Safeguard Scientifics Inc (SFE) 2003 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. And welcome to Safeguard Scientific's third quarter 2003 conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require assistance during the call, please press star and then zero on your touch-tone phone. As a reminder this call is being recorded this call is also being webcast with slides for your viewing on Safeguard's web site at www.Safeguard.com. Two hours after the conclusion of the call, a replay will be available from Safeguard's web site or by dialing 1-800-642-1687 and entering identification number 3600839 until midnight on November 1st. At this time, I would now like to introduce you to Kara Keating Senior Corporate Counsel.

Good afternoon. I would like to remind everyone that the statements contained in this call and presentation that are not historical facts are forward-looking statements. They include, without limits risks associated with the future performance of our company, acquisitions after decisional companies, dispositions of companies, the ability to successfully integrate our acquisitions, additional financing requirements, the effect of economic conditions in the business sectors in which our companies operate, our ability to execute our strategy and other uncertainties described in the company's filing with the Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements or other information contained in this conference call and presentation. I would now like to introduce your host for today's conference, Mr. Anthony Craig, President and Chief Executive Officer of Safeguard Scientifics.

Good afternoon. I will relate to you with the legacy and the strategic subsidiaries and then an overview of our third quarter results of operations. After my remarks, Chris will provide details on Safeguard's third quarter financial results and then we'll take any questions you might have.

On slide four, during the third quarter we made significant progress on our stated objective of managing our legacy companies to contribute to our balance sheet strength and liquidity. During the quarter we completed our sales of our holdings of Internet Capital Group, bringing the aggregate proceeds of sales of Internet Capital Group in 2003 to $19.2 million. In addition, we have completed the sale of our holdings in Kanbay international to household investment funding, a subsidiary of household international, for aggregate cash proceeds of $26 million. These sales also resulted in significant gains, which Chris will discuss with you shortly. We may deploy these proceeds in a variety of ways including increasing our ownership in our strategic subsidiary as such as Mantas, as I will discuss, acquiring new strategic subsidiaries and from time to time, evaluating the purchase of a portion of our convertible notes due in 2006 or our stock.

Slide 5, our majority owned strategic subsidiaries we have announced on October 1st, the merger of two of our strategic subsidiaries SOTAS into Mantas. This reinforcements Mantas's position in risk management and should accelerate the introduction of new and exciting products for the financial services and telecommunications industries. We believe the combination of these companies, which provide financial services and telecommunication provided with state-of-the-art analytical applications that address risk management, performance management, fraud detection and operation analysis while yielding significant operational efficiencies. Mantas provides enterprise-wide anti-money laundering, surveillance and compliance software for more than a dozen of the world's largest financial institutions. SOTAS has support solutions for global fixed line and mobile communication service providers. As a stand alone relative small company, SOTAS was burdened with large infrastructure costs to support complex software products in a single vertical industry. By combining the companies such infrastructure costs are rationalized. Mantas's platform and suite of software applications is strengthened considerably and Mantas introduction to the telecom industry has been significantly accelerated. SOTAS also provided Mantas with established offshore development capacity for software, which will enhance the company's ability to quickly and cost effectively meet their client needs.

From a development standpoint we believe the marriage of Mantas behavior detection technology, with SOTAS's realtime analysis capability will fuel additional applications. Immediately following the merger Safeguard acquired an additional $13 million interest in the combined company. With this merger, and our investments, Safeguard now has an 84% primary ownership in Mantas. We believe this transaction has provided Safeguard with a tremendous opportunity to reinforce the company's leadership position in a sector predicted to exceed the $4.8 billion mark by the end of 2007. During the third quarter, Mantas was also identified in a report by the tower group as one of a small group of companies capable of addressing the anti-money launder compliance needs of large U.S. banks requiring the U.S. patriot act and the global financial services industry.

On slide 6 Alliance Consulting provided enhanced capabilities and packaged solutions as well as professional solutions as achieved its objectives for Q3. While we have noticed -- have not -- excuse me, while we have noticed improving business conditions, we have not seen any material increases in IT budgets overall. However, Alliance had some impressive client wins in the third quarter. It closed at $2.5 million extension of sales and marketing data warehouse for a top ten global pharmaceutical firm. It also closed a $1.7 million amplification development with one of the largest financial services firms this a project that's a hybrid of onshore and offshore development capabilities. Alliance has also completed multiple projects with DHL, such as integrating the IT systems of their Loomis acquisitions and warded new contracts for similar work, relating to the airborne acquisition Promovision. The cell imaging products manufacturers of the ACIS imaging system experienced several internal changes during the their quarter. As was announced in October the company implemented a reduction in force of approximately 30 employees or 30% of its total work force. In addition, Michael Schneider was promoted to Chief Operating Officer and assumed interim leadership of the company while the national search for a new CEO was undertaken. During the quarter ChromaVision had a financing line with GE commercial finance.

The third quarter 2003 revenues were $3.1 million, which was an 18% increase from the third quarter of 2002. The company also reported an increase in its installed base of units to a total of 255 billion units, compared 246 reported at the end of the second quarter. If you would like more information of this company, ChromaVision's earning call regarding its third quarter 2003 results call was held on October 23rd and is now posted on their web site.

Turning to Compucom, in what continues to be a difficult market, the company reported third quarter 2003 net earnings of $2.1 million, or 4 cents diluted per share. Third quarter 2002 earnings were $5.5 million, or 10 cents per share. Compucom recorded the third quarter 2003 total revenues of $330.7 million, down 12.5% sequentially and down approximately 20.1%, when compared to the third quarter of 2002. Safeguard holds a 58% voting interest in Compucom a leading provider of IT outsourcing technology procurement and system integration services.

As shown on slide seven, for the quarter ended September 30th, 2003, Safeguard's consolidated revenues were $373.7 million, and our consolidated income, net of mi authority interest was $18.2 million. Safeguard's consolidated revenues for our strategic initiative subsidiaries were $32 million. Our share of losses, net of minority interests was $5.1 million. Our cash balance as of September 30th is now $157 million, and as of October 28th, is $144 million.

Let me now turn the call over to Chris Davis, our Chief Financial Officer, who will provide specifics on the financials.

Thank you, Tony, and good afternoon. As you will see on slide 8, I will update you today on Safeguard's third quarter and year-to-date 2003 consolidated results. A legacy company update and an overview of the parent company cash and marketable securities.

As shown on slide 9, we reported a consolidated net income of $18.2 million dollars for the third quarter of 2003. An improvement over our third quarter 2002 consolidated net loss of $23.3 million. The improved operating results are due to a decline of $4.6 million in impairment charges, from $5.9 million in 2002, to $1.3 million in 2003. Other net gains of $31.9 million in 2003 including $17.3 million gain on sale of Kanbay and a $12.7 million gain on sales of Internet Capital Group. Net gains recorded in the same period in 2002 were $800,000. And finally, an overall decrease in our share of losses of consolidated companies.

As shown on slide 10, we reported a consolidated net loss of $400,000 for the nine months ended September 30th, 2003. A reduction over the loss in the same period of 2002, of $97.9 million, excluding the cumulative effect of a change in accounting principle. Our loss for the nine months ended September 30, 2002, including the cumulative effect adjustment, was $119.3 million. The improved operating results are due to a decline of $22.2 million in impairment charges, from $25 million in 2002, to $2.8 million in 2003. Other net gains of $49 million in 2003, including $17.3 million gain on sale of Kanbay, 1$9.2 million gain on sale of Internet Capital Group, and a $5.9 million gain on the sale of Docucorp. Gains recorded in the same period of 2002 were $11.9 million. We also had a $13 million loss in 2002 on the mark-to-market adjustment for our vertical net shares, versus a gain of $800,000 in 2003. We also had an overall decrease in our share of losses in affiliates accounted for under the equity method and finally we eliminated the accretion related to the Tell labs forward contracts settled in 2002. We have included in this quarter's press release the segment results of operations for the three and nine months ended September 30th, 2003, and the same periods in 2002. Our results show increasing revenues in our strategic initiative segment, due primarily to the inclusion of Alliance's revenues subsequent to its acquisition in December of 2002, and the inclusion of Mantas and ChromaVision revenues subsequent to acquiring a controlling interest in the second quarter of 2002. We continue to show losses in our strategic initiative segment while these companies mature and gain traction in their respective markets.

Turning to slide 11, Safeguard's parent company cash balances were $157 million, as of September 30th, 2003. And $144 million, as of October 28th, 2003. The increase from $133 million reported during our last earnings call in July, primarily reflects proceeds generated from the sale of Kanbay in September, partially offset by corporate costs and funding to acquire additional ownership interests in Mantas and SOTAS. Let me also note again that these parent company cash balances, at September 30th, 2003, exclude $142 million of additional cash balances primarily associated with our less-than-wholly-owned but consolidated subsidiaries. The value of our public company marketable securities was $179 million at September 30th, and $188 million at October 28th. This increase is attributable to the fluctuations in the value of our public company securities. During the third quarter, we completed total new investments and follow-on fundings of $10 million, including $1 million to fund existing commitments to private equity funds. These investments are included to be acquisitions of ownership interests in affiliates and subsidiaries on the parent company consolidated statements of cash flows. Included in the Q3 fundings is $5 million of funding to SOTAS to pay down their line of credit and $3 million to increase our ownership in SOTAS and Mantas by acquiring shares from minority shareholders. During the quarter we also received $48 million related to legacy company liquidations and fund distributions, primarily due to the sales of our interests this Kanbay, Vertical Net and Internet Capital Group.

In September of 2003, Safeguard sold its interest in Kanbay resulting in total net proceeds of $26 million. In August and September of 2003, Safeguard sold its interest in Vertical Net resulting in net proceeds of $1.1 million. Additionally we sold our remaining holdings of Internet Capital Group in July, resulting in additional net proceeds of $12.7 billion, bringing the aggregate proceeds of internet capital to $19.2 million. Safeguard's carrying value of its investments the reported under ownership interest in and advancements to affiliates on the company's parent company only balance sheets as reported this our form 10-K and 10-Q filings. And aggregates $245 million at September 30th, 2003, and $260 million at December 31st, 2002, as shown on slide 12. The components of the carrying value include our interest in private companies, public companies and private equity funds, but they exclude Alliance Consulting a 100% owned consolidated entity in the parent company balance sheet.

At September 30, 2003 and December 31, 2002, the carrying value of our private company investments was $33 million. At September 30th, 2003, and December 31st, 2002, the carrying value of our public company investments was $174 million, and $184 million respectively. The market value of the public company investments, as of October 28th, 2003, was $188 million. At September 30th, 2003, the carrying value of our fund interest was $38 million, versus $43 million at December 31, 2002.

I would like to turn now to providing an update for both our public and private companies and our private equity funds. We currently have seven companies in our private company portfolio, as seen on slide 13. The decline of two from June 30th, reflects the sale of Kanbay and the merger of Mantas and SOTAS on October 1st, as Tony mentioned earlier. As stated above, these seven companies have an aggregate carrying value of $33 million at September 30th, 2003, excluding the carrying value of Alliance Consulting, which is consolidated. We continue to assess our legacy companies for balance sheet and liquidity contribution on an ongoing basis, with a view towards supporting our strategic initiatives. We currently have five public companies with a market value of $179 million, as of September 30th, as seen on slide 14. With respect to our private equity funds, we currently hold general partner and limited partner interests in 11 funds on campus. These 11 private equity funds have in excess of $2.6 billion of funds committed and Safeguard's commitment to these funds is a total of $126 million. $96 million of which has already been funded, including $1 million during the third quarter. We expect the remaining $30 million will be funded over the next several years. In addition to our on-campus funds, Safeguard has investments in two other private equity funds. The aggregate size of these is approximately $146 million and Safeguard's commitment to them is $10 million, of which $9 million has already been funded. We continue to reduce our commitments to and participation in the off-campus private equity funds, and during the third quarter, we sold our interest in one of those private equity funds.

Turning to our parent company cash outlook on slide 15, remember that the parent company cash balance from period-to-period is significantly impacted by the pace of our monetization activities, the pace and the size of any acquisitions we make, and follow-on fundings to our companies and private equity funds. For these reasons, as well as the sequencing of the implementation of our strategy, it is difficult to predict a meaningful cash flow forecast at this time. However, we begin the quarter with parent company cash balances of proximately $157 million, and as we announced on October 1st, we funded $13 million to Mantas, subsequent to the merger of Mantas and SOTAS. We anticipate funding $4 million against our existing commitments to private equity funds during the remainder of 2003, based on today's commitments As we have previously said, we can't predict the pace of monetizations, cash distributions and acquisition activity. Interest paid during 2003 will include the $5 million interest payment made in June, and the second payment of $5 million due in December related to the [inaudible] subordinated ventures due in 2006. Tony and I will now take any questions that you may have.

If you would like to ask a question, please press star and then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Again, if you would like to ask a question, please press star, then the number one on your telephone keypad. There are no questions at this time. You may continue with your conference.

Thank you. We end the quarter with measurable progress in three areas. We have significantly improved liquidity, that provides us with additional flexibility to pursue our overall strategy. We have a stronger Mantas as a result of the merger and the investment of SOTAS in which we now have 84% position and continued progress in our strategic companies in their respective markets. We all, as previously continue to hone our strategy in light of ever changing market conditions and I look forward to sharing with you the details of our strategic company's accomplishments during our future calls. Thank you very much for your interest in Safeguard today.

This concludes today's Safeguard Scientifics third quarter 2003 conference call. You may now disconnect.