenue and related gross margin when compared to the comparable prior year period or previous quarter.
      Other Operating Expenses. Other operating expenses decreased 16.6% and 15.6% for the three and six months ended June 30, 2003 as compared to the same period in 2002. CompuCom attributes this decrease to its own cost management efforts related to selling and service expenses and general and administrative expenses, including personnel and
32 

 

related costs and infrastructure cost reductions, primarily telecommunications expense, as well as certain occupancy-related expenses.
      Interest Income . Interest income decreased for the three and six months ended June 30, 2003 as compared to the same periods in 2002. CompuCom attributes the decline to a decrease in interest earned on available cash for the three and six months ended June 30, 2003 as compared to the same prior year period, primarily as a result of a decline in interest rates.
      Interest and Financing Expense. Interest and financing expense decreased for the three and six months ended June 30, 2003 as compared to the prior year periods. The decrease is primarily due to lower effective interest rates in the three and six months ended June 30, 2003 as compared to the prior year periods. 
Reconciling Items

 	 	 	Three Months Ended June 30,	 	Six Months Ended June 30,	
 	 	 		 		
 	 	 	2003	 	2002	 	2003	 	2002	
 	 	 		 		 		 		
 	 	 	(in thousands)	 	(in thousands)	
 	 	 	(unaudited)	 	(unaudited)	
Corporate Operations	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	General and administrative costs, net	 	$	(4,557	)	 	$	(5,129	)	 	$	(11,277	)	 	$	(9,894	)	
 	Stock-based compensation	 	 	(500	)	 	 	(970	)	 	 	(1,294	)	 	 	(1,922	)	
 	Depreciation and amortization	 	 	(63	)	 	 	(337	)	 	 	(238	)	 	 	(678	)	
 	Interest income	 	 	501	 	 	 	1,776	 	 	 	1,191	 	 	 	3,193	 	
 	Interest expense	 	 	(2,888	)	 	 	(4,514	)	 	 	(5,716	)	 	 	(10,711	)	
 	Other	 	 	68	 	 	 	157	 	 	 	(572	)	 	 	(6	)	
 	 	 		 	 	 		 	 	 		 	 	 		 	
 	 	 	(7,439	)	 	 	(9,017	)	 	 	(17,906	)	 	 	(20,018	)	
 	Income tax expense	 	 	(1,465	)	 	 	(1,944	)	 	 	(2,857	)	 	 	(3,062	)	
 	 	 		 	 	 		 	 	 		 	 	 		 	
 	 	$	(8,904	)	 	$	(10,961	)	 	$	(20,763	)	 	$	(23,080	)	
 	 	 		 	 	 		 	 	 		 	 	 		 	
     Our general and administrative expenses consist primarily of employee compensation, insurance, outside services such as legal, accounting and consulting, and travel-related costs. General and administrative expenses decreased $0.6 million for the three months ended June 30, 2003 as compared to the prior year period. The decrease is due to lower employee related costs and decreased professional fees, partially offset by increased directors and officers liability insurance premiums. General and administrative expenses increased $1.4 million for the six months ended June 30, 2003 as compared to the prior year period. The increase is due to increased directors and officers liability insurance premiums and severance costs incurred in the first quarter of 2003.
     As discussed in Note 9, we issued shares of restricted stock to employees in 2002. The value of these shares is recognized as expense on a straight-line basis over the vesting period.
     Interest income decreased $1.3 million and $2.0 million for the three and six months ended June 30, 2003 when compared to the same prior year period. The decrease is primarily related to interest income on a note receivable from a related party. In January 2003, the note went into default and we will not record interest income on the note until the carrying value is paid in full. Also attributing to the decline is lower interest rates earned on invested balances.
     Interest expense decreased $1.6 million and $5.0 million for the three and six months ended June 30, 2003 when compared to the same prior year period. The decreased expense is due to the inclusion in 2002 of the accretion of the obligation and amortization of the cost of the two forward sale contracts on our Tellabs holdings entered into in March and August of 1999 with no similar expense in 2003, as the forward sale contracts were settled in 2002. Interest expense for the three and six months ended June 30, 2002 also included interest on the mortgage for the corporate headquarters, which was sold in October 2002. There is no similar expense included in 2003.
     Other for the six months ended June 30, 2003 includes an impairment charge on a related party loan that was reduced to the value of the collateral that the Company holds.
      Income Taxes. Our consolidated income tax expense recorded for the three and six months ended June 30, 2003, was $1.5 million and $2.9 million net of recorded valuation allowance of $1.8 million and $7.8 million. We have recorded a valuation allowance to reduce our deferred tax asset to an amount that is more likely than not to be realized in future years. Our consolidated effective tax rate before valuation allowance decreased to 25.2% for the three months ended June 30, 2003 compared to 34.4% for the three months ended June 30, 2002. For the six months ended June 30, 2003 our consolidated
33 

 

effective tax rate before valuation allowance decreased to 31.1% compared to 34.3% for the prior year period. This rate differs from the federal statutory rate due to miscellaneous non-deductible expenses.
Liquidity And Capital Resources
     We funded our operations with proceeds from sales of and distributions from affiliates, sales of available-for-sale and trading securities, sales of non-strategic assets and, in 2002, a tax refund. Other sources of liquidity which have been utilized by Safeguard in prior periods include sales of Safeguard equity, issuance of Safeguard debt or operating cash flow from our wholly owned business and IT service companies. Our ability to generate liquidity from sales of affiliates, sales of available-for-sale and trading securities, and Safeguard equity and debt issuances has been adversely affected by the decline in the US markets and other factors.
     Proceeds from sales of and distributions from affiliates were $2 million and $7 million for the three and six months ended June 30, 2003. Proceeds from sales of available-for-sale and trading securities were $22 million for the three and six months ended June 30, 2003. Proceeds from sales of and distributions from affiliates were $7 million and $17 million for the three and six months ended June 30, 2002. Proceeds from sales of available-for-sale and trading securities were $0 and $13 million for the three and six months ended June 30, 2002.
     In May 2003, we renewed our credit agreement that provides for borrowings, issuances of letters of credit and guarantees of up to $25 million. We occasionally use letters of credit to provide transactional support to our companies. This credit facility matures in May 2004 and bears interest at the prime rate (4.0% at June 30, 2003) for outstanding borrowings. The credit facility is subject to an unused commitment fee of 0.125%, which is subject to reduction based on deposits maintained at the bank. The facility requires cash collateral equal to two times any outstanding amounts under the facility. This facility provides us additional flexibility to implement our strategy and support our companies. As of June 30, 2003, guarantees totaling $8 million related to two strategic initiative company’s credit facilities were outstanding.
     The transactions we enter into in pursuit of our strategy could impact our liquidity at any point in time. As we seek to acquire technology-related companies, we may be required to expend our cash or incur debt, which will decrease our liquidity. Conversely, as we dispose of our interests in companies that are no longer strategic, we may receive proceeds from such sales, which could increase our liquidity. From time to time we are engaged in discussions concerning acquisitions and dispositions, which, if consummated, could impact our liquidity, perhaps significantly.
     Our cash and cash equivalents at June 30, 2003 and other internal sources of cash flow are expected to be sufficient to fund our cash requirements for the next twelve months, including commitments to our existing affiliates, our current operating plan to acquire interests in new affiliates and our general corporate requirements.
     In October 2000, we guaranteed certain margin loans advanced by a third party to Mr. Musser, then the Chief Executive Officer of Safeguard. The securities subject to the margin account included shares of our common stock. We entered into this guarantee arrangement to maintain an orderly trading market for Safeguard’s equity securities, to maintain Safeguard’s compliance posture with the Investment Company Act of 1940, and to avoid diversion of the attention of a key executive from the performance of his responsibilities to Safeguard. In May 2001, we entered into a $26.5 million loan agreement with Mr. Musser, the former CEO. The proceeds of the loan were used to repay the margin loans guaranteed by Safeguard in October 2000. The purpose of the May 2001 loan agreement was to eliminate the guarantee obligations and to provide for direct and senior access to Mr. Musser’s assets as collateral for the loan.
     The loan bears interest at an annual default rate of 9% and became payable on a limited basis on January 1, 2003. Safeguard sent Mr. Musser a demand notice in January 2003 and, when no payment was received, a default notice. In conjunction with the original loan, Mr. Musser granted us security interests in securities and real estate as collateral. Based on the information available to us, we concluded that Mr. Musser may not have sufficient personal assets to satisfy the outstanding balance due under the loan when the loan becomes full recourse against Mr. Musser on April 30, 2006. In the first quarter of 2003, we impaired the loan by $0.7 million to the estimated value of the collateral that we held at that date. The carrying value of the loan at June 30, 2003 is $12.8 million. We will continue to evaluate the value of the collateral to the carrying value of the note on a quarterly basis.
     In connection with our ownership interests in certain affiliates, we have guarantees associated with various forms of debt including lines of credit, term loans, performance bonds, equipment leases and mortgages. Of our total guarantees of $23 million at June 30, 2003, $19 million relates to guarantees of our consolidated companies. A total of $8.4 million of debt
34 

 

associated with our guarantees has been recorded on the consolidated companies’ Balance Sheets and are therefore reflected in the Company’s Consolidated Balance Sheets at June 30, 2003. Additionally, we have committed capital of approximately $34 million, including commitments made in prior years to various affiliates, to be funded over the next several years, including approximately $12 million, which is expected to be funded in the next twelve months.
     We have received distributions as both a general partner and a limited partner from certain private equity funds. Under certain circumstances, we may be required to return a portion or all the distributions it received as a general partner to the fund for further distribution to the fund’s limited partners (the “clawback”). Assuming the Funds in which we are a general partner are liquidated or dissolved on June 30, 2003 and assuming for these purposes the only distributions from the funds is equal to the carrying value of the funds on the June 30, 2003 financial statements, the maximum clawback we would be required to return for our general partner interest is approximately $6 million. Management estimates its liability to be approximately $5.5 million. This amount is reflected in “Other Long-Term Liabilities” on the Consolidated Balance Sheets.
     Our ownership in the general partner of the funds which have potential clawback liabilities range from 19-30%. The clawback liability is joint and several, such that we may be required to fund the clawback for other general partners should they default. The Funds have taken several steps to reduce the potential liabilities should other general partners default, including withholding all general partner distributions in escrow and adding rights of set-off among certain funds. We believe our liability under the default of other general partners is remote.
     In June 1999, the Company issued $200 million of 5% convertible subordinated notes due June 15, 2006. Interest is payable semi-annually. The notes are redeemable in whole or in part at the option of the Company on or after June 18, 2002, for a maximum of 102.5% of face value depending on the date of redemption and subject to certain restrictions. At the note holder’s option, the notes are convertible into our common stock subject to adjustment under certain conditions. Pursuant to the terms of the notes, the conversion rate of the notes at June 30, 2003 was $24.1135 of principal amount per share. The closing price of our common stock on June 30, 2003 was $2.70. The note holder’s may also require repurchase of the notes upon certain events, including sales of all or substantially all of our common stock or assets, liquidation, dissolution or a change in control. If the note holders do not elect to convert the notes to common stock prior to their maturity, we believe, through the execution of our stated strategy, including business growth at our subsidiaries and the sale from time to time of various holdings, we will either have the ability to repurchase or refinance the notes outstanding on the due date in accordance with their terms.
     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.
     At June 30, 2003, CompuCom has a $25 million working capital facility and a $100 million receivables securitization facility. The working capital facility, which initially had a May 2002 maturity date but has been extended to a September 2003 maturity date, bears interest at LIBOR plus an agreed upon spread and is secured by a lien on CompuCom’s assets. CompuCom expects to renew the working capital facility during the third quarter of 2003. Availability under the facility is subject to a borrowing base calculation. As of June 30, 2003, availability under the working capital facility was $25 million with no outstanding amounts. The securitization facility’s pricing is based on a designated short-term interest rate plus an agreed upon spread. The securitization allows CompuCom to sell, on an ongoing basis, its trade accounts receivable to a consolidated, wholly owned bankruptcy-remote special purpose subsidiary (SPS). The SPS has sold and, subject to certain conditions, may from time to time sell, an undivided ownership interest in the pool of purchased receivables to financial institutions. As collections reduce receivables balances sold, CompuCom may sell interests in new receivables to bring the amount available up to the maximum allowed. These sales are reflected as reductions of Accounts receivable on the Consolidated Balance Sheets and are included in net cash provided by operating activities on the Consolidated Statements of Cash Flows. The proceeds from the sale of receivables are used primarily to fund working capital requirements. The investors in the securitized receivables have no recourse to the Company’s or CompuCom’s assets as a result of debtor’s defaults. The Company and CompuCom account for these transactions in accordance with SFAS 140, “Accounting or Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” and meet the sales criteria stated in Paragraph 9 of SFAS 140. Amounts outstanding and removed from the Consolidated Balance Sheets as sold receivables as of June 30, 2003 consisted of two certificates totaling $60 million. Within the context of the securitization, each certificate is issued from a separate facility, each facility set at $50 million. One $50 million facility, with an October 2003 maturity date, has one certificate issued for $50 million. The other $50 million facility with an October 2005 maturity date has one certificate issued for $10 million. CompuCom retains the portion of sold receivables that are in excess of the amounts outstanding, referred to as retained. The carrying amount of CompuCom’s retained interest, which approximated fair value
35 

 

because of the short term nature of the receivables, is reflected in Accounts Receivable on the Consolidated Balance Sheets. Both facilities are subject to CompuCom’s compliance with selected financial covenants and ratios.
     CompuCom’s liquidity is impacted by the dollar volume of certain manufacturers’ customer specific rebate programs. Under these programs, CompuCom is required to pay a higher initial amount for product and then claim a rebate from the manufacturer to reduce the final cost. These rebates are then passed on to the customer in the form of reduced sales price. The collection of these rebates can take an extended period of time. Due to these programs, CompuCom’s initial cost for the product is often higher than the sales price CompuCom can obtain from its clients. As of June 30, 2003 and December 31, 2002, CompuCom was owed approximately $15.5 million and $18.5 million, respectively, under these vendor rebate programs. These outstanding amounts are included as a reduction to Accounts Payable on the Consolidated Balance Sheets and a reduction of Cost of sales in the Consolidated Statements of Operations.
     CompuCom participates in certain programs provided by various suppliers that enable it to earn volume incentive dollars. These incentives are generally earned by achieving quarterly sales targets. The amounts earned under these programs are recorded as a reduction to cost of sales when earned. The Company also receives vendor reimbursements that offset certain training, promotional and marketing costs incurred by the Company. These amounts are recorded as Accounts receivable on the Consolidated Balance Sheets, and any amounts received in excess of the actual amounts incurred are recorded as a reduction of Cost of sales in the Consolidated Statements of Operations. As of June 30, 2003 and December 31, 2002, CompuCom was owed approximately $3.8 million and $3.3 million, respectively, under these supplier incentive programs.
     CompuCom’s ability to make distributions to its shareholders is limited by restrictions in CompuCom’s financing agreements and CompuCom’s working capital needs. We do not consider CompuCom’s liquidity to be a source of liquidity to us.
     Net cash used in operating activities was $27 million for the six months ended June 30, 2003 compared to net cash provided of $30 million for the same prior year period. The decrease was due primarily to the receipt of a $63 million tax refund in 2002.
     Net cash provided by investing activities was $16 million for the six months ended June 30, 2003 compared to $7 million for the same prior year period. The increase is primarily due to a decline in acquisitions of less than majority owned companies.
     Consolidated working capital increased to $258 million at June 30, 2003 compared to $242 million at December 31, 2002. The increase is attributable to a decrease in accrued expenses partially offset by an increase in accounts payable at CompuCom.
     During the month of July 2003, we collected an additional $15.4 million of cash proceeds from our sales of Internet Capital Group in June and July of 2003.
     We are involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the our consolidated financial position or results of operations.
     Our general operations are not capital intensive, and capital expenditures in any year normally will not be significant in relation to our overall financial position. There were no material capital asset purchase commitments at June 30, 2003.
     There were no significant changes in the components of contractual cash obligations and other commercial commitments during the quarter ended June 30, 2003.
Recent Accounting Pronouncements
     See Note 5 to the Consolidated Financial Statements.
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Factors That May Affect Future Results
     Forward-looking statements in this report and those made from time to time by us through our senior management team are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Factors that could cause actual results to differ materially from results anticipated in forward-looking statements are described in our SEC filings, including our Annual Report on Form 10-K for the year ended December 31, 2002. These factors include, but are not limited to, the following:

 	•	 	The performance of our companies, which face risks such as intense competition, rapid changes in technology and customer demands, frequent new product introductions and shifting distribution channels.	
 		
 	•	 	Many of our companies have a history of operating losses or limited operating histories, no historical profits and financing requirements that they may not be able to satisfy. These affiliates may not have operating income or net income in the future and their financial results may vary dramatically from quarter to quarter.	
 		
 	•	 	We may have problems raising money we need in the future to fund the needs of our companies and to make acquisitions of affiliates.	
 		
 	•	 	We may incur significant costs to avoid investment company status and may suffer adverse consequences if deemed to be an investment company.	
 		
 	•	 	Our strategy of creating long-term value for our shareholders by taking controlling interests in and developing our strategic companies requires capital. Our ability to generate capital is dependent, in part, on the strength of the public and private capital markets for technology related companies and on the level of activity in the mergers and acquisitions market in the relevant industry, as well as on the requirements of the Federal securities laws regulating the sale of securities.	
 		
 	•	 	Our financial results are likely to vary dramatically from quarter to quarter depending upon various events. These events include the financial results of our affiliates and the way that the partner companies are reflected in our consolidated financial statements, sales of partner companies or our interests in partner companies and distributions from private equity funds which we manage or in which we have an interest.	
 		
 	•	 	Our stock price may be subject to significant fluctuation because the value of some of our partner companies fluctuates and because of market conditions generally.	
Item 3. Quantitative and Qualitative Disclosures About Market Risk
     We are exposed to equity price risks on the marketable portion of our securities. These securities include equity positions in companies in the technology industry, many of which have experienced significant volatility in their stock prices. Historically, we have not attempted to reduce or eliminate our market exposure on securities. Based on closing market prices at June 30, 2003, the fair market value of our holdings in public securities was approximately $220.5 million. A 20% decrease in equity prices would result in an approximate $44.1 million decrease in the fair value of our publicly traded securities. At June 30, 2003, the value of the collateral securing the Musser loan, included $6.8 million of equity securities. A 20% decrease in the fair value of these securities would result in a charge of approximately $1.4 million.
     CompuCom is exposed to interest rate risk primarily through its receivables securitization and working capital facilities. CompuCom utilizes these facilities to meet its working capital and other financing needs. At June 30, 2003, the securitization facility had borrowings of approximately $60 million, and there were no borrowings on the working capital facility. If CompuCom’s effective interest rate were to increase by 100 basis points, or 1.00%, CompuCom’s annual interest and financing expense would increase by $0.6 million based on CompuCom’s average balances utilized under its facilities during the six months ended June 30, 2003. Our share of this increase would be approximately $0.4 million after deduction for minority interest but before income taxes.
37 

 

     At June 30, 2003, we had outstanding $200 million of fixed rate notes due in June 2006. Interest payments of $5 million each are due June and December of each year. Based on transactions for these notes in the secondary market, these notes have a fair market value at June 30, 2003 of approximately $158 million. 

Liabilities	 	2003	 	2004	 	2005	 	2006	 	Fair Market Value	
	 		 		 		 		 		
Convertible Subordinated Notes due by year (in millions)	 	 	—	 	 	 	—	 	 	 	—	 	 	$	200.0	 	 	$	158.0	 	
Fixed Interest Rate	 	 	5	%	 	 	5	%	 	 	5	%	 	 	5	%	 	 	5	%	
Interest Expense (in millions)	 	$	10.0	 	 	$	10.0	 	 	$	10.0	 	 	$	4.5	 	 	 	N/A	 	
Item 4. Controls and Procedures

 	(a)	 	Evaluation of disclosure controls and procedures: The Company’s Chief Executive Officer and its Chief Financial Officer, after evaluating the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) as of the end of the period covered by this report, have concluded that as of the end of the period covered by this report, the Company’s disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company would be made known to them by others within the Company.	
 		
 	(b)	 	Changes in internal controls: During the most recent fiscal quarter, there were no changes in the Company’s internal controls over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.	
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PART II
OTHER INFORMATION 
Item 1. Legal Proceedings
     There have been no material developments during the quarter in the Safeguard Scientifics Securities Litigation disclosed in the 2002 Form 10-K and the Form 10-Q for the quarter ended March 31, 2003. The Company and its subsidiaries are involved in various other claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position or results of operations.  
Item 4. Submission of Matters to a Vote of Security Holders

 	 	 	The Company held its Annual Meeting of Shareholders on June 18, 2003. At the meeting the shareholders voted in favor of the following items listed in the Proxy Statement dated April 30, 2003.	

 	I.	ELECTION OF DIRECTORS:	
 	 	 	 	 	 	 	 	 	
 	 	FOR	 	WITHHELD	
 	 		 		
Anthony L. Craig	 	 	98,725,621	 	 	 	10,021,813	 	
Julie A. Dobson	 	 	104,141,144	 	 	 	4,606,290	 	
Robert E. Keith, Jr.	 	 	98,818,519	 	 	 	9,928,915	 	
Andrew E. Lietz	 	 	105,563,748	 	 	 	3,183,686	 	
George MacKenzie	 	 	103,783,689	 	 	 	4,963,745	 	
Jack L. Messman	 	 	105,115,857	 	 	 	3,631,577	 	
Russell E. Palmer	 	 	105,076,876	 	 	 	3,670,558	 	
John W. Poduska, Sr.	 	 	103,663,138	 	 	 	5,084,296	 	
Robert Ripp	 	 	105,585,923	 	 	 	3,161,511	 	
John J. Roberts	 	 	105,086,254	 	 	 	3,661,180	 	

 	II.	RATIFICATION OF KPMG LLP AS THE COMPANY’S INDEPENDENT AUDITORS FOR THE FISCAL YEAR ENDING DECEMBER 31,2003	
 	 	 	 	 	 	 	 	 	
FOR	 	AGAINST	 	ABSTAIN	
	 		 		
106,739,473	 	 	1,650,073	 	 	 	357,888	 	
39 

 
Item 5. Other Information
     The following information, which is intended to be furnished under Item 11 of Form 8-K, “Temporary Suspension of Trading Under Registrant’s Employee Benefit Plans,” is instead being furnished on this Form 10-Q under Item 5, “Other Information” in accordance with the SEC’s Interim Filing Guidance Related to Insider Trades During Pension Fund Blackout Periods. Notice under Section 245.104 of SEC Regulation BTR of the imposition of a retirement plan blackout period during which the trading prohibitions of Section 306(a) of the Sarbanes-Oxley Act will be in effect was provided on June 3, 2003, to Safeguard Scientifics, Inc., as required by section 101(i)(2)(E) of the Employment Retirement Income Security Act of 1974, and to each director and executive officer of Safeguard. The blackout period required by the Sarbanes-Oxley Act commenced during the week beginning July 13, 2003 and is expected to end during the week beginning August 17, 2003. The Sarbanes-Oxley Act of 2002 prohibits corporate directors and executive officers from directly or indirectly purchasing, selling or otherwise acquiring or transferring any equity securities of Safeguard Scientifics, Inc. during a retirement plan blackout period unless the officer or director can establish that the equity securities were not “acquired in connection with his or her service or employment as a director or executive officer” in a manner consistent with applicable regulations. An individual should not assume that “specific identification” of shares will necessarily provide protection. This prohibition applies regardless of whether such securities are held within or outside of the retirement plan. Violation of these rules may subject the party improperly disposing of equity securities to a requirement to disgorge trading gains or to be subject to other sanctions. The regulations do provide exceptions for a limited number of transactions, primarily those that take place automatically or in a manner that is outside the insider’s control. Bona fide gifts are also exempted. A complete list of the exceptions to the insider trading rules can be found in the relevant SEC rules (at Section 245.101(c) of Regulation BTR). Individuals may contact Deirdre Blackburn, Corporate Secretary, Safeguard Scientifics, Inc., 435 Devon Park Drive, Building 800, Wayne, PA 19087-1945 (610-293-0600) to determine the actual beginning and ending dates of the blackout period or if they have any other inquiries about the blackout period.  
Item 6. Exhibits and Reports on Form 8-K

 	(a)	 	Exhibits.	
 		
 	31	 	Certification of the Chief Executive Officer and the Chief Financial Officer pursuant to Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934	
 		
 	32	 	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	
 		
 	(b)	 	Reports on Form 8-K.	
 		
 	 	 	On April 30, 2003, the Company filed a Current Report on Form 8-K regarding a press release setting forth the Company’s financial information for the quarter ended March 31, 2003.	
 		
 	 	 	On June 5, 2003, the Company filed a Current Report of Form 8-K regarding a press release announcing that DocuCorp has repurchased shares and warrants of its common stock from the Company.	
40 

 
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: August  7, 2003	 	/s/ ANTHONY L. CRAIG	
 	 		
 	 	Anthony L. Craig
Chief Executive Officer and President	
 	 	 	
Date: August  7, 2003	 	/s/ CHRISTOPHER J. DAVIS	
 	 		
 	 	Christopher J. Davis
Managing Director and Chief Financial Officer	
41

Exhibit 31 
CERTIFICATION
I, Anthony L. Craig, certify that:

1.	 	I have reviewed this quarterly report on Form 10-Q of Safeguard Scientifics, Inc.;	
 		
2.	 	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;	
 		
3.	 	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;	
 		
4.	 	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:	

 	a)	 	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;	
 		
 	b)	 	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and	
 		
 	c)	 	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and;	

5.	 	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):	

 	a)	 	all significant deficiencies and material weakness in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and	
 		
 	b)	 	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.	
 	 	 	
SAFEGUARD SCIENTIFICS, INC	 	 	
 	 	 	
Date: August 7, 2003	 	/s/ ANTHONY L. CRAIG	
 	 		
 	 	Anthony L. Craig
Chief Executive Officer	

 

CERTIFICATION
I, Christopher J. Davis, certify that:

1.	 	I have reviewed this quarterly report on Form 10-Q of Safeguard Scientifics, Inc.;	
 		
2.	 	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;	
 		
3.	 	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;	
 		
4.	 	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:	

 	a)	 	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;	
 		
 	b)	 	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and	
 		
 	c)	 	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and;	

5.	 	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):	

 	a)	 	all significant deficiencies and material weakness in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and	
 		
 	b)	 	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.	
 	 	 	
SAFEGUARD SCIENTIFICS, INC	 	 	
 	 	 	
Date: August 7, 2003	 	/s/ CHRISTOPHER J. DAVIS	
 	 		
 	 	Christopher J. Davis
Chief Financial Officer	

 

Exhibit 32
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of Safeguard Scientifics, Inc. (the “Company”) on Form 10-Q for the quarter ended June 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I Anthony L. Craig, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.	 	The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934, (15 U.S.C. 78m(a)); and	
 		
2.	 	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.	
 	 	 	
 	 	SAFEGUARD SCIENTIFICS, INC.	
 	 	 	
Date: August 7, 2003	 	/s/ ANTHONY L. CRAIG	
 	 		
 	 	Anthony L. Craig
Chief Executive Officer	
In connection with the Quarterly Report of Safeguard Scientifics, Inc. (the “Company”) on Form 10-Q for the quarter ended June 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I Christopher J. Davis, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.	 	The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934, (15 U.S.C. 78m(a)); and	
 		
2.	 	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.	
 	 	 	
 	 	SAFEGUARD SCIENTIFICS, INC.	
 	 	 	
Date: August 7, 2003	 	/s/ CHRISTOPHER J. DAVIS	
 	 		
 	 	Christopher J. Davis
Chief Financial Officer	
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Safeguard Scientifics, Inc. and will be retained by Safeguard Scientifics, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.