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Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996 Commission File Number 1-5620
SAFEGUARD SCIENTIFICS, INC.
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(Exact name of Registrant as specified in its charter)
Pennsylvania 23-1609753
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
800 The Safeguard Building
435 Devon Park Drive, Wayne, PA 19087
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610) 293-0600
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of Each Class on which registered
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Common Stock ($.10 par value) New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
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 Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_____]
Aggregate market value of voting stock held by non-affiliates (based on the
closing price on the New York Stock Exchange) on March 20, 1997 was
approximately $481 million. For purposes of determining this amount only,
Registrant has defined affiliates as including (a) the executive officers
named in Part III of this 10-K report, (b) all directors of Registrant, and
(c) each shareholder that has informed Registrant by March 20, 1997 that it
is the beneficial owner of 10% or more of the outstanding common stock of
Registrant.
Indicate the number of shares outstanding of each of the Registrant's classes
of Common Stock, as of March 20, 1997:
Common Stock: 31,417,483 shares
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DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference in this Form 10-K:
PART I
Item 1(b) Page 33 of the Annual Report to Shareholders for the year
ended December 31, 1996, which page is filed as part of
Exhibit 13 hereto.
PART II
Items 5, 6,
7 and 8 Pages 28 to 45 of the Annual Report to Shareholders for the
year ended December 31, 1996, which pages are filed as
part of Exhibit 13 hereto.
PART III
Items 10, 11,
12 and 13 Definitive Proxy Statement relative to the May 8, 1997
annual meeting of shareholders of Registrant, to be filed
within 120 days after the end of the year covered by this
Form 10-K Report.
PART IV
Item 14(a) Pages 33 to 45 of the Annual Report to Shareholders for the
Consolidated year ended December 31, 1996, which pages are filed as
Financial part of Exhibit 13 hereto.
Statements
PART I
ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF THE BUSINESS
OVERVIEW
Safeguard Scientifics, Inc. ("Safeguard" or the "Company") is engaged
primarily in the business of identifying, acquiring interests in, and
developing partnership companies, most of which are engaged in information
technology businesses, broadly defined to include all activities related to
the acquisition, warehousing, processing and dissemination of information and
related technology to improve business and personal productivity. The most
significant of Safeguard's partnership companies are engaged in the delivery
of personal computer services, including procurement and configuration of
personal computers, application software and related products, network
integration, and technical support. In addition, partnership companies in
the information technology industry are engaged in outsourcing and the
development and sale of strategic business software and services, imaging
equipment and software and telecommunications technology. The Company also
has a division that provides specialty metal finishing.
Safeguard develops these partnership companies by providing active strategic
management, operating guidance, acquisition and disposition assistance, board
and management recruitment, and innovative financing. The Company realizes
value for its shareholders by the appreciation of the Company's Common Stock,
by taking partnership companies public (generally through an offer to
Safeguard shareholders of rights to purchase stock of the partnership company
in its initial public offering [a "rights offering"]), through the continued
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operations of partnership companies and through the sale of partnership
companies. The partnership company generally sells newly-issued shares in a
rights offering, although Safeguard sometimes sells some of its shares in the
rights offering as well. In either case, after taking a partnership company
public, Safeguard generally retains a significant ownership interest and
board representation, and continues to provide strategic, managerial, and
operational support. During the four years ended December 31, 1996,
Safeguard's shareholders were given the opportunity to participate in rights
offerings for Cambridge Technology Partners (Massachusetts), Inc., Coherent
Communications Systems Corporation, USDATA Corporation, Integrated Systems
Consulting Group, Inc., and Sanchez Computer Associates, Inc. In February
1997 a rights offering commenced for Diamond Technology Partners,
Incorporated which is expected to be completed in March 1997.
STRATEGY
Safeguard seeks to identify companies which are capable of being market
leaders in segments of the information technology industry and which are at a
stage of development that would benefit from Safeguard's business development
and management support, financing, and market knowledge. Safeguard generally
invests in companies in which it can purchase a large enough stake to enable
it to have significant influence over the management and policies of the
company and to realize a large enough return to compensate it for its
investment of management time and effort, as well as capital.
Safeguard gains exposure to emerging companies through its reputation as a
historically successful developer of information technology companies, its
relationship with seven venture capital and private equity funds, Radnor
Venture Partners, Technology Leaders I, Technology Leaders II, TL Ventures
III, SCP Private Equity Partners, Safeguard International Fund, and EnerTech
Capital Partners, as well as through its sponsorship of such organizations as
the Eastern Technology Council and entrepreneurial centers at Lehigh
University, Temple University and the University of Pennsylvania. Safeguard
considers its access to potential partnership companies to be good.
Emerging companies traditionally seek financing for growth from two primary
sources: independent private venture capital funds and corporate strategic
investors. Each of these sources has disadvantages for the emerging company.
Venture capital funds generally are established for a limited term and their
primary goal is to maximize their financial return within a short time frame.
A venture capital fund often seeks to liquidate its investment in the
emerging company by encouraging either an early initial public offering or a
sale. In addition, traditional venture capital funds generally have limited
resources available to provide managerial and operational support to an
emerging company.
Corporate strategic investors are typically large corporations that invest in
emerging companies to obtain access to a promising product or technology
without incurring the initial cost of development or the diversion of
managerial time and attention necessary to develop new products or
technologies. Often these investments involve both financing support to the
emerging company as well as an arrangement under which the strategic investor
obtains access to the products or technology of the emerging company. While
strategic investors are generally able to provide business development
support, the rationale behind the investment of a strategic investor may be
incompatible with the development of the emerging company. Strategic
investors often discourage the emerging company from becoming a public
company.
Safeguard believes that its relationship with its partnership companies
offers the benefits of both the venture capital model and the strategic
investor model without the related drawbacks. Safeguard has both the capital
and managerial resources to provide financing and strategic, managerial, and
operational support as needed by an emerging company. In addition, Safeguard
encourages emerging companies to achieve the superior returns on investment
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generally provided by public offerings, but only if and when it is
appropriate for the development of the business of that emerging company.
Because of Safeguard's unique process of taking partnership companies public
through "rights offerings" to Safeguard shareholders, as described below,
Safeguard continues to support its partnership companies after their initial
public offerings. This support is often crucial to help a company adjust to
the challenges imposed by the public financial markets.
Safeguard's corporate staff provides hands-on assistance to the managers of
its partnership companies in the areas of management, financial, marketing,
tax, risk management, human resources, legal and technical services.
Safeguard has assisted partnership companies by providing or locating and
structuring financing, identifying and implementing strategic initiatives,
providing marketing assistance, identifying and recruiting executives,
assisting in the development of equity incentive arrangements for executives
and employees, and providing assistance in structuring, negotiating,
documenting, financing, implementing and integrating mergers and
acquisitions. Safeguard is committed to the use of management stock ownership
and equity incentives as the principal means of aligning the interests of
management of its partnership companies with the interests of Safeguard and
its shareholders.
Safeguard also provides a supportive environment to the managers of its
partnership companies by organizing numerous opportunities for them to
interact with managers of other partnership companies to share strategies,
ideas, and insights and to forge business relationships. Twice a year
Safeguard gathers the senior managers of all of its partnership companies,
both private and public, for a "Senior Partners" conference. Safeguard also
convenes periodic "CFO Forums" for senior financial managers of the
partnership companies and occasional sessions on more specific topics.
Safeguard's goal is to maximize the value of its partnership companies for
Safeguard's shareholders, often through taking its partnership companies
public through a rights offering at the appropriate time. A rights offering
is an initial public offering of a partnership company, directed to
Safeguard's shareholders. It involves the grant to Safeguard's shareholders
of transferable rights to buy shares of the partnership company's stock at a
price established by the partnership company, Safeguard, and the underwriter.
Safeguard shareholders are able to exercise the rights, thereby
participating in initial public offerings of high-growth technology companies
which are usually reserved for large institutional investors, or they may
sell the rights at the prevailing market price. Safeguard generally retains
significant ownership in its partnership companies after taking them public.
Safeguard generally also retains significant participation on the company's
board of directors. Between Safeguard's direct continuing interest in its
public partnership companies and the strong identification in the public
financial markets of the companies as "Safeguard rights offering" companies,
Safeguard retains a substantial interest in the continuing success of the
companies after their IPOs, and substantial influence over their management
and strategic direction. Growth in the value of the public partnership
companies benefits Safeguard and also directly benefits its shareholders who
continue to hold the shares purchased in the rights offering.
In recent years, Safeguard has leveraged its financial resources to increase
the number and size of its partnership companies by acquiring substantial
minority ownership interests rather than majority interests in many of its
partnership companies. In many of these cases, Safeguard, either alone or in
conjunction with its associated venture funds, is the largest single
shareholder, and exercises significant influence over the company. Safeguard
also generally obtains significant board representation in these companies.
Safeguard accounts for these companies under the equity method of accounting,
recording its share of the company's net earnings or losses under the caption
"Income from equity investments" in the consolidated statements of operations.
Safeguard's equity investee companies have become increasingly important to
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Safeguard's operations and success in recent years relative to its
consolidated subsidiaries.
RECENT DEVELOPMENTS
Consolidated net sales for 1996 were $2.1 billion, a 36% increase over 1995.
The increase was primarily due to the growth of CompuCom Systems, Inc., the
Company's largest business unit. CompuCom's share of the Company's
consolidated net sales has risen steadily from 76% in 1990 to 97% in 1996.
CompuCom is a leading provider of distributed desktop computer products and
network integration services to large- and medium-sized businesses throughout
the United States. The Company took CompuCom public through a rights
offering in 1985, and currently owns approximately 50% of the common stock
and up to 60% of the voting interests in CompuCom.
In 1996, Safeguard acquired interests in six new partnership companies.
Safeguard intends to continue its strategy, begun in 1996, to seek to
establish new relationships each year with only a select number of larger,
later stage partnership companies and to acquire and retain a larger
ownership percentage in the companies.
The Company successfully completed rights offerings in 1996 for Integrated
Systems Consulting Group, Inc., a leading provider of custom software
development and systems integration services to the pharmaceutical industry,
and for Sanchez Computer Associates, Inc., a leading provider of electronic
banking software products, including PROFILE-Registered Trademark-/Anyware,
an electronic platform for direct banking services.
In February 1997, the Company commenced a rights offering for Diamond
Technology Partners, Inc., a provider of business consulting services based
on information technology.
In February 1996, Safeguard completed the private placement of $115 million
of 6% Convertible Subordinated Notes ("Notes") due February 1, 2006 to J.P.
Morgan Securities, Inc. J.P. Morgan resold the Notes to institutional buyers
and in offshore transactions. The Notes are convertible into Safeguard
Common Stock at $28.985 per share. As of March 1997, approximately $24
million of the Notes had been converted into approximately 832 thousand
shares of common stock.
Four new venture capital and private equity funds associated with the Company
were formed in 1996, raising a total of $500 million of committed capital.
In addition, Safeguard organized Internet Capital Group LLC to focus
exclusively on investment opportunities in the Internet.
During 1996, CompuCom increased the capacity under its bank credit facilities
from $175 million to $325 million, extended the maturity date generally to
September 1999, and negotiated reductions in the effective interest rate of
the facilities.
In 1996, Safeguard also extended its $100 million credit facility to May
2000. The Company anticipates increasing the availability under the credit
facility in 1997.
The Company completed the sale of its commercial real estate operations to
Brandywine Operating Partnership ("BOP"), a subsidiary of Brandywine Realty
Trust (the "REIT"). The Company received common stock and warrants in the
REIT and units in BOP which are convertible into common stock of the REIT.
Nichols' real estate management operations were also merged into an affiliate
of the REIT. The REIT's Common Stock is publicly traded on the American
Stock Exchange.
A number of partnership companies completed mergers and acquisitions to
further their growth and achieve critical mass, including: the merger of
MicroDynamics Ltd. into FormMaker Software, Inc., which is currently in the
process of
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completing a merger with Information Sciences, Inc. to create a powerful
document automation solutions provider to be known as DocuCorp International;
the merger of Value Sourcing Group into Sentry Technology Group to achieve
synergies between VSG's consulting services and Sentry's publishing and
market research capabilities; Intellisource's acquisition of Supply Chain
Solution; and Cambridge's acquisition of Ramos & Associates and NatSoft.
Several partnership companies released innovative new products, including
Sanchez Computer Associates, which released Profile-Registered
Trademark-/Anyware, an electronic banking software product; Tangram
Enterprise Solutions, which released Asset Insight-TM-, an asset tracking and
management software product; and USDATA, which released its new
FactoryLink-Registered Trademark- Enterprise Control System-TM- on both
Windows and UNIX platforms.
Pioneer Metal Finishing acquired land and obtained tax-exempt financing to
begin construction on a new metal finishing facility in Monroe, Michigan.
XL Vision completed a spin-out of its MicroVision Medical Systems division
into a new subsidiary, which then completed a private placement to XL
Vision's shareholders to raise equity financing. As a result of this
innovative transaction, MicroVision is now an independent company with a
strong management team focused on pursuing its exciting market opportunities
in medical diagnostics and research.
The Company helped complete a debt workout for RMS Technologies involving a
transfer of its principal business assets to a new entity, RMS Information
Systems, with a substantially strengthened balance sheet, and an exit from
RMS' money-losing business. The transaction enables RMS to pursue growth in
the commercial outsourcing, integration and facilities management markets.
In March 1997, the Company announced that it has signed a letter of intent to
sell a majority of the assets of Premier Solutions Ltd.
ITEM 1 (b). FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Information on net sales, operating profit, depreciation and amortization,
capital expenditures and assets employed for each segment of the Company's
business for the three-year period ended December 31, 1996 is contained under
the caption "Financial Information--Industry Segments" on page 33 of the
Company's Annual Report to Shareholders for the year ended December 31, 1996,
which page is filed as part of Exhibit 13 hereto and is incorporated herein
by reference.
ITEM 1 (c). NARRATIVE DESCRIPTION OF BUSINESS
OVERVIEW OF BUSINESS SEGMENTS
Safeguard and its majority owned subsidiaries have operations in two industry
segments: Information Technology and Metal Finishing. During 1996 the Company
sold its Commercial Real Estate operations. Over 98% of the Company's sales
in 1996 were in the Information Technology segment, which consists of:
Microcomputer Systems and Services (the delivery of personal computer
services, including procurement and configuration of personal computers,
application software and related products, network integration, and technical
support); and Information Solutions (the design, development and sale of
systems software solutions for strategic business applications). In
Microcomputer Systems and Services, the Company operates through its
majority-owned subsidiary, CompuCom Systems, Inc. and its subsidiaries
("CompuCom"). In Information Solutions, the Company operates through its
majority owned subsidiaries, Premier Solutions Ltd. and its subsidiaries
("Premier"), and Tangram Enterprise Solutions, Inc. ("Tangram"). CompuCom and
Tangram are both publicly held companies, while Premier is privately held.
The Company also actively participates in numerous additional private and
public information technology companies in which it holds significant
minority ownership interests.
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The Company's Metal Finishing segment provides specialty metal finishing
services to a variety of industries. The Company also provides venture
capital management services.
INFORMATION TECHNOLOGY SEGMENT
Microcomputer Systems and Services
CompuCom is a leading provider of distributed desktop computer products and
network integration services to large- and medium-sized businesses throughout
the United States. CompuCom helps its customers, which include primarily
Fortune 1000 companies and other large businesses, manage information
technology to achieve their business goals by providing a wide range of
services in provisioning, support, and technology management. Products and
services are sold by a direct sales force to over 5,000 business customers
through approximately 40 sales and service centers located in and serving
large metropolitan areas nationwide.
CompuCom is an authorized dealer of major distributed desktop computer
products for a number of manufacturers, including Compaq Computer Corporation
("Compaq"), International Business Machines Corporation ("IBM"),
Hewlett-Packard Company ("HP"), Toshiba America Information Systems, and
Apple Computer Corporation. CompuCom also offers a broad selection of
networking and related products, computer-related peripheral equipment and a
range of computer equipment and software from a number of vendors, including
3Com Corporation, Digital Equipment Corporation, Intel Corporation, Kingston
Technology Corporation, Lotus Development Corporation, Microsoft Corporation,
NEC Technologies, Inc., and Novell, Inc. To further meet the needs of its
customers, CompuCom provides a variety of services including LAN/WAN project
services, consulting, network management, help desk, field engineering, and
configuration and product procurement utilizing network applications such as
Novell Netware, Windows NT Server, Windows and Windows 95, IBM's OS/2 Warp
and LAN Server.
Net sales for CompuCom have grown at a compounded rate of 29% over the past
five years, while net earnings have grown by 43% compounded annually over the
same period. Excluding an after-tax, non-recurring, securities-related gain of
$5.2 million in 1996, net earnings over that period have grown at a
compounded rate of 37%. CompuCom's strong sales and net earnings performance
is a result of its continued focus on customer satisfaction, along with the
enhancement of its product and services capabilities created by a strategy of
growth through existing operations and strategic acquisitions. CompuCom's
target customers are becoming increasingly dependent on information
technology to compete effectively in today's markets. As a result, the
decision making process that organizations face when planning, selecting and
implementing technology solutions is becoming more complex and requires many
of these organizations to outsource the management and support of their
technology needs.
CompuCom markets its product procurement, configuration, field engineering,
network management, help desk services, and technology management services
primarily through its direct sales force and service personnel, operating
through approximately 40 sales and service centers. CompuCom focuses on
meeting the business objectives of large corporate businesses, which
accounted for the majority of CompuCom's net sales in 1996. However, no one
customer accounted for in excess of 10% of such sales.
CompuCom provides support to its customers primarily through its customer
center, located in Dallas, Texas. Customer center personnel, called inside
sales representatives ("ISRs"), may be assigned to specific customers or
geographic areas and are knowledgeable about computer technology. Each ISR
works closely with the customer and the CompuCom sales representative to keep
up to date on the business needs of that customer, and to provide the
customer with information about product availability, services, pricing,
shipping and invoicing via a toll-free telephone number. The primary goal of
the customer center is to provide greater support to CompuCom's customers
while allowing
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CompuCom's direct sales force to focus on soliciting new business and
providing the necessary support for the customer's more complex service
needs. As of December 31, 1996, CompuCom employed 240 full-time direct sales
representatives and 450 customer center personnel, of whom approximately 325
worked at the customer center in Dallas and approximately 125 worked on-site
at certain customer locations.
During 1996, services net sales increased 68% due to CompuCom's continued
efforts to focus on increased sales of services to meet customer needs and to
improve profitability. These on-going efforts included: additional training
was provided for system engineers; management provided greater support to the
services group; additional corporate resources were allocated to support the
services group; and the compensation plan of branch general managers and
sales representatives placed greater emphasis on sales of services. In
addition, CompuCom emphasized the hiring of quality services personnel,
increasing the number of its services employees from approximately 1,200 at
the end of 1995 to almost 2,000 by year-end 1996. To further enhance its
service growth, CompuCom began in mid-1996 a campus recruiting campaign
whereby CompuCom hired approximately 120 technology college graduates and
placed them in a six-month engineering training program. CompuCom's sales
from its services business currently represent 9% of its total sales. The
services business is an integral part of CompuCom's strategy to provide
customers with the value-added service solutions to meet their technology
needs.
To further enhance the quality and efficiency of its information systems,
CompuCom has developed a state-of-the-art data warehouse, which increases the
ease with which CompuCom personnel can access historical information and
create customized customer and vendor reports. During 1996, CompuCom made
significant enhancements to its data warehouse by implementing Internet-based
capabilities, which give its customers the ability to directly access order
status and shipment history. This electronic commerce tool, which won a Best
Practices award from the Data Warehouse Institute, also gives customers the
ability to create custom-priced quotations for new orders from an
Internet-based catalog of products, and gives CompuCom's principal vendors
access to product sales history and inventory levels. CompuCom plans to
extend its Internet capabilities during 1997 by implementing Internet-based
order placement and purchased asset lookup. Plans also include improved
product sales information reporting for principal vendors, real time open
call status reporting for service customers, and implementation of a customer
management and event tracking system to be used by customer center personnel.
CompuCom's two distribution centers are highly automated and employ advanced
inventory management and order processing technologies that allow CompuCom to
configure desktop computer products and receive, process and ship customer
orders accurately and efficiently. During 1996, CompuCom tripled its
configuration capacity by relocating its Eastern distribution center to a
300,000 square foot facility in Paulsboro, New Jersey.
The distribution, configuration, and product services departments completed
ISO 9002 certification in 1995. During 1996, CompuCom's returned merchandise
center completed ISO 9002 certification. ISO 9002 is part of the ISO 9000
set of standards developed by the International Organization of
Standardization ("ISO"), which represent common international business
quality standards designed to help demonstrate the capability of a supplier
to control the processes that determine the acceptability of the product
being delivered.
A major portion of CompuCom's sales are derived from sales of distributed
desktop computer products. During 1996, CompuCom's principal suppliers were
Compaq, IBM and HP. CompuCom's agreements with these vendors contain
provisions providing for periodic renewals and permitting termination by the
vendor without cause, generally upon 30 to 90 days written notice, depending
upon the vendor. Since 1987, Compaq, IBM and HP have regularly renewed their
respective dealer agreements with CompuCom, although there can be no
assurance that the regular renewals of CompuCom's dealer agreements will
continue. The
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termination, or non-renewal, of CompuCom's Compaq, IBM, or HP dealer
agreements, or all, would materially adversely affect CompuCom's business.
CompuCom, however, is not aware of any reason for the termination, or
non-renewal, of any of those dealer agreements and believes that its
relationships with Compaq, IBM and HP are satisfactory.
CompuCom purchases products from Compaq, IBM and HP at pricing levels which
CompuCom believes are the lowest prices available to those vendors'
respective dealers with the exception of special bid pricing for specific
large customer accounts. All of CompuCom's principal suppliers require that
CompuCom purchase certain minimum volumes of products in a specified period
to maintain favorable pricing levels. CompuCom also obtains favorable terms
from Compaq, IBM and HP by participating in certain vendor programs offered
by those suppliers. CompuCom has certain selling, promotional and related
expenses reimbursed by vendors under dealer programs offered by those and
other suppliers. However, there can be no assurance that any of these
programs will continue in 1997 or that CompuCom will continue to participate
in any of these programs at the same level as in 1996.
Sales of Compaq, IBM and HP products accounted for approximately 30%, 15% and
11%, respectively, of 1996 net sales in the Information Technology segment
compared to 27%, 15% and 10%, respectively, in 1995 and 24%, 18% and 10%,
respectively, in 1994.
Due to the rapid delivery requirements of its customers and to assure itself
of continuous allotment of products from suppliers, CompuCom maintains
adequate levels of inventory funded through its credit facilities and vendor
credit. Its major suppliers at times provide price protection programs to
CompuCom that are intended to reduce the risk of inventory devaluation by
absorbing temporary price reductions and long-term price declines associated
with aging product life cycles. CompuCom also has the option of returning a
certain percentage of its current product inventories each quarter to these
principal suppliers as it assesses each product's current and forecasted
demand schedule. If such returns exceed certain specified levels, CompuCom
may be charged restocking fees of up to 5%. CompuCom did not incur any
significant restocking fees in 1996.
CompuCom is dependent upon the continued supply of products from its
suppliers, particularly Compaq, IBM and HP. Historically, certain suppliers
occasionally experience shortages of select products that render components
unavailable or necessitate product allocations among resellers. While
certain shortages existed throughout 1996, CompuCom believes the product
availability issues are a result of the present dynamics of the desktop
computer industry as a whole, which include high customer product demand,
shortened product life cycles and increased frequency of new product
introductions into the marketplace. While there can be no assurance that
product unavailability or product allocations, or both, will not increase in
1997, the impact of such an interruption is not expected to be unduly
troublesome due to the breadth of alternative product lines available to
CompuCom and CompuCom's established programs to accelerate configuration and
delivery times when such events occur.
CompuCom is engaged in fields within the desktop computer industry which are
characterized by a high level of competition. Many established desktop
computer manufacturers (including some of CompuCom's own vendors), systems
integrators and other resellers of distributed desktop computer or networking
products, including Entex Corporation, InaCom Corp., Microage, Inc. and
Vanstar Corporation, compete with CompuCom in the configuration and
distribution of computer systems and equipment. In addition, the desktop
computer reseller industry is characterized by intense competition, primarily
in the areas of price, product availability and breadth of product line. In
the highly fragmented computer services area, CompuCom competes with several
larger competitors, other corporate resellers pursuing high-end services
opportunities, as well as several smaller computer services companies. Some
of CompuCom's competitors have financial, technical, manufacturing, sales,
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marketing and other resources that are substantially greater than those of
CompuCom. Although CompuCom believes it currently competes favorably within
the desktop computer reseller industry, there can be no assurance that
CompuCom will be able to continue to compete successfully with new or
existing competition.
Product margins declined in the second half of the year, compared to the
first half, primarily due to pricing to win new business and increased
pricing pressures from competition. CompuCom believes that gross margins
will continue to be reactive to industry-wide changes. Future profitability
will depend on the ability to retain and hire quality service personnel while
effectively managing the utilization of such personnel, competition,
increased focus on providing technical service and support to customers,
manufacturers' pricing strategies, and product availability, as well as
CompuCom's control of operating expenses and effective utilization of vendor
programs.
Information Solutions
The Company has two majority owned subsidiaries in the Information Solutions
field at December 31, 1996: Tangram and Premier. In March 1997, the Company
entered into a letter of intent to sell the majority of Premier's assets to
Sungard Data Systems, Inc. ("Sungard"), subject to the satisfaction of
certain conditions.
Tangram develops and markets asset tracking and management software and
software distribution solutions that enable automated enterprise-wide
information system management. Tangram markets to Fortune 1000 companies and
foreign equivalents and to government agencies that are managing
heterogeneous enterprises and mission critical applications.
Tangram launched its newest product, Asset Insight-TM-, in mid-1996 in response
to the widespread demand by large enterprises for an automated comprehensive
means for tracking and managing computer hardware and software assets
throughout the enterprise. The Asset Insight Internet Subsystem was also
introduced in 1996 to track and manage Internet usage throughout the enterprise.
Tangram's other offerings include the AM:PM-Registered Trademark- product
line, which provides automatic software distribution, data distribution and
collection, and software management throughout the enterprise; and its
Arbiter-Registered Trademark- and Open Advantage-Registered Trademark- product
lines, which provide enterprise-wide connectivity and interoperability
between LAN-resident desktop computers and IBM mainframe computers.
In order to maximize the market penetration of Asset Insight, Tangram
restructured its operations into two divisions: Enterprise Solutions, focused
on marketing Asset Insight; and Consulting Solutions, focused on implementing
customized solutions incorporating its AM:PM, Arbiter and Open Advantage
products.
The Enterprise Solutions division markets and intends to market Asset Insight
through value added resellers, systems integrators and information technology
consultants. Tangram adopted this approach in order to leverage its sales and
marketing resources to address the perceived widespread demand for Asset
Insight as rapidly as possible. CompuCom was the first reseller for the
Enterprise Solutions division. The division has since signed up additional
resellers, including Vanstar Corporation, which is a competitor of CompuCom,
and RMS Information Systems, which is a Safeguard partnership company. The
Consulting Solutions division markets and sells its products and services
directly to its customers in North America and through a network of
independent distributors internationally.
Tangram believes that no product directly competitive with Asset Insight is
currently available in the market. Tangram anticipates that competitive
products eventually will be developed, and it is expending significant
amounts
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to continue to develop and improve Asset Insight and to develop its
distribution channels in order to establish and maintain a market leadership
position. In the broader market for asset management products and services,
competition is intense, and many of Tangram's actual and potential
competitors have substantially greater resources than Tangram. The software
and solutions markets are subject to rapid change in technology, customer
requirements, and the strategic direction of computer hardware manufacturers
and operating system providers. Tangram's future success will depend on its
ability to establish a strong market for Asset Insight before competitive
products are introduced, and to enhance its product line over time and adapt
to changing market conditions in order to maintain a leadership position in
the market for asset tracking and management solutions.
At March 10, 1997, Safeguard owns approximately 67% of Tangram's outstanding
common stock.
Premier develops and markets sophisticated asset management systems solutions
and professional services to the financial services industry worldwide.
Premier's GLOBAL-PLUS-Registered Trademark- software provides complete
multi-currency accounting and global custody processing capabilities, two of
the demanding functions required by international asset management
organizations. Premier's MAXIMIS-Registered Trademark- software provides a
wide range of asset management and investment accounting solutions on
multiple platforms and is targeted at investment advisors, insurance
companies and pension funds. Premier's NIDS division provides software
products and solutions to the investment management industry. Premier's
CogniSource division, started in 1996, provides professional consulting
services. Premier incurred significant losses in 1996, principally in the
MAXIMIS product line.
A significant portion of Premier's 1996 sales were in Canada. Target
industries are major financial institutions, including traditional trust
organizations, investment advisory firms, domestic and global custodians,
international asset management organizations, insurance companies and large
pension funds.
In March 1997, Safeguard entered into a letter of intent to sell Premier's
assets, excluding the MAXIMIS business, to Sungard. Completion of the sale is
subject to the execution of a definitive agreement and federal antitrust
clearance. Premier is also exploring the sale of its MAXIMIS business
separately.
At March 10, 1997, Safeguard owns approximately 94% of Premier's outstanding
common stock, and 85% of the outstanding voting stock.
Product Development Expenses
For Information Solutions, the Company spent $8.2 million, or approximately
22% of Information Solutions net sales, for product development in 1996 (made
up of $3.4 million by Tangram and $4.8 million by Premier), compared to $10.0
million or approximately 25% of net sales in 1995 and $10.3 million or 19% of
net sales in 1994. The 1994 amount includes $2 million expended by Coherent
for the first six months of the year before its rights offering, after which
the Company ceased consolidating Coherent's results. Only an immaterial
amount of product development expenditures were customer-sponsored.
Other Segment Information
Export sales in the Information Technology segment for the three-year period
ended December 31, 1996 were less than 5% of the segment's total sales in
each of those years. Backlog for this segment, most of which was accounted
for at year-end by CompuCom, is not considered to be a meaningful indication
of
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future business prospects due to CompuCom's relatively short order
fulfillment cycle.
METAL FINISHING SEGMENT
Pioneer Metal Finishing is engaged in the finishing of aluminum and other
metal parts through operations conducted in Minneapolis, Minnesota and Green
Bay, Wisconsin. During 1996, Pioneer sold its Phoenix, Arizona facility,
which generally had been unprofitable for Pioneer. Major technical processes
include sulfuric, hardcoat and R-5 bright dip anodizing, chromate conversion,
electroless nickel and the application of other specialty coatings. Pioneer
provides insulation, heat dispersal, decoration and protection to a wide
range of metal parts, including highly sophisticated equipment and small
parts with precision tolerance requirements for the computer, ordnance,
automotive, cookware and recreational industries, electronic components and
other applications.
Metal finishing services are sold to a wide range of customers and industries
by a direct sales force and independent representatives. Finishing is usually
performed on customer-owned material. Because of transportation costs, most
customers are located within a 200-300 mile radius of the finishing
facilities. In order to better serve and expand its customer base in the
Midwest, Pioneer began construction in the fourth quarter of 1996 on a new
metal finishing plant in Monroe, Michigan. The plant is being financed with
$8 million of tax exempt bonds, and is expected to be completed in the third
quarter of 1997.
Pioneer competes with many other metal finishers serving its geographical
areas, but Pioneer has established itself as a reputable industry leader and
quality metal finisher. Prompt service, quality of work performed and
geographic location are the most important competitive factors.
Backlog is not considered material to this business as work is generally
processed in a one- to two-week period.
The Company believes that all facilities comply with existing environmental
pollution control regulations, compliance with which in recent years has been
an important competitive factor in the industry.
Safeguard owns 100% of Pioneer Metal Finishing.
COMMERCIAL REAL ESTATE SEGMENT
In 1996, Safeguard sold its commercial real estate operations to a
partnership controlled by a publicly traded REIT in exchange for common stock
and warrants in the REIT and units in the partnership which are convertible
into common stock of the REIT. Safeguard recognized an after-tax gain of $1.3
million from the sale. See "RECENT DEVELOPMENTS" above.
The operations of the Company and its partnership companies, particularly the
Metal Finishing segment, are subject to environmental laws and regulations.
The Company does not believe that expenditures relating to those laws and
regulations will have a material adverse effect on the business, financial
condition or results of operations of the Company.
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OTHER PARTNERSHIP COMPANIES
Public Companies
Safeguard uses the equity method of accounting for companies in which it owns
less than a majority of the outstanding voting securities but exercises
significant influence. Public partnership companies accounted for on the
equity method in 1996 included Cambridge Technology Partners, Coherent
Communications Systems, Sanchez Computer Associates, and USDATA.
Cambridge Technology Partners (Massachusetts), Inc. is an international
professional services firm that works with clients to design, develop, and
deploy client/server and Internet applications. Cambridge's information
technology development offerings also include third-party software
implementation and management consulting services. Cambridge provides the
majority of its services on a fixed-price, fixed-timetable model with client
involvement at all stages of the process. In performing its services,
Cambridge employs a rapid development methodology which enables it to deliver
results in unprecedented time frames - typically within three to twelve
months. Cambridge believes the solutions it delivers help provide clients
with competitive advantages by focusing on high value-added areas such as
distribution, sales and marketing, and customer management.
In 1996, Cambridge strengthened its software package implementation service
offering through the acquisition of Ramos & Associates, Inc., which provides
strategic information solutions and consulting services in the Enterprise
Resource Planning services market. Overall, Cambridge increased its employee
headcount during 1996 from 1,278 to 1,824 at year-end in order to meet the
growing U.S. and international demand for its services. Cambridge's future
success will depend in large part on its continuing ability to attract,
retain, and motivate highly skilled employees.
Cambridge's information technology and management consulting services are
offered at the enterprise-wide, specific business process and application
software levels of an organization. Upon the completion of consulting
services, Cambridge typically designs and develops one or more strategic
software applications and then rolls-out such applications to the
organization's end-users. These software applications are designed to achieve
a competitive advantage, enhance the efficiency and functionality of specific
business processes, and support financial goals. A client engagement for the
design, development, and implementation of a strategic software application
typically results in fees of $1 million to $3 million. To date, Cambridge's
revenues have been generated principally from its custom software design and
development activities. Because of the size of these assignments, clients
may undertake projects on an irregular basis. However, no customer accounted
for more than 5% of net revenues in either 1996, 1995 or 1994.
At March 10, 1997, Safeguard owns approximately 18% of Cambridge's
outstanding common stock, and warrants which could increase its ownership to
19%.
Coherent Communications Systems Corporation develops, manufactures and
markets voice quality enhancement products for wireless (including digital
cellular and Personal Communication Systems ("PCS")), satellite-based
Cable Communication Systems, and wireline telecommunications systems
throughout the world. Coherent's principal product lines are transmission
products and teleconference products. Coherent's products utilize a
proprietary high speed reduced instruction set computer ("RISC") microchip
along with its proprietary software to enhance the quality of voice
communications during a telephone call in several ways, including eliminating
echoes inherent in modern telecommunications systems and hands free telephone
and teleconference usage. Coherent's products are compatible with domestic
and foreign telecommunications systems.
The technological advances incorporated into telecommunications systems, such
as wireless and digital transmission technology, speech compression, fiber
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optic transmission lines and satellite links, make echo canceller products an
essential component of most digital telecommunications networks. Coherent
sells its transmission products to network operators and other end-users
through its direct sales force and third-party distributors, and to
telecommunications equipment manufacturers through its direct sales force.
Users of Coherent's transmission products include telecommunications network
operators throughout the world, such as British Telecommunications PLC,
Deutsche Bundespost, AT&T Wireless, Kokusai Denshin Denwa Co., Ltd. ,
Telefonos de Mexico, SA, Teleglobe Canada Inc., PTT Telecom Logistics
(Netherlands) and Telia Mobitel (Sweden). Coherent historically has
experienced its greatest success selling its transmission products
internationally, where competition is based principally on technological
characteristics. Competition in the U.S. has been more price sensitive.
However, Coherent believes that the release in 1996 of improved international
standards and the increasing demands for improved transmission quality have
made potential U.S. customers more concerned with cost effective performance.
Coherent expanded its direct sales efforts in the U.S. during 1996 to
capitalize on this trend. As a result, Coherent nearly doubled its North
American sales of transmission products from 1995, and overall North American
sales increased from 25% of total net sales in 1995 to 31% of total net sales
in 1996. Coherent's strategy for future growth is to continue to develop new
software products running on its echo canceller platforms to support new
telecommunications technologies, and to continue to develop and expand
strategic relationships with major telecommunications network operators,
telecommunications equipment manufacturers, and telecommunications equipment
distributors.
Coherent's teleconference products include Call Port-Registered Trademark-,
which is an audio subsystem for desktop computers; Conference
Master-Registered Trademark-, a high quality teleconferencing system; and
Voicecrafter-TM-, an audio subsystem for video conferencing systems. All
teleconference products incorporate Coherent's echo cancellation technology
and provide full-duplex, hands-free operation.
At March 10, 1997, Safeguard owns approximately 32% of Coherent's outstanding
common stock.
Sanchez Computer Associates, Inc. completed its rights offering in December
1996. Sanchez designs, develops, markets, implements, and supports a
comprehensive software system called PROFILE-Registered Trademark- for
financial services organizations worldwide. Sanchez's highly flexible
PROFILE family of products is comprised of three integrated modules which
operate on open client-server platforms. Historically, Sanchez has
experienced success installing PROFILE in emerging market banks, particularly
in Central Europe, with little existing enterprise-wide automation. Sanchez
has recently begun to expand its target markets to the Asian-Pacific Rim,
while also targeting large U.S. and Canadian banks looking to develop on-line
retail banking business to be conducted via alternate distribution channels.
Sanchez believes PROFILE can be the next generation infrastructure for direct
banking, providing the flexibility for banks to deliver customized banking
products over a wide variety of consumer interfaces, including over the
Internet.
At March 10, 1997, Safeguard owns approximately 24% of Sanchez's outstanding
common stock, and warrants which could increase its ownership to 26%.
USDATA Corporation provides a wide range of software components, hardware
systems and services, design consulting and maintenance support used by its
customers to improve the overall productivity of their businesses and to
monitor automated processes. The real-time information provided by USDATA's
products enables customers to reduce operating costs, improve product quality
and increase overall throughput and productivity.
USDATA produces automation software tools that enable an organization's
information systems to supervise, monitor and control manufacturing and other
automated processes and to interface with management information systems.
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<PAGE>
USDATA's family of software products, marketed under the name
FactoryLink-Registered Trademark-, provides a powerful set of software tools
designed for users who are technically competent but who may not be
experienced software programmers.
USDATA is also engaged in the design and turnkey implementation of integrated
third-party data collection systems that allow remote, real-time data
collection using a variety of automatic identification techniques. USDATA
has executed a non-binding letter of intent to sell this portion of its
business.
At March 10, 1997, Safeguard owns approximately 20% of USDATA's outstanding
common stock, and warrants which could increase its ownership to 25%.
Diamond Technology Partners, Incorporated expects to complete its rights
offering in March 1997. Diamond is a management consulting firm that devises
business strategies enabled by information technology and manages the
implementation of those strategies. The distinguishing qualities of Diamond's
consulting process are its ability to synthesize strategy with technology and
deliver solutions with measurable results, which generally include the
design, deployment, and integration of information technology solutions
together with modification of business processes and organizational
structures. Diamond delivers its strategic consulting and information
technology solutions through a single, integrated multi-disciplinary team.
Upon completion of Diamond's rights offering, Safeguard will own
approximately 8% of Diamond's outstanding common stock and warrants which
could increase its ownership to 10%. Diamond's Chairman and CEO controls a
majority of the aggregate voting rights of the common stock.
Integrated Systems Consulting Group, Inc. ("ISCG") completed its rights
offering in May 1996. ISCG provides consulting services that address its
clients' information processing needs through technologically advanced
solutions, including client-server architecture, graphical user interface
based applications, relational and object-oriented databases and
cross-platform applications integration. ISCG delivers consulting services
principally in software applications development, but also in systems and
network management. ISCG focuses its marketing efforts on the pharmaceutical
industry. ISCG has extensive experience in the development, implementation,
integration and management of information systems used in the drug
development process. It uses this experience and expertise to help
pharmaceutical companies shorten the time required for developing, clinical
testing, and submission of FDA applications for new drugs. At March 10,
1997, Safeguard owns approximately 7% of ISCG's outstanding common stock and
warrants which could increase its ownership to 9%. ISCG's Chairman and CEO
owns approximately 38% of the outstanding common stock.
National Media Corporation is the world's largest infomercial company, using
transactional television to sell innovative consumer products. With its
international subsidiary, Quantum International, Ltd., the company reaches
364 million television households in more than 70 countries. At March 10,
1997, Safeguard owns preferred stock convertible into 2% of National Media's
outstanding common stock and warrants which could increase its ownership to
9%.
Private Companies
Diablo Research Corporation is a contract engineering company with expertise
in radio frequency technology and applications, CEBUS technology for home
automation and fixed wireless applications for the telecommunications
industry. At March 10, 1997, Safeguard owns approximately 20% of Diablo's
outstanding voting capital stock.
FormMaker Software, Inc. provides multi-platform, enterprise-wide document
automation solutions for document-intensive industries with mission-critical,
complex and high-volume needs. FormMaker also provides consulting,
implementation, training and outsourcing services. Another Safeguard
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partnership company, Micro Dynamics Ltd., a document imaging systems company,
merged into FormMaker during 1996. FormMaker has agreed to merge with Image
Sciences, Inc., subject to satisfaction of certain conditions including
shareholder approval. The resulting company will be renamed DocuCorp
International. At March 10, 1997, Safeguard owns approximately 46% of
FormMaker's outstanding common stock, and warrants which could increase its
ownership to 48%, before the effect of the pending merger. If the merger is
completed, Safeguard will own 22% of DocuCorp's outstanding common stock,
and warrants which could increase its ownership to 24%.
Intellisource, Inc. provides outsourcing services ranging from advisory help
to turnkey solutions, enabling customers to gain the benefits of
reengineering support tasks while freeing resources for core competitive
activities. The company's subsidiary, Supply Chain Solutions, provides
"SCORE" software for supply chain management solutions. At March 10, 1997,
Safeguard owns approximately 12% of Intellisource's outstanding common stock,
and non-voting preferred stock which could be converted to increase
Safeguard's ownership to 65%.
Internet Capital Group, LLC was established by Safeguard in 1996 to identify,
invest in, and develop early to mid-stage Internet-related companies in the
target areas of enabling tools and technology businesses, software
application developers, content providers, and ongoing enterprises whose
business model is enhanced by the Internet. Internet Capital Group has
received commitments for $40 million of funding, of which Safeguard has
committed 33% of that amount.
MultiGen, Inc. develops and markets the leading real-time 3D authoring
software that is used to create, edit, and view scenes for visual simulation,
entertainment, CAD visualization, and virtual reality applications. The
company's newest products include the MultiGen-Registered Trademark- Series
II and its innovative real-time 3D virtual reality scene builder,
SmartScene-TM-. At March 10, 1997, Safeguard owns approximately 28% of
MultiGen's outstanding common stock.
MicroVision Medical Systems, Inc. has developed an automated intelligent
microscopy system which uses proprietary imaging technologies for a wide
variety of diagnostic and research applications. MicroVision intends to
introduce its system to the healthcare market to identify cells with specific
characteristics within a sample of cells by detecting color produced by the
reaction between common laboratory stains and the cells. The system software
can be configured to identify different stains, thereby allowing the system
to be adapted to identify a broad range of target cellular conditions.
MicroVision intends to establish its system as the preferred platform for
multiple diagnostic applications. At March 10, 1997, Safeguard owns common
stock and convertible preferred stock of MicroVision which constitutes
approximately 40% of MicroVision's outstanding capital stock.
OAO International Corporation provides global, full-service information
technology solutions and outsourcing services through industry-specific
partnerships. OAO's expertise lies in enterprise system management,
distributed systems management, help desk services, and software engineering.
It has teamed with such companies as IBM Global Services, Digital Equipment
Corporation, and Perot Systems. At March 10, 1997, Safeguard owns 50% of
OAO's outstanding common stock, subject to an option held by OAO's founder
which could reduce Safeguard's ownership to 40%.
RMS Information Systems provides design, development, integration, and
operation of telecommunications, network services and facilities management
for voice, data, and video systems, principally to governmental agencies. At
the end of 1996, RMS was restructured through a transfer of its principal
business assets to a new entity to eliminate a part of its outstanding debt
burden, to exit a money-losing business, and to facilitate its strategy of
pursuing business in the commercial markets. At March 10, 1997, Safeguard
owns 20% of RMS' outstanding common stock.
Sentry Technology Group resulted from a 1996 merger between Value Sourcing
Group and Sentry Technology Group. The company provides information
technology market research, management consulting, and communications
services for IT buyers and sellers. Sentry publishes Software Magazine and
Client/Server Computing, two monthly magazines with an aggregate circulation
to 250,000 CIOs
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and senior IT executives worldwide. At March 10, 1997, Safeguard owns
approximately 49% of Sentry's outstanding common stock.
Whisper Communications, Inc. has developed a two-way, fixed-base automated
meter reading technology which will allow utilities to remotely read meters
(gas, water, or electric) via the use of radio frequency technology and a
wireless communications backbone. At March 10, 1997, Safeguard owns
preferred stock convertible into approximately 18% of Whisper's common stock.
XL Vision, Inc. specializes in producing application-specific electronic
imaging solutions to meet specific customer needs and identifiable market
needs. XL Vision's product lines under development include PhotoVision-TM-,
an automatic identification system for use with credit cards, ATM cards and
ID cards; and Enhanced Vision Systems-TM-, proprietary thermal infrared
imaging systems capable of "seeing" in darkness, fog or haze. XL Vision spun
out MicroVision Medical Systems, Inc. as a separate company during 1996, and
is preparing to spin out Enhanced Vision Systems during the first half of
1997. At March 10, 1996, Safeguard owns 13% of XL Vision's outstanding
common stock, and convertible preferred stock which could increase its
ownership to 66%.
Safeguard's ownership percentages in certain of the partnership companies
described above include shares which Safeguard has granted to certain of its
executives under its long term incentive plan. These grants are subject to
certain restrictions, and Safeguard continues to control the voting of these
shares until the restrictions lapse.
Safeguard also participates in managing seven venture capital and private
equity funds. These funds invest in early stage, rapidly growing and/or
established businesses, and have co-invested in certain of the Company's
partnership companies. The following table lists these funds. While
Safeguard's focus is on the information technology industry, the funds also
invest in health care, life sciences, service-related companies, technology
companies in the energy utilities markets, basic industries, and later stage
companies in various industries. Radnor Venture Partners, Technology Leaders
I, and Technology Leaders II are fully invested (including reserves set aside
for follow-on investments).
Venture Capital and Private Equity Funds
Capital % Owned by Year
Name of Fund Commitments Safeguard(1) Established
- ------------ ----------- ------------ -----------
Radnor Venture Partners $33,000,000 14% 1988
Technology Leaders I 61,000,000 3% 1992
Technology Leaders II 113,000,000 4% 1994
TL Ventures III 285,000,000 4% 1996
EnerTech Capital Partners 50,000,000 6% 1996
Safeguard International Fund 75,000,000 13%(2) 1996
SCP Private Equity Partners 88,000,000 10%(2) 1996
(1) Represents the percentage of the outstanding limited partnership
interests in each fund owned by Safeguard. In addition, Safeguard owns
interests in the general partners of these funds which have carried interests
in the funds' profits.
(2) Estimated pending final fund closing.
EMPLOYEES
Safeguard and its consolidated subsidiaries have approximately 4,600
employees, of which approximately 81% are employed by CompuCom. The Company
believes relations with employees are good.
ITEM 1(d). FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND
EXPORT SALES
The Company does not believe that foreign or geographic area sales are
material or significant to an understanding of its business and operations
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during the three-year period ended December 31, 1996. Where appropriate,
information concerning the Company's export sales is discussed in Item 1(c)
"Narrative Description of Business."
ITEM 1(e). EXECUTIVE OFFICERS
Information about the Company's executive officers can be found in Part III
of this report under "Item 10. Directors and Executive Officers of
Registrant." None of the officers have fixed term employment agreements.
ITEM 2. PROPERTIES
The Company owns its corporate headquarters and administrative offices
located in Wayne, Pennsylvania. The headquarters building is subject to a
$3.6 million mortgage bearing interest at 9.75%, which amortizes over a 30
year term and is callable by the lender at any time beginning in 2002. The
principal properties of the Company consisted of the following as of March
10, 1997:
INDUSTRY SEGMENT/LOCATION TYPE OF FACILITY LEASE EXPIRES
INFORMATION TECHNOLOGY
MICROCOMPUTER SYSTEMS AND SERVICES (COMPUCOM)
Dallas, TX Executive/Admin. Offices *
Paulsboro, NJ Distribution Center 2001(1)
Stockton, CA Distribution Center 1999(2)
Dallas, TX Customer Center 2000
Dallas, TX Sales and Service 1998
Dallas, TX Future Corporate/Operations * (3)
INFORMATION SOLUTIONS
Cary, NC (Tangram) Office/Distribution 2004
Malvern, PA (Premier) Office/Distribution 1998(4)
METAL FINISHING (Pioneer)
Minneapolis, MN Manufacturing/Office *
Green Bay, WI Manufacturing/Office *
Monroe, MI Manufacturing/Office * (5)
(*) Owned facility.
(1) CompuCom has a cancellation option exercisable at any time after August
1999.
(2) CompuCom has a cancellation option exercisable in May of each year.
(3) CompuCom purchased this facility in 1996 and is currently renovating the
facility for future occupancy by most of its current Dallas operations.
(4) Premier has a cancellation option exercisable at any time.
(5) Pioneer purchased land in 1996 and is constructing a new metal finishing
facility.
CompuCom's executive office building in Dallas, Texas is subject to a $3.9
million ten-year mortgage which matures in 2003. CompuCom's new corporate
and operations campus was purchased for approximately $26 million which has
been funded on an interim basis through its bank credit facility pending
permanent mortgage financing. Pioneer has a variable rate industrial revenue
bond mortgage on its Green Bay property with a principal balance of $1.9
million as of December, 31, 1996, which matures in 2002. Pioneer has a
variable rate industrial revenue bond mortgage on its Monroe property to
finance construction in an ultimate principal amount of $8 million, maturing
in 2008.
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In the opinion of management, the properties and plants are in good condition
and repair and are adequate for the particular operations for which they are
used. The extent of utilization of manufacturing facilities varies from
plant to plant. CompuCom's new 300,000 square foot New Jersey distribution
center doubles its previous warehouse space and contains a state-of-the-art
90,000 square foot configuration center, triple the size of the previous
configuration space. CompuCom's new Dallas property contains 250,000 square
feet of office space in two buildings on 20 acres. CompuCom is renovating
this space for use as its new corporate and operations campus, and will
relocate most of its Dallas area operations to this facility with expansion
capacity for future growth. The other existing facilities of the Company
generally are capable of supporting increased activity without any
significant capital expenditures.
ITEM 3. LEGAL PROCEEDINGS
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of 1996.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company incorporates by reference the information contained under the
caption "Common Stock Data" on page 45 of its Annual Report to Shareholders
for the year ended December 31, 1996 which page is filed as part of Exhibit
13 hereto.
ITEM 6. SELECTED FINANCIAL DATA
The Company incorporates by reference the information contained under this
caption on page 28 of its Annual Report to Shareholders for the year ended
December 31, 1996 which page is filed as part of Exhibit 13 hereto.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company incorporates by reference the information contained under this
caption on pages 28 through 32 of its Annual Report to Shareholders for the
year ended December 31, 1996 which pages are filed as part of Exhibit 13
hereto.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company incorporates by reference the information on pages 33 through 45
of its Annual Report to Shareholders for the year ended December 31, 1996
which pages are filed as part of Exhibit 13 hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS:
The following persons were executive officers of the Registrant at March 20,
1997:
HAS BEEN AN
OFFICER
NAME AGE SINCE POSITION
Warren V. Musser 70 1953 Chairman of the Board and
Chief Executive Officer
Donald R. Caldwell(1) 50 1993 President and Chief Operating
Officer
Edward R. Anderson(2) 50 1994 President and Chief Executive
Officer, CompuCom Systems,
Inc.
Jerry L. Johnson(3) 49 1995 Senior Vice President--
Operations
Thomas C. Lynch(4) 54 1995 Senior Vice President
Michael W. Miles(5) 39 1996 Vice President and Chief
Financial Officer
James A. Ounsworth 54 1991 Senior Vice President, General
Counsel and Secretary
Glenn T. Rieger(6) 38 1993 Vice President
Charles A. Root 64 1984 Executive Vice President
(1) Mr. Caldwell has served as President of the Company since February 1996
and as Executive Vice President from March 1993 to February 1996. Prior
to joining the Company, from 1991 through 1993, Mr. Caldwell was President
of Valley Forge Capital Group, Ltd., a business mergers and acquisition
advisory firm that he founded. From 1990 through 1991, Mr. Caldwell was
Chief Administrative Officer of Cambridge Technology Partners
(Massachusetts), Inc., a provider of systems integration, consulting and
custom system development services.
(2) Mr. Anderson has served as President and Chief Executive Officer of
CompuCom Systems, Inc. since January 1994 and served as Chief Operating
Officer from August 1993 through December 1993. Prior to joining CompuCom,
Mr. Anderson served from May 1988 to July 1993 as President and Chief
Operating Officer of Computerland Corporation (now known as Vanstar), a
computer reseller.
(3) Mr. Johnson served at US West, a Regional Bell Operating Company, from 1985
through 1995, most recently as Vice President of Network Technology
Services.
(4) In 1995 Mr. Lynch retired from the U.S. Navy as an Admiral after 31 years,
including serving as Superintendent of the U.S. Naval Academy from 1991
through 1994 and the Director, Navy Roles and Missions from 1994 through
1995.
(5) Mr. Miles has served as Vice President and Chief Financial Officer since
January 1997 and has been with the Company since 1984 in various financial
positions, most recently as Vice President and Corporate Controller.
(6) Mr. Rieger has served as a Vice President of the Company since January
1994. Prior to joining the Company, from 1991 through 1993, Mr. Rieger was
a Managing Director of Valley Forge Capital Group, Ltd., a business
mergers and acquisition advisory firm.
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DIRECTORS:
The Company incorporates by reference the information contained under the
caption "ELECTION OF DIRECTORS" in its definitive Proxy Statement relative to
its May 8, 1997 annual meeting of shareholders, to be filed within 120 days
after the end of the year covered by this Form 10-K Report pursuant to
Regulation 14A under the Securities Exchange Act of l934, as amended.
DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K:
The Company incorporates by reference the information contained under the
caption "SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE" in its
definitive Proxy Statement relative to its May 8, 1997 annual meeting of
shareholders, to be filed within 120 days after the end of the year covered
by this Form 10-K Report pursuant to Regulation 14A under the Securities
Exchange Act of l934, as amended.
ITEM 11. EXECUTIVE COMPENSATION
The Company incorporates by reference the information contained under the
captions "Directors' Compensation," "Compensation Committee Interlocks and
Insider Participation" and "EXECUTIVE COMPENSATION" in its definitive Proxy
Statement relative to its May 8, 1997 annual meeting of shareholders, to be
filed within 120 days after the end of the year covered by this Form 10-K
Report pursuant to Regulation 14A under the Securities Exchange Act of l934,
as amended.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company incorporates by reference the information contained under the
caption "SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" in
its definitive Proxy Statement relative to its May 8, 1997 annual meeting of
shareholders, to be filed within 120 days after the end of the year covered
by this Form 10-K Report pursuant to Regulation 14A under the Securities
Exchange Act of l934, as amended.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company incorporates by reference the information contained under the
captions "Compensation Committee Interlocks and Insider Participation" and
"CERTAIN TRANSACTIONS" in its definitive Proxy Statement relative to its May
8, 1997 annual meeting of shareholders, to be filed within 120 days after the
end of the year covered by this Form 10-K Report pursuant to Regulation 14A
under the Securities Exchange Act of l934, as amended.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules
CONSOLIDATED FINANCIAL STATEMENTS *
INDUSTRY SEGMENTS
BALANCE SHEETS - December 31, 1996 and 1995
OPERATIONS - years ended December 31, 1996, 1995, and 1994
CASH FLOWS - years ended December 31, 1996, 1995, and 1994
SHAREHOLDERS' EQUITY - years ended December 31, 1996, 1995,
and 1994
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
STAEMENT OF MANAGEMENT'S FINANCIAL RESPONSIBILITY
QUARTERLY FINANCIAL DATA
21
<PAGE>
________
* Incorporated by reference from pages 33 through 45 of the Company's
Annual Report to Shareholders for the year ended December 31, 1996, which
pages are filed as part of Exhibit 13 hereto.
FINANCIAL STATEMENT SCHEDULES
INDEPENDENT AUDITORS' REPORT
Schedule I - Condensed Consolidated Financial Information
of Registrant
Schedule II - Valuation and Qualifying Accounts
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Safeguard Scientifics, Inc.:
Under date of February 7, 1997, we reported on the consolidated balance
sheets of Safeguard Scientifics, Inc. and subsidiaries as of December 31,
1996 and 1995, and the related consolidated statements of operations, cash
flows and shareholders' equity for each of the years in the three-year period
ended December 31, 1996, as contained in the 1996 annual report to
shareholders. These consolidated financial statements and our report thereon
are incorporated by reference in the annual report on Form 10-K for the year
1996. In connection with our audits of the aforementioned consolidated
financial statements, we also audited the related consolidated financial
statement schedules as listed in the accompanying index. These financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statement
schedules based on our audits.
In our opinion, such financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
/s/ KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
February 7, 1997
22
<PAGE>
Safeguard Scientifics, Inc.
Schedule I
Condensed Consolidated Balance Sheets
December 31, 1996 and 1995
(In thousands)
<TABLE>
<CAPTION>
ASSETS 1996 1995
- --------------- ---------- ----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents................ $ 8,019 $ 1,999
Receivables less allowances
($25-1996; $136-1995)................... 4,140 3,538
Notes and other receivables.............. 9,403 4,259
Inventories.............................. 992 1,262
Other current assets..................... 8,127 8,562
----------- ----------
Total current assets..................... 30,681 19,620
PROPERTY, PLANT AND EQUIPMENT, NET....... 20,707 20,852
COMMERCIAL REAL ESTATE, NET.............. 17,787
OTHER ASSETS
Investments in unconsolidated subsidiaries
and affiliates.......................... 241,490 224,890
Notes and other receivables.............. 14,989 6,147
Other.................................... 9,846 1,873
---------- ----------
266,325 232,910
---------- ----------
$ 317,713 $291,169
---------- ----------
---------- ----------
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995
- ----------------------------------------- ---------- ----------
<S> <C> <C>
CURRENT LIABILITIES
Current debt obligations.................... $ 3,560 $ 1,815
Current commercial real estate debt......... 3,103
Accounts payable............................ 1,730 1,162
Accrued expenses............................ 16,702 10,113
---------- ----------
Total current liabilities................... 21,992 16,193
LONG TERM DEBT.............................. 12,591 79,216
COMMERCIAL REAL ESTATE DEBT................. 17,380
DEFERRED TAXES.............................. 10,860 22,899
OTHER LIABILITIES........................... 1,128 1,172
CONVERTIBLE SUBORDINATED NOTES.............. 102,131
SHAREHOLDERS' EQUITY
Common stock................................ 3,280 3,280
Additional paid-in capital.................. 35,566 20,709
Retained earnings........................... 129,970 110,043
Treasury stock, at cost..................... (7,165) (10,471)
Net unrealized appreciation on investments.. 7,360 30,748
------------- ----------
169,011 154,309
------------- -----------
$ 317,713 $291,169
------------- -----------
------------- -----------
</TABLE>
23
<PAGE>
Safeguard Scientifics, Inc.
Schedule I
Condensed Consolidated Statements of Operations
Years Ended December 31, 1996, 1995 and 1994
(In thousands except per share amounts)
<TABLE>
<CAPTION>
1996 1995 1994
---------- --------- ---------
<S> <C> <C> <C>
REVENUES
Net sales............................. $ 30,286 $ 35,628 $ 35,024
Gains on sales of securities, net..... 26,011 17,464 21,789
Other income.......................... 10,273 9,210 7,323
--------- --------- ---------
Total revenues........................ 66,570 62,302 64,136
COSTS AND EXPENSES
Cost of sales......................... 19,223 23,899 22,054
Selling............................... 1,248 1,378 1,307
General and administrative............ 21,464 17,683 14,334
Depreciation and amortization......... 3,818 4,536 4,383
Interest.............................. 8,623 6,643 5,141
Equity in income of unconsolidated
subsidiaries and affiliates, net
of taxes............................. (12,345) (12,655) (2,378)
--------- --------- ---------
Total costs and expenses.............. 42,031 41,484 44,841
--------- --------- ---------
EARNINGS BEFORE TAXES ON INCOME....... 24,539 20,818 19,295
Provision for taxes on income......... 4,612 2,555 3,555
--------- --------- ---------
NET EARNINGS.......................... $ 19,927 $ 18,263 $ 15,740
--------- --------- ---------
--------- --------- ---------
EARNINGS PER SHARE
Primary............................... $ .61 $ .57 $ .51
Fully diluted......................... $ .61 $ .53 $ .47
AVERAGE COMMON SHARES OUTSTANDING
Primary............................... 31,348 30,734 29,439
Fully diluted......................... 31,348 30,908 29,679
</TABLE>
24
<PAGE>
Safeguard Scientifics, Inc.
Schedule I
Condensed Consolidated Statements of Cash Flows
Years Ended December 31, 1996, 1995 and 1994
(In thousands)
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings.................................. $ 19,927 $ 18,263 $ 15,740
Adjustments to reconcile net earnings to cash
from operating activities
Depreciation and amortization................. 3,818 4,536 4,383
Deferred income taxes......................... 109 1,891 3,006
Equity in income of unconsolidated subsidiaries
and affiliates, net.......................... (12,345) (12,655) (2,378)
Gains on sales of securities, net............. (26,011) (17,464) (21,789)
--------- --------- ---------
(14,502) (5,429) (1,038)
Cash provided (used) by changes in working
capital items
Receivables................................... (5,746) 422 (5,239)
Inventories................................... 270 29 (103)
Accrued liabilities and other................. 5,354 (7,587) 1,132
--------- --------- ---------
Cash (used) by operating activities............ (14,624) (12,565) (5,248)
Proceeds from sales of securities, net......... 41,982 24,952 16,953
--------- --------- ---------
Cash provided by operating activities and
sales of securities, net...................... 27,358 12,387 11,705
OTHER INVESTING ACTIVITIES
Investments and notes acquired, net.......... (64,110) (28,638) (49,343)
Capital expenditures......................... (5,985) (3,068) (2,375)
Other, net................................... (5,592) (1,302)
--------- --------- ---------
Cash (used) by other investing activities..... (75,687) (31,706) (53,020)
FINANCING ACTIVITIES
Net borrowings (repayments) on revolving
credit facilities........................... (63,425) 16,351 17,927
Net borrowings (repayments) on term debt..... 455 (1,035) 21,717
Issuance of convertible subordinated notes,
net......................................... 112,109
Repurchase of common stock................... (33) (551)
Stock options exercised...................... 5,210 3,771 1,358
--------- --------- ---------
Cash provided by financing activities......... 54,349 19,054 40,451
--------- --------- ---------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................. 6,020 (265) (864)
Cash and cash equivalents--beginning of year.. 1,999 2,264 3,128
--------- --------- ---------
CASH AND CASH EQUIVALENTS--END OF YEAR........ $ 8,019 $ 1,999 $ 2,264
--------- --------- ---------
--------- --------- ---------
</TABLE>
25
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1-DEBT
<TABLE>
<CAPTION>
1996 1995
--------- ---------
(In thousands)
<S> <C> <C>
Revolving credit facility................. $ 47,800
Notes payable to equity investee
companies................................ 23,589
Industrial development revenue bonds, due
in installments through 2008............. $ 9,870 2,210
Mortgage note, 9.75%, payable monthly
through 2002............................. 3,487 3,516
Other..................................... 2,794 3,916
---------- ---------
16,151 81,031
Current debt obligations................. (3,560) (1,815)
---------- ---------
Long-term debt........................... $ 12,591 $ 79,216
---------- ----------
---------- ----------
</TABLE>
Aggregate maturities of long-term debt during future years are as follows (in
millions): $3.6-1997; $.9-1998; $1.0-1999; $1.0-2000; $1.0-2001 and
$8.7-thereafter.
Interest paid in 1996, 1995 and 1994 was $6.3 million, $6.6 million, and $4.9
million, respectively, of which $1.1 million, $2.0 million and $2.7 million
in 1996, 1995, and 1994, respectively, related to commercial real estate
debt, and $3.4 million in 1996 related to convertible subordinated notes.
In connection with investments in certain unconsolidated subsidiaries and
investee companies, the Company is contingently obligated for approximately
$28 million in bank loan and other guarantees and $59 million for possible
future investments, including committed capital to various venture funds and
private equity partnerships.
NOTE 2-RECLASSIFICATIONS
Certain amounts previously reported in the condensed consolidated financial
statements have been reclassified to conform to the current year presentation.
26
<PAGE>
SAFEGUARD SCIENTIFICS, INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
BALANCE ADDITIONS
BEGINNING CHARGED TO DEDUCTIONS BALANCE
DESCRIPTION OF YEAR OPERATIONS (1) OTHER END OF YEAR
- --------------------------------------------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts
Year ended December 31, 1994..................... $ 5,480 $ 3,378 $ 1,669 $ (723)(2) $ 6,466
Year ended December 31, 1995..................... $ 6,466 $ 1,277 $ 968 $(4,131)(3) $ 2,644
Year ended December 31, 1996..................... $ 2,644 $ 1,472 $ 995 $ (33)(4) $ 3,088
Inventory reserves
Year ended December 31, 1994..................... $ 15,400 $ 15,049 $ 18,627 $(1,148)(2) $ 10,674
Year ended December 31, 1995..................... $ 10,674 $ 13,333 $ 13,581 $ (902)(3) $ 9,524
Year ended December 31, 1996..................... $ 9,524 $ 15,529 $ 16,119 $ $ 8,934
</TABLE>
(1) Net write-offs.
(2) Sale and deconsolidation of Micro Decisionware and Coherent, respectively.
(3) Deconsolidation of Center Core.
(4) Sale of the Phoenix location of Pioneer Metal Finishing and the Commerical
Real Estate operations.
27
<PAGE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of 1996.
(c) Exhibits
The following is a list of exhibits required by Item 601 of Regulation S-K
filed as part of this Report. Where so indicated by footnote, exhibits which
were previously filed are incorporated by reference. For exhibits
incorporated by reference, the location of the exhibit in the previous filing
is indicated in parentheses.
3.1 Amended and Restated Articles of Incorporation of the Company*
3.2 By-laws of the Company, as amended (6)(Exhibit 3.2)
4.1** 1979 Stock Option Plan (1)(Exhibit 10)
4.2** 1980 Stock Option Plan (1)(Exhibit 10)(5)(Exhibit 10.5)
4.3** 1990 Stock Option Plan, as amended*
4.4** Stock Option Plan for Non-Employee Directors (11) (Exhibit 4.8)
4.5** Safeguard Scientifics, Inc. Amended and Restated Stock Savings Plan
(14) (Exhibit 4.9)
4.6** First Amendment to Safeguard Scientifics, Inc. Stock Savings Plan*
4.7** Safeguard Scientifics, Inc. Stock Savings Plan Trust Agreement
(5)(Exhibit 4.2)
4.8 Trust Indenture Agreement dated February 1, 1996 (17) (Exhibit 10.34)
4.9 Purchase Agreement dated February 1, 1996 between Safeguard
Scientifics, Inc. and JP Morgan Securities, Inc. (17) Exhibit 10.35)
10.1** Safeguard Scientifics Money Purchase Pension Plan (6)(Exhibit 10.3)
10.2** First Amendment to Safeguard Scientifics Money Purchase Pension Plan
(11) (Exhibit 10.2)
10.3** Second Amendment to Safeguard Scientifics Money Purchase Pension Plan
(14) (Exhibit 10.3)
10.4** Third Amendment to Safeguard Scientifics Money Pension Plan (17)
(Exhibit 10.4)
28
<PAGE>
10.5** Safeguard Scientifics Money Purchase Pension Plan Trust Agreement
(6)(Exhibit 10.4)
10.6** Safeguard Management Incentive Compensation Plan (7)(Exhibit 10.3)
10.7** Safeguard Scientifics, Inc. Long Term Incentive Plan, as amended and
restated effective June 15, 1994 (14) (Exhibit 10.6)
10.8** Form of Promissory Notes dated December 22, 1994 given by certain
executives for advances by the Company of income tax withholdings on
restricted stock grants (14) (Exhibit 10.7)
10.9** Form of Promissory Notes dated January 3, 1995 given by certain
executives for advances by the Company of income tax withholdings on
restricted stock grants (14) (Exhibit 10.8)
10.10** Form of Promissory Notes dated December 12, 1995 and December 20, 1995
given by certain executives for advances by the Company of income tax
withholdings on restricted stock grants. (17) (Exhibit 10.10)
10.11** Form of Promissory Notes dated February 12, 1997 given by certain
executives for advances by the Company of income tax withholdings on
restricted stock grants*
10.12** Safeguard Scientifics, Inc. Deferred Compensation Plan (2)(Exhibit
10.12)
10.13 Credit Agreement, dated as of September 13, 1996, between Safeguard
Scientifics, Inc., Safeguard Scientifics (Delaware), Inc. and PNC
Bank, N.A. (exhibits omitted) (19) (Exhibit 10.1)
10.14 Credit Agreement, dated as of September 26, 1996, between NationsBank
of Texas, N.A. and CompuCom Systems, Inc. (exhibits and schedules
omitted) (19) (Exhibit 10.2)
10.15 Amended and Restated Master Security and Administration Agreement,
dated as of September 25, 1996, among CompuCom Systems, Inc.,
NationsBank of Texas, N.A., CSI Funding, Inc. and Enterprise Funding
Corporation (exhibits omitted) (19) (Exhibit 10.3)
10.16 Amendment No. 1 dated December 5, 1996 to Amended and Restated Master
Security Agreement among CompuCom Systems, Inc., NationsBank of Texas,
CSI Funding, Inc. and Enterprise Funding Corporation*
10.17 Receivables Purchase Agreement dated April 1, 1996 between CompuCom
Systems, Inc. and CSI Funding, Inc. (exhibits omitted) (18) (Exhibit
10.6)
10.18 First Amendment to Receivables Purchase Agreement, dated as of
September 25, 1996, between CompuCom Systems, Inc. and CSI Funding,
Inc. (exhibits omitted) (19) (Exhibit 10.4)
10.19 Transfer and Administration Agreement, dated as of April 1, 1996,
among CSI Funding, Inc., CompuCom Systems, Inc., Enterprise Funding
Corporation and NationsBank, N.A. (exhibits omitted) (18) (Exhibit
10.7)
10.20 First Amendment to Transfer and Administration Agreement, dated as of
September 25, 1996, among CSI Funding, Inc.,
29
<PAGE>
CompuCom Systems, Inc., Enterprise Funding Corporation and
NationsBank, N.A. (exhibits omitted) (19) (Exhibit 10.5)
10.21 Amendment No. 2 dated December 5, 1996 to Transfer and Administration
Agreement among CSI Funding, Inc., CompuCom Systems, Inc., Enterprise
Funding Corporation and NationsBank, N.A.*
10.22** Promissory Note dated February 12, 1997 from Edward Anderson to
CompuCom Systems, Inc.*
10.23** Pledge Agreement dated August 31, 1994 between Edward Anderson and
CompuCom Systems, Inc. (14) (Exhibit 10.27)
11 Computation of Per Share Earnings*
13 Pages 28 to 45 of Annual Report to Shareholders for year ended
December 31, 1996*
21 List of Subsidiaries*
23 Consent of KPMG Peat Marwick LLP, independent auditors*
27 Financial Data Schedule*
________________________________
* Filed herewith.
** These exhibits relate to compensatory plans, contracts or arrangements in
which directors and/or executive officers of the registrant may
participate.
(1) Filed on March 30, 1981 as an exhibit to the Annual Report on Form 10-K
(No. 1-5620) and incorporated herein by reference.
(2) Filed on March 30, 1987 as an exhibit to Annual Report on Form 10-K (No.
1-5620) and incorporated herein by reference.
(3) Filed on April 8, 1988 as an exhibit to Form 8-K (No. 1-5620) and
incorporated herein by reference.
(4) Filed on March 29, 1991 as an exhibit to Form 10-K (No. 1-5620) and
incorporated herein by reference.
(5) Filed on December 13, 1991 as an exhibit to Form 8-K (No. 1-5620) and
incorporated herein by reference.
(6) Filed on March 30, 1992 as an exhibit to Form 10-K (No. 1-5620) and
incorporated herein by reference.
(7) Filed on March 31, 1993 as an exhibit to Form 10-K (No. 1-5620) and
incorporated herein by reference.
(8) Filed on April 9, 1993 as an exhibit to Form 8 Amendment to Form 10-K
(No. 1-5620) and incorporated herein by reference.
(9) Filed on October 22, 1993 as an exhibit to Form 8-K (No. 1-5620) and
incorporated herein by reference.
(10) Filed on November 15, 1993 as an exhibit to Form 10-Q (No. 1-5620) and
incorporated herein by reference.
(11) Filed on March 30, 1994 as an exhibit to Form 10-K (No. 1-5620) and
incorporated herein by reference.
(12) Filed on August 15, 1994 as an exhibit to Form 10-Q (No. 1-5620) and
incorporated herein by reference.
(13) Filed on October 17, 1994 as an exhibit to Form 8-K (No. 1-5620) and
incorporated herein by reference.
(14) Filed on March 30, 1995 as an exhibit to Form 10-K (No. 1-5620) and
incorporated herein by reference.
(15) Filed on August 14, 1995 as an exhibit to Form 10-Q (No. 1-5620) and
incorporated herein by reference.
(16) Filed on November 14, 1995 as an exhibit to Form 10-Q (No. 1-5620) and
incorporated by reference herein.
30
<PAGE>
(17) Filed on April 1, 1996 as an exhibit to Form 10-K (No. 1-5620) and
incorporated herein by reference.
(18) Filed on May 15, 1996 as an exhibit to Form 10-Q (No. 1-5620) and
incorporated herein by reference.
(19) Filed on November 12, 1996 as an exhibit to Form 10-Q (No. 1-5620) and
incorporated herein by reference.
31
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: March 24, 1997 SAFEGUARD SCIENTIFICS, INC.
By: /s/ Warren V. Musser
----------------------------------
Warren V. Musser, Chairman and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Dated: March 24, 1997 /s/ Warren V. Musser
-----------------------------------------
Warren V. Musser, Chairman and Chief
Executive Officer (Principal Executive
Officer)
Dated: March 25, 1997 /s/ Michael W. Miles
-----------------------------------------
Michael W. Miles, Vice President and Chief
Financial Officer (Principal Financial and
Accounting Officer)
Dated: March 26, 1997 /s/ Vincent G. Bell, Jr.
-----------------------------------------
Vincent G. Bell, Jr., Director
Dated: March 27, 1997 /s/ Donald R. Caldwell
-----------------------------------------
Donald R. Caldwell, Director
Dated: March 25, 1997 /s/ Robert A. Fox
-----------------------------------------
Robert A. Fox, Director
Dated: March 25, 1997 /s/ Delbert W. Johnson
-----------------------------------------
Delbert W. Johnson, Director
Dated: March 21, 1997 /s/ Robert E. Keith, Jr.
-----------------------------------------
Robert E. Keith, Jr., Director
Dated: March 24, 1997 /s/ Peter Likins
-----------------------------------------
Peter Likins, Director
Dated: March 26, 1997 /s/ Jack L. Messman
-----------------------------------------
Jack L. Messman, Director
Dated: March 25, 1997 /s/ Russell E. Palmer
-----------------------------------------
Russell E. Palmer, Director
Dated: March 27, 1997 /s/ John W. Poduska Sr.
-----------------------------------------
John W. Poduska Sr., Director
Dated: March 25, 1997 /s/ Heinz Schimmelbusch
-----------------------------------------
Heinz Schimmelbusch, Director
Dated: March 23, 1997 /s/ Hubert J. P. Schoemaker
-----------------------------------------
Hubert J. P. Schoemaker, Director
32
<PAGE>
SAFEGUARD SCIENTIFICS, INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
BALANCE ADDITIONS
BEGINNING CHARGED TO DEDUCTIONS BALANCE
DESCRIPTION OF YEAR OPERATIONS (1) OTHER END OF YEAR
- --------------------------------------------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts
Year ended December 31, 1994..................... $ 5,480 $ 3,378 $ 1,669 $ (723)(2) $ 6,466
Year ended December 31, 1995..................... $ 6,466 $ 1,277 $ 968 $(4,131)(3) $ 2,644
Year ended December 31, 1996..................... $ 2,644 $ 1,472 $ 995 $ (33)(4) $ 3,088
Inventory reserves
Year ended December 31, 1994..................... $ 15,400 $ 15,049 $ 18,627 $(1,148)(2) $ 10,674
Year ended December 31, 1995..................... $ 10,674 $ 13,333 $ 13,581 $ (902)(3) $ 9,524
Year ended December 31, 1996..................... $ 9,524 $ 15,529 $ 16,119 $ $ 8,934
</TABLE>
(1) Net write-offs.
(2) Sale and deconsolidation of Micro Decisionware and Coherent, respectively.
(3) Deconsolidation of Center Core.
(4) Sale of the Phoenix location of Pioneer Metal Finishing and the Commerical
Real Estate operations.
27
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: March 24, 1997 SAFEGUARD SCIENTIFICS, INC.
By: /s/ Warren V. Musser
----------------------------------
Warren V. Musser, Chairman and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Dated: March 24, 1997 /s/ Warren V. Musser
-----------------------------------------
Warren V. Musser, Chairman and Chief
Executive Officer (Principal Executive
Officer)
Dated: March 25, 1997 /s/ Michael W. Miles
-----------------------------------------
Michael W. Miles, Vice President and Chief
Financial Officer (Principal Financial and
Accounting Officer)
Dated: March 26, 1997 /s/ Vincent G. Bell, Jr.
-----------------------------------------
Vincent G. Bell, Jr., Director
Dated: March 27, 1997 /s/ Donald R. Caldwell
-----------------------------------------
Donald R. Caldwell, Director
Dated: March 25, 1997 /s/ Robert A. Fox
-----------------------------------------
Robert A. Fox, Director
Dated: March 25, 1997 /s/ Delbert W. Johnson
-----------------------------------------
Delbert W. Johnson, Director
Dated: March 21, 1997 /s/ Robert E. Keith, Jr.
-----------------------------------------
Robert E. Keith, Jr., Director
Dated: March 24, 1997 /s/ Peter Likins
-----------------------------------------
Peter Likins, Director
Dated: March 26, 1997 /s/ Jack L. Messman
-----------------------------------------
Jack L. Messman, Director
Dated: March 25, 1997 /s/ Russell E. Palmer
-----------------------------------------
Russell E. Palmer, Director
Dated: March 27, 1997 /s/ John W. Poduska Sr.
-----------------------------------------
John W. Poduska Sr., Director
Dated: March 25, 1997 /s/ Heinz Schimmelbusch
-----------------------------------------
Heinz Schimmelbusch, Director
Dated: March 23, 1997 /s/ Hubert J. P. Schoemaker
-----------------------------------------
Hubert J. P. Schoemaker, Director
32
<PAGE>
EXHIBIT 3.1
AMENDED AND
RESTATED ARTICLES OF INCORPORATION
OF
SAFEGUARD SCIENTIFICS, INC.
The Articles of Incorporation of Safeguard Scientifics. Inc. are hereby
amended and restated in their entirety to read as follows:
1st The name of the corporation is
SAFEGUARD SCIENTIFICS, INC.
2nd The location and post office address of its registered office in
this Commonwealth is 800 The Safeguard Building, 435 Devon Park Drive, Wayne,
Pennsylvania 19087.
3rd The purpose or purposes of the corporation are
To have unlimited power to engage in and do any lawful act concerning any or
all lawful business for which corporations may be incorporated under the
Pennsylvania Business Corporation Law, including, without limitation thereto,
the manufacture, purchase and sale of goods, wares and merchandise of every
class and description.
4th The term of its existence is perpetual.
5th The aggregate number of shares which the corporation shall have
authority to issue is 100,055,423 shares, divided into 100,000,000 shares of
Common Stock, par value $.10 per share, and 55,423 shares of Preferred Stock,
par value $l0.00 per share.
Each share of Common and Preferred Stock shall be entitled to one vote
per share at all meetings of shareholders.
The Board of Directors shall have the power, by resolution, to issue
from time to time, the kinds of shares herein authorized.
The following is a statement in respect of the Preferred Stock:
PREFERRED SHARES
The shares of Preferred Stock may by resolution of the Board of
Directors, from time to time, be divided into and issued in one or more series,
each of which series shall be designated as to distinguish the shares thereof
from the shares of all other series and classes. All shares of the respective
<PAGE>
series of Preferred Stock shall be identical except as to the following
relative rights and preferences, in respect of any or all of which there may
be variations between different series, namely, the rate of dividend, the
right of redemption and the price at, and the terms and conditions on which
shares may be redeemed, the amounts payable upon shares in event of voluntary
or involuntary liquidation, sinking fund provisions for the redemption or
purchase of shares, the right of conversion and the terms and conditions on
which shares may be converted in the event the shares of any series of
Preferred Stock are issued with the privilege of conversion. Different series
of the Preferred Stock shall not be construed to constitute different classes
of shares for the purpose of voting by classes under the Pennsylvania
Business Corporation Law.
Except as may be provided by the resolution establishing and
designating such class or series, the Board of Directors is hereby authorized
by resolution to increase or decrease the authorized number of shares of each
class or series (but not below the number of shares thereof then
outstanding).
6th (a) Except as set forth in paragraph (d) of this Article 6th,
the affirmative vote or consent in writing of the holders of 80% of the
voting power of all of the shares of stock of the corporation entitled to
vote in elections of directors shall be required:
(i) for a merger or consolidation of this corporation or any
subsidiary thereof with or into any other corporation, or
(ii) for any sale or lease of all or any substantial part of the
assets of this corporation or any subsidiary thereof to any other
corporation, person or other entity, or
(iii) for any sale or lease to this corporation or any
subsidiary thereof of any assets (except assets having an aggregate
fair market value of less than $2,000,000) in exchange for voting
securities (or securities convertible into voting securities or
options, warrants, or rights to purchase voting securities or
securities convertible into voting securities) of this corporation or
any subsidiary by any other corporation, person or other entity,
if, as of the record date for the determination of shareholders entitled
to notice thereof and to vote thereon or consent thereto, such other
corporation, person or other entity which is party to such a transaction is
the beneficial owner, directly or indirectly, of 5% or more in number of
shares of the outstanding shares of any class of or shares of stock of this
corporation entitled to vote in elections of directors.
(b) For purposes of this Article 6th, any corporation, person or
other entity shall be deemed to be the beneficial owner of any shares of
stock of this corporation,
(i) which it owns directly, whether or not of record, or
(ii) which it has the right to acquire pursuant to any agreement
or understanding or upon exercise of conversion rights, warrants or
options or otherwise, whether or not presently exercisable, or
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(iii) which are beneficially owned, directly (including shares
deemed to be owned through application of clause (ii) above), by an
"affiliate" or "associate" as those terms are defined herein, or
(iv) which are beneficially owned, directly or indirectly, by
any other corporation, person or entity (including any shares which
such other corporation, person or entity has the right to acquire
pursuant to any agreement or understanding or upon exercise of
conversion rights, warrants or options or otherwise, whether or not
presently exercisable) with which it or its "affiliate" or "associate"
has any agreement or arrangement or understanding for the purpose of
acquiring, holding, voting or disposing of shares of stock of this
corporation.
For the purposes of this Article 6th, the outstanding shares of stock of
this corporation shall include Convertible Preferred Stock, Series 10
issuable on the exchange of certificates of Safeguard Automotive Corporation
common stock, but shall not include any other shares which may be issuable
pursuant to any agreement or upon exercise of conversion rights, warrants,
options or otherwise.
For the purpose of this Article 6th, the term "affiliate" shall mean any
person that directly, or indirectly through one or more intermediaries,
controls, or is controlled by, or is under common control with, such
corporation, person or other entity. The term "control" (including the terms
"controlling," "controlled by" and "under common control with") means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of a corporation, person or other
entity, whether through the ownership of voting securities, by contract or
otherwise.
For the purpose of this Article 6th, the term "associate" shall mean (1)
any corporation or organization (other than this corporation or a
majority-owned subsidiary of this corporation) of which such corporation,
person or other entity is an officer or partner or is, directly or
indirectly, the beneficial owner of ten percent (10%) or more of any class of
equity securities, (2) any trust or other estate in which such corporation,
person or other entity has a substantial beneficial interest or as to which
such corporation, person or entity serves as a trustee or in a similar
fiduciary capacity, and (3) any relative or spouse of such person, or any
relative of such spouse, who has the same home as such person.
(c) The Board of Directors shall have the power and duty to
determine for the purposes of this Article 6th on the basis of information
known to the Board of Directors of this corporation, whether
(i) such other corporation, person or other entity
beneficially owns more than 5% in number of shares of the outstanding
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shares of any class of stock of this corporation entitled to vote in
elections of directors,
(ii) a corporation, person or other entity is an "affiliate" or
"associate" (as defined in paragraph (b) above) of another, and
(iii) the assets being acquired by this corporation, or any
subsidiary thereof, have an aggregate fair market value of less than
$2,000,000.
Any such determination shall be conclusive and binding for all purposes
of this Article 6th.
(d) The provisions of this Article 6th shall not apply to any
merger or other transaction referred to in this Article 6th with any
corporation, person or other entity if (1) the Board of Directors of this
corporation has approved a written agreement, memorandum of understanding, or
letter of intent with such other corporation, person or other entity with
respect to such transaction prior to the time that such other corporation,
person or other entity shall have become a beneficial owner of more than 5%
in number of shares of the outstanding shares of stock of any class of this
corporation entitled to vote in elections of directors, or (2) if such
transaction is otherwise approved by the Board of Directors of this
corporation, provided that a majority of the members of the Board of
Directors voting for the approval of such transaction were fully elected and
acting members of the Board of Directors prior to the time that such other
corporation, person or other entity shall have become a beneficial owner of
more than 5% in number of shares of the outstanding shares of stock of any
class of this corporation entitled to vote in elections of directors. In
addition, the provisions of this Article 6th shall not apply to any merger or
other transaction referred to in this Article 6th with a subsidiary (which
term shall mean a corporation of which a majority of the outstanding shares
of stock entitled to vote in elections of directors is owned by this
corporation directly, and/or indirectly through one or more subsidiaries).
7th The corporation reserves the right to amend, alter,
change or repeal any provision contained in the Articles of Incorporation, in
the manner now or hereafter prescribed by statute, and all rights conferred
upon shareholders herein are granted subject to this reservation.
Notwithstanding any other provision of these Articles of Incorporation or the
By-laws of this corporation (and in addition to any other vote that may be
required by law, these Articles of Incorporation or the By-laws of this
corporation), the affirmative vote of the holders of 80% of the voting power
of al1 shares of stock of this corporation entitled to vote in elections of
directors (considered for this purpose as one class) shall be required to
amend, alter, change or repeal Article 6th or 7th of these Articles of
Incorporation.
8th (a) Effective December 23, 1983, section 910 of the
Pennsylvania Business Corporation Law of 1933 (added by Pennsylvania Act No.
1983-92 enacted on December 23, 1983) or any corresponding provision of
succeeding law shall not be applicable to this corporation.
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(b) Paragraph (a) of this Article 8th shall cease to be
operative as part of the Articles of Incorporation of the corporation upon
the adoption of the Board of Directors of this corporation of a resolution to
that effect.
(c) Article VIII of the By-laws of the corporation, adopted
February 7, l984, is hereby rescinded.
9th Duties and Liabilities of Directors and Officers.
Section 1. Directors and officers as fiduciaries. A director or
officer of the corporation shall stand in a fiduciary relation to the
corporation and shall perform his or her duties as a director or officer,
including his or her duties as a member of any committee of the board upon
which he or she may serve, in good faith, in a manner he or she reasonably
believes to be in the best interests of the corporation, and with such care,
including reasonable inquiry, skill and diligence, as a person of ordinary
prudence would use under similar circumstances. In performing his or her
duties, a director or officer shall be entitled to rely in good faith on
information, opinions, reports or statements, including financial statements
and other financial data, in each case prepared or presented by: (a) one or
more officers or employees of the corporation whom the director or officer
reasonably believes to be reliable and competent with respect to the matters
presented, (b) counsel, public accountants or other persons as to matters
that the director or officer reasonably believes to be within the
professional or expert competence of such person, or (c) a committee of the
Board of Directors upon which the director or officer does not serve, duly
designated in accordance with law, as to matters within its designated
authority, which committee the director or officer reasonably believes to
merit confidence. A director or officer shall not be considered to be acting
in good faith if he or she has knowledge concerning the matter in question
that would cause his or her reliance to be unwarranted. Absent breach of
fiduciary duty, lack of good faith or self-dealing, actions taken as a
director or officer of the corporation or any failure to take any action
shall be presumed to be in the best interests of the corporation.
Section 2. Personal liability of directors. A director of the
corporation shall not be personally liable for monetary damages as such
(including, without limitation, any judgment, amount paid in settlement,
penalty, punitive damages or expense of any nature (including, without
limitation, attorneys' fees and disbursements) for any action taken, or any
failure to take any action, unless the director has breached or failed to
perform the duties of his or her office under these Articles of
Incorporation, the By-laws of the corporation or applicable provisions of law
and the breach or failure to perform constitutes self-dealing, willful
misconduct or recklessness.
Section 3. Personal liability of officers. An officer of the
corporation shall not be personally liable, as such, to the corporation or
its shareholders for monetary damages (including, without limitation, any
judgment, amount paid in settlement, penalty, punitive damages or expense of
any nature (including, without limitation, attorneys' fees and
disbursements)) for any action taken, or any failure to take any action,
unless the officer has breached or failed to perform the duties of his or her
office under these Articles of Incorporation, the By-laws of the corporation
or applicable provisions of law and the breach or failure to perform
constitutes self-dealing, willful misconduct or recklessness.
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Section 4. Interpretation of Article. The provisions of Section
2 and 3 of this Article 9th shall not apply to the responsibility or
liability of a director or officer, as such, pursuant to any criminal statute
or for the payment of taxes pursuant to local, state or federal law. The
provisions of this Article 9th have been adopted pursuant to the authority of
sections 204A(10) and 801 of the Pennsylvania Business Corporation Law of
1933, and shall be deemed to be a contract with each director or officer of
the corporation who serves as such at any time while this Article 9th is in
effect, and such provisions are cumulative of and shall be in addition to and
independent of any and all other limitations on the liabilities of directors
or officers of the corporation, as such, or rights of indemnification by the
corporation to which a director or officer of the corporation may be
entitled, whether such limitations or rights arise under or are created by
any statute, rule of law, By-law, agreement, vote of shareholders or
disinterested directors or otherwise. Each person who serves as a director or
officer of the corporation while this Article 9th is in effect shall be
deemed to be doing so in reliance on the provision of this Article 9th. No
amendment to or repeal of this Article 9th nor the adoption of any provision
of these Articles of Incorporation inconsistent with this Article 9th, shall
apply to or have any effect on the liability or alleged liability of any
director or officer of the corporation for or with respect to any acts or
omissions of such director or officer occurring prior to such amendment,
repeal or adoption of an inconsistent provision. In any action, suit or
proceeding involving the application of the provisions of this Article 9th
the party or parties challenging the right of a director or officer to the
benefits of this Article 9th shall have the burden of proof.
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EXHIBIT 4.3
SAFEGUARD SCIENTIFICS, INC.
1990 STOCK OPTION PLAN
As adopted by the Board of Directors on August 8, 1990, as amended by the
Board of Directors on February 25, 1991, and as approved by the shareholders
on May 1, 1991; as amended by the Board of Directors on December 16, 1992,
and as approved by the shareholders on May 11, 1993; as amended by the Board
of Directors on October 25, 1996 and as approved by the shareholders on May
___, 1997. (Adjusted for 9/7/94 [2-for-1], 8/31/95 [3-for-2] and 7/17/96
[2-for-1] stock splits)
1. Purpose. The purpose of this Stock Option Plan (the "Plan") is to
provide additional incentive, in the form of stock options which may be
either incentive stock options or non-qualified stock options, to employees
(including employees who are also officers or directors), non-employee
directors and Eligible Independent Contractors (as hereinafter defined) of
Safeguard Scientifics, Inc., a Pennsylvania corporation (the "Corporation"),
and its subsidiaries whose judgment, initiative and efforts contribute
significantly to the successful operation of the Corporation's business, and
to increase their proprietary interest in the success of the enterprise to
the benefit of the Corporation and its shareholders.
2. Definitions. When used in this Plan, unless the context otherwise
requires:
(a) "Board" shall mean the Board of Directors of the Corporation.
(b) "Cause" shall mean, except to the extent otherwise specified
by the Committee, a finding by the Committee that the Optionee has breached
his or her employment or service contract, non-competition agreement, or
other obligation with the Corporation, or has been engaged in disloyalty to
the Corporation, including without limitation, fraud, embezzlement, theft,
commission of a felony or proven dishonesty in the course of his or her
employment or service, or has disclosed trade secrets or confidential
information of the Corporation to persons not entitled to receive such
information.
(c) "Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time, and any successor thereto.
(d) "Committee" shall mean the Committee designated by the Board
to administer the Plan.
(e) "Eligible Independent Contractor" shall mean an independent
consultant or advisor hired by the Corporation to provide bona fide services
for the Corporation that are not in connection with the offer or sale of
securities in a capital-raising transaction.
(f) "Employed by the Corporation" shall mean employment as an
employee or Eligible Independent Contractor or member of the Board so that for
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purposes of exercising Stock Options, an Optionee shall not be considered to
have terminated employment until the Optionee ceases to be an employee,
Eligible Independent Contractor or member of the Board, unless the Committee
determines otherwise.
(g) "ISO" shall mean a stock option which, at the time such option
is granted, qualifies as an incentive stock option, as defined in Section 422
of the Code.
(h) "NQSO" shall mean a stock option which, at the time such
option is granted, does not qualify as an ISO as defined in the Code.
(i) "Optionee" shall mean an employee, non-employee director or
Eligible Independent Contractor to whom an award is granted pursuant to the
Plan.
(j) "Options" shall mean all ISOs and NQSOs which from time to
time may be granted under this Plan.
(k) "Share" shall mean a share of the common stock, $.10 par
value, of the Corporation.
(l) "Parent" shall mean any corporate parent of the Corporation,
as defined in Section 424(e) of the Code.
(m) "Plan" shall mean the Safeguard Scientifics, Inc. 1990 Stock
Option Plan, as amended from time to time.
(n) "Subsidiary" shall mean any corporate subsidiary of the
Corporation, as defined in Section 424(f) of the Code.
3. Administration. The Plan shall be administered by a Committee of
the Board of Directors, which shall consist of not less than two members of
the Board of the Corporation, who shall be appointed by, and shall serve at
the pleasure of, the Board. Each member of such Committee, while serving as
such, shall be deemed to be acting in his capacity as a director of the
Corporation.
The Committee shall have full authority, subject to the terms of
the Plan, to select the persons to whom ISOs or NQSOs may be granted under
the Plan, to grant Options on behalf of the Corporation, and to set the
number of Shares to be covered by such Options, the times and dates at which
such Options shall be granted and exercisable and the other terms of such
Options. The Committee also shall have the authority to establish such rules
and regulations, not inconsistent with the provisions of the Plan, for the
proper administration of the Plan, and to amend, modify or rescind any such
rules and regulations, and to make such determinations and interpretations
under, or in connection with, the Plan, as it deems necessary or advisable.
All such rules, regulations, determinations and interpretations shall be
binding and conclusive upon the Corporation, its shareholders and all
employees, and
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upon their respective legal representatives, beneficiaries, successors and
assigns and upon all other persons claiming under or through any of them.
No member of the Board or the Committee shall be liable for any
action or determination made in good faith with respect to the Plan or any
Option granted under it. Nothing herein shall be deemed to expand the
personal liability of a member of the Board or Committee beyond that which
may arise under any applicable standards set forth in the Corporation's
by-laws and Pennsylvania law, nor shall anything herein limit any rights to
indemnification or advancement of expenses to which any member of the Board
or the Committee may be entitled under any by-law, agreement, vote of the
shareholders or directors, or otherwise.
4. Eligibility. The class of persons who shall be eligible to receive
Options under the Plan shall be the employees (including any employees who
are also officers or directors ), non-employee directors and Eligible
Independent Contractors of the Corporation or of any Subsidiary. More than
one Option may be granted to an Optionee under the Plan.
The Committee may require that the exercise of the Option shall be
subject to the satisfaction of conditions relating to the Optionee's position
and duties with the Corporation and the performance thereof.
5. Amount of Stock. The stock to be offered for purchase pursuant to
Options granted under this Plan shall be treasury or authorized but unissued
Shares, and the total number of such Shares which may be issued pursuant to
Options under this Plan shall not exceed 4,750,000 Shares, subject to
adjustment as provided in Section 16 hereof. The maximum aggregate number of
shares of Stock that shall be subject to Options granted under the Plan to
any Optionee shall not exceed 1,000,000. If any unexercised Options lapse or
terminate for any reason, the Shares covered thereby may again be optioned.
6. Stock Option Agreement. Each Option granted under this Plan shall
be evidenced by an appropriate stock option agreement ("Agreement"), which
Agreement shall expressly specify whether such Option is an ISO or NQSO and
shall be executed by the Corporation and by the Optionee. The Agreement
shall contain such terms and provisions, not inconsistent with the Plan, as
shall be determined by the Committee. Such terms and provisions may vary
between Optionees or as to the same Optionee to whom more than one Option may
be granted.
7. Option Price. The exercise price under each Option granted
hereunder shall be determined by the Committee in its discretion, provided,
however, that the exercise price of an ISO shall in no event be less than an
amount equal to the fair market value of the Shares subject to the ISO on the
date of grant.
8. Ten Percent Shareholders. If an Optionee owns more than ten
percent of the total combined voting power of all shares of stock of the
Corporation or of a Parent or Subsidiary at the time an ISO is granted to
him, the Option price for the ISO shall
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be not less than 110% of the fair market value of the Shares subject to the
ISO on the date the ISO is granted, and such ISO, by its terms, shall not be
exercisable after the expiration of five years from the date the ISO is
granted. The conditions set forth in this Section 8 shall not apply to NQSOs.
9. Term and Exercise of Option.
(a) Term. Each Option shall expire on such date as may be
determined by the Committee with respect to such Option, but in no event
shall any Option expire more than ten years from the date it is granted. The
date on which an Option shall be granted shall be the date of the Committee's
authorization of the Option or such later date as may be determined by the
Committee at the time the Option is authorized.
(b) Exercise. Options shall be exercisable in such installments
and on such dates, and/or upon the occurrence of such events, as the
Committee may specify. The Committee may accelerate the exercise date of any
outstanding Options, in its discretion, if it deems such acceleration to be
desirable. Except as provided in Section 11, no Option shall be exercised
unless at the time of such exercise the Optionee is then employed by the
Corporation or any Subsidiary. Exercisable Options may be exercised, in
whole or in part, from time to time, by giving written notice of exercise to
the Corporation at its principal office, specifying the number of Shares to
be purchased and accompanied by payment in full of the aggregate Option price
for such Shares. Only full Shares shall be issued under the Plan, and any
fractional Share which might otherwise be issuable upon exercise of an Option
granted hereunder shall be forfeited.
(c) Payment of Option Price. The Option price shall be payable
(i) in cash or its equivalent; (ii) in the discretion of the Committee, in
Shares previously acquired by the Optionee (including Shares acquired in
connection with the exercise of an Option, subject to such restrictions as
the Committee deems appropriate), provided that, if such Shares were acquired
through exercise of an ISO, such Shares have been held by the Optionee for a
period of not less than the holding period described in section 422(a)(1) of
the Code on the date of exercise, and that, in any case, such Shares have
been held by the Optionee for the requisite period of time necessary to avoid
a charge to the Corporation's earnings for financial reporting purposes and
adverse accounting consequences to the Corporation with respect to the
Option; (iii) in the discretion of the Committee, in any combination of (i)
and (ii) above; or (iv) in the discretion of the Committee, by delivering a
properly executed notice of exercise of the Option to the Corporation and a
broker, with irrevocable instructions to the broker to deliver to the
Corporation on the settlement date the amount of sale proceeds necessary to
pay the exercise price of the Option.
(d) Replacement Options. The Committee may, in its sole
discretion and at the time of the original option grant, authorize the
Optionee to receive automatically replacement Options pursuant to this part
of the Plan. Any such replacement Option shall be granted upon such terms
and subject to such conditions
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and limitations as the Committee may deem appropriate. Any replacement
Option shall cover a number of shares determined by the Committee, but in no
event more than the number of shares of the original Option exercised. The
per share exercise price of any replacement Option shall equal the then
current Fair Market Value of a Share, and shall have a term as determined by
the Committee at the time of grant of the original Option.
The Committee shall have the right, and may reserve the right in
any Option grant, in its sole discretion and at any time, to discontinue the
automatic grant of replacement Options if it determines the continuance of
such grants to no longer be in the best interest of the Corporation.
10. Maximum Value of ISOs. The aggregate fair market value of the
Shares, determined as of the date of grant, with respect to which ISOs first
become exercisable during any calendar year by an Optionee (under this Plan
and any other plan of the Corporation or any parent or Subsidiary) shall not
exceed $100,000.
11. Termination of Employment.
(a) Except as set forth below, and unless otherwise determined by
the Committee at or after grant, in the event of termination (voluntary or
involuntary) for any reason of an Optionee's employment by the Corporation or
any subsidiary, all Options granted hereunder to such Optionee, to the extent
exercisable on the date of termination, or to any greater extent permitted by
the Committee, may be exercised by the Optionee at any time within ninety
days after the date of such termination, provided, however, that in no event
shall any Option be exercisable after the expiration of its term.
(b) Unless otherwise determined by the Committee at or after
grant, if the termination of employment is due to disability (as defined in
Section 22(e)(3) of the Code), the Optionee shall have the privilege of
exercising the unexercised Option to the extent such Option was exercisable
on the date of such termination due to disability, or to any greater extent
permitted by the Committee, within one year of such date, provided, however,
that in no event shall any Option be exercisable after the expiration of its
term.
(c) Unless otherwise determined by the Committee at or after
grant, if the Optionee dies within three months of termination of employment
or the termination of employment is due to the death of the Optionee while in
the employ of the Corporation or a subsidiary, the estate of the holder or
the person or persons who acquired the right to exercise such Option by
bequest or inheritance, shall have the privilege of exercising the
unexercised Option to the extent such Option was exercisable on the date of
such termination, or to any greater extent permitted by the Committee, within
one year of the earlier of the date of termination or the date of death, but
in no event shall any Option be exercisable after the expiration of its term.
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(d) Unless otherwise determined by the Committee at or after
grant, if the Corporation terminates the employment of the Optionee for
Cause, any Option held by such Optionee shall terminate as of the date the
Optionee ceases to be employed by the Corporation, and the Optionee shall
automatically forfeit all Shares underlying any exercised portion of an
Option for which the Corporation has not yet delivered the share certificates
upon refund by the Corporation of the exercise price paid by the Optionee for
such Shares.
(e) Notwithstanding the provisions of subparagraphs 11(a), 11(b),
11(c) and 11(d) above, the Committee may determine with respect to any NQSO
that such NQSO shall terminate at a time later than the expiration of such
three-month or one-year periods, as set forth in the Agreement.
12. Withholding and Use of Shares to Satisfy Tax Obligations.
(a) Required Withholding. The obligation of the Corporation to
deliver Shares upon the exercise of any Option shall be subject to applicable
federal (including FICA), state and local tax withholding requirements. The
Corporation may require the Optionee or other person receiving such Shares to
pay to the Corporation the amount of any such taxes that the Corporation is
required to withhold with respect to such Options, or the Corporation may
deduct from other wages paid by the Corporation the amount of any withholding
taxes due with respect to such Options.
(b) Election to Withhold Shares. If the Committee so permits, an
Optionee may elect to satisfy the Corporation's income tax withholding
obligation with respect to an Option by having shares withheld up to an
amount that does not exceed the Grantee's maximum marginal tax rate for
federal (including FICA), state and local tax liabilities. The election must
be in a form and manner prescribed by the Committee and shall be subject to
the prior approval of the Committee.
13. Non-Assignability. Each Option granted under the Plan shall be
non-transferable by the Optionee except by will or the laws of descent and
distribution, and each Option shall be exercisable during the Optionee's
lifetime only by him. Notwithstanding the foregoing, the Committee may
provide, at or after grant, that an Optionee may transfer NQSOs pursuant to a
domestic relations order or to family members or other persons or entities on
such terms as the Committee may determine.
14. Issuance of Shares and Compliance with Securities Acts. Within a
reasonable time after exercise of an Option, the Corporation shall cause to
be delivered to the Optionee a certificate for the Shares purchased pursuant
to the exercise of the Option. At the time of any exercise of any Option,
the Corporation may, if it shall deem it necessary and desirable for any
reason connected with any law or regulation of any governmental authority
relative to the regulation of securities, require the Optionee to represent
in writing to the Corporation that it is his then intention to acquire the
Common Stock for investment and not with a view to distribution thereof and
that such Optionee will not dispose of such shares in any
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manner that would involve a violation of applicable securities laws. In such
event, no shares shall be issued to such holder unless and until the
Corporation is satisfied with such representation. Certificates for Shares
issued pursuant to the exercise of Options may bear an appropriate securities
law legend.
15. Rights as a Shareholder. An Optionee shall have no rights as a
shareholder with respect to Shares covered by his Option until the date of
the issuance or transfer of the Shares to him and only after such Shares are
fully paid. No adjustment shall be made for dividends or other rights for
which the record date is prior to the date of such issuance or transfer.
16. Stock Adjustments. In the event of a reorganization,
recapitalization, change of shares, stock split, or spinoff, stock dividend,
reclassification, subdivision or combination of shares, merger,
consolidation, rights offering, or any other change in the corporate
structure or shares of the Corporation, the Committee shall make such
adjustment as it, in its sole discretion, deems appropriate in the number and
kind of shares authorized by the Plan, in the number and kind of shares
covered by grants made under the Plan or in the purchase prices of
outstanding Options, and such adjustments shall be effective and binding on
the Optionee and the Corporation for all purposes of the Plan, provided,
however, that no such adjustments shall be made to any ISO without the
Optionee's consent if such adjustment would cause such ISO to fail to qualify
as such under Section 422 of the Code.
In the event of a corporate transaction (as that term is described
in Section 424(a) of the Code and the Treasury Regulations issued thereunder
as, for example, a merger, consolidation, acquisition of property or stock,
separation, reorganization, or liquidation), each outstanding Option shall be
assumed by the surviving or successor corporation, provided, however, that in
the event of a proposed corporate transaction, the Committee may terminate
all or a portion of the outstanding Options if it determines that such
termination is in the best interests of the Corporation. If the Committee
decides to terminate outstanding Options, the Committee shall give each
Optionee holding an Option to be terminated not less than seven days' notice
prior to any such termination by reason of such a corporate transaction, and
any such outstanding Option which is to be so terminated may be exercised (if
and only to the extent that it is then exercisable) up to and including the
date immediately preceding such termination. Notwithstanding the preceding
sentence, as provided in Section 9 hereof, the Committee, in its discretion,
may accelerate, in whole or in part, the date on which any or all Options
become exercisable.
17. Adoption by Board and Approval by Shareholders. This Plan becomes
effective on August 8, 1990 (the date the Plan was adopted by the Board),
provided, however, that if the Plan is not approved by a majority of the
votes cast at a duly held meeting at which a quorum representing a majority
of all outstanding voting stock of the Corporation is, either in person or by
proxy, present and voting on the Plan, within 12 months after said date, the
Plan and all Options granted hereunder shall be null and void and no
additional Options shall be granted hereunder.
7
<PAGE>
18. Termination and Amendment of the Plan. Subject to the right of the
Board to terminate the Plan prior thereto, the Plan shall terminate on, and
no Options shall be granted hereunder after, August 8, 2000. The Board shall
have power at any time, in its discretion, to amend, abandon or terminate the
Plan, in whole or in part, provided that no such action shall affect any
Options theretofore granted and then outstanding under the Plan. Nothing
contained in this Section 18, however, shall terminate or affect the
continued existence of rights created under Options issued hereunder and
outstanding on August 8, 2000, which by their terms extend beyond such date.
The Board may amend or terminate the Plan at any time or from time
to time, but no amendment or termination shall be made which would impair the
rights of an Optionee under an Option theretofore granted without the
Optionee's consent; and provided, further that the Board shall not amend the
Plan without shareholder approval if such approval is required pursuant to
the Code or the rules of any national securities exchange or over-the-counter
market on which the Corporation's Shares are then listed or included.
19. Interpretation. A determination of the Committee as to any
question which may arise with respect to the interpretation of the provisions
of this Plan or any Options shall be final and conclusive, and nothing in
this Plan, or in any regulation hereunder, shall be deemed to give any
Optionee, his legal representatives, assigns or any other person any right to
participate herein except to such extent, if any, as the Committee may have
determined or approved pursuant to this Plan. The Committee may consult with
legal counsel who may be counsel to the Corporation and shall not incur any
liability for any action taken in good faith in reliance upon the advice of
such counsel.
20. Governing Law. With respect to any ISOs granted pursuant to the
Plan and the Agreements thereunder, the Plan, such Agreements and any ISOs
granted pursuant thereto shall be governed by the applicable Code provisions
to the maximum extent possible. Otherwise, the laws of the Commonwealth of
Pennsylvania shall govern the operation of, and the rights of Optionees
under, the Plan, the Agreements and any Options granted thereunder.
21. Rule 16b-3 Compliance. Unless an Optionee could otherwise transfer
Shares issued hereunder without incurring liability under Section 16(b) of
the Exchange Act, at least six months must elapse from the date of grant of
an Option to the date of disposition of the Shares issued upon exercise of
the Option.
8
<PAGE>
Exhibit 4.6
FIRST AMENDMENT TO
SAFEGUARD SCIENTIFICS, INC.
STOCK SAVINGS PLAN
---------------------------
WHEREAS, Safeguard Scientifics, Inc. (the "Company") established the
Safeguard Scientifics, Inc. Stock Savings Plan (the "Plan") for the benefit
of certain of its employees effective January 1, 1981; and
WHEREAS, the Company most recently amended and restated the Plan
generally effective January 1, 1989; and
WHEREAS, the Company reserved to itself the right to amend the Plan in
Section 16.1 thereof, subject to certain inapplicable limitations; and
WHEREAS, the Company desires to amend the Plan (i) to clarify
readmission after a Break in Service; (ii) to clarify in Section 10.2, as
provided in Section 2.1, that participation commencing on the first Entry
Date following date of hire is for the sole purpose of making Deferral Amount
Contributions under the Plan and does not apply to any other provisions under
the Plan regarding participation; (iii) to provide for amendment of the loan
provisions by the Plan Administrator; (iv) to eliminate the limit on
amendments within any six-month period and (v) to make certain other changes;
NOW, THEREFORE, the Plan is hereby amended, effective January 1, 1996,
except as otherwise provided herein as follows:
1. Section 2.2 is hereby amended for clarification purposes, and to
substitute "Break in Service" for the term "Period of Severance" to read as
follows:
2.2 Readmission after Breaks in Service and Employment Termination.
The following provisions apply separately to participation for the purpose of
making Deferral Amount Contributions and participation for all other purposes
(including the right of an Eligible Employee to have Employer Matching
Contributions allocated to his Matching Contribution Subaccount) under the
Plan.
(a) A person described in paragraph (1) or (2) below shall be eligible
to resume active participation under the Plan upon the first date on which he
accrues an Hour of Service as an Eligible Employee after incurring a Break in
Service or termination of employment.
(1) A person who has been an Active Participant in the Plan and
who experienced a Break in Service or termination of employment.
(2) Any person who satisfied the minimum service requirements
for Active Participant status, who experienced a termination of employment
prior to the payroll period containing the Entry Date on which he would
have assumed Active Participant status and was not in the employ of the
Employer on that Entry Date, and who subsequently again becomes an
Eligible Employee without experiencing a Break in Service.
(b) With respect to a person who has previously been employed by the
Employer or an Affiliate, who has never been an Active Participant, and who
has terminated such employment and/or has experienced a Break in Service,
eligibility for participation in the Plan shall be determined as follows:
(1) For the purpose of determining eligibility to be an Active
Participant, service prior to the occurrence of a Break in Service shall
be combined with service subsequent to such Break in Service except where
the service prior to the Break in Service is Disregarded Prior Service.
(2) Any individual who experiences a Break in Service, whose
prior service is not protected under the provisions of paragraph (a) of
this Section, and who thereafter retains or resumes a status as an
Employee, shall be considered a new Employee upon performance of one (1)
Hour of Service subsequent to such Break in Service, and shall be required
to satisfy the minimum service requirements of Section 2.1(b) without
regard to service prior to his Reemployment Commencement Date.
2. Subsection (g) is added at the end of Section 4.12 to read as
follows:
(g) Amendment. Notwithstanding Section 16.1 of this Plan, the
provisions set forth above in this Section 4.12 may be amended from time
to time as deemed necessary or desirable by written action of the Plan
Administrator. As set forth above loans shall also be subject to the
requirements of any written procedures and guidelines as may be adopted
from time to time by the Plan Administrator which are consistent with
the provisions of this Section 4.12.
3. The last sentence of Section 7.4(e) is hereby amended to read as
follows:
The Plan Administrator and/or the Trustees may offer to all
Participants additional investment sub-funds and may at any time or times
cease to offer such investment sub-funds' as deemed appropriate.
4. Section 10.2(a)(1) is hereby amended for clarification purposes to
read as follows:
(1) Completion of twelve months, or, in the case of any Employee
who first became an Active Participant on or after January 1, 1985,
twenty-four months, of participation (whether or not successive months)
after such Employee has become an Active Participant for purposes of
entitlement to Employer Matching Contributions under the Plan, where in
each of such months Deferral Amounts were contributed for the
Participant's Account.
5. Section 16.1(e) (limiting certain Plan amendments within a
six-month period) is deleted, effective November 1, 1996.
6. Wherever the terms "Period of Severance" or "Severance from
Service Date" appear, the term "Break in Service" shall be substituted.
IN WITNESS WHEREOF, and as evidence of the adoption of this First
Amendment, the Company has caused the same to be executed by its duly
authorized officers, and its corporate seal to be affixed this 11th day of
December, 1996.
Attest: SAFEGUARD SCIENTIFICS, INC.
/sig/ By: /sig/
- ------------------------------ -------------------------
(Corporate Seal)
2
<PAGE>
EXHIBIT 10.11
PROMISSORY NOTE
$
----------------- February 12, 1997
In consideration of the loan (hereinafter referred to as a "Loan") Safeguard
Scientifics, Inc., a Pennsylvania corporation (the "Lender"), has made to
, an individual residing at (the "Borrower"), and for value
received, the Borrower hereby promises to pay to the order of the Lender, at the
Lender's office located at 800 The Safeguard Building, 435 Devon Park Drive,
Wayne, PA 19087-1945 or at such other place in the continental United States as
the Lender may designate in writing, in lawful money of the United States, and
in immediately available funds, the principal sum of $ , together with
interest thereon at the rate hereinafter set forth.
Interest on the outstanding principal amount of the Note shall accrue from
the date hereof at a per annum rate equal to 5.81%. The unpaid principal balance
of the Note, together with accrued interest thereon, shall be paid on February
12, 1999. In the event of Borrower's termination of employment, the unpaid
principal balance and all accrued interest thereon shall be paid in full.
This Note and all of the Borrower's obligations hereunder are secured by the
pledge by the Borrower of certain shares of stock acquired by the Borrower under
the Lender's Long Term Incentive Plan (the "Pledged Stock") pursuant to the
terms and conditions of a Pledge Agreement (the "Pledge Agreement") of even date
herewith between the Borrower and the Lender. Notwithstanding the foregoing, the
Borrower shall remain liable to the Lender for any deficiency remaining after
any foreclosure of the pledge pursuant to the Pledge Agreement.
All payments made on this Note (including, without limitation, prepayments)
shall be applied, at the option of the Lender, first to late charges and
collection costs, if any, then to accrued interest, if any, and then to
principal. Any interest payable hereunder shall be calculated for actual days
elapsed on the basis of a 360-day year.
The outstanding principal amount of this Note, together with accrued
interest, may be prepaid in whole or in part without any prepayment penalty or
premium at any time or from time to time by the Borrower upon notice to the
Lender.
Notwithstanding anything in this Note, the interest rate charged hereon
shall not exceed the maximum rate allowable by applicable law. If any stated
interest rate herein exceeds the maximum allowable rate, then the interest rate
shall be reduced to the maximum allowable rate, and any excess payment of
interest made by the Borrower at any time shall be applied to the unpaid balance
of any outstanding principal of this Note.
An event of default hereunder shall consist of:
<PAGE>
(i) a default in the payment by the Borrower to the Lender of principal
or interest under this Note as and when the same shall become due and payable;
(ii) an event of default by the Borrower under any other obligation,
instrument, note or agreement with the Lender for borrowed money, beyond any
applicable notice and/or grace period;
(iii) any default in the performance of the Obligations of the Borrower
under the Pledge Agreement (the "Pledge Agreement") dated the date hereof
between the Borrower and the Lender, such default continuing after 15 days
notice thereof from the Lender to the Borrower;
(iv) any representation or warranty set forth in Paragraph A of the
Pledge Agreement proves to be untrue; provided, the Borrower will have 48
hours after notice by the Lender to cure any untrue representations and
warranties unless the Lender, in its reasonable discretion, will be
materially and adversely affected by allowing such cure period; or
(v) institution of any proceeding by or against the Borrower under any
present or future bankruptcy or insolvency statute or similar law and, if
involuntary, if the same are not stayed or dismissed within 60 days, or the
Borrower's assignment for the benefit of creditors or the appointment of a
receiver, trustee, conservator or other judicial representative for the
Borrower or the Borrower's property or the Borrower's being adjudicated a
bankrupt or insolvent.
Upon the occurrence of any event of default, interest shall accrue on the
outstanding balance of this Note at a per annum rate equal to 7.81%, the entire
unpaid principal amount of this Note and all unpaid interest accrued thereon
shall, at the sole option of the Lender, without notice, become immediately due
and payable, and the Lender shall thereupon have all the rights and remedies
provided hereunder or now or hereafter available at law or in equity.
The Borrower hereby waives presentment, demand, protest and notice of
dishonor and protest, and also waives all other exemptions; and agrees that
extension or extensions of the time of payment of this Note or any installment
or part thereof may be made before, at or after maturity by agreement by the
Lender. The Borrower shall pay to the Lender, upon demand, all costs and
expenses, including, without limitation, attorneys' fees and legal expenses,
that may be incurred by the Lender in connection with the enforcement of this
Note.
Any failure by the Lender to exercise any right hereunder shall not be
construed as a waiver of the right to exercise the same or any other right at
any time. No amendment to or modification of this Note shall be binding upon the
Lender unless in writing and signed by it.
Notices required to be given hereunder shall be deemed validly given (i)
three business days after sent, postage prepaid, by certified mail, return
receipt requested, (ii) one business day after sent, charges paid by the sender,
by Federal Express Next Day Delivery or other guaranteed delivery service, (iii)
when sent by facsimile transmission, or (iv) when delivered by hand:
<PAGE>
If to the Lender:
Safeguard Scientifics, Inc.
Attention: General Counsel
800 The Safeguard Building
435 Devon Park Drive
Wayne, PA 19087
If to the Borrower:
to the address set forth in the first
paragraph of this Note
or to such other address, or in care of such other person, as holder or the
Borrower shall hereafter specify to the other from time to time by due notice.
Any provision hereof found to be illegal, invalid or unenforceable for
any reason whatsoever shall not affect the validity, legality or
enforceability of the remainder hereof.
This Note shall apply to and bind the successors of the Borrower and
shall inure to the benefit of the Lender, its successors and assigns.
The Note shall be governed by and interpreted in accordance with the
laws of the Commonwealth of Pennsylvania.
The Borrower has duly executed this Note as of the date first above
written.
<PAGE>
SCHEDULE OF PROMISSORY NOTES
The promissory note dated February 12, 1997 executed by certain of the
Company's executive officers and employee directors is identical in all
material respects except as to the borrower and the amount of the
note. The following schedule identifies the material details in which such
promissory notes differ from the promissory note which is filed herewith:
BORROWER AMOUNT OF NOTE
- ------------------------------------------ --------------
Donald R. Caldwell $ 181,424.21
Jerry L. Johnson $ 166,225.82
Thomas C. Lynch $ 166,225.82
Michael W. Miles $ 108,855.67
James A. Ounsworth $ 136,070.61
Glenn T. Rieger $ 108,855.67
Charles A. Root $ 181,424.21
Delbert W. Johnson $ 54,429.60
<PAGE>
EXHIBIT 10.16
AMENDMENT NO. 1 TO AMENDED AND RESTATED MASTER
SECURITY AND ADMINISTRATION AGREEMENT
AMENDMENT NO. 1 (this "Amendment"), dated as of December 5, 1996,
TO AMENDED AND RESTATED MASTER SECURITY AND ADMINISTRATION AGREEMENT dated as
of September 25, 1996 is executed and entered into by and among COMPUCOM
SYSTEMS, INC., a Delaware corporation, NATIONSBANK OF TEXAS, N.A., a national
bank, in its capacity as Administrative Secured Party, NATIONSBANK OF TEXAS,
N.A., a national bank, in its individual corporate capacity, CSI FUNDING,
INC., a Delaware corporation, and ENTERPRISE FUNDING CORPORATION, a Delaware
corporation.
W I T N E S S E T H :
WHEREAS, the parties hereto have entered into an Amended and
Restated Master Security and Administration Agreement, dated as of September
25, 1996 (the "Agreement"); and
WHEREAS, the parties hereto wish to amend the Agreement as
hereinafter provided.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants herein contained, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto hereby agree as follows:
SECTION 1. Defined Terms. Unless otherwise defined herein, the
terms used herein shall have the meanings assigned to such terms in, or
incorporated by reference into, the Agreement.
SECTION 2. Amendments to Agreement. The Agreement is hereby
amended, effective on the Effective Date, as follows:
(a) Section 2.1(c) of the Agreement is hereby deleted in its
entirety and replaced with the following (solely for convenience, language
added to such definition is italicized):
"(c) Unless and until agreed otherwise by Administrative
Secured Party and the Beneficial
<PAGE>
Secured Parties, all deposits to the Concentration Account shall be
disbursed simultaneously by Administrative Secured Party as follows
(subject to prior payment of Secured Obligations due and payable by
CompuCom to Administrative Secured Party as provided by the
Administration Documents):
If no Event of Default has occurred:
(1) If CFI elects not to reduce the Net Investment
under the TAA, or if the Net Investment under the TAA is not
otherwise required to be reduced pursuant to the terms thereof, a
percentage of each dollar thereof equal to the product of the
Purchase Discount (as defined in the RPA) and the RPA Interest
Percentage as of the time of disbursement shall be deposited to
the CFI Account; and
(2) If CFI elects not to reduce the Net Investment
under the TAA, or if the Net Investment under the TAA is not
otherwise required to be reduced pursuant to the terms thereof, a
percentage of each dollar thereof equal to one minus the product of
the Purchase Discount (as defined in the RPA) and the RPA Interest
Percentage as of the time of disbursement shall be deposited to the
CompuCom Account for the benefit of CFI in satisfaction of certain
of its obligations under the RPA.
(3) If CFI elects to reduce the Net Investment under
the TAA, or if the Net Investment under the TAA is otherwise required
to be reduced pursuant to the terms thereof, (i) a percentage of each
dollar thereof as designated by CFI (up to a maximum percentage equal
to the RPA Percentage) at the time of disbursement shall be paid to
the Agent (under and as defined in the TAA) and (ii) after giving
effect to the deposit described in clause (i), a percentage of each
dollar equal to one minus such percentage at the time of disbursement
shall be deposited to the CompuCom Account for the benefit of CFI in
satisfaction of certain of its obligations under the RPA.
2
<PAGE>
If an Event of Default has occurred and is continuing:
(1) A percentage of each dollar thereof equal to the RPA
Interest Percentage as of the time of disbursement shall be deposited
to the Collection Account (under and as defined in the TAA); and
(2) A percentage of each dollar thereof equal to the
CompuCom Interest Percentage as of the time of disbursement shall
be deposited to the CompuCom Account; provided that at all times
following receipt by the Administrative Secured Party of written
instructions from the Administrative Lender, all such funds
described in this paragraph 2 shall be disbursed by the
Administrative Secured Party in accordance with such written
instructions."
SECTION 3. Effectiveness. This Amendment shall become effective
on the first date on which the parties hereto shall have executed and
delivered one or more counterparts to this Amendment and each shall have
received one or more counterparts of this amendment executed by the others.
SECTION 4. Execution in Counterparts. This Amendment may be
executed simultaneously in one or more multiple originals, each of which
shall be deemed an original, but all of which together shall constitute one
and the same Amendment.
SECTION 5. Consents; Binding Effect. This Amendment shall be
binding upon and inure to the benefit of CompuCom, Administrative Secured
Party and the Beneficial Secured Parties, and their respective successors in
interest. This Amendment is intended for the benefit of CompuCom,
Administrative Secured Party, the Beneficial Secured Parties (and any Person
properly claiming through any of them as an assignee to the limited extent
otherwise permitted by the Agreement), and may not be relied upon by any
other Person.
SECTION 6. Governing Law. This Amendment, and all documents and
instruments executed in connection
3
<PAGE>
herewith, shall be governed by and construed according to the laws of the
State of Texas.
SECTION 7. Severability of Provisions. If any provision of this
Amendment is held to be illegal, invalid, or unenforceable under any present
or future laws effective during the Contract Term, such provisions shall be
fully severable, and this Amendment and the Agreement shall be construed and
enforced as if such illegal, invalid, or unenforceable provision had never
comprised a part of this Amendment or the Agreement, as applicable. In such
case, the remaining provisions of this Amendment or the Agreement, as
applicable, shall remain in full force and effect and shall not be effected
thereby.
SECTION 8. Captions. The captions in this Amendment are for
convenience of reference only and shall not define or limit any of the terms
or provisions hereof.
SECTION 9. Agreement to Remain in Full Force and Effect. Except
as amended hereby, the Agreement shall remain in full force and effect and is
hereby ratified, adopted and confirmed in all respects. This Amendment shall
be deemed to be an amendment to the Agreement. All references in the
Agreement to "this Agreement", "hereunder", "hereof", "herein", or words of
like import, and all references to the Agreement in any other agreement or
document shall hereafter be deemed to refer to the Agreement as amended
hereby.
[REMAINDER OF THIS PAGE LEFT INTENTIONALLY BLANK]
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
No. 1 to Amendment and Restated Master Security and Administration Agreement
to be executed as of the date and year first above written.
COMPUCOM SYSTEMS, INC.
By:/s/ Robert J. Boutin
--------------------------------
Authorized Signatory
NATIONSBANK OF TEXAS, N.A.,
in its capacity as Administrative
Secured Party
By:/s/ Michelle M. Heath
--------------------------------
Authorized Signatory
NATIONSBANK OF TEXAS, N.A.,
in its capacity as Administrative
Lender on behalf of the Lenders
By:/s/ Brent W. Mellon
--------------------------------
Authorized Signatory
CSI FUNDING, INC.
By:/s/ Dan Lane
--------------------------------
Authorized Signatory
ENTERPRISE FUNDING CORPORATION
By:/s/ Stewart L.Cutler
--------------------------------
Authorized Signatory
5
<PAGE>
Exhibit 10.21
AMENDMENT NO. 2 TO TRANSFER AND ADMINISTRATION AGREEMENT
AMENDMENT NO. 2 (this "Amendment"), dated as of December 5, 1996,
TO TRANSFER AND ADMINISTRATION AGREEMENT dated as of April 1, 1996, as
amended as of September 25, 1996, by and among CSI FUNDING INC., a Delaware
corporation, as transferor (hereinafter, together with its successors and
assigns in such capacity, called the "Transferor"), COMPUCOM SYSTEMS, INC., a
Delaware corporation, as collection agent (hereinafter, together with its
successors and assigns in such capacity, called the "Collection Agent"),
ENTERPRISE FUNDING CORPORATION, a Delaware corporation (hereinafter, together
with its successors and assigns, called the "Company") and NATIONSBANK, N.A.,
a national banking association, as agent for the benefit of the Company and
the Bank Investors (hereinafter, together with its successors and assigns in
such capacity, called the "Agent").
W I T N E S S E T H :
WHEREAS, the Transferor, the Collection Agent, the Company and the
Agent have entered into a Transfer and Administration Agreement, dated as of
April 1, 1996 (such agreement, as amended to the date hereof, the
"Agreement"); and
WHEREAS, the parties hereto wish to amend the Agreement as
hereinafter provided.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants herein contained, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto hereby agree as follows:
SECTION 1. Defined Terms. Unless otherwise defined herein, the
terms used herein shall have the meanings assigned to such terms in, or
incorporated by reference into, the Agreement.
<PAGE>
SECTION 2. Amendments to Agreement. The Agreement is hereby
amended, effective on the Effective Date, as follows:
(a) Section 1.1 of the Agreement shall be amended in the
definition of "Eurodollar Rate" by deleting the reference to "0.625%" in the
second line thereof and by replacing it with "1.00%".
(b) Section 1.1 of the Agreement shall be amended in the
definition of "Commitment Termination Date" by deleting the reference to
"April 2, 1997" and by replacing it with "March 31, 1997".
(c) The definition of "Net Receivables Balance" set forth in
Section 1.1 of the Agreement is hereby deleted in its entirety and replaced
with the following (solely for convenience, language added to such definition
is italicized):
""Net Receivables Balance" means, at any time, (A) the
RPA Interest Percentage of (a) the Outstanding Balance of the Eligible
Receivables at such time reduced by (b) the sum of (i) the aggregate
Outstanding Balance of all Eligible Receivables which are Defaulted
Receivables, (ii) the aggregate Outstanding Balance of all Eligible
Receivables of each Obligor with respect to which 50% or more of such
Obligor's Receivables are more than ninety (90) days past due, (iii)
for a particular Obligor on any date of determination, the amount
(if positive) by which either (x) if the aggregate amount due and
owing by CompuCom to such Obligor exceeds the aggregate amount due
and owing by such Obligor to CompuCom, then the amount due and owing
by such Obligor to CompuCom or (y) if the aggregate amount due and
owing by an Obligor to CompuCom exceeds the aggregate amount due and
owing by CompuCom to such Obligor, then the amount due and owing by
CompuCom to such Obligor, (iv) credits which are aged more than
ninety (90) days (this clause (iv) calculated in the aggregate for all
Designated Obligors) minus (B) for each Designated Obligor, the
amount by which (x) the RPA Interest
2
<PAGE>
Percentage of the aggregate Outstanding Balance of Eligible
Receivables related to such Designated Obligor exceeds (y) the
Concentration Amount with respect to such Designated Obligor."
SECTION 3. Effectiveness. This Amendment shall become effective
on the first date on which the parties hereto shall have executed and
delivered one or more counterparts to this Amendment and each shall have
received one or more counterparts of this amendment executed by the others.
SECTION 4. Execution in Counterparts. This Amendment may be
executed in any number of counterparts and by different parties hereto on
separate counterparts, each of which counterparts, when so executed and
delivered, shall be deemed to be an original and all of which counterparts,
taken together, shall constitute but one and the same Amendment.
SECTION 5. Consents; Binding Effect. The execution and delivery
by the Seller and the Purchaser of this Amendment shall constitute the
written consent of each of them to this Amendment. This Amendment shall be
binding upon, and inure to the benefit of, the parties hereto and their
respective successors and assigns.
SECTION 6. Governing Law. This Amendment shall be governed by and
construed in accordance with the laws of the State of New York.
SECTION 7. Severability of Provisions. Any provision of this
Amendment which is prohibited or unenforceable in any jurisdiction shall, as
to such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof or
affecting the validity or enforceability of such provision in any other
jurisdiction.
SECTION 8. Captions. The captions in this Amendment are for
convenience of reference only and shall not define or limit any of the terms
or provisions hereof.
3
<PAGE>
SECTION 9. Agreement to Remain in Full Force and Effect. Except
as amended hereby, the Agreement shall remain in full force and effect and is
hereby ratified, adopted and confirmed in all respects. This Amendment shall
be deemed to be an amendment to the Agreement. All references in the
Agreement to "this Agreement", "hereunder", "hereof", "herein", or words of
like import, and all references to the Agreement in any other agreement or
document shall hereafter be deemed to refer to the Agreement as amended
hereby.
[REMAINDER OF THIS PAGE LEFT INTENTIONALLY BLANK]
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 2
to Transfer and Administration Agreement to be executed as of the date and
year first above written.
ENTERPRISE FUNDING CORPORATION,
as Company
By /s/ Stewart L. Cutler
--------------------------------
Name:Stewart L. Cutler
Title:Vice President
CSI FUNDING INC., as Transferor
By /s/R. Boutin
--------------------------------
Name:R. Boutin
Title:
COMPUCOM SYSTEMS, INC.,
as Collection Agent
By /s/R. Boutin
--------------------------------
Name: R. Boutin
Title:
NATIONSBANK, N.A., as Agent
and as Bank Investor
Commitment: By:/s/ Michelle M. Heath
--------------------------------
$100,000,000 Name:Michelle M. Heath
Title:Vice President
5
<PAGE>
Exhibit 10.22
TERM NOTE
$1,181,250.00 Dallas, Texas February 12,1997
FOR VALUE RECEIVED, Edward R. Anderson, an individual, referred to
herein as "Borrower", promises to pay to the order of CompuCom Systems, Inc.,
a Delaware corporation and referred to herein as "Lender", the principal sum
of One Million, One Hundred Eighty One Thousand, Two Hundred Fifty Dollars
($1,181,250.00), together with interest on the unpaid principal balance as
set forth below. All sums hereunder are payable to Lender at its principal
office in Dallas, Dallas County, Texas.
1. Definitions. Unless the context hereof otherwise requires or
provides, the terms used herein defined in that certain Pledge Agreement
between Borrower and Lender of even date herewith, as the same has been or
may be amended or supplemented from time to time (the "Agreement") have the
same meanings. In addition, the following terms shall have the following
meanings:
a. "Prime Rate" means that variable rate of interest per annum
established by NationsBank of Texas, N.A. (the "Bank") from time to time as
its "prime rate" (whether by that or any other name). The Bank sets such
rate as a general reference rate of interest and takes into account such
factors as the Bank may deem appropriate. Many of the Bank's commercial or
other loans are priced in relation to such rate, but it is not necessarily
the lowest or best rate actually charged to any customer.
b. "Maximum Rate" means the higher of the maximum interest rate
allowed by applicable United States or Texas law as amended from time to time
and in effect on the date for which a determination of interest accrued
hereunder is made. The determination of the maximum rate permitted by
applicable Texas law shall be made pursuant to the indicated rate ceiling as
defined in Tex.Rev.Civ.Stat.Ann. art. 5069-1.04, but Lender reserves the
right to implement from time to time any other rate ceiling permitted by such
law.
2. Interest Rate.
a. The unpaid principal balance from the date hereof until
maturity (whether by acceleration or otherwise) shall bear interest at a rate
per annum equal to 6%.
b. All past-due payments of principal and interest under this
Note shall bear interest at the Maximum Rate (or if there is no such Maximum
Rate, then at the Prime Rate plus 3%) from maturity until paid.
3. Payment of Principal and Interest.
a. The principal amount outstanding under this Note shall be due
and payable on February 15, 1999. Interest shall be payable annually on
January 1st of each year during the term hereof, commencing January 1, 1998,
and upon payment of this Note in full.
<PAGE>
b. Unless Lender in its sole discretion elects to apply payments
differently, each payment shall be first credited to the discharge of
interest accrued on the unpaid principal balance to the date of the payment,
and the remainder shall be credited to the reduction of said principal.
c. The principal and interest due hereunder shall be evidenced by
Lender's records which, absent manifest error, shall be conclusive evidence
of the computation of principal and interest balances owed by Borrower to
Lender.
d. Notwithstanding anything contained in this Note or in the
Agreement to the contrary, in the event Borrower's employment with Lender is
terminated, whether such termination is voluntary or involuntary, this Note
shall be due and payable on the 30th day immediately following the effective
date of such termination. In the event this Note becomes payable pursuant to
the terms of this Section 3(d), Borrower at his option may elect to have
Lender offset any amounts owed to Lender by Borrower under this Note against
any severance or other payments to be made by Lender to Borrower as a result
of Borrower's termination of employment with Lender.
4. Default. Failure to pay this Note or any installment hereunder as
it becomes due, or failure of Borrower or any other person to perform (after
the expiration of any applicable cure period) any of the terms or provisions
set forth in, or the occurrence of any default under the terms of the
Agreement, or the occurrence of any default under any other agreement between
Borrower and Lender shall, at the election of the holder hereof, without
notice, demand or presentment, which are hereby waived, mature the principal
of this Note and all interest then accrued, and the same shall at once become
due and payable and subject to those remedies of the holder hereof.
5. Prepayment. Borrower may at any time prepay in whole or in part
the unpaid principal of this Note without premium or penalty, and the
interest shall immediately cease on any amounts so prepaid. Prepayments of
principal shall be applied in the inverse order of maturity.
6. Waiver. Each surety, endorser, guarantor and any other party now
or hereafter liable for the payment of this Note in whole or in part
("Surety") and Borrower hereby severally (a) waive grace, demand, presentment
for payment, notice of nonpayment, protest, notice of protest, non-payment or
dishonor, notice of intent to accelerate, notice of acceleration and all
other notices (except as provided in the Agreement), filing of suit and
diligence in collecting this Note or enforcing any other security with
respect to same, (b) agree to any substitution, surrender, subordination,
waiver, modification, change, exchange or release of any security or the
release of the liability of any parties primarily or secondarily liable
hereon, (c) agree that Lender is not required first to institute suit or
exhaust its remedies hereon against Borrower, any Surety or others liable or
to become liable hereon or to enforce its rights against them or any security
with respect to same or to join any of them in any suit against any others of
them, and (d) consent to any extension or postponement of time of payment of
this Note and to any other indulgence with respect hereto without notice
thereof to any of them. No failure or delay on the part of Lender in
exercising any right, power or privilege hereunder shall operate as a waiver
thereof.
7. Attorneys' Fees. If this Note is not paid at maturity, regardless
of how such maturity may be brought about, or is collected or attempted to be
collected through the initiation or prosecution of any suit or through any
probate, bankruptcy or any other judicial proceedings, or is placed in the
hands of an attorney for collection, Borrower shall pay, in addition to all
other amounts owing hereunder, all actual expenses of collection, all court
costs and reasonable attorney's fees incurred by the holder hereof.
8. Limitation on Agreements. All agreements between Borrower and
Lender, whether now existing or hereafter arising, are hereby limited so that
in no event shall the amount paid, or agreed to be paid to Lender for the
use, forbearance, or detention of money or for the payment or
<PAGE>
performance of any covenant or obligation contained herein or in any other
document evidencing, securing or pertaining to this Note, exceed the Maximum
Rate. If any circumstance otherwise would cause the amount paid to exceed
the Maximum Rate, the amount paid or agreed to be paid to Lender shall be
reduced to the Maximum Rate, and if Lender ever receives interest which
otherwise would exceed the Maximum Rate, such amount which would be excessive
interest shall be applied to the reduction of the principal of this Note and
not to the payment of interest, or if such excessive interest otherwise would
exceed the unpaid balance of principal of this Note such excess shall be
applied first to other indebtedness of Borrower to Lender, and the balance,
if any, shall be refunded to Borrower. In determining whether the interest
paid or agreed to be paid hereunder exceeds the highest amount permitted by
applicable law, all sums paid or agreed to be paid to Lender for the use,
forbearance or detention of the indebtedness of Borrower to Lender shall, to
the extent permitted by applicable law, (i) be amortized, prorated, allocated
and spread throughout the full term of such indebtedness until payment in
full so that the actual rate of interest on account of such indebtedness is
uniform throughout such term, (ii) be characterized as a fee, expense or
other charge other than interest, and (iii) exclude any voluntary prepayments
and the effects thereof. The terms and provisions of this paragraph shall
control and supersede every other provision of all agreements between Lender
and Borrower in conflict herewith.
9. Governing Law and Venue. This Note and the rights and obligations
of the parties hereunder shall be governed by the laws of the United States
of America and by the laws of the State of Texas, and is performable in
Dallas, Dallas County, Texas. Chapter 15 of the Texas Credit Code (Tex. Rev.
Civ. Stat. Ann. art 5069.1501 et seq.) does not apply to this Note.
10. Business Day. If any action is required or permitted to be taken
hereunder on a Sunday, legal holiday or other day on which banking
institutions in the State of Texas are authorized or required to close (a
"Non-Business Day"), such action shall be taken on the next succeeding day
which is not a Non-Business Day, and, to the extent applicable, interest on
the unpaid principal balance shall continue to accrue at the applicable rate.
11. Agreement. This Note is the Note referred to in the Agreement, and
is entitled to the benefits thereof and the security as provided for therein.
Reference is made to the Agreement for a statement of the rights and
obligations of Borrower, a description of the nature and extent of the
security and the rights of the parties in respect to such security, and a
statement of the terms and conditions under which the due date of this Note
may be accelerated.
12. Restatement. This Note is given in amendment and restatement
and not in payment or satisfaction of and replaces that certain Promissory
Note dated August 31, 1994, in the original principal amount of $1,181,250
executed by Edward R. Anderson and payable to the order of Lender. Address:
------------------------------
Edward R. Anderson
<PAGE>
SAFEGUARD SCIENTIFICS, INC.
EXHIBIT 11 - COMPUTATION OF PER SHARE EARNINGS
Years ended December 31, 1996, 1995 and 1994
(In thousands except per share data)
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Primary earnings per common share
Net earnings..................................................................... $ 19,927 $ 18,263 $ 15,740
Adjustment (1)................................................................... (832) (771) (656)
--------- --------- ---------
$ 19,095 $ 17,492 $ 15,084
--------- --------- ---------
--------- --------- ---------
Average common shares outstanding................................................ 29,900 29,052 28,344
Average common shares equivalents................................................ 1,448 1,682 1,095
--------- --------- ---------
Average number of common shares and common share equivalents outstanding......... 31,348 30,734 29,439
--------- --------- ---------
--------- --------- ---------
Primary earnings per common share................................................ $ .61 $ .57 $ .51
--------- --------- ---------
--------- --------- ---------
Fully diluted earnings per common share
Primary net earnings............................................................. $ 19,927 $ 18,263 $ 15,740
Adjustment (1)................................................................... (832) (1,798) (1,781)
--------- --------- ---------
$ 19,095 $ 16,465 $ 13,959
--------- --------- ---------
--------- --------- ---------
Average common shares outstanding................................................ 29,900 29,052 28,344
Average common share equivalents................................................. 1,448 1,856 1,335
--------- --------- ---------
Average number of common shares assuming full dilution........................... 31,348 30,908 29,679
--------- --------- ---------
--------- --------- ---------
Fully diluted earnings per common share.......................................... $ .61 $ .53 $ .47
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------
(1) Net earnings are adjusted for the dilutive effect of public subsidiary
common stock equivalents (primary) and convertible securities (fully
diluted).
Share and per share data have been retroactively adjusted to reflect the
two-for-one split of the Company's common shares effective July 17, 1996.
<PAGE>
EXHIBIT 13
SELECTED FINANCIAL DATA
(in thousands except per share amounts)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $2,062,809 $1,517,740 $1,412,026 $1,168,349 $845,018
Net earnings 19,927 18,263 15,740 3,853* 8,864
Earnings per share
Primary .61 .57 .51 .11 .30
Fully diluted .61 .53 .47 .07 .28
Total assets 936,070 742,874 617,155 542,824 416,299
Long-term debt 252,725 204,431 201,393 156,482 109,536
Commercial real estate debt 20,483 20,714 40,668 41,159
Convertible subordinated notes 102,131
Shareholders' equity 169,011 154,309 110,547 88,767 91,685
- -----------------------------------------------------------------------------------------
</TABLE>
The Company offers its shareholders, through the rights offering process, the
opportunity to acquire direct ownership in selected partnership companies
which it believes are ready for public ownership.
The Company has no present intention to pay cash dividends.
Per share amounts have been retroactively restated to reflect the two-for-one
split of the Company's common shares effective July 17, 1996.
* After goodwill write-off of $6,419 or $.21 per share.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
----------
General
The Company's business strategy is the development of advanced
technology-oriented, entrepreneurially-driven partnership companies to achieve
maximum returns for its shareholders. The Company provides to its partnership
companies and associated venture funds active strategic management, operating
guidance, acquisition and disposition assistance, board and management
recruitment and innovative financing. The Company offers its shareholders,
through the rights offering process, the opportunity to acquire direct ownership
in selected partnership companies which it believes are ready for public
ownership.
If the Company significantly increases or reduces its investment in any of the
partnership companies, the Company's consolidated net sales and earnings may
fluctuate primarily due to the applicable accounting method used for recognizing
its participation in the operating results of that company.
The net sales and related costs and expenses of a partnership company are
included in the Company's consolidated operating results if the Company owns
more than 50% of the outstanding voting securities of the partnership company.
Participation of shareholders other than the Company in the earnings or losses
of a more than 50% owned partnership company is reflected in the caption
"Minority interest" in the Consolidated Statements of Operations which adjusts
consolidated earnings to reflect only the Company's share of the earnings or
losses of the partnership company.
Investments in companies in which the Company owns 50% or less of the
outstanding voting securities, in which significant influence is exercised, are
accounted for on the equity method of accounting. Under this method, a
partnership company's net sales and related costs and expenses are not included
in the Company's consolidated operating results; however, the Company's share of
the earnings or losses of the partnership company is reflected in the caption
"Income from equity investments" in the Consolidated Statements of Operations.
Under either consolidation accounting or the equity method of accounting, only
the Company's share of the earnings or losses of a partnership company is
included in the Consolidated Statements of Operations.
Operations Overview
Net sales increased 36% in 1996 and 7% in 1995, primarily attributable to
CompuCom's (Microcomputer Systems and Services) 38% and 15% sales increases for
the same periods. CompuCom represented 97% and 95% of the Company's total
consolidated net sales in 1996 and 1995, respectively. As a result of the
relative significance of CompuCom in the consolidated results, fluctuations in
the financial results of other business units have tended to have a minimal
impact.
Comparability of 1996 and 1995 net sales and earnings to prior periods is
impacted by the sale of the Company's commercial real estate operations in the
third quarter of 1996, the mid-1994 rights offering of Coherent Communications
Systems Corporation which reduced the Company's ownership in Coherent below 50%,
and actions taken during late 1994 which resulted in the Company holding a
minority ownership position in Core
SAFEGUARD SCIENTIFICS, INC.
28
<PAGE>
Technologies (Pennsylvania), Inc., formerly CenterCore, Inc., which is not
included in the Company's consolidated financial statements beginning January 1,
1995.
The following after-tax data reflect the components of the Company's net
earnings (in thousands):
Year Ended December 31 1996 1995 1994
================================================================================
Earnings before
securities gains and
minority interest $ 13,664 $ 15,212 $ 4,189
Securities gains 18,223 11,375 14,501
Minority interest (11,960) (8,324) (2,950)
- --------------------------------------------------------------------------------
Net earnings $ 19,927 $ 18,263 $ 15,740
================================================================================
CompuCom's earnings, excluding a non-recurring securities gain, increased
22%, while Metal Finishing earnings increased 68% in 1996. However, overall
earnings before securities gains and minority interest decreased in 1996 due to
losses or reduced earnings at certain of the Company's other business units and
an increase in general corporate and interest expense to support the increased
activity at partnership companies. Although CompuCom's earnings increased in
1996, its contribution to consolidated earnings, excluding the effect of a
non-recurring securities gain, increased only 4% due to a decrease in the
Company's ownership of CompuCom common stock which resulted primarily from the
dilution following the October 1995 conversion of CompuCom's convertible
subordinated notes into 8.4 million shares of CompuCom. CompuCom's 41% earnings
increase in 1995 and the elimination of losses incurred by Core in 1994 were the
primary contributors to the increased earnings before securities gains and
minority interest in 1995; these increases were partially offset by losses or
reduced earnings at certain of the Company's other business units and an
increase in interest expense.
Securities gains in 1996 include the open market sales of a portion of the
Company's interest in Coherent and Cambridge Technology Partners and the sale of
shares of Integrated Systems Consulting Group and Sanchez Computer Associates in
rights offerings to the Company's shareholders. Securities gains in 1996 also
include the sale of the Company's remaining interest in Gandalf and the
Company's share of CompuCom's gain from the sale of substantially all of their
holdings in PC Service Source. Partially offsetting these gains was a write-down
of the Company's holdings in Sybase due to the other than temporary decline in
the market price of that stock, charges incurred in the disposition of
investments and provisions for other investments and notes.
Securities gains in 1995 included the open market sales of the Company's
remaining interest in Novell and the open market sales of a portion of its
interest in Coherent and Gandalf. Securities gains in 1995 also included gains
from distributions from certain of the Company's investments in venture funds.
In addition, the Company recognized gains in 1995 and 1994 based upon the
performance of Micro Decisionware in those years after recording a gain from the
sale of its 55% interest in Micro Decisionware to Sybase in early 1994. Also in
1994, the Company recorded gains from the sale of shares of Coherent stock in a
rights offering to the Company's shareholders and from distributions from
certain of the Company's investments in venture funds. Partially offsetting the
1995 and 1994 securities gains were charges incurred in the disposition of
investments and provisions for other investments and notes. Securities gains of
varying magnitude have been realized in recent years; prior gains are not
necessarily indicative of gains which may be realized in the future.
The number of partnership companies accounted for on the equity method has
increased significantly over the last several years. In addition, the Company's
current strategy is to invest in larger, more mature companies. As a result,
total revenues from the Company's equity investments, which are not included in
the Consolidated Statements of Operations, have increased significantly (see
Note 2 to the consolidated financial statements). Also as a result of these
larger investments, the excess of carrying value of equity investments over the
Company's share of the underlying net assets of such investments has increased.
Income from equity investments fluctuates with the Company's ownership
percentage and the operating results of investees accounted for on the equity
method. Increased equity income from the Company's public equity investments in
1996 was more than offset by the Company's share of losses at certain private,
early-stage equity investments and increased amortization of the excess of
carrying value over the Company's share of underlying net assets. The Company's
public equity investments accounted for on the equity method in 1996 included
Cambridge, Coherent, USDATA Corporation, and Sanchez.
Cambridge's sales and earnings increased 51% and 58%, respectively, in 1996
and 66% and 68%, respectively, in 1995 after adjusting for acquisitions
accounted for on the pooling-of-interests method. Cambridge continues to see
increased demand for its wide range of quality services domestically and
internationally. International revenues continued to rise as they represented
25% of 1996 total revenues. Also during 1996,
SAFEGUARD SCIENTIFICS, INC.
29
<PAGE>
Cambridge's business grew significantly as it added new services, significantly
increased head count, and further expanded its geographic presence domestically
and internationally. The Company owns approximately 18% of the common stock of
Cambridge at December 31, 1996.
Coherent's sales and earnings increased 24% and 28%, respectively, in 1996
and 44% and 100%, respectively, in 1995 as it continued to add to its impressive
worldwide list of major customers. Coherent continues to grow domestically and
internationally. By adding more than fifteen new customers, the Company nearly
doubled its North American echo canceller sales. Internationally, Coherent
successfully entered the Chinese market, opened new sales offices in various
parts of the globe and experienced significant sales growth in its Latin
American operations. The Company owns approximately 32% of the common stock of
Coherent at December 31, 1996.
USDATA reported 6% lower sales and a net loss in 1996 of approximately $1.1
million compared to net income of approximately $1.6 million in 1995. Revenue
growth from USDATA's new Factory Link Enterprise Control System (ECS) product,
which was introduced in March 1996, has been slower than expected. However,
USDATA is cautiously optimistic that the marketplace is beginning to respond to
its efforts with respect to its ECS product. The Company owns approximately 20%
of the common stock of USDATA at December 31, 1996.
Sanchez reported sales and earnings of $17.7 million and $1.1 million,
respectively, for the year ended December 31, 1996. Sanchez increased
investments in product and new market development in 1996 in order to position
itself as a leader in the Direct Banking Market, and significantly increased the
pipeline for new business in the emerging markets of Central Europe and the Asia
Pacific Rim. The Company owns approximately 24% of Sanchez's common stock at
December 31, 1996.
Segment Trends
MICROCOMPUTER SYSTEMS AND SERVICES (CompuCom) posted record sales and earnings
for the eighth consecutive year in 1996. Product sales, derived from the sale of
distributed desktop products to corporate customers, increased to $1.8 billion
in 1996 compared to $1.3 billion in 1995 and $1.2 billion in 1994. Sales from
systems integration services, including product configuration, field
engineering, network management, help desk services, LAN/WAN projects,
consulting, and other services, were $178 million, $107 million and $59 million
in 1996, 1995 and 1994, respectively. CompuCom's 1996 product sales reflect the
increased demand for distributed computing technologies, as well as the
company's efforts in establishing new relationships with several large customers
during the year. The strong product results also reflect the advancements
CompuCom has made in customer procurement systems, data warehouse queries and
Web-based order statusing, which have reduced customers' overall procurement
cost. Although product sales growth was strong in 1996, CompuCom anticipates
slower sales growth in the first quarter of 1997 as part of an overall
industry-wide demand softness caused by smaller than anticipated manufacturers'
price reductions and the anticipated upgrade to Pentium Pro technology. The
increase in services sales reflects CompuCom's continued focus on expanding its
network and technology services at competitive prices to meet increased customer
demand for its value-added desktop network services, as well as the full year
impact of various small service acquisitions which occurred during 1995.
CompuCom's product gross margin decreased to 10.0% in 1996 compared to
10.6% in 1995, due principally to pricing to win new business and increased
price competitiveness in the marketplace. Product gross margin increased to
10.6% in 1995 from 10.2% in 1994 principally due to certain manufacturer
price reductions and reduced price competitiveness in the marketplace in the
first half of 1995, as well as CompuCom's decision not to do business with
the lowest margin customers. Services gross margin increased to 33.3% in 1996
from 30.5% in 1995 primarily due to increased productivity of CompuCom's
service engineers and the company's improved management of spare parts
inventory. Services gross margin decreased to 30.5% in 1995 from 32.7% in
1994 primarily as a result of increasing costs related to the scarcity of
system engineers and CompuCom's continuing investment in its service business.
CompuCom's net earnings growth rate for the second half of 1996 was less
than the first half of 1996 primarily due to the company's continued investment
in the service business as well as the company's decision to make additional
investments to exploit opportunities with customers and new market segments.
CompuCom anticipates the slower net earnings growth rate will continue through
the first quarter of 1997. Future profitability will depend on competition,
increased focus on providing technical service and support to customers, the
ability to hire and retain quality service personnel while effectively managing
the utilization of such personnel, manufacturer product pricing strategies and
product availability, as well as CompuCom's control of operating expenses and
effective utilization of vendor programs. CompuCom participates in certain
manufacturer-sponsored programs designed to increase sales of specific products.
These programs, excluding volume incentive programs and specific product rebates
offered by certain manufacturers, are not material when compared to CompuCom's
overall financial results.
SAFEGUARD SCIENTIFICS, INC.
30
<PAGE>
INFORMATION SOLUTIONS includes Tangram Enterprise Solutions and Premier
Solutions Ltd. The most significant event in 1996 was the introduction of
Tangram's Asset Insight-TM-, an asset tracking business management tool for
information technology executives which includes an Internet subsystem that
allows customers to control end-user productivity and network utilization
across the enterprise. The decrease in Information Solutions sales in 1996
is partially due to Tangram's efforts to devote more attention to the asset
tracking opportunity while reducing emphasis on its traditional mainframe
product lines. Due to the initial market response to Asset Insight-TM- and
interest generated by its resellers, Tangram plans on doubling its work force
in 1997 to ensure its continued high level of responsiveness to its customers
in anticipation of sales growth.
Sales at Premier decreased modestly in 1996 and Information Solutions
operating losses were higher primarily due to lower results from Premier's
MAXIMIS product line. The Company is pursuing efforts to mitigate the impact of
Premier's losses on the Company. Information Solutions sales and operating
profits declined in 1995 due to the sale of Micro Decisionware in the first
quarter of 1994, the change from consolidation to the equity method of
accounting for Coherent subsequent to its mid-1994 rights offering and decreased
operating profits at Premier.
WORKSTATION AND SECURITY SYSTEMS (Core) is not included in the Company's
consolidated financial statements beginning January 1, 1995 as a result of
actions initiated in late 1994 that resulted in the Company holding a minority
ownership interest in Core. Core reported significant losses in 1994 reflecting
lower than anticipated margins or losses incurred in an effort to complete many
of the major detention and other contracts in process at the time of the
acquisition of Maris Equipment Company. Included in these losses was the
write-off of $2.1 million of goodwill primarily related to the Maris
acquisition. The Company's participation in the after-tax, after-minority
interest losses incurred by Core in 1994 was $10.4 million.
METAL FINISHING sales decreased in 1996 as a result of the sale of the Phoenix,
Arizona location in early 1996. However, operating profits increased due to
elimination of losses at the Phoenix facility and modest increases at other
locations. In 1996, the construction of a new location in Monroe, Michigan
commenced. The new facility is expected to be completed in 1997 and is being
financed by an industrial revenue bond.
COMMERCIAL REAL ESTATE operations were sold in 1996 to Brandywine Operating
Partnership, LP ("BOP"), a subsidiary of Brandywine Realty Trust ("BRT"), a
publicly traded REIT. The Company received shares of BRT and ownership units in
BOP, each unit being convertible to one share of BRT.
Costs and Expenses
Gross margin as a percentage of sales declined to 13.1% in 1996 compared to
13.6% for 1995 primarily due to the decreased product margin at CompuCom,
partially offset by the increased services margin at CompuCom. Services sales
carry a higher margin than CompuCom's product sales. Gross margin decreased
from 14.2% in 1994 to 13.6% in 1995 primarily due to the deconsolidation of
Coherent, Micro Decisionware and Core, which had higher gross margins as a
percentage of sales than other consolidated business units, and decreased
gross margins at Premier, partially offset by increased services sales at
CompuCom as a percentage of CompuCom's total sales.
Selling and general and administrative expenses, in absolute dollars,
increased significantly in 1996 primarily due to the costs to manage and expand
the growing services business and maintain the overall infrastructure at
CompuCom and increased corporate expenses incurred to support the growing
activities of the partnership companies. Selling and general and administrative
expenses as a percentage of sales was 10.3% in 1996 and 1995 and 11.7% in 1994.
The lower selling and general and administrative expenses as a percentage of
sales in 1995 were principally due to the deconsolidation of Core, Coherent and
Micro Decisionware in 1994. General and administrative expenses at CompuCom are
reported net of reimbursements from certain manufacturers for specific training,
promotional and marketing programs. These reimbursements offset the expenses
incurred by CompuCom.
Depreciation and amortization increased in 1996 primarily due to an
increase at CompuCom related to facility improvements and warehouse equipment
for its new eastern distribution facility, enhancements to its information
systems and other capital expenditures to support increased business activity.
Depreciation and amortization for 1995 did not differ significantly from 1994.
Interest expense increased in 1996 primarily as a result of the issuance of
the Company's convertible subordinated notes and higher working capital required
to support the sales growth at CompuCom. These increases were partially offset
by the repayment of all of the outstanding indebtedness under the Company's
revolving credit facility, the lower interest rate on the Company's convertible
subordinated notes compared to the bank credit facility, CompuCom's lower
effective interest rate resulting from
SAFEGUARD SCIENTIFICS, INC.
31
<PAGE>
the 1996 amendments to their credit facility, and the conversion of CompuCom's
convertible subordinated notes in October 1995. Interest expense increased in
1995 due to increased borrowings at CompuCom to fund working capital
requirements and at the Company to fund new business opportunities. Interest
expense is expected to increase in 1997 as a result of higher borrowings to fund
the Company's expected investments in new and existing partnership companies and
to support CompuCom's expected continued sales growth.
Minority interest expense increased in 1996 as a greater portion of
CompuCom's earnings were allocated to minority interest due to a decrease in the
Company's ownership of the common stock of CompuCom from over 60% in October
1995 to approximately 50% at December 31, 1995 and 1996. The Company continues
to hold up to a 60% voting interest in CompuCom as a result of voting rights
associated with the Company's ownership of CompuCom's Series B cumulative
convertible preferred stock.
The 1994 effective tax rate was lower than the 1996 and 1995 effective tax
rates as the tax basis of Coherent stock sold in the 1994 rights offering was
greater than the accounting basis due to the prior amortization of goodwill
which had not been deductible for tax purposes.
Liquidity and Capital Resources
In February 1996, the Company issued $115 million of 6% Convertible Subordinated
Notes (the "Notes") due February 1, 2006. The Notes are convertible into the
Company's Common Stock at $28.985 per share. The Company used approximately $67
million of the net proceeds to repay all of its outstanding indebtedness under
its $100 million revolving credit facility. In November 1996 and February 1997,
approximately $12.9 million and $11.3 million, respectively, of Notes were
converted into 443,988 shares and 388,131 shares, respectively, of the Company's
common stock.
The Company's $100 million revolving credit facility continues to be
maintained and there were no outstanding borrowings at December 31, 1996. The
credit facility was amended in 1996 to extend its maturity to May 2000. All
other significant terms of the facility remained essentially the same and it
continues to be secured by the equity securities the Company holds of its
publicly traded partnership companies, including CompuCom. The value of these
securities significantly exceeds the total availability under the credit
facility.
At December 31, 1996, the Company held approximately $7.1 million of
temporary cash investments in institutional money market accounts. Existing cash
resources, availability under the Company's revolving credit facility, proceeds
from the sales from time to time of selected minority-owned publicly-traded
securities and other internal sources of cash flow should be sufficient to fund
the Company's cash requirements through 1997, including investments in new or
existing partnership companies and general corporate requirements. However, the
Company anticipates increasing the availability under the credit facility in
1997.
CompuCom and Premier maintain separate, independent bank credit facilities,
which are nonrecourse to the Company and are secured by substantially all of the
assets of the applicable borrower. During recent years, CompuCom has utilized
operating earnings, the bank credit facilities, equity financing and long-term
subordinated notes to fund its significant revenue growth and related operating
asset requirements. During 1996, CompuCom amended its bank facilities to
increase its financing capacity to $325 million, consisting of a $225 million
credit facility and a $100 million receivables securitization agreement. The
credit facility prohibits the payment of common stock dividends by CompuCom
while its credit line remains outstanding. At December 31, 1996, approximately
$234 million was outstanding under CompuCom's bank facilities, of which $12.5
million is due in September 1998 with the remainder due in September 1999.
Approximately $3.3 million was outstanding on Premier's $4.5 million master
demand note at December 31, 1996 which is payable on demand within five days of
notice and bears interest at the prime rate plus .5%.
Working capital increased in 1996 primarily from increases in accounts
receivable and inventories, partially offset by an increase in accounts payable.
These working capital changes were primarily due to increased sales activity at
CompuCom. The Company's operations are not capital intensive and capital
expenditures in any year normally would not be significant in relation to total
assets. Capital asset requirements are generally funded through internally
generated funds or other financing sources. During 1996, CompuCom purchased real
property intended to be utilized as a new corporate and operations campus for
approximately $26 million which was funded on an interim basis through its
amended bank credit facility pending permanent mortgage financing. There were no
material asset purchase commitments at December 31, 1996 and capital
expenditures, excluding spending related to the new CompuCom and Metal Finishing
facilities, should return to normal historical levels in 1997.
SAFEGUARD SCIENTIFICS, INC.
32
<PAGE>
FINANCIAL INFORMATION - INDUSTRY SEGMENTS
(in thousands)
1996 1995 1994
================================================================================
NET SALES
Information Technology
Microcomputer Systems and Services $ 1,995,190 $ 1,441,597 $ 1,255,813
Information Solutions 37,333 40,517 53,962
Workstation and Security Systems 67,227
- --------------------------------------------------------------------------------
2,032,523 1,482,114 1,377,002
Metal Finishing 28,640 33,315 31,135
Commercial Real Estate 1,646 2,311 3,889
- --------------------------------------------------------------------------------
$ 2,062,809 $ 1,517,740 $ 1,412,026
- --------------------------------------------------------------------------------
OPERATING PROFIT (LOSS)
Information Technology
Microcomputer Systems and Services $ 55,704 $ 46,567 $ 34,702
Information Solutions (5,294) (2,513) 3,353
Workstation and Security Systems (16,049)
- --------------------------------------------------------------------------------
50,410 44,054 22,006
Metal Finishing 2,096 1,592 2,688
Commercial Real Estate 1,305 2,587 2,565
- --------------------------------------------------------------------------------
53,811 48,233 27,259
Gains on sales of securities, net 30,373 18,925 21,789
Income from equity investments 1,539 2,731 2,669
Interest expense (23,916) (19,538) (17,468)
General corporate expense, net (8,661) (6,111) (6,171)
Minority interest (19,934) (13,853) (4,428)
- --------------------------------------------------------------------------------
Earnings before taxes on income $ 33,212 $ 30,387 $ 23,650
- --------------------------------------------------------------------------------
DEPRECIATION & AMORTIZATION
Information Technology
Microcomputer Systems and Services $ 9,600 $ 6,866 $ 5,221
Information Solutions 7,606 6,140 6,129
Workstation and Security Systems 1,577
- --------------------------------------------------------------------------------
17,206 13,006 12,927
Metal Finishing 1,709 2,070 2,044
Commercial Real Estate 729 1,061 1,699
General Corporate 1,001 790 640
- --------------------------------------------------------------------------------
$ 20,645 $ 16,927 $ 17,310
- --------------------------------------------------------------------------------
CAPITAL EXPENDITURES
Information Technology
Microcomputer Systems and Services $ 42,135 $ 5,999 $ 5,018
Information Solutions 1,864 2,130 4,066
Workstation and Security Systems 376
- --------------------------------------------------------------------------------
43,999 8,129 9,460
Metal Finishing 3,057 2,349 1,428
Commercial Real Estate 493 272
General Corporate 2,435 541 947
- --------------------------------------------------------------------------------
$ 49,984 $ 11,291 $ 11,835
- --------------------------------------------------------------------------------
ASSETS EMPLOYED
Information Technology
Microcomputer Systems and Services $ 700,773 $ 514,674 $ 434,545
Information Solutions 37,346 36,261 28,828
Workstation and Security Systems 26,413
- --------------------------------------------------------------------------------
738,119 550,935 489,786
Metal Finishing 25,170 18,366 18,091
Commercial Real Estate 19,784 21,124
General Corporate 172,781 153,789 88,154
- --------------------------------------------------------------------------------
$ 936,070 $ 742,874 $ 617,155
- --------------------------------------------------------------------------------
Information Technology consists of the delivery of personal computer services,
including procurement and configuration of personal computers, application
software and related products, network integration, and technical support; and
the design, development and sale of systems software solutions for strategic
business applications.
Metal Finishing provides specialty metal finishing services.
SAFEGUARD SCIENTIFICS, INC.
33
<PAGE>
CONSOLIDATED BALANCE SHEETS
----------
(in thousands except share and per share amounts)
December 31 1996 1995
- --------------------------------------------------------------------------------
Assets
CURRENT ASSETS
Cash and cash equivalents $ 12,881 $ 7,267
Receivables less allowances ($3,088 - 1996;
$2,644 - 1995) 399,403 285,684
Inventories 234,543 197,948
Other current assets 7,239 7,376
- --------------------------------------------------------------------------------
Total current assets 654,066 498,275
PROPERTY, PLANT AND EQUIPMENT 118,394 80,235
Less accumulated depreciation and amortization (39,525) (36,960)
- --------------------------------------------------------------------------------
78,869 43,275
COMMERCIAL REAL ESTATE 25,810
Less accumulated depreciation (8,023)
- --------------------------------------------------------------------------------
17,787
OTHER ASSETS
Investments 134,844 132,860
Notes and other receivables 9,038 5,882
Excess of cost over net assets of businesses acquired 30,286 28,830
Other 28,967 15,965
- --------------------------------------------------------------------------------
203,135 183,537
- --------------------------------------------------------------------------------
$ 936,070 $ 742,874
- --------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
CURRENT LIABILITIES
Current debt obligations $ 8,640 $ 9,382
Current commercial real estate debt 3,103
Accounts payable 221,992 192,919
Accrued expenses 77,904 66,212
- --------------------------------------------------------------------------------
Total current liabilities 308,536 271,616
LONG TERM DEBT 252,725 204,431
COMMERCIAL REAL ESTATE DEBT 17,380
DEFERRED TAXES 18,311 28,449
MINORITY INTEREST AND OTHER 85,356 66,689
CONVERTIBLE SUBORDINATED NOTES 102,131
SHAREHOLDERS' EQUITY
Common stock, par value $.10 a share
Authorized 100,000,000 shares;
Issued 32,799,342 shares 3,280 3,280
Additional paid-in capital 35,566 20,709
Retained earnings 129,970 110,043
Treasury stock, at cost (1996 - 2,231,829 shares;
1995 - 3,434,828 shares) (7,165) (10,471)
Net unrealized appreciation on investments 7,360 30,748
- --------------------------------------------------------------------------------
169,011 154,309
- --------------------------------------------------------------------------------
$ 936,070 $ 742,874
- --------------------------------------------------------------------------------
See notes to consolidated financial statements.
SAFEGUARD SCIENTIFICS, INC.
34
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
----------
(in thousands except per share amounts)
<TABLE>
<CAPTION>
Year ended December 31 1996 1995 1994
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Net sales
Product $ 1,856,889 $ 1,380,371 $ 1,331,803
Services 205,920 137,369 80,223
- -------------------------------------------------------------------------------------
Total net sales 2,062,809 1,517,740 1,412,026
Gains on sales of securities, net 30,373 18,925 21,789
Other income 8,646 9,132 4,616
- -------------------------------------------------------------------------------------
Total revenues 2,101,828 1,545,797 1,438,431
- -------------------------------------------------------------------------------------
COSTS AND EXPENSES
Cost of sales - product 1,655,893 1,219,055 1,160,475
Cost of sales - services 137,065 92,277 50,789
Selling 128,467 92,998 97,260
General and administrative 84,235 63,493 67,614
Depreciation and amortization 20,645 16,927 17,310
Interest 23,916 19,538 17,468
Income from equity investments (1,539) (2,731) (2,669)
Goodwill write-off 2,106
- -------------------------------------------------------------------------------------
Total costs and expenses 2,048,682 1,501,557 1,410,353
- -------------------------------------------------------------------------------------
EARNINGS BEFORE MINORITY INTEREST AND TAXES 53,146 44,240 28,078
Minority interest (19,934) (13,853) (4,428)
- -------------------------------------------------------------------------------------
EARNINGS BEFORE TAXES ON INCOME 33,212 30,387 23,650
Provision for taxes on income 13,285 12,124 7,910
- -------------------------------------------------------------------------------------
NET EARNINGS $ 19,927 $ 18,263 $ 15,740
- -------------------------------------------------------------------------------------
EARNINGS PER SHARE
Primary $ .61 $ .57 $ .51
Fully diluted $ .61 $ .53 $ .47
AVERAGE COMMON SHARES OUTSTANDING
Primary 31,348 30,734 29,439
Fully diluted 31,348 30,908 29,679
</TABLE>
See notes to consolidated financial statements.
SAFEGUARD SCIENTIFICS, INC.
35
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
----------
(in thousands)
Year ended December 31 1996 1995 1994
- --------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net earnings $ 19,927 $ 18,263 $ 15,740
Adjustments to reconcile net earnings
to cash from operating activities
Depreciation and amortization 20,645 16,927 17,310
Deferred income taxes 1,910 7,968 2,500
Income from equity investments (1,539) (2,731) (2,669)
Gains on sales of securities, net (30,373) (18,925) (21,789)
Minority interest, net 11,960 8,419 1,536
Write-off of goodwill 2,106
- --------------------------------------------------------------------------------
22,530 29,921 14,734
Cash provided (used) by changes
in working capital items
Receivables (113,719) (30,113) (30,828)
Inventories (36,595) (41,298) (34,350)
Accrued liabilities and other 38,454 36,310 12,200
- --------------------------------------------------------------------------------
(111,860) (35,101) (52,978)
- --------------------------------------------------------------------------------
Cash (used) by operating activities (89,330) (5,180) (38,244)
Proceeds from sales of securities, net 53,350 24,952 16,953
- --------------------------------------------------------------------------------
Cash provided (used) by operating activities
and sales of securities, net (35,980) 19,772 (21,291)
OTHER INVESTING ACTIVITIES
Business acquisitions, net of cash acquired (6,937) (2,310) (442)
Investments and notes acquired, net (59,270) (25,707) (19,379)
Capital expenditures (49,984) (11,291) (11,835)
Other, net (14,197) (8,250) (5,719)
- --------------------------------------------------------------------------------
Cash (used) by other investing activities (130,388) (47,558) (37,375)
FINANCING ACTIVITIES
Net borrowings on revolving credit facilities 27,131 22,934 32,898
Net borrowings (repayments) on term debt 24,165 (1,576) 20,040
Issuance of convertible subordinated notes, net 112,109
Issuance of Company and subsidiary stock 8,577 5,868 4,343
Repurchase of common stock (33) (551)
- --------------------------------------------------------------------------------
Cash provided by financing activities 171,982 27,193 56,730
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 5,614 (593) (1,936)
Cash and cash equivalents - beginning of year 7,267 7,860 9,796
- --------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 12,881 $ 7,267 $ 7,860
- --------------------------------------------------------------------------------
See notes to consolidated financial statements.
SAFEGUARD SCIENTIFICS, INC.
36
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands except share amounts)
<TABLE>
<CAPTION>
Common Stock Additional Treasury Stock Net Unrealized
------------------- Paid-in Retained --------------------- Appreciation
Shares Amount Capital Earnings Shares Amount on Investments
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE - DECEMBER 31, 1993 32,799,342 $3,280 $23,444 $ 76,040 4,772,088 $(13,997)
Net earnings 15,740
Stock options exercised 38 (549,300) 1,320
Repurchase of common stock 126,000 (551)
Net change in unrealized appreciation
on investments $ 5,233
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1994 32,799,342 3,280 23,482 91,780 4,348,788 (13,228) 5,233
Net earnings 18,263
Stock options exercised 981 (918,160) 2,790
Repurchase of common stock 4,200 (33)
Subsidiaries' equity transactions (3,754)
Net change in unrealized appreciation
on investments 25,515
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1995 32,799,342 3,280 20,709 110,043 3,434,828 (10,471) 30,748
Net earnings 19,927
Stock options exercised 3,323 (759,011) 1,887
Conversion of convertible
subordinated notes 11,364 (443,988) 1,419
Subsidiaries' equity transactions 170
Net change in unrealized appreciation
on investments (23,388)
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1996 32,799,342 $3,280 $35,566 $129,970 2,231,829 $ (7,165) $ 7,360
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
(1) Significant Accounting Policies
DESCRIPTION OF THE COMPANY - The Company is engaged in the business of
identifying, acquiring interests in and developing partnership companies, most
of which are engaged in information technology businesses, broadly defined to
include all activities related to the acquisition, processing and dissemination
of information and related technology to improve business and personal
productivity. The most significant of the Company's partnership companies are
engaged in the delivery of personal computer services, including procurement and
configuration of personal computers, application software and related products,
network integration, and technical support. In addition, partnership companies
in the information technology industry are engaged in outsourcing and the
development and sale of strategic business software and services, imaging
equipment and software and telecommunications technology. The Company also has a
division that provides specialty metal finishing.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
accounts of the Company and its subsidiaries, primarily CompuCom Systems, Inc.,
Premier Solutions Ltd., and Tangram Enterprise Solutions, Inc., and its metal
finishing division. The effect of adjustments to the Company's carrying values
of subsidiaries resulting from their underlying equity transactions is included
in the Company's additional paid-in capital. Investments in companies owned 50%
or less, in which significant influence is exercised, are accounted for on the
equity method of accounting. Significant influence is presumed at a 20%
ownership level; however, the Company applies the equity method for certain
companies in which it owns less than 20% because it exerts significant influence
through representation on those companies' Boards of Directors and other means.
Certain investments accounted for under the cost method are classified as
available-for-sale and recorded at fair value. The related net unrealized
appreciation of $7.4 million and $30.7 million, which is net of taxes of $3.8
million and $15.8 million, is recorded as a separate component of shareholders'
equity at December 31, 1996 and 1995, respectively. All other investments are
stated at the lower of cost or net
SAFEGUARD SCIENTIFICS, INC.
37
<PAGE>
realizable value. The Company continually evaluates investments for indications
of impairment based on the market value of each investment relative to cost, the
financial condition and near-term prospects of the investment and other relative
factors. All material intercompany accounts and transactions have been
eliminated.
Core Technologies (Pennsylvania) Inc., formerly CenterCore, Inc., is not
included in the consolidated financial statements effective January 1, 1995 due
to the Company's reduced ownership.
In 1996, the Company sold all of its commercial real estate operations to
Brandywine Operating Partnership, LP ("BOP"), a subsidiary of Brandywine Realty
Trust ("BRT"), a publicly traded REIT. The Company received shares of BRT and
ownership units in BOP, each unit being convertible to one share of BRT.
ACCOUNTING ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid instruments
with a remaining maturity of 90 days or less at the time of purchase to be cash
equivalents. Included in cash and cash equivalents at December 31, 1996 is
approximately $7.1 million of investments in institutional money market
accounts.
INVENTORIES, primarily finished goods, are stated at the lower of average cost
or market. The Company continually assesses the appropriateness of the inventory
valuations considering obsolete, slow moving and non-salable inventory.
PROPERTY, PLANT AND EQUIPMENT are carried at cost less accumulated depreciation
and amortization. Included in property, plant and equipment was $56.1 million
and $25.3 million of land, building and improvements and $62.3 million and $54.9
million of machinery and equipment at December 31, 1996 and 1995, respectively.
Provision for depreciation and amortization is based on the estimated useful
lives of the assets (buildings and improvements - 3 to 33 years; machinery and
equipment - 3 to 12 years) and is computed primarily on the straight-line
method.
EXCESS OF COST OVER NET ASSETS OF BUSINESSES ACQUIRED is amortized on a
straight-line basis primarily over 7 to 10 years. Accumulated amortization at
December 31, 1996 and 1995 was $17.8 million and $13.9 million, respectively.
The Company continually evaluates goodwill for indications of impairment based
on the forecasted undiscounted cash flow from the related business activity
(including possible proceeds from a sale of the business). The amount by which
the Company's carrying value exceeds its share of the underlying net assets of
equity investees is amortized on a straight-line basis which adjusts the
Company's share of the investees' earnings or losses.
TAXES ON INCOME are reduced by allowable tax credits. Deferred taxes are
accounted for using the asset and liability method of accounting for income
taxes. Under this method, deferred taxes are recognized for the tax consequences
of "temporary differences" by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts and
the tax basis of existing assets and liabilities. The effect on deferred taxes
of a change in tax rates is recognized in income in the period the change
occurs.
FINANCIAL INSTRUMENTS - The Company's financial instruments, principally cash,
accounts receivable, accounts payable and accrued liabilities, are carried at
cost which approximates fair value due to the short maturity of these
instruments. The Company's debt is carried at cost which approximates fair value
as the debt bears interest at rates approximating current market rates.
EARNINGS PER SHARE of common stock are computed on adjusted net earnings using
the weighted-average number of common shares outstanding during each year,
including common stock equivalents (unless anti-dilutive) which would arise from
the exercise of stock options and conversion of convertible securities. Net
earnings are adjusted for the dilutive effect of common stock equivalents
(primary) and convertible securities (fully diluted) issued by the Company's
public subsidiaries.
REVENUE RECOGNITION - Product sales are generally recognized upon shipment with
provisions made for anticipated returns, which historically have been
immaterial. Services sales are generally recognized when the service is rendered
or ratably if performed over a service contract period.
VENDOR PROGRAMS - CompuCom receives volume incentives and rebates from certain
manufacturers related to sales of certain products which are recorded when
earned as a reduction of cost of sales. CompuCom also receives manufacturer
reimbursements for certain training, promotional and marketing activities which
offset expenses incurred by the company.
SAFEGUARD SCIENTIFICS, INC.
38
<PAGE>
STOCK SPLIT - All share and per share data have been retroactively restated to
reflect the two-for-one split of the Company's common shares effective July 17,
1996.
STOCK-BASED COMPENSATION - In 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), which gives companies the option to adopt the fair value method for
expense recognition of employee stock options and other stock-based awards or to
continue to account for such items using the intrinsic value method as outlined
under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" ("APB 25") with pro forma disclosure of net income and net income
per share as if the fair value method had been applied. The Company has elected
to continue to apply APB 25 for stock options and other stock-based awards and
has disclosed pro forma net earnings and earnings per share as if the fair value
method had been applied.
(2) Investments
In the following summary of investments, market value reflects the price of
minority-owned publicly-traded securities at the close of business on December
31 of each year. Unrealized appreciation reflects the net excess of market value
over carrying value of publicly-traded securities classified as
available-for-sale.
1996 1995
- --------------------------------------------------------------------------------
Carrying Market Carrying Market
(000 omitted) Value Value Value Value
- --------------------------------------------------------------------------------
Equity Investees
Cambridge $ 15,340 $316,620 $ 10,280 $195,567
Coherent 10,206 94,445 7,160 107,075
Sanchez 4,346 22,799
USDATA 6,664 14,410 6,844 41,147
Non-public companies 40,333 27,623
- --------------------------------------------------------------------------------
76,889 51,907
Brandywine Realty Trust 8,519 9,695
Integrated Systems
Consulting Group 1,891 9,770
National Media 2,035 7,790 2,035 45,390
Sybase 13,733 9,059 17,451 16,674
Other public companies 989 2,005 905 4,915
Unrealized appreciation 11,152 46,588
Non-public companies 19,636 13,974
- --------------------------------------------------------------------------------
$134,844 $132,860
- --------------------------------------------------------------------------------
The market value of the Company's holdings in Cambridge declined to
approximately $226 million at February 28, 1997.
The Company owns approximately 18%, 32%, 24% and 20% of the common stock of
Cambridge, Coherent, Sanchez and USDATA, respectively, at December 31, 1996.
The following summarized financial information for investees accounted for
on the equity method of accounting has been compiled from the financial
statements of the respective investees and reflects historical data for the
period during which each respective investee was accounted for on the equity
method (in thousands):
BALANCE SHEETS
December 31 1996 1995
- --------------------------------------------------------------------------------
Current assets $263,781 $140,920
Non-current assets 87,436 39,686
- --------------------------------------------------------------------------------
Total assets $351,217 $180,606
- --------------------------------------------------------------------------------
Current liabilities $125,032 $ 63,323
Non-current liabilities 19,006 8,964
Shareholders' equity 207,179 108,319
- --------------------------------------------------------------------------------
Total liabilities and equity $351,217 $180,606
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Year Ended December 31 1996 1995 1994
- --------------------------------------------------------------------------------
Net sales - public companies $332,708 $223,047 $111,534
Net sales - non-public companies 161,241 117,953 54,418
- --------------------------------------------------------------------------------
$493,949 $341,000 $165,952
- --------------------------------------------------------------------------------
Net income $ 22,322 $ 13,706 $ 5,896
- --------------------------------------------------------------------------------
SAFEGUARD SCIENTIFICS, INC.
39
<PAGE>
Average cost is generally used to compute securities gains. Securities
gains are net of related costs, charges incurred in the disposition of
investments and provisions for other investments and notes. The following
summarizes significant pre-tax gains from securities transactions (in millions):
1996 1995 1994
- --------------------------------------------------------------------------------
Coherent $ 15.1 $ 5.5 $ 11.7
Cambridge 18.6 .7
Sanchez 5.3
Micro Decisionware 3.5 10.7
Sybase (4.5)
PC Service Source 4.4
Gandalf 1.9 4.3
Novell 6.4 1.6
Other (10.4) (1.5) (2.2)
- --------------------------------------------------------------------------------
$ 30.4 $ 18.9 $ 21.8
- --------------------------------------------------------------------------------
Securities gains in 1996 include the open market sales of a portion of the
Company's interest in Coherent and Cambridge and the sale of shares in the
Integrated Systems Consulting Group and Sanchez rights offerings. Securities
gains in 1996 also include the sale of the Company's remaining interest in
Gandalf and the Company's share of CompuCom's gain from the sale of
substantially all of their holdings in PC Service Source. Partially offsetting
these gains was a write-down of the Company's holdings in Sybase due to the
other than temporary decline in the market price of that stock, charges incurred
in the disposition of investments and provisions for other investments and
notes.
Securities gains in 1995 included the open market sales of a portion of the
Company's interest in Coherent and Gandalf and the Company's remaining interest
in Novell. Securities gains in 1994 included gains from the Coherent rights
offering and open market sales of a portion of the Company's interest in Novell.
A portion of securities gains in 1995 and 1994 resulted from the Company's sale
of its controlling interest in Micro Decisionware to Sybase, including amounts
earned based on the performance of Micro Decisionware subsequent to the sale and
distributions from certain of the Company's investments in venture funds,
partially offset by charges incurred in the disposition of investments and
provisions for other investments and notes.
(3) Debt
The following is a summary of long-term debt at December 31, 1996 and 1995:
(000 omitted) 1996 1995
- ------------------------------------------------------------------------------
PARENT COMPANY AND OTHER RECOURSE DEBT
Revolving credit facility $47,800
Notes payable to equity investee
companies 23,589
Industrial revenue bonds $ 9,870 2,210
Other 6,281 7,432
- ------------------------------------------------------------------------------
16,151 81,031
- ------------------------------------------------------------------------------
SUBSIDIARY DEBT
(NON-RECOURSE TO PARENT)
CompuCom revolving credit facilities 209,091 117,510
CompuCom real estate facility 25,000
Premier revolving credit facility 3,275 4,300
Other 7,848 10,972
- ------------------------------------------------------------------------------
245,214 132,782
- ------------------------------------------------------------------------------
261,365 213,813
Current debt obligations (8,640) (9,382)
- ------------------------------------------------------------------------------
Long-term debt $ 252,725 $204,431
- ------------------------------------------------------------------------------
The Company's $100 million revolving credit facility, the maturity of which
was extended in 1996 to May 2000, bears interest at the prime rate and/or, at
the Company's option, at LIBOR plus 1.75% and is subject to a commitment fee of
.25% on the unused portion. The stock of certain subsidiaries and investments is
pledged as collateral for the facility. During 1996 and 1995, the Company
borrowed a maximum of $67.5 million and $52.6 million, respectively, and the
weighted average interest rate was approximately 7.7% and 8.4% in 1996 and 1995,
respectively.
CompuCom has $325 million of borrowing capacity consisting of a $225
million credit facility and a $100 million receivables securitization facility.
In 1996, CompuCom replaced its August 1993 Financing and Security Agreement with
a new Credit Agreement ("Credit Facility"), increasing the amount of credit
facility capacity to $225 million from $175 million and making it substantially
all LIBOR-based. The $225 million Credit Facility is comprised of two elements:
a $200 million working capital facility and a $25 million facility to be used
solely to purchase real property intended to be utilized as CompuCom's corporate
and operations campus. The $200 million component bears interest at LIBOR plus
1% while the $25 million component bears interest at LIBOR plus 1.25%. The
interest rates on the Credit Facility are subject to
SAFEGUARD SCIENTIFICS, INC.
40
<PAGE>
adjustment based on certain performance criteria. CompuCom is currently in the
process of seeking alternative permanent financing for the $25 million real
estate loan.
In 1996, CompuCom entered into a receivables securitization arrangement for
up to $100 million, whereby a portion of trade receivables are pledged to a
third party as collateral. The interest rate applicable to the receivables
securitization is based upon the bank's commercial paper rate (which at December
31, 1996 was 5.4%) plus 55 basis points.
All of CompuCom's bank debt matures in September 1999, except for $12.5
millon of the real estate loan which is due in September 1998. Of the $325
million of availability, $234 million was outstanding at December 31, 1996.
During 1996 and 1995, CompuCom borrowed a maximum of $271 million and $156
million, respectively, and the weighted average interest rate was 6.7% and 7.9%,
respectively.
In October 1995, CompuCom called for the redemption of $18.5 million of 9%
convertible subordinated notes which were converted into 8.4 million shares of
CompuCom's common stock. Primarily as a result of this transaction, the
Company's ownership of CompuCom decreased from over 60% prior to the conversion
to approximately 50% at December 31, 1995 and 1996. The Company continues to
hold up to a 60% voting interest in CompuCom as a result of voting rights
associated with the Company's ownership of CompuCom's Series B Cumulative
Convertible Preferred Stock.
There was $3.3 million outstanding on Premier's $4.5 million secured master
demand note at December 31, 1996. The note is payable on demand within five days
of notice and bears interest at prime plus .5%.
The credit facilities generally require some or all of the following: the
maintenance of specified levels of tangible net worth, debt to tangible net
worth and net earnings; specified interest coverage ratios; and limitations on
the amount available for dividends, capital expenditures, investments and third
party guarantees. The aggregate net assets of subsidiaries which are restricted
and unavailable for dividends at December 31, 1996 are approximately $87
million. The credit facilities are secured by substantially all the assets of
the applicable borrower.
The Company had aggregate indebtedness of $23.6 million to certain equity
investee companies as of December 31, 1995 which was repaid in the first quarter
of 1996.
Aggregate maturities of long-term debt during future years are (in
millions): $8.6 - 1997; $17.2 - 1998; $223.2 - 1999; $1.5 - 2000; $1.4 - 2001
and $9.5 - thereafter.
Interest paid in 1996, 1995 and 1994 was $22.0 million, $19.2 million and
$16.8 million, respectively, of which $1.1 million, $2.0 million and $2.7
million in 1996, 1995 and 1994, respectively, related to commercial real estate
debt, and $3.4 million in 1996 related to convertible subordinated notes.
(4) Convertible Subordinated Notes
In February 1996, the Company issued $115 million of 6% Convertible Subordinated
Notes ("Notes") due February 1, 2006. The Notes are convertible into the
Company's Common Stock at $28.985 per share. Interest is payable semi-annually.
In November 1996, approximately $12.9 million of Notes were converted into
443,988 shares of the Company's Common Stock. The Company recorded in
shareholders' equity the principal amount of the converted debt along with
forfeited interest and a proportionate share of the related unamortized deferred
charges. In February 1997, approximately $11.3 million of Notes were converted
into 388,131 shares of the Company's Common Stock.
(5) Leases
The Company conducts a portion of its operations in leased facilities and leases
machinery and equipment under leases expiring at various dates to 2004.
Future minimum lease payments under non-cancelable operating leases with
initial or remaining terms of one year or more at December 31, 1996 are (in
millions):$10.8 - 1997; $9.3 - 1998; $7.9 - 1999; $5.8 - 2000;$3.3 - 2001 and
$4.2 - thereafter.
Total rental expense under operating leases was $14.5 million, $8.9 million
and $9.3 million in 1996, 1995 and 1994, respectively.
(6) Commitments and Contingencies
The Company and its subsidiaries are involved in various claims and legal
actions arising in the ordinary course of business. In the opinion of
management, the ultimate disposition of these matters will not have a material
adverse effect on the Company's consolidated financial position or results of
operations.
In connection with certain investments, the Company is contingently
obligated for approximately $28 million in bank loan and other guarantees and
$59 million for possible future investments, including committed capital to
various venture funds and private equity partnerships.
SAFEGUARD SCIENTIFICS, INC.
41
<PAGE>
(7) Preferred Stock
Shares of preferred stock, par value $10 a share, are voting and are issuable in
one or more series with rights and preferences as to dividends, redemption,
liquidation, sinking funds and conversion determined by the Board of Directors.
At December 31, 1996, there were 55,423 shares authorized and none outstanding.
(8) Income Taxes
The provision for income taxes is comprised of:
(000 omitted) 1996 1995 1994
- --------------------------------------------------------------------------------
Current $11,375 $ 4,156 $5,410
Deferred 1,910 7,968 2,500
- --------------------------------------------------------------------------------
$13,285 $12,124 $7,910
- --------------------------------------------------------------------------------
State taxes on income
included above $ 1,607 $ 1,248 $1,025
Total income tax expense differed from the amounts computed by applying the
U.S. Federal income tax rate of 35% in 1996, 1995 and 1994 to earnings before
income taxes as a result of the following:
(000 omitted) 1996 1995 1994
- --------------------------------------------------------------------------------
Statutory tax provision $ 11,624 $ 10,635 $ 8,278
Increase (decrease) in taxes
resulting from:
Non-deductible goodwill
amortization/write-off 1,347 1,181 1,187
Book/tax basis difference
on securities sold (284) (59) (2,552)
State taxes, net of federal
tax benefit 1,045 812 666
Income taxed at rates
other than statutory rate (447) (445) 331
- --------------------------------------------------------------------------------
$ 13,285 $ 12,124 $7,910
- --------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1996 and 1995 are presented below:
(000 omitted) 1996 1995
- --------------------------------------------------------------------------------
Deferred tax assets:
Subsidiary/investee carrying values $ 1,292 $ 4,250
Accounts receivable allowances 806 829
Inventories, reserves and tax
capitalized costs 6,694 1,453
Other 1,768 1,712
- --------------------------------------------------------------------------------
Gross deferred tax assets 10,560 8,244
Less valuation allowance (1,600) (1,876)
- --------------------------------------------------------------------------------
Deferred tax assets 8,960 6,368
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Subsidiary/investee carrying values (9,371) (3,907)
Accelerated depreciation (4,760) (6,453)
Unrealized appreciation on
investments (3,792) (15,840)
Other (9,348) (8,617)
- --------------------------------------------------------------------------------
Deferred tax liabilities (27,271) (34,817)
- --------------------------------------------------------------------------------
Net deferred tax liabilities $(18,311) $(28,449)
- --------------------------------------------------------------------------------
The net change in the valuation allowance for the years ended December 31,
1996 and 1995 was a decrease of $276,000 and $59,000, respectively.
Subsequently recognized tax benefits relating to the valuation allowance
for deferred tax assets as of December 31, 1996 will be reported as an income
tax benefit in the consolidated statement of operations.
Income taxes paid were $18.4 million, $10.9 million and $11.2 million in
1996, 1995, and 1994, respectively.
(9) Stock-Based Compensation
Options may be granted to Company employees, directors and consultants under
various stock option plans. Generally, outstanding options vest over periods not
exceeding four years after the date of grant and expire eight years after the
date of grant. To the extent allowable, all grants are incentive stock options.
All options granted under the plans to date have been at prices which have been
equal to the fair market value at the date of grant. At December 31, 1996, the
Company reserved approximately 3.2 million shares of common stock for possible
future issuance under its stock option plans. Several subsidiaries also maintain
stock option plans for their employees and directors.
SAFEGUARD SCIENTIFICS, INC.
42
<PAGE>
Option activity under the Company's plans is summarized below:
<TABLE>
<CAPTION>
(000 omitted except per share amounts) 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 2,702 $ 7.11 3,104 $ 3.16 3,080 $ 2.75
Options granted 190 32.96 527 22.71 729 4.31
Options exercised (774) 2.86 (919) 2.73 (681) 2.58
Options canceled (40) 19.24 (10) 3.93 (24) 2.41
- -------------------------------------------------------------------------------------------------------------
Outstanding at end of year 2,078 $ 10.82 2,702 $ 7.11 3,104 $ 3.16
- -------------------------------------------------------------------------------------------------------------
Options exercisable at year-end 1,150 1,220 1,381
Shares available for future grant 1,139 1,255 1,772
</TABLE>
The following summarizes information about the Company's stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted Average Weighted Weighted
Number Remaining Average Number Average
Range of Outstanding Contractual Life Exercise Exercisable Exercise
Exercise Prices (000 omitted) (in years) Price (000 omitted) Price
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 2.04 - $ 2.71 599 3.9 $ 2.67 599 $ 2.67
3.06 - 3.92 463 5.0 3.88 227 3.92
4.31 - 5.75 331 5.3 4.87 164 4.79
21.31 - 22.00 217 6.8 21.65 86 21.65
23.50 - 39.88 468 7.3 27.34 74 23.50
- ------------------------------------------------------------------------------------------------------------------------------------
$ 2.04 - $39.88 2,078 5.4 $10.82 1,150 $ 5.98
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company, its subsidiaries and its investees accounted for on the equity
method apply APB 25 and related interpretations in accounting for stock option
plans. Had compensation cost been recognized consistent with SFAS 123, the
Company's consolidated net earnings and earnings per share would have been
reduced to the pro forma amounts indicated below:
1996 1995
- --------------------------------------------------------------------------------
Consolidated net earnings As reported $19,927 $18,263
(000 omitted) Pro forma $15,986 $16,799
Earnings per share
- Primary As reported $.61 $.57
Pro forma $.48 $.52
- Fully diluted As reported $.61 $.53
Pro forma $.48 $.48
- --------------------------------------------------------------------------------
The per share weighted-average fair value of stock options issued by the
Company during 1996 and 1995 was $14.64 and $9.83, respectively, on the date of
grant.
<PAGE>
The following assumptions were used by the Company, its subsidiaries and
its investees accounted for on the equity method to determine the fair value of
stock options granted using the Black-Scholes option-pricing model:
Subsidiaries and
Company Investees
- --------------------------------------------------------------------------------
Dividend yield 0% 0%
Expected volatility 40% 30% to 64%
Average expected option life 5 years 3 1/2 to 6 years
Risk-free interest rate 5.4% to 6.5% 5.4% to 7.1%
- --------------------------------------------------------------------------------
Pro forma consolidated net earnings reflects only options granted in 1996
and 1995. Therefore, the full impact of calculating compensation cost for stock
options under SFAS 123 is not reflected in the pro forma consolidated net
earnings amounts presented above because compensation cost is reflected over an
option's vesting period and compensation cost for options granted prior to
January 1, 1995 is not considered.
SAFEGUARD SCIENTIFICS, INC.
43
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------
The Board of Directors and Shareholders
Safeguard Scientifics, Inc. [LOGO] KPMG Peat Marwick LLP
Wayne, Pennsylvania
We have audited the accompanying consolidated balance sheets of Safeguard
Scientifics, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, cash flows and shareholders'
equity for each of the years in the three-year period ended December 31, 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standard require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Safeguard
Scientifics, Inc. and subsidiaries at December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
February 7, 1997
STATEMENT OF MANAGEMENT'S FINANCIAL RESPONSIBILITY
----------
[LOGO] Safeguard Scientifics, Inc.
Management has prepared and is responsible for the integrity and
objectivity of the consolidated financial statements and related financial
information in this Annual Report. The statements are prepared in conformity
with generally accepted accounting principles. The financial statements reflect
management's informed judgment and estimation as to the effect of events and
transactions that are accounted for or disclosed.
Management maintains a system of internal control at each business unit.
This system, which undergoes continual evaluation, is designed to provide
reasonable assurance that assets are safeguarded and records are adequate for
the preparation of reliable financial data. In determining the extent of the
system of internal control, management recognizes that the cost should not
exceed the benefits derived. The evaluation of these factors requires estimates
and judgment by management.
KPMG Peat Marwick LLP is engaged to render an opinion as to whether
management's financial statements present fairly, in all material respects,
Safeguard Scientifics' financial condition and operating results in accordance
with generally accepted accounting principles. The scope of their engagement
included a review of the internal control system, tests of the accounting
records and other auditing procedures to the extent deemed necessary to render
their opinion on the financial statements. Their report is presented above.
The Audit Committee of the Board of Directors meets with the independent
auditors and management to satisfy itself that they are properly discharging
their responsibilities. The auditors have direct access to the Audit Committee.
Safeguard Scientifics, Inc.
/s/ Michael W. Miles
Michael W. Miles
Vice President and Chief Financial Officer
SAFEGUARD SCIENTIFICS, INC.
44
<PAGE>
QUARTERLY FINANCIAL DATA
----------
(in thousands except per share amounts)
In the opinion of the Company, the following unaudited quarterly data includes
all adjustments (consisting of only normal recurring adjustments) necessary for
a fair presentation of operations for such periods.
Quarter Ended March 31 June 30 Sept. 30 Dec. 31
- ------------------------------------------------------------------------------
1996
Net Sales $430,097 $527,442 $515,338 $589,932
After-tax Operating Earnings* 3,308 5,140 2,176 3,040
After-tax Securities Gains 3,408 3,767 4,882 6,166
Net Earnings 3,980 5,408 4,745 5,794
Earnings Per Share
Primary .12 .16 .15 .18
Fully Diluted .12 .16 .15 .18
1995
Net Sales $343,159 $370,572 $366,345 $437,664
After-tax Operating Earnings* 3,646 3,712 2,819 5,035
After-tax Securities Gains 1,205 2,755 3,612 3,803
Net Earnings 3,536 4,766 4,705 5,256
Earnings Per Share
Primary .11 .15 .15 .16
Fully Diluted .10 .14 .13 .16
- ------------------------------------------------------------------------------
* Before securities gains and minority interest.
Net securities gains of varying magnitude have been realized in recent years;
prior gains are not necessarily indicative of gains which may be realized in
the future.
Earnings per share calculations for each of the quarters are based on the
weighted average number of shares outstanding in each period and adjust net
earnings for the dilutive effect of public subsidiary common stock
equivalents (primary) and convertible securities (fully diluted). Therefore,
the sum of the quarters may not necessarily equal the year-to-date earnings
per share.
Per share amounts have been retroactively restated to reflect the two-for-one
split of the Company's common shares effective July 17, 1996.
Sales are typically higher in the fourth quarter of each year, reflecting the
historically stronger fourth quarter results at CompuCom, the Company's
largest subsidiary.
COMMON STOCK DATA
----------
Safeguard Scientifics, Inc.
Common Stock Listed on New York Stock Exchange
Symbol SFE
1996 1995
- --------------------------------------------------------------------------------
High Low High Low
- --------------------------------------------------------------------------------
First Quarter 29 11/16 21 9 1/8 5 2/3
Second Quarter 47 7/16 29 9/16 15 7/12 8 1/6
Third Quarter 39 7/8 26 25 3/4 13 1/12
Fourth Quarter 43 1/2 27 1/4 25 3/16 19 3/16
- --------------------------------------------------------------------------------
The last sale price reported for the Company's common stock on March 14, 1997
was 19 7/8.
There are approximately 23,000 holders of the Company's common stock.
SAFEGUARD SCIENTIFICS, INC.
45
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF SAFEGUARD SCIENTIFICS, INC.
Exclusive of inactive subsidiaries and companies in which
Registrant holds a minority interest, Registrant as of March 20, 1997 had the
following subsidiaries:
PLACE OF
NAME INCORPORATION
---- -------------
Safeguard Scientifics (Delaware), Inc. Delaware
CompuCom Systems, Inc. Delaware
CompuCom Properties, Inc. Delaware
ClientLink, Inc. Delaware
The Computer Factory Inc. New York
International Micronet Systems California
CSI Funding, Inc. Delaware
Premier Solutions Ltd. Pennsylvania
Safeguard International Group, Inc. Delaware
Safeguard Technologies, Inc. Delaware
SSI Management Company, Inc. Delaware
Tangram Enterprise Solutions, Inc. Pennsylvania
Technology Leaders Management, Inc. Delaware
XL Realty Corp. Delaware
<PAGE>
Exhibit 23
Consent of Independent Auditors
The Board of Directors
Safeguard Scientifics, Inc.:
We consent to incorporation by reference in Registration Statements (No.
33-41853, No.33-31840, No.2-79617, No.2-63245, No.33-48579, No.33-48462, No.
2-72362, No.33-72559 and No.33-72560) on Form S-8 and (No.2-93525) on Form
S-3 of Safeguard Scientifics, Inc. of our report dated February 7, 1997,
relating to the consolidated balance sheets of Safeguard Scientifics, Inc. and
subsidiaries as of December 31, 1996 and 1995, the related consolidated
statements of operations, cash flows and shareholders' equity and related
schedules for each of the years in the three-year period ended December 31,
1996, which reports are included or incorporated by reference in the December
31, 1996 annual report on Form 10-K of Safeguard Scientifics, Inc.
/s/KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
March 27, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1996 AND THE
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE TWELVE MONTHS ENDED
DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 12,881
<SECURITIES> 0
<RECEIVABLES> 402,491
<ALLOWANCES> 3,088
<INVENTORY> 234,543
<CURRENT-ASSETS> 654,066
<PP&E> 118,394
<DEPRECIATION> 39,525
<TOTAL-ASSETS> 936,070
<CURRENT-LIABILITIES> 308,536
<BONDS> 354,856
0
0
<COMMON> 3,280
<OTHER-SE> 165,731
<TOTAL-LIABILITY-AND-EQUITY> 936,070
<SALES> 1,856,889
<TOTAL-REVENUES> 2,101,828
<CGS> 1,655,893
<TOTAL-COSTS> 1,792,958
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,472
<INTEREST-EXPENSE> 23,916
<INCOME-PRETAX> 51,607
<INCOME-TAX> 13,285
<INCOME-CONTINUING> 19,927
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,927
<EPS-PRIMARY> .61
<EPS-DILUTED> .61
</TABLE>
