Safeguard Scientifics Inc (SFE) 2004 Q2 法說會逐字稿

Good morning, my name is Christy and I will be your conference facilitator. At this time I would like to welcome everyone to the Safeguard Scientifics, Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer period. If you would like to ask a question during this time simply press "*" then the number "1" on your telephone keypad. If you would like to withdraw your question press "*" then the number "2" on your telephone keypad. I would now like to turn the conference over to Janine Dusossoit, Vice President of Investor Relations. Please go ahead madam.

Thank you, good morning and welcome. We announced our second quarter earnings in a press release this morning, and it is available at our website www.safeguard.com. This call is also being webcast, with slides for your viewing on Safeguard's website. Two hours after the conclusion of the call a replay will be available from Safeguard's website or by dialing 1-800-642-1687 and referencing the call number which is 9192849. The replay will be available for five days. Before we begin our remarks, I would like to remind everyone that the statements contained in this call and in the presentation accompanying it that are not historical fact, may constitute forward-looking statements. These statements involve certain risks and uncertainties, including but not limited to, risks associated with the uncertainty of managing rapidly changing technology, limited access to capital, competition, the ability to attract and retain qualified employees, our ability to execute our strategy, the uncertainty of future performance of our companies, acquisitions and dispositions of additional companies, the inability to manage growth, government regulations and legal liabilities, additional financing requirements, labor disputes, the effects of economic conditions in the business sectors in which our companies operate, and other uncertainties as described in the Company's filings with the Securities and Exchange Commission. The Company does not assume any obligation to update any forward-looking statements or other information in this conference call -- contained in this conference call and presentation.

I would now like to introduce Tony Craig, Safeguard's President, CEO, and he will in turn introduce Chris Davis, Executive Vice President and Chief Administrative and Financial Officer. Tony.

Good morning. We were pretty busy in the second quarter and we start on slide 3. I'll share with you some highlights of our second quarter activities at the parent company and we'll do an update on the progress made by our strategic companies, a snapshot consistent with our process of increased transparency of one of our non-strategic companies. Chris Davis, will then provide details on Safeguard's financial results for the second quarter and six months. And then after that I'll come back to say a few words about acquisitions and we will take some questions.

If we go to slide 4, our strategic companies reported a 19% growth in revenues in the second quarter of 2004 as compared to the second quarter of last year. We have a strong balance sheet and now a $152 million in parent company cash as of August 3, 2004. We are therefore very well positioned to support our companies both financially and managerially and we are focused on acquiring and developing new companies that meet our criteria. Two exit events had a significant impact on Safeguard's consolidated results in the second quarter, Sanchez Computer and CompuCom, we have discussed in the previous call that it is important to put these events into context, so that you can understand the results within the framework of our long-term growth strategy. First the sale of our interest in Sanchez Computer Associates was completed on April 15 and generated a gain of $32 million. You can see the impact of this in the net income line of the non-strategic segment. We divested our 23% interest in Sanchez as part of the overall strategy of focusing on majority ownership positions.

The second exit event was related to the proposed sale of our 58% majority interest in CompuCom Systems, which we discussed in a conference call on June 1. Safeguard has filed a proxy statement with the SEC that was mailed to shareholders in July and it is accessible through our website. The proxy contains important, very detailed information about this transaction including pro forma financial statements for the three-year period ending December 31, 2003 and for the first quarter of 2004. These statements reflect the impact of the transaction on Safeguard's financial results. As you know, this transaction is projected to be completed in the third quarter of 2004 assuming all conditions to the deal have been satisfied, but it did have an impact on our second quarter results in the form of an impairment charge. Safeguard has invested a total of about $67 million to acquire its ownership interest in CompuCom and for accounting purposes over the years has booked its share of CompuCom profits as an increase in carrying value.

In the second quarter Safeguard included an impairment charge in our operating results of $23.3 million after-taxes relating to the goodwill of CompuCom. Chris will talk further about certain financial aspects of the CompuCom deal in a moment. But what I want to convey is that while the impairment charge had a significant impact on our second quarter results, we believe the long-term benefits of this transaction are very clear. By exiting our position in CompuCom we will substantially increase our financial flexibility to invest in and develop time-to-volume companies, enable them to grow, and create shareholder value over time.

Let us now turn to our strategic companies for some highlights of their operations. Revenues in the strategic company segment increased 19% in the second quarter over the same period last year and sequentially 2% from the first quarter this year. We continue to see real traction in these businesses.

On Slide 5, going first of all to Alliance. I think you know Alliance provides custom software solutions and IT consulting services to client in the Fortune 2000 market. It has extensive expertise in pharmaceuticals and financial service sector and draws on knowledge of a full time staff complimented by more than 500 consultants and independent contractors with deep industry expertise. Alliance tailors project teams to meet its client specific needs. This assembled-to-ordered model enables the teams to hit the ground running and allows Alliance to be more resilient during industry downturns. Alliance reported revenues of $23.8 million in the second quarter, a 14% increase from the 20.8 million of the second quarter a year ago. Most of the increase year-over-year was a result of greater staff utilization.

During the second quarter Alliance had a number of market successes including a three-year extension of a contract with a large pharmaceutical client, and a new financial services project in conjunction with Mantas. Earlier this year Alliance hired some very seasoned business development executives who are making in roads in targeted regions of the U.S. At the end of the quarter, Alliance had approximately 125 active projects including business intelligence and data warehousing, strategy, application development, and integration in managed services.

On slide 6, taking a look at Mantas, that's the leader of -- a leading provider of sophisticated next generation analytic applications in the areas of risk management, fraud detection, and operational analysis, primarily for financial services and telecom industries. Mantas Behavior Detection Platform can analyze billions of accounts and transactions. All in the context of one another, in order to identify the small amount of suspicious activity that needs further review.

Mantas reported second quarter 2004 revenues of $5.5 million compared with $3.3 million for the same period last year. Their financial service customers revenues increased by $1.9 million while telecom revenues increased by 400,000 when compared with the second quarter last year. Mantas has been developing new business as evidence by an announcement in May by ADP that it is providing in partnership with Mantas a fully integrated compliance system for customers of ADP’s brokerage processing services. As you know anti-money laundering is a focal point for legislatures in the banking industry and Mantas is being recognized in the business and trade media as a top rank provider of solutions. Recently Bank Technology News, the leading source for financial services technology selected Mantas as one of their 10 technology companies to watch. In addition, Mantas was named best anti-money laundering solution in the 2004 Waters magazine rankings.

Mantas begin the third quarter of 2004 with a strong financial services and telecom backlog of $41 million, up from $38 million as of March 31 this year. In July, Safeguard committed an additional $10 million of capital to Mantes of which $5 million has been funded for growth and product development.

On slide 7, ChromaVision also had an active second quarter. ChromaVision is the leading provider of automated cell imaging systems and manufacturer of the ACIS digital microscopy system. The highly accurate images it produces assist pathologists in making critical medical decisions. The Company has significant patents and a very broad FDA clearance. ChromaVision, a public company, released its second quarter 2004 results on July 22 reporting revenues of $2.4 million, up 24% from the first quarter of 2004, but down 16% from the second quarter of last year. ChromaVision’s revenues are a function of both the number of ACIS systems installed, which generate per click revenues as well as the number of systems outright sold.

In their release ChromaVision cited lower reimbursement rates in the Medicare arena for certain breast cancer tests as a factor in the revenue decline; however, they also reported an increase in ACIS system sales to research organizations and the launching of their new laboratory services. The new clinical laboratory services provides a platform to capture an additional and significant revenue stream in the diagnostics market place. Revenues in the second quarter from the start up of the new laboratory and bio-analytical services where $200,000.

During the quarter, ChromaVision also completed a private placement financing in which Safeguard participated and they also obtained a $4.5 million new equipment financing line from a unit of GE Capital to fund the growth of the lab services business. They will build out this new service over the coming months. But as they mentioned, they have begun to capture revenues already. By the end of the second quarter, ChromaVision reported it had successfully converted more than 75% of its remote pathology customers from a third party service to its new laboratory service. The latest news at ChromaVision is the appointment of the new Chief Executive Officer, Ronald or Ronny Andrews, Jr., who comes to the Company from Roche Molecular Diagnostics. If you’d like more information on ChromaVision, the conference call regarding its second quarter 2004 results is archived on their website at www.chromavision.com.

In line with the additional transparency, we are providing on our strategic companies and in response to request for insight into the rest of our companies, we thought we’d give some color on our non-strategic companies in these quarterly calls. While we will not disclose specific revenues or earnings figures for these companies individually, we will take a few minutes in each quarterly call to introduce you to a different one of these businesses, so you can learn more about the technology-based products and services they offer. We will begin with Pacific Title and Arts today and look at another company next quarter.

On slide 8, revenue in our non-strategic segment is a total of $8.2 million in the second quarter and 16 (ph) million in the 6 months ended June 30, 2004. Non-strategic segment revenues are derived primarily from Pacific Title and Arts Studio shown on slide 8, of which Safeguard owns 84%. Pac Title is a leader in feature film, post-production services in Hollywood, California. It provides digitally and optically prepared titles, credits, trailers, 2-D and 3-D special effects, film scanning and recording, sub titling and film lab services. When Safeguard first invested in Pac Title in 1997, 15% of their work was digital and 85% was chemical based. Today 95% of the work at Pac Title is digital. Pac Title may have from 25 to 30 projects in house at anytime and they work with all 7 of the major studios as well as with independent film producers. In addition to their regular post production work, they have also done preservation and restoration work for such films as the Wizard of Oz, Vertigo, and the Exorcist.

In summary, on slide 9, our strategic companies are experiencing revenue growth in 2004 and we believe they are on the way to profitability, although as we have said building great companies takes time and we typically invest at a point where they may be losing money. We have ample resources to continue to invest in their growth and to support them managerially. I'll be back in a moment to discuss acquisitions, but now let me turn the call over to Chris, our CFO who'll provide much more detail on the financials.

Thank you Tony and good morning, as you'll see on slide 10, I am going to update you this morning on Safeguard’s 3-month and 6-month consolidated results, certain transaction that we completed in the second quarter, our carrying values, our private and public company ownership interest, our parent company cash and marketable securities, and our parent company cash outlook.

As shown on slide 11 Safeguard reported consolidated revenue of $381.8 million for the second quarter of 2004. This is a decrease from revenues of $419.2 million for the same period in 2003 and was due primarily to lower revenues at CompuCom, a trend that has been on going for the last several quarters.

For the second quarter, we reported a consolidated net loss of $12.5 million compared to a net loss on $3.2 million in the second quarter of 2003. As Tony mentioned, included in the results for the second quarter is an impairment charge related to the good will of CompuCom. As previously announced in connection with the proposed merger of CompuCom with an affiliate of Platinum Equity (ph) LLC, Safeguard anticipated recording an impairment of good will in the second quarter. The total impairment charge included in the operating results for the second quarter is $23.3 million after income taxes. This includes $14 million related to our share of CompuCom's goodwill impairment charge and an additional impairment charge recorded by Safeguard of $9.3 million.

For the six months ended June 30, Safeguard’s consolidated revenues were $720.5 million compared to $789.9 million in the prior year period. Net loss for the six months ended June 30, was $17.1 million compared to a loss of $18.7 million in the first six months of last year.

As you can see on slide 12 we have provided results of operations by segment for the three months ended June 30, 2004 versus the same periods in 2003.

The six months ended Jun 30, 2004 are shown separately on slide 13. Revenues in our strategic companies segment increased 19% in the second quarter from a year ago primarily due to increased revenues at Alliance and Mantas. We continue to show losses in our strategic company segment while these companies mature and gain traction in their respective markets. Our non-strategic segment results for the three and six months periods ending June 30, 2004 were income of $28.3 million and $37.5 million, respectively, due primarily to the $32 million gain on the sales of Sanchez. Results for the CompuCom segment for the three and six-month periods ending June 30, 2004 were a loss of $27 million and $25.5 million respectively. These results included the CompuCom impairment charge.

On Slide 14, we list several transactions completed during the second quarter. Safeguard retired an additional $58.7 million of our 5% Convertible Subordinated Notes due in 2006. The total amount repurchased to-date is $145.2 million and as of August 3, 2004 the principal amount outstanding is $54.8 million. Regarding the 2.625% Convertible Subordinated Debentures we've a stated maturity of 2024 that were issued in February of 2004. The $450 million is outstanding. Safeguard filed a Form S-3 or shelf registration statement with the SEC in April to provide for their resale. The registration statement become effective on July 22. Those debentures you recall extended the maturity of our long-term debt and reduced our interest expense by approximately $3.5 million per year on an annualized basis.

During the second quarter of 2004, we sold the remaining shares of Opsware that we had received in connection with the disposition of Tangram Enterprises earlier in the year. This generated $2.4 million in net cash proceeds in the second quarter, in addition to the $4.1 million of cash received in the first quarter. And finally we completed the sale of Sanchez Computer for $32.1 million in cash and we subsequently sold the shares of FNF stock that we had received in the transaction for an additional $8.3 million in cash.

As noted on Slide 15 Safeguard's carrying value of its investments is reported under the heading "Ownership interests in and advances to affiliates" on the Company's parent company-only balance sheets as reported in our Form 10-K and 10-Q filings. That value was $210.2 million at June 30, 2004 compared with $249.8 million at March 31, 2004. The components of the carrying value include our interest in private companies, public companies, and private equity funds, but exclude Alliance Consulting, a 100% owned consolidated entity in the parent Company balance sheet. The carrying value of Alliance Consulting was $61.5 million as of June 30, 2004 and was $64 million as on December 31, 2003. The carrying value of our public Company investments at June 30, 2004 was a $147.8 million compared to a $178.4 million on March 31, 2004. This change is a result of the sale of Sanchez Computer and the CompuCom impairment charge. The market value of these securities as of August 3, 2004 was a $172 million. At June 30, 2004 the carrying value of our private company investments was $35.9 million compared to $41.5 (ph) million at the end of the first quarter of 2004. At June 30, 2004 the carrying value of our private equity fund interest was $26.5 million compared to $29.9 million at March 31, 2004.

I'd like to turn now to updating you on our public and private company ownership interests and our private equity funds. On Slide 16 you can seen that as of June 30, 2004 we had interest in nine private companies. Of these two are in our strategic company's reporting segment Alliance Consulting and Mantas. As I mentioned earlier, the aggregate carrying value as of June 30 of our private companies was $35.9 million. That excludes Alliance Consulting's carrying value of $61.5 million which was consolidated on the parent Company balance sheet. We continue to assess our non strategic companies for balance sheet and liquidity contribution on an ongoing basis with a view towards supporting our strategic initiatives.

We currently have 3 public companies with an aggregate market value of a $172 million as of August 3, as you can see on Slide 17. With respect to our private equity funds, we currently hold general partner and limited partner interests in 11 private equity funds, these 11 funds have an excess of $2.6 billion of funds committed and Safeguard's commitment to these funds is a total of $126 million -- $101 million of which has already been funded. We expect the remaining $25 million will be funded over the next several years. In addition to these funds, at June 30 Safeguard had an investment in one other private equity fund, the size of that fund is approximately $25 million and Safeguard's commitment to them is $5 million out of which only $200,000 remains to be funded. We continue to reduce our commitments to and participation in these funds and as we've previously said we have no plans to make any new commitments to these funds.

Turning to Slide 18 Safeguard's parent company cash balance was $161.4 million as of June 30 and $152 million of as of August 3, 2004. The decrease from $194 million reported during our last earnings call on April 29 primarily reflects our bond repurchases of $41.1 million offset by our receipt of $10 million from our sale of the FNF common stock and the remaining shares of the Opsware stock that we have received.

Let me also note that these parent company cash balances at June 30, 2004 exclude a $140 million of additional cash balances primarily associated with our less than fully owned consolidated subsidiary. The value of our public company marketable securities was $199.6 million at June 30, and $172 million at August 3. This change is attributable to periodic changes in the market values of these holdings.

Turning to our parent Company cash outlook on Slide 19, remember that our parent Company balances from period to period, may be significantly impacted by the pace of monetization activities, the pace and size of acquisitions, follow-on fundings to our companies and private equity funds.

That said let me offer some information that may be useful to you in your analysis of Safeguard. As I mentioned a moment ago, we begin the rest of the year with parent company cash balances of approximately $152 million as of August 3. The anticipated funding $8.9 million to existing companies and private equity funds between now and the end of the year based on today's commitments. That would bring our fundings for all of 2004 to approximately $31.3 million. We estimate that Safeguard's corporate, general and administrative expenses will be about $19 million for 2004. Under the terms of the proposed sale of CompuCom, Safeguard would receive gross cash proceeds of approximately $128 million. As we explained on our June 1 conference call, we are required to use a portion of those proceeds to do the following things; first, we will retire the remaining $54.8 million, of our 5% Convertible Subordinated Notes due in 2006. And second we will escrow approximately $19.7 million to pre-fund the first 5 years of interest payments on our new subordinated debentures. These actions will have a positive impact on our interest costs in 2004. We estimate that interest expense related to our convertible securities for the full year will be approximately $8.1 million as compared to $10 million in 2003. The rest of the CompuCom proceeds about $53 million will increase our cash balances and further strengthen our balance sheet.

And finally as we discussed on the June 1 call, we expect that the tax gain of $61 million on the sale of CompuCom will be offset by existing capital loss carry forwards. Now let me turn the call back to Tony.

Thanks Chris. Before we open the call for questions, I would like to say a few words about acquisitions. You’ll see this on slide 20. We recently stepped up our capability to identify and acquire new businesses that fit our strategy. We have hired two very qualified business development executives, one to source deals in Healthcare and Life Sciences and one for the Business Decision Solutions area. Each has extensive experience in the sector and a deep knowledge of the market. With a $152 million in parent company cash as of August 3 and an another $53 million potentially from the proposed sale of CompuCom, we will have after closing tremendous flexibility both to fund growth in our existing strategic companies and to pursue acquiring additional business which meet our criteria. We are targeting healthcare life sciences because of the growth prospects driven by the aging U.S. population and the need for accurate diagnostics. We are especially interested in drug formulation or delivery techniques, diagnostics and bioinformatics.

In the Business Decision Solutions area, which encompass software applications and IT, we are focusing on business intelligence and analytic applications, which are compute and storage intensive in financial services, telecom, life sciences, retail and manufacturing. In all cases, we will typically seek majority ownership positions.

The opportunity pipeline is becoming significant, and we are optimistic that we will find businesses that fit our criteria.

What are we looking for? We seek business in the time to volume stage of development where the company needs to be grown and turned into a viable productive organization. They will have a product, they would have customers, and they are now ready to build a company around that. We prefer businesses with low capital requirements. We prefer businesses with high operating leverage and a key factor, ones that have proprietary software-based applications or proprietary intellectual property. Typically, we seek companies with annual revenue run rate between 10 million and 50 million and depending on the deal with an investment opportunity somewhere in that same 10 to 50 million range. As we have said they must also be businesses that would benefit from Safeguard's strategic guidance and operating disciple and access to best practices and deep industry knowledge. This is how we will build their value over time and how we will create value for Safeguard shareholders. We will be discriminating in what we acquire and we hope to have more to report to you in the coming months. With that said, I think we can now open up this for questions

At this time I would like to remind everyone if you would like to ask a question please press "*" then "1" 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 "*" then the "1" on your telephone keypad. Your first question comes from Bill Sutherland of Boenning & Scattergood.

Good morning.

Good morning, Bill.

Good morning Bill

I was just looking sequentially at the numbers there in Mantas and Alliance and wondered if you could comment on the Q2 results relative to Q1, you know, referencing seasonality if that's the issue?

Bill, I didn't hear the last part of your question.

Well, just saying if there is a seasonal factor I should understand.

Okay, seasonal factor. No, I don't believe in Q2 versus Q1 there would be any seasonal activity. Alliance does have some seasonal activity when you get into periods with extensive holidays or vacations, but that would not have been a factor in Q2. And Mantas generally does not see any seasonality in their results.

I think if anything that might provide some insight here, Mantas is still fairly small and the timing of completing projects or receiving license revenues, the material effecting on a sequential basis, and that's probably as big a factor than anything.

So, when you -- so obviously last year was extraordinarily lumpy Q2 versus Q1 for Mantas and it is just -- I guess it is hard to know kind of what to expect with the lumpiness. You referenced the backlog being up 3 million quarter-over-quarter?

Correct.

Is that -- does that provide as good a sense as any?

I think it does. It really reflects the sense of the rate at which the opportunity Mantas sees is being converted into installable backlog and seeing that go up while we have seen an increase year-over-year it gives us an indicator of how the business is doing.

In July you said you had committed about 10 million to Mantas?

Yes an additional 10 million, 5 million of which has been funded in July and the balance of which we expect will be funded during the rest of 2004.

And what's -- can you give us some color on the use of that -- expected use of that?

The biggest part of that Bill, if you look closely at the Company, you’d see they have moved down a path from being very customized by individual to creating a product, which is more applicable with more functionality across wider markets. A good portion of the activity has been related to the completion, development, and release of that product.

What's the status of that, is it in beta (ph) or is it really being rolled out?

Bill, the Company hasn't disclosed that yet I don't think we should be disclosing it on their behalf during this call.

So, they are still developing it, okay. What was that utilization at Alliance in the quarter?

Bill, we haven't given those statistics and we can think about including them in future periods but so far we haven’t made that information public.

Okay there has been some discussions by some of the Enterprise software vendors as well as a couple of solutions companies about the marketplace for project implementations in the second half being somewhat impacted by Sarbanes-Oxley basically crowding out, as companies [grapple] with that, any comments from your companies relative to that?

I would say that the observation on the market in the areas that our companies are active have not seen an impact of that type. The critical nature of the applications that Mantas installs really has them on time-driven schedules, which are pretty competitive and driven by a regulatory environment that is as strong as Sarbanes-Oxley is, so that certainly isn't impacting the direction there and in the IT services sector, if we look at Alliance’s market we have seen some definite come back and releasing the purchase orders that have been tensed up for some number of years, but we’ve not seen anything there that’s tempering that in terms of other priorities other than the release of new projects tends to be segmented in portions as opposed to whole projects being released at once.

All right. You said you had -- last question. You said, you had 125 active projects at Alliance, that’s ex-30. Can you give us a sense of what that compares to over prior period? ?

It actually very comparable to - the end of Q1.

Okay thanks guys.

Thank you Bill.

Thank you.

Our next question comes from Charles Gastenhein (phonetic) of Satellite Asset Management.

Hey guys how are you?

Good morning.

Real quick on CompuCom, the status of the CompuCom merger, I know the shareholders [vote is] scheduled for the 19. Do you have -- given that there have been some complaints filed against it, do you have an update for us on the, obviously, hopefully that you still feel that it is going to be completed and that any notion or feeling that those complaints are baseless or any other comments you may have?

Charles, we announced the other day that the complaints that you are referring to had been consolidated and that there had been a request for an expedited hearing and essentially an injunction to block the sale. The judge denied all of that. So at this point we believe the sale will proceed without interruption from that litigation. As far as the rest of the deal is concerned, we are scheduled to have the special shareholders’ meeting on the 19. No reason to think at this point that that won't happen, and we are otherwise proceeding according to the timetable we talked earlier about which is that the deal would close some time late in the third quarter.

Okay. Thanks very much.

Your next question comes from David Schoen (phonetics) of Morgan Stanley.

Yeah. Hi how are you?

Good morning David.

I just have question about going forward you had mentioned that you know looking at new companies there would be revenue generators of possibly anywhere from $25-50 million. Is that true?

I think what I have said between $10-50 million was our target range.

Okay. 10 and 50. I guess my question goes down to ChromaVision, where I see we are still only doing about $2.5 million but I know we continue to fund that aggressively, so I was just trying to understand why do we follow the course on that one?

David a couple of things just to be clear about the numbers. When we were talking about target acquisitions we were talking about an annual revenue run rate of 10 to 50. The ChromaVision revenue that you referred to is their quarterly revenue.

Okay.

And then beyond that I think ChromaVision is a company that we have been invested in for many years, and in that sense shouldn't be compared to our new acquisition criteria. It's a company that has been in the portfolio for quite some time. But we think it is certainly consistent with the description of our strategic companies as we go forward.

Okay so I guess what I was getting to obviously is at some point with ChromaVision I guess what you are saying is we are in this far and you will continue to continue on.

Well we supported ChromaVision in the last financing which they did and bringing exterior capital in and we continue to support them fairly actively from a managerial point of view. Mike Cola one of our people acted as CEO there for a three month period as we went through the -- with the Board, the search for a new CEO. So ChromaVision remains in our strategic portfolio; we are excited about the market it's in, we see it's getting some traction, it went through that difficult period where the reimbursement codes went under some scrutiny and then came out with a specific answer that removed that ambiguity and they are now investing and building the land services business to associate that with the diagnostic services that they have, so strategically the Company is doing the kinds of things that attract our interest, and we will probably continue to support it.

Okay and just a second question goes back to the financing -- the refinancing of the debt the converts and then the performance thereafter from the stock, and I was just wondering if you had any feedback or feel as to you know the precipitous decline that happened right after that, and whether or not these bondholders or purchases were shorting it or what exactly happened.

David we think a couple of things have happened since we issued the bonds. Some of them are just external market forces, as you know the market since mid-February or particularly for small cap technology focus companies has been very difficult, so we think there is an element of that, an external force if you will. Interest rates have risen since we issued the bonds in February and I think there is an element of that. And then I think there are some more company specific related issues and there is some evidence that there have been either hedging or arbitrage activities or short selling associated with the bonds, and we think it is really a combination of those external and company-related issues that have led to the decline in the stock value as well as the decline in the bond value since they were issued.

Okay.

Again, if you would like to ask a question, please press "*" then the number "1" on your telephone keypad. Your next question comes from Randy Laufman (phonetics) of Imperial Capital

Hi, thank you. I know that Safeguard has carried some subsidiary that’s specifically from CompuCom, the receivables securitization facility. I was wondering if you’d comment on the balance as of 6/30/04 is that CompuCom and any other subsidiaries that are recoursed to the parent?

Yeah, a couple of things, I guess or a couple of ways to answer your question. The CompuCom receivable financing is not recoursed to Safeguard in any way and it actually is structured in a way where it is not reflected in their balance sheet or in our balance sheet. So you are not seeing any of their debt in our consolidated financial statement. For the most part the debt that you did see on our consolidated financial statements relating to the subsidiaries is not recoursed to Safeguard except where we have specifically given a guarantee and those guarantees are spelled out in quite a bit of detail in the 10-Q which will be filed in the next couple of days.

Okay do you have an estimated amount of that -- that is recoursed?

Again it's only contingently recoursed based on the guarantees that we've given and the details of that will be out in the next couple of days.

Okay.

I don't have it in front of me right now.

Okay that is fine, thanks.

Your next question comes from William Brockbank (phonetic) of Assembly Parts (phonetic).

Hello everyone. Just a couple of quick questions, can you just comment on the fact that over the years you've been divesting yourself of some of the own campus fund that you have seen since [inaudible] your stocks weeding out some of the own strategic companies but nonetheless annual corporate expenditure continues to be pretty high up in the sort of, upper teens on the $20 million level. Is it really necessary to spend that much money [at the moment]?

Well I think overall our corporate expenditures have come down from some where north of 40 to some where south of 20 in the last two years, so we've made some pretty good progress and having that align itself with the decrease in activity in the total portfolio those downwards pressure are sort of managerially initiated and we will always take every opportunity we can to further press that. There are pressures in the opposite direction we are having to digest the Sarbanes-Oxley and the 404 implementations and the things that go with that. And we do see upward pressure on the D&O insurance and on the cost of operating a public company [about]. So, we are not totally able to keep the trends line going at the same rate that it had been going in the past. But I think you can rest assured we take every opportunity we can to bring that down to a level that allows us to execute our strategy effectively.

So we can expect it to continue to go down?

Well certainly not at the rate of the past, we would not and I really can’t predict what these upward pressures are going to continue to do to us.

Okay and just clarification on the 5 million, is that you will be putting into Mantas later. Is that included in the 8.9 million that you said you’d be spending on PE funds and companies for the rest of the year?

Yes it is part of the 8.9.

And so the balance of 4.9 will that be predominantly to companies or will some of that be to the fund and if so how much?

It's our estimate of what would likely be funded to the private equities funds during the balance in the year.

We can expect that your liability of 25 million will be reduced [by only] 5 million.

Yes by the $3.9 million difference rate.

Right okay and just one final question. You haven’t discussed stock repurchase but was the stock bouncing off an extreme low -- that becomes a more and more accretive option for you. Do you have got any comments?

I think we have the same comment that we had during prior calls, which is -- it is something that we look at on a regular basis. It's a balance between using the capital we have for executing our new strategy versus the opportunities to repurchase stock. It involves obviously trying to assess or access to capital in the future, and as I said we continue to look at it and have not made any decisions about it one way or the other at this point.

Okay. Thank you very much.

Your next question is a follow-up question from Bill Sutherland of Boenning & Scattergood.

The prior caller took care of a couple of them. I am actually not where I can see the slide show and I don’t know if you presented income for the three strategic companies for the quarter?

Yes the slide that we presented Bill shows the revenue and the net loss from each of those companies.

Okay what loss. So I -- I will look those up and I want to make sure they had been provided?

Yes, the three-month results and the six-month results are there.

Okay and then just a follow up actually to the prior caller, maybe it would be helpful as far as where you go with the corporate overhead number from this point the $19 million or so annualized debt. If you just carved up the major components for us, so we understand where you have some ability of further take action?

Okay we will certainly consider that. We might be able to break it down into a few pieces to help you understand what makes it up and what opportunity there may be to reduce it going forward.

Okay. Thanks Chris.

Thank you Bill.

Ladies and gentlemen we have reached the allotted time for questions and answers, are there any closing remarks?

Well, thank you everybody for your attention today and for your questions, obviously, we think Safeguard is now pretty well positioned after this last 2.5 years of work and structuring to provide shareholders with an efficient and liquid vehicle to participate in stages of company growth that aren't generally available to investors in public market. In doing that, in providing that opportunity, we are focused on growing companies that have revenue and have customers and can grow to maturity. We will continue to strengthen our parent company balance sheet, so we have a solid platform to fund that growth and manage that growth and we are committed to generating long-term value for shareholders and we will keep you apprised of our progress with systematic focus on hopefully increasing our transparency. Thanks very much for your time and attention and support.

Thank you. And just a reminder two hours after this call, a replay will be available either by the website or by dialing 1-800-642-1687 and referencing the code number, 9192849. Thank you

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