SAFEGUARD SCIENTIFICS INC ET AL - 10-Q Quarterly Report

SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended June 30, 2002

Commission File Number 1-5620

SAFEGUARD SCIENTIFICS, INC.
(Exact name of registrant as specified in its charter)


Pennsylvania (State or other jurisdiction of incorporation or organization)		23-1609753 (I.R.S. Employer Identification Number)









800 The Safeguard Building, 435 Devon Park Drive Wayne, PA (Address of principal executive offices)		19087 (Zip Code)

(610) 293-0600
Registrant’s telephone number, including area code

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes (CHECK BOX) No (BOX)

Number of shares outstanding as of August 14, 2002
Common Stock 119,426,972

TABLE OF CONTENTS


	CONSOLIDATED BALANCE SHEETS
	CONSOLIDATED STATEMENTS OF OPERATIONS
	CONSOLIDATED STATEMENTS OF CASH FLOWS
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
LOAN AGREEMENT DATED MAY 10, 2002
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
CERTIFICATION OF CHIEF FINANCIAL OFFICER

SAFEGUARD SCIENTIFICS, INC.
QUARTERLY REPORT FORM 10-Q
INDEX


		Page

PART I — FINANCIAL INFORMATION




Item 1 - Financial Statements:




	Consolidated Balance Sheets – June 30, 2002 (unaudited) and December 31, 2001		3




	Consolidated Statements of Operations (unaudited) — Three and Six Months Ended June 30, 2002 and 2001		4




	Consolidated Statements of Cash Flows (unaudited) — Six Months Ended June 30, 2002 and 2001		5




	Notes to Consolidated Financial Statements		6




Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations			30




Item 3 - Quantitative and Qualitative Disclosures About Market Risk			46




PART II — OTHER INFORMATION




Item 1 - Legal Proceedings			47




Item 4 – Submission of Matters to a Vote of Security Holders			47




Item 6 - Exhibits and Reports on Form 8-K			47




Signatures			48

SAFEGUARD SCIENTIFICS, INC.

CONSOLIDATED BALANCE SHEETS


					June 30,			December 31,
					2002			2001

					(in thousands except per share data)
					(unaudited)
				ASSETS




Current Assets




	Cash and cash equivalents				$	332,811		$	298,095




	Restricted cash					3,612			8,033




	Trading securities					88,269			205,553




	Accounts receivable, less allowances ($3,093-2002; $3,266-2001)					182,129			157,661




	Inventories					38,154			32,084




	Income tax receivable					—			62,346




	Prepaid expenses and other current assets					13,638			14,796

				Total current assets		658,613			778,568




Property and equipment, net						57,882			59,320




Ownership interests in and advances to affiliates						87,250			132,940




Available-for-sale securities						4,406			4,822




Intangible assets, net						9,848			11,670




Goodwill, net						174,180			159,540




Deferred taxes						3,179			3,240




Note receivable — related party						24,983			25,046




Other						21,576			17,117

				Total Assets	$	1,041,917		$	1,192,263

			LIABILITIES AND SHAREHOLDERS’ EQUITY




Current Liabilities




	Current maturities of long-term debt				$	7,194		$	7,761




	Accounts payable					160,903			125,121




	Accrued expenses and deferred revenue					103,210			124,438




	Other current liabilities					85,670			171,804

		Total current liabilities				356,977			429,124




Long-term debt						17,854			20,138




Minority interest						129,764			112,746




Other long-term liabilities						12,457			11,579




Convertible subordinated notes						200,000			200,000




Commitments and contingencies




	Shareholders’ Equity




	Preferred stock, $10.00 par value; 1,000 shares authorized					—			—




	Common stock, $0.10 par value; 500,000 shares authorized; 119,450 and 118,154 shares issued and outstanding in 2002 and 2001, respectively					11,945			11,815




	Additional paid-in capital					738,282			743,885




	Accumulated deficit					(422,421	)		(326,384	)




	Accumulated other comprehensive income					2,153			1,968




	Treasury stock, at cost (23 shares-2002; 381 shares-2001)					(90	)		(11,528	)




	Unamortized deferred compensation					(5,004	)		(1,080	)

		Total shareholders’ equity				324,865			418,676

		Total Liabilities and Shareholders’ Equity			$	1,041,917		$	1,192,263

See Notes to Consolidated Financial Statements.

SAFEGUARD SCIENTIFICS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS


			Three Months Ended June 30,						Six Months Ended June 30,

			2002			2001			2002			2001

			(in thousands except per share data)
			(unaudited)
Revenue




	Product sales		$	353,730		$	426,751		$	616,497		$	912,214




	Service sales			93,097			81,939			175,560			166,823




	Other			6,025			6,334			11,599			12,962

		Total revenue		452,852			515,024			803,656			1,091,999




Operating Expenses




	Cost of sales-product			324,759			382,628			558,017			824,789




	Cost of sales-service			58,377			52,495			113,297			109,456




	Selling and service			33,536			36,104			63,023			73,999




	General and administrative			36,140			42,612			70,774			82,805




	Depreciation and amortization			7,110			9,766			14,511			19,460

		Total operating expenses		459,922			523,605			819,622			1,110,509

				(7,070	)		(8,581	)		(15,966	)		(18,510	)




Other loss, net				(3,397	)		(28,300	)		(8,928	)		(37,575	)




Interest income				1,828			2,988			3,281			6,974




Interest and financing expense				(5,079	)		(6,743	)		(11,977	)		(15,476	)

Loss before income taxes, minority interest, equity loss and change in accounting principle				(13,718	)		(40,636	)		(33,590	)		(64,587	)




Income taxes (expense) benefit				(1,944	)		(3,071	)		(3,062	)		6,186




Minority interest				(608	)		(1,248	)		(1,449	)		(2,298	)




Equity loss				(17,639	)		(65,517	)		(36,546	)		(299,516	)

Net loss before change in accounting principle				(33,909	)		(110,472	)		(74,647	)		(360,215	)




Cumulative effect of change in accounting principle (Note 3)				—			—			(21,390	)		—

Net Loss			$	(33,909	)	$	(110,472	)	$	(96,037	)	$	(360,215	)

Basic Loss Per Share:




	Prior to cumulative effect of change in accounting principle		$	(0.29	)	$	(0.94	)	$	(0.64	)	$	(3.07	)




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

			$	(0.29	)	$	(0.94	)	$	(0.82	)	$	(3.07	)

Diluted Loss Per Share:




	Prior to cumulative effect of change in accounting principle		$	(0.29	)	$	(0.95	)	$	(0.65	)	$	(3.08	)




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

			$	(0.29	)	$	(0.95	)	$	(0.83	)	$	(3.08	)

Weighted Average Shares Outstanding — Basic and Diluted				117,572			117,300			117,548			117,269

See Notes to Consolidated Financial Statements.

SAFEGUARD SCIENTIFICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS


		Six Months Ended June 30,

		2002			2001

		(in thousands)
		(unaudited)





Net cash provided by operating activities		$	29,687		$	174,081




Investing Activities




Proceeds from sales of available-for-sale and trading securities			13,269			11,029




Proceeds from sales of and distributions from affiliates			16,649			20,730




Advances to affiliates			(4,397	)		(12,582	)




Repayment of advances to affiliates			—			30




Acquisitions of ownership interests in affiliates and subsidiaries, net of cash acquired			(17,004	)		(46,927	)




Acquisitions by subsidiaries, net of cash acquired			—			(79,309	)




Advances to related party, net			(588	)		(26,499	)




Repayments of advances to related party, net			1,459			—




Decrease in restricted cash and short-term investments			4,421			86,728




Capital expenditures			(5,394	)		(14,369	)




Other, net			(1,638	)		(1,467	)

Net cash provided by (used in) investing activities			6,777			(62,636	)




Financing Activities




Borrowing on revolving credit facilities			7,829			19,549




Repayments on revolving credit facilities			(9,311	)		(17,996	)




Borrowings on long-term debt			569			3,509




Repayments on long-term debt			(1,786	)		(1,752	)




Issuance of Company common stock, net			—			139




Issuance of subsidiary common stock			951			375

	Net cash (used in) provided by financing activities		(1,748	)		3,824

Net Increase in Cash and Cash Equivalents			34,716			115,269




Cash and Cash Equivalents at beginning of period			298,095			133,201

Cash and Cash Equivalents at end of period		$	332,811		$	248,470

See Notes to Consolidated Financial Statements.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002

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 2001 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 aligne and Lever8 Solutions (formerly K Consultants and Palarco). The Company’s Consolidated Statements of Operations and Cash Flows also include the following majority-owned subsidiaries:


For the three months ended June 30,

2002		2001

Agari Mediaware		CompuCom Systems




ChromaVision Medical Systems		SOTAS




(Since June 13, 2002)		Tangram Enterprise Solutions




CompuCom Systems




Mantas (Since April 2002)




Pacific Title and Arts Studio




Protura (since January 2002)




SOTAS




Tangram Enterprise Solutions


For the six months ended June 30,

2002		2001

Agari Mediaware		CompuCom Systems




Aptas		SOTAS




ChromaVision Medical Systems		Tangram Enterprise Solutions




(Since June 13, 2002)




CompuCom Systems




Mantas (Since April 2002)




Pacific Title and Arts Studio




Protura (since January 2002)




SOTAS




Tangram Enterprise Solutions

SAFEGUARD SCIENTIFICS, INC.

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

The Company’s Consolidated Balance Sheets also include the following majority-owned subsidiaries:


June 30, 2002		December 31, 2001

Agari Mediaware		Agari Mediaware




ChromaVision Medical Systems		Aptas




CompuCom Systems		CompuCom Systems




Mantas		Pacific Title and Arts Studio




Pacific Title and Arts Studio		SOTAS




Protura		Tangram Enterprise Solutions




SOTAS




Tangram Enterprise Solutions

3. GOODWILL AND OTHER INTANGIBLE ASSETS

In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets”. SFAS 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized but instead tested for impairment at least annually. SFAS 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values. These provisions of SFAS 142 were adopted by the Company as of January 1, 2002.

Under SFAS No. 142, the Company was required to test all existing goodwill and intangible assets with indefinite useful lives for impairment as of January 1, 2002, on a “reporting unit” basis. A reporting unit is generally the same as an operating segment, unless discrete financial information is prepared and regularly reviewed by management at a “component” level, generally one level below the operating segment level. In this case, the component is the reporting unit. A fair value approach was used to test goodwill for impairment. Under the fair value approach, an impairment charge would be recognized for the amount, if any, by which the carrying amount of goodwill exceeds its fair value. Fair values were determined primarily using discounted cash flows and when available, comparative market multiples. The Company completed the required testing during the second quarter 2002.

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

Additionally, in connection with the transitional impairment tests performed upon the adoption of SFAS 142, the Company reported a $21.8 million goodwill impairment loss in the Business and IT services reporting unit (a component of the Company’s Strategic Private Companies segment). The fair value of that reporting unit was determined by estimating the present value of future cash flows and by reviewing the valuations of comparable public companies. In accordance with SFAS 142, this loss is presented as a cumulative effect of a change in accounting principle in the Consolidated Statements of Operations as of January 1, 2002.

SAFEGUARD SCIENTIFICS, INC.

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

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


			Three Months Ended June 30,						Six Months Ended June 30,

			2002			2001			2002			2001

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




Net loss before change in accounting principle			$	(33,909	)	$	(110,472	)	$	(74,647	)	$	(360,215	)




Add back goodwill amortization




		— consolidated companies		—			3,014			—			6,019




		— equity method companies		—			6,764			—			14,495

Adjusted net loss before change in accounting principle				(33,909	)		(100,694	)		(74,647	)		(339,701	)




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

Adjusted net loss			$	(33,909	)	$	(100,694	)	$	(96,037	)	$	(339,701	)

Impact on Basic Earnings Per Share:
Net loss before change in accounting principle			$	(0.29	)	$	(0.94	)	$	(0.64	)	$	(3.07	)




Add back goodwill amortization




	— consolidated companies			—			0.02			—			0.05




	— equity method companies			—			0.06			—			0.12

Adjusted net loss before change in accounting principle				(0.29	)		(0.86	)		(0.64	)		(2.90	)




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

Adjusted net loss			$	(0.29	)	$	(0.86	)	$	(0.82	)	$	(2.90	)






Impact on Fully Diluted Earnings Per Share:




Net loss before change in accounting principle			$	(0.29	)	$	(0.95	)	$	(0.65	)	$	(3.08	)




Add back goodwill amortization




	— consolidated companies			—			0.03			—			0.05




	— equity method companies			—			0.06			—			0.13





Adjusted net loss before change in accounting principle				(0.29	)		(0.86	)		(0.65	)		(2.90	)




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

Adjusted net loss			$	(0.29	)	$	(0.86	)	$	(0.83	)	$	(2.90	)

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


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

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




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




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




Additions		18,346			—			18,450		908		37,704




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




Impairment charges		—			(329	)		—		—		(329	)

Balance at June 30, 2002	$	49,875		$	—		$	19,865	$	104,440	$	174,180

SAFEGUARD SCIENTIFICS, INC.

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

Intangible assets with definite useful lives are amortized over their respective estimated useful lives to their estimated residual values. The following table provides a summary of the Company’s intangible assets with definite useful lives:


				June 30, 2002

		Gross
	Amortization	Carrying		Accumulated
	Period	Value		Amortization		Net

				(in thousands)
				(unaudited)




Customer-related	6-11 years	$	15,467	$	7,920	$	7,547




Contract-related	2-3 years		2,840		777		2,063




Technology-related	2-17 years		484		246		238

Total		$	18,791	$	8,943	$	9,848


				December 31, 2001

		Gross
	Amortization	Carrying		Accumulated
	Period	Value		Amortization		Net

				(in thousands)




Customer-related	6-11 years	$	15,467	$	6,690	$	8,777




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




Technology-related	2-17 years		373		149		224

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

Amortization expense related to intangible assets was $0.9 million and $1.9 million for the three and six months ended June 30, 2002 and $0.5 million and $1.1 million for the three and six months ended June 30, 2001, respectively. The following table provides estimated future amortization expense related to intangible assets:


	Total

	(in thousands)
	(unaudited)




Remainder of 2002	$	1,890




2003		3,191




2004		2,502




2005		587




2006 and thereafter		1,678

	$	9,848

SAFEGUARD SCIENTIFICS, INC.

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

4. OTHER NEW ACCOUNTING PRONOUNCEMENTS

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

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

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

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

5. COMPREHENSIVE LOSS

Comprehensive loss is the change in equity of a business enterprise from transactions and other events and circumstances from non-owner sources. Excluding net loss, the Company’s source of comprehensive loss is from net unrealized appreciation (depreciation) on its holdings classified as available-for-sale. Reclassification adjustments result from the recognition in net loss of unrealized gains or losses that were included in comprehensive loss in prior periods.

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


		Three Months Ended June 30,						Six Months Ended June 30

		2002			2001			2002			2001

		(in thousands)
		(unaudited)




Net Loss		$	(33,909	)	$	(110,472	)	$	(96,037	)	$	(360,215	)

Other Comprehensive Income (Loss), Before Taxes:




	Unrealized holding losses in available-for-sale securities		(84	)		(2,809	)		(344	)		(4,891	)




	Reclassification adjustments		74			(4,009	)		629			4,571




Related Tax (Expense) Benefit:




	Unrealized holding losses in available-for-sale securities		29			983			120			1,712




	Reclassification adjustments		(26	)		1,403			(220	)		(1,600	)

Other Comprehensive Income (Loss)			(7	)		(4,432	)		185			(208	)

Comprehensive Loss		$	(33,916	)	$	(114,904	)	$	(95,852	)	$	(360,423	)

SAFEGUARD SCIENTIFICS, INC.

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

6. RECLASSIFICATIONS

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

7. FINANCIAL INSTRUMENTS

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

The net gain recognized during the three and six months ended June 30, 2002 was $0.5 million and $1.2 million. This amount reflects 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 $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 Loss, Net in the Consolidated Statements of Operations.

The Company currently intends to settle the remaining liability of $86 million in August 2002 by delivering the remaining 1.4 million shares of Tellabs. This liability is included in Other Current Liabilities on the Consolidated Balance Sheets. The August 2002 settlement will reduce Trading Securities and Other Current Liabilities by approximately $86 million in the third quarter of 2002. This settlement will have no impact on cash.

8. TRADING AND AVAILABLE-FOR-SALE SECURITIES

Trading Securities

The fair market value of trading securities consisted of the following:


	June 30,		December 31,
	2002		2001

	(in thousands)
	(unaudited)





Tellabs (a)	$	86,378	$	175,728




Palm (b)		—		14,211




VerticalNet		1,684		14,732




Other		207		882

	$	88,269	$	205,553

SAFEGUARD SCIENTIFICS, INC.

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

(a) As discussed in Note 7, the Company settled a portion of its liability entered into in connection with the first hedge of Tellabs holdings by delivering 2.0 million shares of Tellabs in March 2002. The remaining liability will be settled in August 2002 by delivering all of the remaining Tellabs shares.

(b) The Company sold all of its holdings in Palm in the first quarter of 2002.

Available-for-Sale Securities

Available-for-sale securities consisted of the following:

At June 30, 2002


			Unrealized
			Holding		Fair
	Cost		Gains		Value

	(in thousands)
	(unaudited)





Pac-West Telecomm	$	1,087	$	—	$	1,087




Other public companies		6		3,313		3,319

	$	1,093	$	3,313	$	4,406

At December 31, 2001


			Unrealized
			Holding			Fair
	Cost		Gains (Losses)			Value

	(in thousands)





Pac-West Telecomm	$	1,642	$	(283	)	$	1,359




Other public companies		152		3,311			3,463

	$	1,794	$	3,028		$	4,822

9. 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, 2002 and December 31, 2001.


		June 30,		December 31,
		2002		2001

		(in thousands)
		(unaudited)





Equity Method




	Public Companies	$	21,759	$	32,178




	Non-Public Companies		4,814		23,923




	Private Equity Funds		50,474		62,168

			77,047		118,269




Cost Method




	Non-Public Companies		5,929		7,950




	Private Equity Funds		4,274		6,221




Advances to Affiliates			—		500

		$	87,250	$	132,940

SAFEGUARD SCIENTIFICS, INC.

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

The market value of the Company’s public companies accounted for under the equity method was $71 million at June 30, 2002 and $161 million at December 31, 2001. Of the total decline, $28 million relates to ChromaVision, which is not included in the equity ownership balance at June 30, 2002, as it was consolidated effective in June 2002. The remaining decline is due to an overall decline in market valuations as a result of current economic conditions.

During management’s ongoing review of the recoverability of recorded carrying value versus fair value, it was determined that the carrying value of goodwill and certain other intangible assets were not fully recoverable. For the three months ended June 30, 2002 and 2001, the Company recorded impairment charges totaling $7.2 million and $39.4 million, respectively. Impairment charges associated with equity method companies for the three months ended June 30, 2002 and 2001 of $4.4 million and $20.6 million are included in Equity Loss on the Consolidated Statements of Operations. Impairment charges related to consolidated and cost method companies for the three months ended June 30, 2002 and 2001 of $2.8 million and $18.8 million are included in Other loss, Net (Note 13) in the Consolidated Statements of Operations.

For the six months ended June 30, 2002 and 2001, the Company recorded impairment charges totaling $19.1 million and $81.4 million, respectively. Impairment charges associated with equity method companies for the six months ended June 30, 2002 and 2001 of $12.7 million and $58.6 million are included in Equity Loss on the Consolidated Statements of Operations. Impairment charges related to consolidated and cost method companies for the six months ended June 30, 2002 and 2001 of $6.4 million and $22.8 million are included in Other loss, Net (Note 13) in the Consolidated Statements of Operations. The amount of the impairment charge was determined by comparing the carrying value of the affiliate to fair value.

10. DEBT

The following is a summary of long-term debt:


	June 30,			December 31,
	2002			2001

	(in thousands)
	(unaudited)





Parent company and other recourse debt	$	21,649		$	22,224




Subsidiary debt (non-recourse to parent)		3,399			5,675

Total debt		25,048			27,899




Current maturities of long-term debt		(7,194	)		(7,761	)

Long-term debt	$	17,854		$	20,138

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

Parent company and other recourse debt includes primarily mortgage obligations ($17.2 million), bank credit facilities ($4.0 million) and capital lease obligations ($0.5 million). These obligations bear interest at fixed rates between 7.75% to 9.75%, and variable rates between 72% of the prime rate (4.75% at June 30, 2002) and prime plus 1%.

SAFEGUARD SCIENTIFICS, INC.

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

At June 30, 2002, CompuCom has a $25 million working capital facility and a $125 million receivables securitization facility. Consistent with its financing requirements, CompuCom reduced the working capital facility from $50 million to $25 million in May 2002. The working capital facility, which had a May 2002 maturity date but has been extended to a October 2002 maturity date, bears interest at a rate of LIBOR plus an agreed-upon spread and is secured by a lien on CompuCom’s assets. CompuCom expects the working capital facility to be renewed prior to its maturity date. Availability under the working capital facility is subject to a borrowing base calculation. As of June 30, 2002, availability under the working capital facility was $25 million. No amounts were outstanding under the working capital facility as of June 30, 2002 and December 31, 2001. Terms of the working capital facility limit the amounts available for capital expenditures and dividends. 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 special purpose subsidiary (SPS). The risk that CompuCom bears from bad debt losses on trade receivables sold is addressed in its allowance for doubtful accounts. 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. CompuCom records these transactions as sales of accounts receivable. 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. CompuCom is retained as servicer of the receivables; however, the cost of servicing the receivables is not material. Discounts associated with the sale of receivables totaled $0.5 million and $0.9 million for the three and six months ended June 30, 2002, respectively, and $1.5 million and $3.7 million for the three and six months ended June 30, 2001, respectively, and are included in Interest and Financing Expenses on the Consolidated Statements of Operations. Amounts outstanding as sold receivables as of June 30, 2002, consisted of two certificates totaling $60 million, one certificate for $10 million which had an April 2002 maturity date but has been extended to a September 2002 maturity date, and one certificate for $50 million with an October 2003 maturity date. CompuCom expects the $10 million certificate to be renewed at its maturity date. Both facilities are subject to CompuCom’s compliance with selected financial covenants and ratios.

Subsidiary debt includes bank credit facilities, term loans and capital lease obligations of consolidated partner companies. These obligations bear interest at fixed rates ranging between 7.0% and 12% and variable rates consisting of the prime rate plus 1%.

Aggregate maturities of long-term debt during future years are (in millions): $6.0 — 2002; $2.0 — 2003; $1.3 — 2004; $0.6 — 2005; $0.6 — 2006; and $14.5 — thereafter.

11. STOCK-BASED COMPENSATION

The Company made an offer to its employees to exchange stock options held by these employees for restricted shares of the Company’s stock. Under the exchange program, each employee with an outstanding stock option with an exercise price in excess of $15.00 per share was offered the opportunity to exchange the options for shares of restricted stock. In order to participate in the exchange, a participant had to exchange all eligible options held. The shares of restricted stock were issued on January 22, 2002, and vest on the later of July 22, 2002, or the date on which the unvested eligible option exchanged for the restricted shares would have vested. Vesting will be accelerated upon certain circumstances. Until the restricted stock vests, the shares are generally subject to forfeiture in the event an employee leaves the Company for a reason other than a termination for cause. As a result of the exchange, the Company issued 537,878 shares of restricted stock in January 2002 in return for 2,038,071 stock options that were canceled. As of June 30, 2002, total options available for future grant totaled 3.7 million.

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

SAFEGUARD SCIENTIFICS, INC.

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

The following tables reflect the effect on the Company’s outstanding options of the exchange program:


				Weighted Average
	Shares			Exercise Price

	(in thousands)





Outstanding at December 31, 2001		12,472		$	15.80




Options canceled/forfeited under exchange program		(2,038	)		36.94

		10,434		$	11.68

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

Total compensation expense for restricted stock issuances was $1.0 million and $1.9 million for the three and six months ended June 30, 2002.

Pro Forma Disclosures – Stock Options Issued to Employees and Directors

The Company, its subsidiaries and its partner companies that are accounted for under the equity method apply APB 25 and related interpretations in accounting for stock option plans. The Company provides pro forma disclosures on an annual basis to reflect what the Company’s consolidated net loss and loss per share would have been reduced to if compensation cost related to options had been recorded under SFAS 123. At December 31, 2001, the Company’s unamortized compensation expense related to options it issued to its employees was $36.5 million. At June 30, 2002, this amount was reduced to $12.5 million, primarily as a result of the Company’s January 2002 option exchange program.

SAFEGUARD SCIENTIFICS, INC.

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

12. RESTRUCTURING

During the first quarter of 2000, CompuCom effected a restructuring plan designed to reduce its cost structure by closing its distribution facility located in Houston, Texas, closing and consolidating three office facilities, and reducing its workforce. As a result, CompuCom recorded a restructuring charge of $5.2 million. During the fourth quarter of 1998, CompuCom recorded a $16.4 million restructuring charge, primarily consisting of costs associated with the closing of facilities and disposing of related fixed assets as well as employee severance and benefits related to a reduction in workforce.

The following table provides a summary rollforward by category of the activity in CompuCom’s restructuring accrual for the six months ended June 30, 2002:


	Accrual at		Cash			Accrual at
	12/31/01		Payments			6/30/02

	(in thousands)
	(unaudited)





Lease termination costs	$	1,861	$	(154	)	$	1,707

The remaining accrual at June 30, 2002 is reflected in Accrued Expenses on the Consolidated Balance Sheets and relates to eight leases for former office sites that have not been terminated, two of which have not been sublet. CompuCom believes the restructuring accrual is adequate. Differences, if any, between the estimated amount accrued and actual amounts paid will be reflected in operating expenses in future periods.

SAFEGUARD SCIENTIFICS, INC.

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

13. OTHER LOSS, NET

Other loss, net, consists of the following:


	Three Months Ended June 30,						Six Months Ended June 30,

	2002			2001			2002			2001

	(in thousands)						(in thousands)
	(unaudited)						(unaudited)





Gain (loss) on sale of public holdings, net	$	(17	)	$	1,551		$	(1,183	)	$	1,392




Gain on sale of private partner companies, net		4,726			1,454			10,523			1,518




Gain on distributions from private equity funds, net		—			—			486			—




Unrealized gain (loss) on Tellabs and related forward sales contracts, net		527			(12,196	)		1,242			(16,528	)




Unrealized loss on other trading securities, net		(6,015	)		(272	)		(13,718	)		(1,126	)




Impairment charges		(2,770	)		(18,837	)		(6,430	)		(22,831	)




Other		152			—			152			—

	$	(3,397	)	$	(28,300	)	$	(8,928	)	$	(37,575	)

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

During 2002, the Company received $2.9 million and $9.0 million in the three and six months ended June 30, 2002 related to the release of escrowed proceeds from the sale of a partner company in 2000. The net gain on the sale of private partner companies was $4.7 million and $10.5 million for the three and six months ended June 30, 2002.

The net gain recognized during the three and six months ended June 30, 2002 related to the Company’s holdings in Tellabs was $0.5 million and $1.2 million. This amount reflects 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 $22.3 million gain on the fair value of the hedging contract, reduced by a $21.1 million loss gain on the fair value of the Tellabs holdings for the six months ended June 30, 2002. This gain is reflected in Other Loss, Net in the Consolidated Statements of Operations.

Impairment charges reflect certain holdings accounted for under the consolidation or cost method judged to have experienced an other than temporary decline in value (Note 9).

14. INCOME TAXES

Income taxes are accounted for under the asset and liability method whereby deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis, using the tax rate expected to be in effect when the taxes are actually paid or recovered. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance.

The Company’s consolidated income tax expense recorded for the three and six months ended June 30, 2002 was $1.9 million and $3.1 million, net of a recorded valuation allowance of $12.9 million and $27.6 million. The Company recorded a valuation allowance against its deferred tax assets since it is more likely than not that these assets will not be realized in future years.

SAFEGUARD SCIENTIFICS, INC.

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

15. NET LOSS PER SHARE

The calculations of net loss per share were:


	Three Months Ended June 30,						Six Months Ended June 30,

	2002			2001			2002			2001

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




Net loss prior to cumulative effect of change in accounting principle	$	(33,909	)	$	(110,472	)	$	(74,647	)	$	(360,215	)




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

Net loss after cumulative effect of change in accounting principle	$	(33,909	)	$	(110,472	)	$	(96,037	)	$	(360,215	)

Average common shares outstanding		117,572			117,300			117,548			117,269

Basic prior to cumulative effect of change in accounting principle	$	(0.29	)	$	(0.94	)	$	(0.64	)	$	(3.07	)




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

Basic after cumulative effect of change in accounting principle	$	(0.29	)	$	(0.94	)	$	(0.82	)	$	(3.07	)

Diluted:




Net loss prior to cumulative effect of change in accounting principle	$	(33,909	)	$	(110,472	)	$	(74,647	)	$	(360,215	)




Effect of public holdings		(714	)		(389	)		(1,170	)		(744	)

Adjusted net loss	$	(34,623	)	$	(110,861	)	$	(75,817	)	$	(360,959	)

Average common shares outstanding		117,572			117,300			117,548			117,269

Diluted prior to cumulative effect of change in accounting principle	$	(0.29	)	$	(0.95	)	$	(0.65	)	$	(3.08	)

Net loss after cumulative effect of change in accounting principle	$	(33,909	)	$	(110,472	)	$	(96,037	)	$	(360,215	)




Effect of public holdings		(714	)		(389	)		(1,244	)		(744	)

Adjusted net loss	$	(34,623	)	$	(110,861	)	$	(97,281	)	$	(360,959	)

Average common shares outstanding		117,572			117,300			117,548			117,269

Diluted after cumulative effect of change in accounting principle	$	(0.29	)	$	(0.95	)	$	(0.83	)	$	(3.08	)

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, 2002, excludes 1.8 million and 1.7 million shares of non-vested restricted stock.

Approximately 0.1 million and 0.2 million weighted average common stock equivalents related to stock options were excluded from the denominator in the calculation of diluted loss per share for the three and six months ended June 30, 2002 and 0.1 million and 0.5 million for the three and six months ended June 30, 2001 because their effect was anti-dilutive. Approximately 8.3 million shares representing the weighted average effect of assumed conversion of the convertible subordinated notes were excluded in all periods presented from the denominator in the calculation of diluted loss per share because their effect was anti-dilutive.

SAFEGUARD SCIENTIFICS, INC.

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

16. PARENT COMPANY FINANCIAL INFORMATION

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

Parent company financial information is provided to present the financial position and results of operations of the Company as if the less than wholly owned consolidated companies (see Note 2) were accounted for under the equity method of accounting for all periods presented during which the Company owned its interest in these companies. Parent company financial statements include the results of the Company’s wholly-owned subsidiaries including aligne and Lever 8 Solutions.

Parent Company Balance Sheets


			June 30,		December 31,
			2002		2001

			(in thousands)
			(unaudited)
Assets




	Cash and cash equivalents		$	192,485	$	171,531




	Restricted cash			3,612		8,033




	Trading securities			88,269		205,553




	Income tax receivable			—		62,647




	Other current assets			13,420		18,299

		Total current assets		297,786		466,063




	Ownership interests in and advances to affiliates			278,111		274,389




	Available-for-sale securities			4,406		4,822




	Note receivable — related party			24,983		25,046




	Other			50,855		71,009

		Total Assets	$	656,141	$	841,329

Liabilities and Shareholders’ Equity




	Current liabilities, primarily accrued expenses and accounts payable		$	17,695	$	23,632




	Other current liabilities			85,670		171,804

		Total current liabilities		103,365		195,436




	Long-term debt			16,416		16,676




	Other long-term liabilities			11,495		10,541




	Convertible subordinated notes			200,000		200,000




	Shareholders’ equity			324,865		418,676

		Total Liabilities and Shareholders’ Equity	$	656,141	$	841,329

SAFEGUARD SCIENTIFICS, INC.

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

Debt includes primarily mortgage obligations bearing interest at fixed rates between 7.75% to 9.75%, and variable rates of 72% of the prime rate (4.75% at June 30, 2002) and prime plus 1%.

Aggregate maturities of long-term debt during future years are (in millions): $0.4 — 2002; $0.6 — 2003; $0.5 — 2004; $0.5 — 2005; $0.6 — 2006; and $14.6 — thereafter.

Parent Company Statements of Operations


		Three Months Ended June 30,						Six Months Ended June 30,

		2002			2001			2002			2001

		(in thousands)						(in thousands)
		(unaudited)						(unaudited)





Revenue		$	12,744		$	16,434		$	26,287		$	35,350






Operating expenses:




	Cost of sales		4,487			7,966			11,136			15,580




	Selling		611			458			1,403			872




	General and administrative		14,690			17,905			27,138			35,334




	Depreciation and amortization		446			2,145			919			4,336

			20,234			28,474			40,596			56,122

			(7,490	)		(12,040	)		(14,309	)		(20,772	)




Other loss, net			(3,456	)		(28,300	)		(6,913	)		(37,575	)




Interest and financing expense, net			(2,922	)		(2,864	)		(7,515	)		(5,612	)

Loss before income taxes and equity loss			(13,868	)		(43,204	)		(28,737	)		(63,959	)




Income taxes			(9	)		(2,193	)		(9	)		7,826




Equity loss			(20,032	)		(65,075	)		(45,476	)		(304,082	)

Net loss prior to cumulative change in accounting principle			(33,909	)		(110,472	)		(74,222	)		(360,215	)




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

Net loss		$	(33,909	)	$	(110,472	)	$	(96,037	)	$	(360,215	)

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

SAFEGUARD SCIENTIFICS, INC.

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

Parent Company Statements of Cash Flows


			Six Months Ended June 30,

			2002			2001

			(in thousands)
			(unaudited)





Net cash provided by (used in) operating activities			$	43,012		$	(10,430	)









Investing Activities




	Proceeds from sales of trading securities			13,269			11,029




	Proceeds from sales of and distributions from affiliates			16,649			20,730




	Advances to affiliates			(4,897	)		(12,582	)




	Repayment of advances to affiliates			—			955




	Acquisitions of ownership interests in affiliates and subsidiaries, net cash acquired			(51,091	)		(48,927	)




	Capital expenditures			(346	)		(3,018	)




	Advances to related party, net			(588	)		(26,499	)




	Repayments of advances to related party, net			1,459			—




	Decrease in restricted cash and short-term investments			4,421			86,728




	Other, net			(683	)		(955	)

	Net cash provided by (used in) investing activities			(21,807	)		27,461









Financing Activities




	Borrowings on long-term debt			—			1,976




	Repayments on long-term debt			(251	)		(1,198	)




	Issuance of Company common stock, net			—			139

		Net cash (used in) provided by financing activities		(251	)		917

Net Increase in Cash and Cash Equivalents				20,954			17,948




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

Cash and Cash Equivalents at end of year			$	192,485		$	135,722

SAFEGUARD SCIENTIFICS, INC.

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

17. OPERATING SEGMENTS

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

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

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

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

SAFEGUARD SCIENTIFICS, INC.

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

Three Months Ended June 30, 2002


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

			(in thousands)
			(unaudited)
Revenue




	Product sales		$	2,484		$	129		$	827		$	350,290		$	353,730		$	—		$	353,730




	Service sales			9,199			5,961			2,085			75,852			93,097			—			93,097




	Other			—			6,033			—			—			6,033			(8	)		6,025

				11,683			12,123			2,912			426,142			452,860			(8	)		452,852




Operating expenses




	Cost of sales — product			405			327			16			324,011			324,759			—			324,759




	Cost of sales — service			6,129			3,926			429			47,893			58,377			—			58,377




	Selling and service			6,901			860			3,175			22,600			33,536			—			33,536




	General and administrative			4,506			6,728			95			18,720			30,049			6,091			36,140




	Depreciation and amortization			794			584			708			4,687			6,773			337			7,110

		Total operating expenses		18,735			12,425			4,423			417,911			453,494			6,428			459,922

				(7,052	)		(302	)		(1,511	)		8,231			(634	)		(6,436	)		(7,070	)




	Other income (loss), net			—			2,041			(5,563	)		—			(3,522	)		125			(3,397	)




	Interest and financing expense, net			(74	)		69			(267	)		(241	)		(513	)		(2,738	)		(3,251	)

Net income (loss) before equity loss, minority interest, income taxes and change in accounting principle				(7,126	)		1,808			(7,341	)		7,990			(4,669	)		(9,049	)		(13,718	)




Income taxes				—			—			—			—			—			(1,944	)		(1,944	)




Minority interest				1,628			2			765			(3,003	)		(608	)		—			(608	)




Equity income (loss)				(895	)		(12,978	)		(3,798	)		—			(17,671	)		32			(17,639	)

Net Income (Loss)			$	(6,393	)	$	(11,168	)	$	(10,374	)	$	4,987		$	(22,948	)	$	(10,961	)	$	(33,909	)

SAFEGUARD SCIENTIFICS, INC.

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

Three Months Ended June 30, 2001


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

		(in thousands)
		(unaudited)
Revenue




	Product sales	$	5,728		$	—		$	1,305		$	419,718		$	426,751		$	—		$	426,751




	Service sales		11,093			—			1,855			68,991			81,939			—			81,939




	Other		—			6,253			—			—			6,253			81			6,334

			16,821			6,253			3,160			488,709			514,943			81			515,024




Operating expenses




	Cost of sales — product		331			—			473			381,824			382,628			—			382,628




	Cost of sales — service		8,635			—			450			43,410			52,495			—			52,495




	Selling and service		3,161			—			1,645			31,298			36,104			—			36,104




	General and administrative		3,023			6,319			619			22,249			32,210			10,402			42,612




	Depreciation and amortization		821			106			753			5,720			7,400			2,366			9,766

	Total operating expenses		15,971			6,425			3,940			484,501			510,837			12,768			523,605

			850			(172	)		(780	)		4,208			4,106			(12,687	)		(8,581	)




	Other loss, net		—			(10,487	)		(11,275	)		—			(21,762	)		(6,538	)		(28,300	)




	Interest and financing expense, net		(44	)		8			(5	)		(748	)		(789	)		(2,966	)		(3,755	)

Net income (loss) before equity loss, minority interest and income taxes			806			(10,651	)		(12,060	)		3,460			(18,445	)		(22,191	)		(40,636	)




	Income taxes		—			—			—			—			—			(3,071	)		(3,071	)




	Minority interest		—			—			—			(1,248	)		(1,248	)		—			(1,248	)




	Equity loss		—			(29,514	)		(6,118	)		—			(35,632	)		(29,885	)		(65,517	)

Net Income (Loss)		$	806		$	(40,165	)	$	(18,178	)	$	2,212		$	(55,325	)	$	(55,147	)	$	(110,472	)

SAFEGUARD SCIENTIFICS, INC.

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

Six Months Ended June 30, 2002


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

			(in thousands)
			(unaudited)
Revenue




	Product sales		$	2,865		$	1,948		$	2,125		$	609,559		$	616,497		$	—		$	616,497




	Service sales			17,553			10,594			3,882			143,531			175,560			—			175,560




	Other			—			11,562			—			—			11,562			37			11,599

				20,418			24,104			6,007			753,090			803,619			37			803,656




	Operating expenses




	Cost of sales – product			457			979			32			556,549			558,017			—			558,017




	Cost of sales – service			13,007			7,447			830			92,013			113,297			—			113,297




	Selling and service			11,151			1,678			4,459			45,735			63,023			—			63,023




	General and administrative			7,393			14,105			1,145			36,278			58,921			11,853			70,774




	Depreciation and amortization			1,214			1,762			1,383			9,474			13,833			678			14,511

		Total operating expenses		33,222			25,971			7,849			740,049			807,091			12,531			819,622

				(12,804	)		(1,867	)		(1,842	)		13,041			(3,472	)		(12,494	)		(15,966	)




	Other loss, net			(16	)		5,228			(14,265	)		—			(9,053	)		125			(8,928	)




	Interest and financing expense, net			(150	)		(135	)		(343	)		(550	)		(1,178	)		(7,518	)		(8,696	)

Net income (loss) before equity loss, minority interest and income taxes				(12,970	)		3,226			(16,450	)		12,491			(13,703	)		(19,887	)		(33,590	)




	Income taxes			—			—			—			—			—			(3,062	)		(3,062	)




	Minority interest			2,274			135			765			(4,623	)		(1,449	)		—			(1,449	)




	Equity loss			(1,958	)		(27,458	)		(6,999	)		—			(36,415	)		(131	)		(36,546	)

Net Income (Loss) before cumulative effect of change in accounting principle				(12,654	)		(24,097	)		(22,684	)		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)			$	(34,469	)	$	(24,097	)	$	(22,684	)	$	8,293		$	(72,957	)	$	(23,080	)	$	(96,037	)

SAFEGUARD SCIENTIFICS, INC.

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

Six Months Ended June 30, 2001


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

		(in thousands)
		(unaudited)
Revenue




	Product sales	$	7,207		$	—		$	2,928		$	902,079		$	912,214		$	—		$	912,214




	Service sales		22,173			—			3,732			140,918			166,823			—			166,823




	Other		—			12,801			—			—			12,801			161			12,962

			29,380			12,801			6,660			1,042,997			1,091,838			161			1,091,999




Operating expenses




	Cost of sales – product		1,735			—			959			822,095			824,789			—			824,789




	Cost of sales – service		16,880			—			832			91,744			109,456			—			109,456




	Selling and service		6,324			—			3,258			64,417			73,999			—			73,999




	General and administrative		5,936			12,739			1,435			44,260			64,370			18,435			82,805




	Depreciation and amortization		1,504			176			1,460			11,389			14,529			4,931			19,460

	Total operating expenses		32,379			12,915			7,944			1,033,905			1,087,143			23,366			1,110,509

			(2,999	)		(114	)		(1,284	)		9,092			4,695			(23,205	)		(18,510	)




	Other loss, net		—			(13,329	)		(17,708	)		—			(31,037	)		(6,538	)		(37,575	)




	Interest and financing expense, net		(105	)		20			(83	)		(2,477	)		(2,645	)		(5,857	)		(8,502	)

Net income (loss) before equity loss, minority interest and income taxes			(3,104	)		(13,423	)		(19,075	)		6,615			(28,987	)		(35,600	)		(64,587	)




	Income taxes		—			—			—			—			—			6,186			6,186




	Minority interest		—			—			—			(2,298	)		(2,298	)		—			(2,298	)




	Equity loss		—			(67,076	)		(150,924	)		—			(218,000	)		(81,516	)		(299,516	)

Net Income (Loss)		$	(3,104	)	$	(80,499	)	$	(169,999	)	$	4,317		$	(249,285	)	$	(110,930	)	$	(360,215	)

SAFEGUARD SCIENTIFICS, INC.

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


		Three Months Ended June 30,						Six Months Ended June 30,

		2002			2001			2002			2001

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




Corporate




	Corporate operations	$	(9,017	)	$	(13,915	)	$	(20,018	)	$	(25,544	)




	Results of operations – dispositions		—			(29,621	)		—			(73,413	)




	Goodwill amortization		—			(8,540	)		—			(18,159	)




Income tax (expense) benefit			(1,944	)		(3,071	)		(3,062	)		6,186

		$	(10,961	)	$	(55,147	)	$	(23,080	)	$	(110,930	)

18. BUSINESS COMBINATIONS

Acquisitions by the Company

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

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

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

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

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

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

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

SAFEGUARD SCIENTIFICS, INC.

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

Acquisitions by Subsidiaries

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

Pro Forma Financial Information

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


	Three Months Ended June 30,						Six Months Ended June 30,

	2002			2001			2002			2001

	(in thousands except per share data)
	(unaudited)





Total revenues	$	454,691		$	538,471		$	810,338		$	1,139,354




Net loss	$	(35,332	)	$	(112,751	)	$	(99,147	)	$	(364,779	)




Diluted loss per share	$	(0.31	)	$	(0.97	)	$	(0.85	)	$	(3.12	)

19. RELATED PARTY TRANSACTIONS

In May 2001, we consummated a definitive agreement with our former Chairman and CEO, Mr. Musser, under which we loaned him $26.5 million. The loan bears interest at an annual rate of 7% and is payable on demand at any time after January 1, 2003. Mr. Musser granted us security interests in securities and real estate as collateral. Until April 30, 2006, we will have recourse only against the collateral. After April 30, 2006, we will have recourse against Mr. Musser personally, except with respect to certain ongoing compensation to be received by Mr. Musser. We have the right to sell the collateral at any time and apply the net after-tax proceeds from the sales of collateral against amounts outstanding on the loan. The outstanding balance of the loan at June 30, 2002 was approximately $25.0 million. Proceeds received from dispositions of the collateral may not be sufficient to repay the loan in full.

20. COMMITMENTS AND CONTINGENCIES

Litigation Arising Out Of The Initial Public Offering of Opus360 Corporation

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

SAFEGUARD SCIENTIFICS, INC.

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

The cases are brought against Opus360, its officers and directors (including the former Company officer), the Company, CompuCom, and Opus360’s underwriters. In these cases, the plaintiffs allege, among other things, that the prospectus and registration statement for Opus360’s initial public offering contained misrepresentations and/or omissions regarding: (1) Opus360’s products, including Opus Xchange; (2) Opus360’s cash flow and liquidity, including its need for additional financing in the 12 month period following the initial public offering; and (3) Opus360’s relationships with its customers. Plaintiffs assert claims under Sections 11, 12 and 15 of the Securities Act of 1933. Plaintiffs seek damages in an amount in excess of $70 million. The cases have been consolidated into a single proceeding and the court has approved the designation of a lead plaintiff and the retention of lead plaintiffs’ counsel. Plaintiffs have filed a consolidated and amended complaint. Safeguard and the other defendants have moved to dismiss this complaint for failure to state a claim upon which relief may be granted. While the outcome of this litigation is uncertain, the Company believes that it has valid defenses to plaintiffs’ claims and intends to defend the lawsuits vigorously.

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, the loan to Mr. Musser, the guarantee of certain margin debt and the consequences thereof on Safeguard’s stock price, violated the federal securities laws. Plaintiffs allege claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934.

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

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

Other

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

In connection with its ownership interests in certain affiliates, the Company has guaranteed $7 million of bank loan and other commitments, and has committed capital of approximately $59 million to various affiliates, to be funded over the next several years, including approximately $16 million which is expected to be funded in the next twelve months.

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

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.

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

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

General

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

In the past, we have focused on early-stage, technology companies in software, communications and e-Services in the “time-to-market” stage of development. Time-to-market is the process of getting from an idea to a commercially viable product, and involves the conception and development of a technology or product.

We shifted our strategy to build on specific paths to value creation for our shareholders. We will first focus on acquiring and developing business and IT services companies where positive and recurring cash flow opportunities exist, as well as the potential for growth and operational improvement. Our goal in this sector is to become self-sustainable from internally generated cash flow. We will build on our base of existing companies in the business and IT services area and will seek to acquire controlling ownership in other service companies, which have the proper profile to allow us to leverage our operational and management expertise in order to maximize the companies’ cash generating potential. We are focusing on building software companies with compelling technology and market potential for growth in the “time-to-volume” stage of development. Time-to-volume is the process of taking a commercially viable product and building a viable company with distribution channels, a sales and marketing organization, and a corporate infrastructure that has the capability to grow rapidly and achieve market success. Our focus in software will be to provide capital, operating leadership and post-acquisition involvement to build the go-to-market model, and enhance the likelihood of success of these companies. Once progress has been made in the services and software areas, we expect to continue to support entrepreneurs in creating new technologies and applications by acquiring interests in their companies. Our goal in this area will be to continue to allow our shareholders and us to participate in the rewards of value creation inherent in technology innovation. Although this strategy represents a shift in focus for us, the goal of providing long-term shareholder value through operating and managing promising companies to realize their full potential remains the same.

We expect business and IT service companies to provide the operating cash flow for us, existing and to-be-acquired software companies to provide growth and value generation and emerging technologies to allow our shareholders to participate in entrepreneurial new technologies. Our strategy is to create long-term value as an operating company that focuses on technology-related asset acquisitions. These assets will be developed through superior operations and management.

In order to focus capital resources on our strategy, we have reviewed our investing posture with respect to private equity funds, and have concluded that we likely will not enter into new investment commitments to off-campus funds in the immediate future. We are also evaluating our current participation in off-campus private equity funds. During 2002, we sold our interest in an off-campus fund and reduced our unfunded commitments by over $6 million. We continue to participate in the management of 12 private equity funds which are located on our corporate campus, which have total committed capital of more than $2.6 billion.

The private equity funds help us to provide operational and management support to our partner companies. The private equity funds provide acquisition syndication opportunities, increase our capital base, facilitate strategic partner development and increase our geographic penetration. The personal relationships and expertise of the professionals employed by these funds are important resources for developing and evaluating acquisition opportunities. We frequently refer opportunities that do not fit our operating strategy to an appropriate fund. The funds may pursue broader investment strategies and may invest at earlier stages and at less significant ownership percentages than us. The diversification within the funds allows us to identify and take advantage of a broader range of emerging technologies, to maintain relationships with a greater number of promising entrepreneurs and to evaluate perceived shifts in technologies.

Our operations are classified into the following operating segments: i) Strategic Private Companies; ii) Other Private Companies and Funds; iii) Public Companies (excluding CompuCom); and iv) CompuCom.

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

Effect of Various Accounting Methods on the Consolidated Financial Statements

The various interests that we acquire in our partner companies and private equity funds are accounted for under three methods: consolidation, equity and cost. The applicable accounting method is generally determined based on our voting interest in the entity.

Our Consolidated Financial Statements include the accounts of the Company and all subsidiaries in which we directly or indirectly own more than 50% of the outstanding voting securities. If this majority voting ownership is likely to be temporary, we account for the company under the equity method. Under the consolidation method, a partner company’s results of operations are included within our Consolidated Statements of Operations. Participation of other partner company shareholders in the income or losses of a consolidated partner company is reflected in Minority Interest in our Consolidated Statements of Operations. Minority interest adjusts our consolidated net income (loss) to reflect only our share of the earnings or losses of the consolidated partner company.

Partner companies and private equity funds whose results we do not consolidate, but over whom we exercise significant influence, or for whom majority voting ownership is likely to be temporary, are generally accounted for under the equity method of accounting. Whether or not we exercise significant influence with respect to a partner company depends on an evaluation of several factors including, among others, our representation on the partner company’s board of directors and ownership level, which is generally a 20% to 50% interest in the voting securities of the partner company, including voting rights associated with our holdings in common, preferred and other convertible instruments in the partner company. We also account for our interests in some private equity funds under the equity method of accounting, based on our respective general and limited partner interests. Under the equity method of accounting, a partner company’s results of operations are not reflected within our Consolidated Statements of Operations; however, our share of the income or losses of the partner company is reflected in Equity Loss in our Consolidated Statements of Operations. When the carrying value of a partner company accounted for under the equity method is reduced to zero, we no longer include our share of losses of that company in our operating results unless we have outstanding guarantee obligations or have committed additional financing. When that company subsequently reports income, we will not record our share of such income until it equals the amount of our share of losses not previously recognized. The share of income or losses is generally based upon our voting ownership of the partner company’s securities, which may be different from the percentage of the economic ownership of the partner company held by us.

The effect of an affiliate’s net results of operations on our results of operations is the same under either the consolidation method of accounting or the equity method of accounting, because under each of these methods only our share of the income or losses of an affiliate is reflected in our net results of operations in the Consolidated Statements of Operations.

Partner companies and private equity funds that we do not account for under either the consolidation or the equity method of accounting are accounted for under the cost method of accounting. Under the cost method, the Company’s share of the income or losses of such entities is not included in the Consolidated Statements of Operations. However, the effect of the change in market value of cost method holdings classified as trading securities is reflected in our results of operations during each reporting period.

Many of our partner companies that we account for under the equity method or consolidation method are technology-related companies with limited operating histories that have not generated significant revenues and have incurred substantial losses in prior years. We expect these losses to continue in 2002. We expect to continue to acquire interests in more technology-related companies that may have operating losses when we acquire them. Additionally, we expect certain of our existing partner companies to continue to invest in their products and services and to recognize operating losses related to those activities.

We periodically assess the impairment of goodwill and other intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors that we consider important which could trigger an impairment review include significant underperformance relative to historical or expected future operating results, significant changes in the manner or use of the acquired assets or the strategy for the overall business, significant negative industry or economic trends or a decline in its stock price for a sustained period. Additionally, on a continuous basis, but no less frequently than at the end of each quarterly reporting period, we evaluate the carrying value of our ownership interests in and advances to each of our affiliates for possible impairment based on achievement of business plan objectives and milestones, the fair value of each ownership interest in and advances to each affiliate relative to its carrying value, the financial condition and prospects of the affiliate and other relevant factors. The business plan objectives and milestones we consider include, among others, those related to financial performance such as achievement of planned financial results or completion of capital raising activities, and those that are not primarily financial in nature, such as the hiring of key employees or the establishment of strategic relationships. We then determine whether there has been an other than temporary decline in the carrying value of the affiliate. Impairment charges are determined by comparing the estimated fair value of a partner company with the carrying value. The fair value of our ownership interests in and advances to privately held partner companies is generally determined based on the value at which independent third parties have invested or have committed to invest in these companies, or the value negotiated with the partner company’s founders. The fair value of our ownership interests in private equity funds is generally determined based on the value of our pro rata portion of the funds’ net assets.

We operate in an industry which is rapidly evolving and extremely competitive. It is reasonably possible that our accounting estimates with respect to the ultimate recoverability of the carrying value, including goodwill, could change in the near term and that the effect of such changes on our Consolidated Financial Statements could be material. While we believe that the current recorded carrying values of our affiliates are not impaired, there can be no assurance that our future results will confirm this assessment or that a significant write-down or write-off of the carrying value will not be required in the future.

Effect of Various Accounting Methods on the Presentation of our Consolidated Financial Statements

The presentation of our financial statements may differ from period to period primarily due to the applicable accounting method used for recognizing our equity interests in the operating results of an affiliate. For example, the presentation of our financial statements is significantly influenced by the consolidated results of operations of CompuCom, which we consolidate based on our 60% voting interest.

To understand our net results of operations and financial position without the effect of consolidating our consolidated partner companies, please refer to Note 16 to our Consolidated Financial Statements, which summarizes our parent company statements of operations and balance sheets and presents consolidated partner companies as if they were accounted for under the equity method of accounting. Our share of the income or losses of the consolidated partner

companies is included in Equity Loss in the Parent Company Statements of Operations. The carrying value of these companies is included in Ownership Interests In and Advances to Affiliates on the Parent Company Balance Sheets.

Although the Parent Company Statements of Operations and Balance Sheets presented in Note 16 reflect our historical results, they are not necessarily indicative of future parent company balance sheets and statements of operations.

Net Results of Operations

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


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

Consolidated	Agari Mediaware (70%) aligne (100%) Lever8 Solutions (100%) Mantas (63%) Protura (56%) Sotas (75%)	PTM Productions (84%)	Tangram (58%) ChromaVision Medical Systems (51%)	CompuCom (60%)









Equity		Aptas (45%) Kanbay (30%) Nextone (30%) Persona (31%) QuestOne (31%) Zer0to5ive (33%)	DocuCorp (20%) eMerge Interactive (16%) Internet Capital Group (13%) Sanchez (24%) USDATA (34%)









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

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

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

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

Three Months Ended June 30, 2002


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

			(in thousands)
			(unaudited)
Revenue




	Product sales		$	2,484		$	129		$	827		$	350,290		$	353,730		$	—		$	353,730




	Service sales			9,199			5,961			2,085			75,852			93,097			—			93,097




	Other			—			6,033			—			—			6,033			(8	)		6,025

				11,683			12,123			2,912			426,142			452,860			(8	)		452,852




Operating expenses




	Cost of sales – product			405			327			16			324,011			324,759			—			324,759




	Cost of sales – service			6,129			3,926			429			47,893			58,377			—			58,377




	Selling and service			6,901			860			3,175			22,600			33,536			—			33,536




	General and administrative			4,506			6,728			95			18,720			30,049			6,091			36,140




	Depreciation and amortization			794			584			708			4,687			6,773			337			7,110

		Total operating expenses		18,735			12,425			4,423			417,911			453,494			6,428			459,922

				(7,052	)		(302	)		(1,511	)		8,231			(634	)		(6,436	)		(7,070	)




	Other income (loss), net			—			2,041			(5,563	)		—			(3,522	)		125			(3,397	)




	Interest and financing expense, net			(74	)		69			(267	)		(241	)		(513	)		(2,738	)		(3,251	)

Net income (loss) before equity loss, minority interest, income taxes and change in accounting principle				(7,126	)		1,808			(7,341	)		7,990			(4,669	)		(9,049	)		(13,718	)




Income taxes				—			—			—			—			—			(1,944	)		(1,944	)




Minority interest				1,628			2			765			(3,003	)		(608	)		—			(608	)




Equity income (loss)				(895	)		(12,978	)		(3,798	)		—			(17,671	)		32			(17,639	)

	Net Income (Loss)		$	(6,393	)	$	(11,168	)	$	(10,374	)	$	4,987		$	(22,948	)	$	(10,961	)	$	(33,909	)

Three Months Ended June 30, 2001


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

		(in thousands)
		(unaudited)
Revenue




	Product sales	$	5,728		$	—		$	1,305		$	419,718		$	426,751		$	—		$	426,751




	Service sales		11,093			—			1,855			68,991			81,939			—			81,939




	Other		—			6,253			—			—			6,253			81			6,334

			16,821			6,253			3,160			488,709			514,943			81			515,024




Operating expenses




	Cost of sales – product		331			—			473			381,824			382,628			—			382,628




	Cost of sales – service		8,635			—			450			43,410			52,495			—			52,495




	Selling and service		3,161			—			1,645			31,298			36,104			—			36,104




	General and administrative		3,023			6,319			619			22,249			32,210			10,402			42,612




	Depreciation and amortization		821			106			753			5,720			7,400			2,366			9,766

	Total operating expenses		15,971			6,425			3,940			484,501			510,837			12,768			523,605

			850			(172	)		(780	)		4,208			4,106			(12,687	)		(8,581	)




	Other loss, net		—			(10,487	)		(11,275	)		—			(21,762	)		(6,538	)		(28,300	)




	Interest and financing expense, net		(44	)		8			(5	)		(748	)		(789	)		(2,966	)		(3,755	)

Net income (loss) before equity loss, minority interest and income taxes			806			(10,651	)		(12,060	)		3,460			(18,445	)		(22,191	)		(40,636	)




	Income taxes		—			—			—			—			—			(3,071	)		(3,071	)




	Minority interest		—			—			—			(1,248	)		(1,248	)		—			(1,248	)




	Equity loss		—			(29,514	)		(6,118	)		—			(35,632	)		(29,885	)		(65,517	)

Net Income (Loss)		$	806		$	(40,165	)	$	(18,178	)	$	2,212		$	(55,325	)	$	(55,147	)	$	(110,472	)

Six Months Ended June 30, 2002


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

			(in thousands)
			(unaudited)
Revenue




	Product sales		$	2,865		$	1,948		$	2,125		$	609,559		$	616,497		$	—		$	616,497




	Service sales			17,553			10,594			3,882			143,531			175,560			—			175,560




	Other			—			11,562			—			—			11,562			37			11,599

				20,418			24,104			6,007			753,090			803,619			37			803,656




	Operating expenses




	Cost of sales – product			457			979			32			556,549			558,017			—			558,017




	Cost of sales – service			13,007			7,447			830			92,013			113,297			—			113,297




	Selling and service			11,151			1,678			4,459			45,735			63,023			—			63,023




	General and administrative			7,393			14,105			1,145			36,278			58,921			11,853			70,774




	Depreciation and amortization			1,214			1,762			1,383			9,474			13,833			678			14,511

	Total operating Expenses			33,222			25,971			7,849			740,049			807,091			12,531			819,622

				(12,804	)		(1,867	)		(1,842	)		13,041			(3,472	)		(12,494	)		(15,966	)




	Other loss, net			(16	)		5,228			(14,265	)		—			(9,053	)		125			(8,928	)




	Interest and financing expense, net			(150	)		(135	)		(343	)		(550	)		(1,178	)		(7,518	)		(8,696	)

Net income (loss) before equity loss, minority interest and income taxes				(12,970	)		3,226			(16,450	)		12,491			(13,703	)		(19,887	)		(33,590	)




	Income taxes			—			—			—			—			—			(3,062	)		(3,062	)




	Minority interest			2,274			135			765			(4,623	)		(1,449	)		—			(1,449	)




	Equity loss			(1,958	)		(27,458	)		(6,999	)		—			(36,415	)		(131	)		(36,546	)

Net Income (Loss) before cumulative effect of change




		in accounting principle		(12,654	)		(24,097	)		(22,684	)		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)			$	(34,469	)	$	(24,097	)	$	(22,684	)	$	8,293		$	(72,957	)	$	(23,080	)	$	(96,037	)

Six Months Ended June 30, 2001


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

		(in thousands)
		(unaudited)
Revenue




	Product sales	$	7,207		$	—		$	2,928		$	902,079		$	912,214		$	—		$	912,214




	Service sales		22,173			—			3,732			140,918			166,823			—			166,823




	Other		—			12,801			—			—			12,801			161			12,962

			29,380			12,801			6,660			1,042,997			1,091,838			161			1,091,999




Operating expenses




	Cost of sales – product		1,735			—			959			822,095			824,789			—			824,789




	Cost of sales – service		16,880			—			832			91,744			109,456			—			109,456




	Selling and service		6,324			—			3,258			64,417			73,999			—			73,999




	General and administrative		5,936			12,739			1,435			44,260			64,370			18,435			82,805




	Depreciation and amortization		1,504			176			1,460			11,389			14,529			4,931			19,460

	Total operating expenses		32,379			12,915			7,944			1,033,905			1,087,143			23,366			1,110,509

			(2,999	)		(114	)		(1,284	)		9,092			4,695			(23,205	)		(18,510	)




	Other loss, net		—			(13,329	)		(17,708	)		—			(31,037	)		(6,538	)		(37,575	)




	Interest and financing expense, net		(105	)		20			(83	)		(2,477	)		(2,645	)		(5,857	)		(8,502	)

Net income (loss) before equity loss, minority interest and income taxes			(3,104	)		(13,423	)		(19,075	)		6,615			(28,987	)		(35,600	)		(64,587	)




	Income taxes		—			—			—			—			—			6,186			6,186




	Minority interest		—			—			—			(2,298	)		(2,298	)		—			(2,298	)




	Equity loss		—			(67,076	)		(150,924	)		—			(218,000	)		(81,516	)		(299,516	)

Net Income (Loss)		$	(3,104	)	$	(80,499	)	$	(169,999	)	$	4,317		$	(249,285	)	$	(110,930	)	$	(360,215	)


		Three Months Ended June 30,						Six Months Ended June 30,

		2002			2001			2002			2001

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




Corporate




	Corporate operations	$	(9,017	)	$	(13,915	)	$	(20,018	)	$	(25,544	)




	Results of operations – dispositions		—			(29,621	)		—			(73,413	)




	Goodwill amortization		—			(8,540	)		—			(18,159	)




Income tax (expense) benefit			(1,944	)		(3,071	)		(3,062	)		6,186

		$	(10,961	)	$	(55,147	)	$	(23,080	)	$	(110,930	)

Corporate expenses include the costs of providing operations and management support to our partner companies. Results of operations - dispositions includes the results for partner companies which were disposed of prior to the new segments being developed. Goodwill is no longer amortized as a result of the adoption of SFAS 142 effective January 2002.

Strategic Private Companies


	Three Months Ended June 30,						Six Months Ended June 30,

	2002			2001			2002			2001

	(in thousands)						(in thousands)
	(unaudited)						(unaudited)





Revenue	$	11,683		$	16,821		$	20,418		$	29,380




Total operating expenses		18,735			15,971			33,222			32,379

		(7,052	)		850			(12,804	)		(2,999	)




Other loss, net		—			—			(16	)		—




Interest expense, net		(74	)		(44	)		(150	)		(105	)




Minority interest		1,628			—			2,274			—




Equity loss		(895	)		—			(1,958	)		—

		(6,393	)		806			(12,654	)		(3,104	)




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

	$	(6,393	)	$	806		$	(34,469	)	$	(3,104	)

Revenue. Revenue consists of sales by aligne, Lever8 Solutions and Sotas and, for 2002, sales by Agari and Mantas. Revenue decreased $5.1 million and $9.0 million for the three and six months ended June 30, 2002 compared to the prior year periods. Of this decrease, $4.5 million and $7.6 million relate to a decline in consulting revenue at aligne and Lever8 for the three and six months ended June 30, 2002 compared to the prior year period. The decrease is due to reduced demand for IT services and continued market softness. During the first quarter, we integrated two existing partner companies, Palarco, a provider of global IT solutions, and aligne Solutions (formerly K Consultants), an IT management organization, to create a full service IT solutions company, Lever8 Solutions. Lever8 provides tailored software, staffing and infrastructure outsourcing solutions to fit the needs of its clients, which span multiple industries, including pharmaceuticals, consumer packaged goods, manufacturing, healthcare, financial services and technology. The remaining decrease relates to a decline in revenue at SOTAS partially offset by the inclusion of revenue for Mantas subsequent to consolidating its results in April 2002.

Operating Expenses. Operating expenses increased $2.8 million and $0.8 million for the three and six months ended June 30, 2002 compared to the prior year periods. Of the increases, $8.0 million and $10.9 million of operating expenses related to Agari, Mantas and Protura subsequent to consolidating their results in 2002. Excluding these companies, total operating expenses decreased $5.3 million and $10.0 million for the three and six months ended June 30, 2002 compared to the prior year period. This is due to a $1.9 million and $5.3 million decrease in costs at SOTAS and a $3.4 million and $4.7 million decrease in costs at aligne and Lever8 Solutions for the three and six months ended June 30, 2002 compared to the prior year period. During the second half of 2001 and the first half of 2002, these companies took steps to reduce their costs to better align their overall cost structure and organization with anticipated demand for their products and services. These steps, including a reduction in the number of consultants and functional support personnel, were taken as a result of the continued decline in demand for technology services.

Equity Loss. Equity loss for the three and six months ended June 30, 2002 includes our share of Mantas’ results of operations. We acquired a controlling interest in Mantas in April 2002. As a result, we have consolidated Mantas’ results in the second quarter of 2002.

Other Private Companies and Funds


	Three Months Ended June 30,						Six Months Ended June 30,

	2002			2001			2002			2001

	(in thousands)						(in thousands)
	(unaudited)						(unaudited)





Revenue	$	12,123		$	6,253		$	24,104		$	12,801




Operating expenses		12,425			6,425			25,971			12,915

		(302	)		(172	)		(1,867	)		(114	)




Other income (loss), net		2,041			(10,487	)		5,228			(13,329	)




Interest and financing expense, net		69			8			(135	)		20




Minority interest		2			—			135			—




Equity loss		(12,978	)		(29,514	)		(27,458	)		(67,076	)

	$	(11,168	)	$	(40,165	)	$	(24,097	)	$	(80,499	)

Revenue. Revenue includes management fees charged to private equity funds for operational and management services and, in 2002, sales by PTM Productions and Aptas [for the six months ended]. Revenue increased $5.9 million and $11.3 million for the three and six months ended June 30, 2002 compared to the prior year periods. The increase is due to an additional $6.1 million and $12.5 million of revenue related to the operations of PTM and Aptas subsequent to consolidating their results, partially offset by reduced management fees for the three and six months ended June 30, 2002 compared to the prior year period.

Operating Expenses. Operating expenses increased $6.0 million and $13.1 million for the three and six months ended June 30, 2002 compared to the prior year period. The increase is due to an additional $6.2 million and $14.4 million of costs related to the operations of PTM and Aptas subsequent to consolidating their results, partially offset by reduced costs at the private equity funds for the three and six months ended June 30, 2002 compared to the prior year period.

Other Income (Loss), Net. Other income (loss), net includes $2.9 million and $9.0 million for the three and six months ended June 30, 2002 related to the release of escrowed proceeds from the sale of a partner company in 2000. Other income (loss), net also includes $2.6 million and $3.6 million of impairment charges for the three and six months ended June 30, 2002 and $12.1 million and $15.0 million for the three and six months ended June 30, 2001. Impairment charges reflect certain holdings judged to have experienced an other than temporary decline in value.

Equity Loss. Equity loss fluctuates with the number of companies accounted for under the equity method, our voting ownership percentage in these companies and the net results of operations of these companies. Equity loss decreased $16.5 million and $39.6 million for the three and six months ended June 30, 2002 compared to the prior year periods. Of the total decrease, $1.7 million and $11.7 million relate to our share of losses of a private equity funds. An additional $6.3 million and $9.9 million of the decrease relates to impairment charges on affiliates accounted for under the equity method, and $2.3 million and $5.5 million of the decrease is due to discontinuing the recording of equity losses of partner companies whose carrying value was reduced to $0 during 2001. The remaining decline is primarily due to reduced operating losses at certain companies.

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

As a result, equity losses could continue to be significant. It is reasonably possible that the impairment factors evaluated by management will change in subsequent periods, given that we operate in a volatile business environment. This could result in additional material impairment charges in future periods.

Public Companies (excluding CompuCom)


	Three Months Ended June 30,						Six Months Ended June 30,

	2002			2001			2002			2001

	(in thousands)						(in thousands)
	(unaudited)						(unaudited)





Revenue	$	2,912		$	3,160		$	6,007		$	6,660




Operating expenses		4,423			3,940			7,849			7,944

		(1,511	)		(780	)		(1,842	)		(1,284	)




Other loss, net		(5,563	)		(11,275	)		(14,265	)		(17,708	)




Interest and financing expense, net		(267	)		(5	)		(343	)		(83	)




Minority interest		765			—			765			—




Equity loss		(3,798	)		(6,118	)		(6,999	)		(150,924	)

	$	(10,374	)	$	(18,178	)	$	(22,684	)	$	(169,999	)

Revenue and Operating Expenses. Revenue decreased $0.2 million and $0.7 million for the three and six months ended June 30, 2002 compared to the prior year periods. Of the total decline, $0.7 million and $1.2 million relate to Tangram, partially offset by a $0.4 million increase related to the operations of ChromaVision, which was consolidated effective June 2002.

Other Loss, Net.


	Three Months Ended June 30,						Six Months Ended June 30,

	2002			2001			2002			2001

	(in thousands)						(in thousands)
	(unaudited)						(unaudited)





Gain (loss) on sale of companies	$	(17	)	$	1,374		$	(1,183	)	$	1,215




Unrealized gain (loss) on Tellabs and related forward sale contracts, net		527			(12,196	)		1,242			(16,528	)




Unrealized loss on other trading securities		(6,015	)		(272	)		(13,718	)		(1,126	)




Impairment charges		(58	)		(181	)		(606	)		(1,269	)

	$	(5,563	)	$	(11,275	)	$	(14,265	)	$	(17,708	)

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

We recognized a net gain of $0.5 million and $1.2 million for the three and six months ended June 30, 2002 related to our holdings in Tellabs. This amount reflects 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 $22.3 million gain on the fair value of the hedging contract, reduced by a $21.1 million loss gain on the fair value of the Tellabs holdings for the six months ended June 30, 2002.

Impairment charges reflect certain equity holdings judged to have experienced an other than temporary decline in value (Note 9).

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

Excluding equity loss attributable to Internet Capital Group, equity loss was $3.8 million and $7.0 million for the three and six months ended June 30, 2002 and $6.1 million and $14.4 million for the three and six months ended June 30, 2001, which represents a decrease of $2.3 million for the three months ended June 30, 2002 and $7.4 million for the six months ended June 30, 2002. This decrease is primarily due to reduced losses at certain partner companies.

Many of our equity method partner companies are technology-related companies with limited operating histories that have not generated significant revenues and have incurred substantial losses in prior years. We expect these losses to continue in 2002. We expect to continue to acquire interests in more technology-related companies that may have operating losses when we acquire them and that we may account for under the equity method. Additionally, we expect certain of our existing partner companies to continue to invest in their products and services and to recognize operating losses related to those activities.

CompuCom


	Three Months Ended June 30,						Six Months Ended June 30,

	2002			2001			2002			2001

	(in thousands)						(in thousands)
	(unaudited)						(unaudited)





Revenue	$	426,142		$	488,709		$	753,090		$	1,042,997




Cost of Sales		371,904			425,234			648,562			913,839

		54,238			63,475			104,528			129,158




Other operating expenses		46,007			59,267			91,487			120,066

		8,231			4,208			13,041			9,092




Interest and financing expense, net		(241	)		(748	)		(550	)		(2,477	)




Minority interest		(3,003	)		(1,248	)		(4,623	)		(2,298	)

		4,987			2,212			7,868			4,317




Cumulative effect of change in accounting principle		—			—			425			—

	$	4,987		$	2,212		$	8,293		$	4,317

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

Revenue. Revenue, which consists of product revenue and service revenue, decreased $63 million or 13% for the three months ended June 30, 2002 and $290 million or 28% for the six months ended June 30, 2002 as compared to the same periods in 2001. Of the total decrease for the three months ended June 30, 2002, $70 million or 17% was attributable to product revenue, which was partially offset by an increase of $7 million or 10% attributable to service revenue. Of the total decrease for the six months ended June 30, 2002, $293 million or 32% was attributable to product revenue, which was partially offset by an increase in service revenue of $3 million or 2% as compared to the same period in 2001. CompuCom attributes the product revenue decrease primarily to general economic conditions that have resulted in lower demand for

personal computer products mainly from its Fortune 1000 client base. Product revenue was negatively impacted by certain clients electing to purchase product directly from manufacturers. The increase in service revenue was primarily due to services directly related to the 2001 acquisitions, partially offset by a decline in field engineering revenue.

Cost of Sales/Gross Margin. Product gross margin for the three and six months ended June 30, 2002 was 7.5% and 8.7% compared to 9.0% and 8.9% for the same period in 2001. CompuCom believes this decrease is due to an increase in the proportion of lower margin software revenue relative to total product revenue, lower volume incentive dollars from suppliers as well as increased buying from its traditionally larger, higher volume clients as a result of more selective aggressive pricing by CompuCom. Service gross margin remained relatively flat for the three and six months ended June 30, 2002 at 36.9% and 35.9% compared to 37.1% and 34.9% for the same period in 2001.

Due to 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 22.4% and 23.8% for the three and six months ended June 30, 2002 as compared to the same periods in 2001. CompuCom attributes this decrease to its own cost management efforts related to selling and service expenses and general administrative expenses, including personnel and related costs and infrastructure costs.

Interest and Financing Expense, Net. Interest and financing expense, net was $0.2 million and $0.7 million for the three months ended June 30, 2002 and 2001 and $0.6 million and $2.5 million for the six months ended June 30, 2002 and 2001. The decrease is primarily due to CompuCom’s continued improvement in management of working capital, lower financing requirements due to the decline in product revenues and the effect of lower effective interest rates in the six months ended June 30, 2002 as compared to the six months ended June 30, 2001.

Reconciling Items

Corporate Operations


	Three Months Ended June 30,					Six Months Ended June 30,

	2002			2001		2002		2001

	(in thousands)					(in thousands)
	(unaudited)					(unaudited)





General and administrative costs, net	$	5,130		$	10,300	$	9,895	$	18,253




Stock-based compensation		969			21		1,921		21




Depreciation and amortization		337			590		678		1,267




Interest expense, net		2,738			2,966		7,518		5,857




Other		(157	)		38		6		146

	$	9,017		$	13,915	$	20,018	$	25,544

Our general and administrative expenses consist primarily of employee compensation, outside services such as legal, accounting and consulting, and travel-related costs. General and administrative expenses decreased $5.2 million and $8.4 million for the three and six months ended June 30, 2002 when compared to 2001. The decrease is due to certain cost reduction efforts undertaken during 2001, including reduced compensation and travel-related costs as a result of a reduction in headcount and the reduction in the use of outside consulting services.

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

Interest expense, net, decreased $0.2 million for the three months ended June 30, 2002 compared to 2001. The decrease is due to the elimination of accretion of the obligation and amortization of the cost of our initial Tellabs forward sale contract which was settled in March 2002, partially offset by lower interest rates earned on invested balances. Interest expense, net increased $1.7 million for the six months ended June 30, 2002 when compared to 2001. The increased expense is due to lower interest rates earned on invested balances, partially offset by the elimination of financing fees incurred in the first

quarter of 2001 and the elimination of costs associated with the initial Tellabs contract settled in March 2002. Interest includes 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.

In March 2002, we settled the liability related to our first hedge of our Tellabs holdings by delivering Tellabs shares. We intend to settle the second hedge of our Tellabs holdings by delivering Tellabs shares in August 2002.

Income Taxes. Our consolidated income tax expense recorded for the three and six months ended June 30, 2002, was $1.9 million and $3.1 million, net of recorded valuation allowance of $12.9 million and $27.6 million. We have recorded a valuation allowance to reduce our deferred tax asset to an amount that is more likely than not to be realized in future years. Our consolidated effective tax rate before valuation allowance increased to 34.4% for the three months ended June 30, 2002 compared to 32.5% for the prior year period. For the six months ended June 30, 2002 our consolidated effective tax rate before valuation allowance increased to 34.3% compared to 33.3% for the prior year period. This rate differs from the federal statutory rate due to miscellaneous non-deductible expenses.

Liquidity And Capital Resources

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

Proceeds from sales of and distributions from affiliates for the six months ended June 30, 2002 were $29.8 million.

In May 2002, we entered into a credit agreement providing for borrowings’, issuances of letters of credit and guarantees of up to $25 million. We occasionally use letters of credit to provide transactional support to our partner companies. This credit facility matures in May 2003 and bears interest at the prime rate for outstanding borrowings. The credit facility is subject to an unused commitment fee of 0.125% which is subject to reduction based on deposits maintained at the bank. The facility requires cash collateral equal to two times any outstanding amounts under the facility. This facility provides us additional flexibility to implement our strategy and support our partner companies. As of June 30, 2002, a guarantee totaling $5.0 million was outstanding.

In August 1999, in order to mitigate our market exposure and generate cash, we entered into a forward sale contract related to 3.4 million shares of our holdings in Tellabs common stock. We pledged these shares of Tellabs under a contract that expires in August 2002 and, in return, received cash. In March 2002, we settled $91 million of the liability entered into in connection with our first hedge of our Tellabs holdings by delivering 2.0 million shares of Tellabs. We currently intend to settle the remaining liability of $86 million in August 2002 by delivering the remaining 1.4 million shares. These settlements have no impact on our cash balances.

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

At June 30, 2002 we have guaranteed $7 million of bank loan and other commitments. Additionally, we have committed capital of approximately $59 million, including commitments made in prior years to various affiliates, to be funded over the next several years, including approximately $16 million which is expected to be funded in the next twelve months.

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

At June 30, 2002, CompuCom has a $25 million working capital facility and a $125 million receivables securitization facility. Consistent with its financing requirements, CompuCom reduced the working capital facility to $25 million in May 2002. The working capital facility, which had a May 2002 maturity date but has been extended to a October 2002 maturity date, bears interest at a rate of LIBOR plus an agreed-upon spread and is secured by a lien on CompuCom’s assets. CompuCom expects the working capital facility to be renewed prior to its maturity date. Availability under the working capital facility is subject to a borrowing base calculation. As of June 30, 2002, availability under the working capital facility was $25 million. No amounts were outstanding under the working capital facility as of June 30, 2002 and December 31, 2001. Terms of the working capital facility limit the amounts available for capital expenditures and dividends. 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 special purpose subsidiary (SPS). The risk that CompuCom bears from bad debt losses on trade receivables sold is addressed in its allowance for doubtful accounts. 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. CompuCom records these transactions as sales of accounts receivable. 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. CompuCom is retained as servicer of the receivables; however, the cost of servicing the receivables is not material. Amounts outstanding as sold receivables as of June 30, 2002, consisted of two certificates totaling $60 million, one certificate for $10 million which had an April 2002 maturity date but has been extended to a September 2002 maturity date, and one certificate for $50 million with an October 2003 maturity date. CompuCom expects the $10 million certificate to be renewed at its maturity date. 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’ rebate programs. Under these programs, CompuCom is required to pay a higher initial amount for product and claim a rebate from the manufacturer to reduce the final cost. 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. These programs have been at times a material factor in CompuCom’s financing needs. As of both June 30, 2002 and December 31, 2001, CompuCom was owed approximately $14 million, respectively, under these vendor rebate 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 provided from operating activities was $30 million for the six months ended June 30, 2002 compared to $174 million during the same prior year period. The decrease was due to a $190 million decline in cash provided by operating activities at CompuCom, primarily due to changes in accounts receivable and inventory when compared to the prior year periods. This decrease was partially offset by a $63 million tax refund received by the Company in 2002.

Consolidated working capital decreased to $302 million at June 30, 2002 compared to $349 million at December 31, 2001. This decrease is primarily due to the sale of Palm shares and the decline in the market value of VerticalNet.

From July 1, 2002 through August 14, 2002, we funded $1.1 million to acquire ownership interests in or make advances to affiliates.

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, 2002.

Recent Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets”. Under SFAS No. 142, we are required to perform transitional impairment tests for its goodwill and intangible assets with indefinite useful lives as of the date of adoption. Step one of the transitional goodwill impairment test, which compares the fair values of our reporting units to their respective carrying values, will be completed by June 30, 2002. Under step two of SFAS No. 142, any transitional impairment losses for goodwill will be recognized as the cumulative effect of a change in accounting principle in the Consolidated Statements of Operations.

In August 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations” (SFAS 143). SFAS 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. We will adopt SFAS 143 in fiscal year 2003. We do not expect the provisions of SFAS 143 to have any significant impact on our financial condition or results of operations.

In October 2001, the FASB issued SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which supercedes SFAS 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.” We are required to adopt SFAS 144 in fiscal year 2002. We do not expect the adoption of SFAS 144 to have a significant impact on our financial statements.

Factors That May Affect Future Results

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

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

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

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

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

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

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

• Our ability to execute our strategy.

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to equity price risks on the marketable portion of our securities. These securities include equity positions in companies in the technology industry, many of which have experienced significant volatility in their stock prices. Historically, we have not attempted to reduce or eliminate our market exposure on securities (except the Tellabs transactions as described below). Based on closing market prices at June 30, 2002, the fair market value of our holdings in public securities was approximately $221 million (excluding our holdings in Tellabs). A 20% decrease in equity prices would result in an approximate $44 million decrease in the fair value of our publicly traded securities.

The Company has an outstanding forward sale contract related to its holdings in Tellabs. We pledged shares of Tellabs for three years in exchange for cash. At the end of the term, we have the option to deliver cash or Tellabs shares with a value determined by the stock price of Tellabs at maturity. We intend to deliver our remaining shares of Tellabs in August 2002 to settle the contract in full. This settlement will have no impact on our cash balances.

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

PART II

OTHER INFORMATION

Item 1. Legal Proceedings

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

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

Item 4. Submission of Matters to a Vote of Security Holders

The Company held its Annual Meeting of Shareholders on May 22, 2002. At the meeting the shareholders voted in favor of the following items listed in the Proxy Statement dated April 19, 2002


I.	ELECTION OF DIRECTORS:	FOR		WITHHELD

	Vincent G. Bell, Jr.		94,692,919		2,049,122




	Walter W. Buckley, III		94,713,186		2,028,855




	Anthony L. Craig		91,011,481		5,730,560




	Robert A. Fox		95,058,476		1,683,565




	Robert E. Keith, Jr.		94,200,473		2,541,568




	Jack L. Messman		95,213,067		1,528,974




	Russell E. Palmer		94,468,908		2,273,133




	John W. Poduska, Sr.		94,656,047		2,085,994

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits.


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

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

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

(b) Reports on Form 8-K. No reports on Form 8-K have been filed by the registrant during the three months ended June 30, 2002.

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 14, 2002		/s/ Anthony L. Craig
		Anthony L. Craig Chief Executive Officer and President









Date: August 14, 2002		/s/ Christopher J. Davis
		Christopher J. Davis Managing Director and Chief Financial Officer

(a)		As discussed in Note 7, the Company settled a portion of its liability entered into in connection with the first hedge of Tellabs holdings by delivering 2.0 million shares of Tellabs in March 2002. The remaining liability will be settled in August 2002 by delivering all of the remaining Tellabs shares.

(b)		The Company sold all of its holdings in Palm in the first quarter of 2002.

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

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

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

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

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

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

	•		Our ability to execute our strategy.

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