<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended September 30, 1998 Commission File Number 1-5620
------------------ ------
SAFEGUARD SCIENTIFICS, INC.
--------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1609753
- - ------------------------------- -----------------------
(state or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
800 The Safeguard Building, 435 Devon Park Drive Wayne, PA 19087
- - ----------------------------------------------------------- ------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (610) 293-0600
--------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities and
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports)
and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
----- -----
Number of shares outstanding as of November 12, 1998
Common Stock 31,582,947
<PAGE>
SAFEGUARD SCIENTIFICS, INC.
QUARTERLY REPORT FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION
-------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Item 1 - Financial Statements:
Consolidated Balance Sheets -
September 30, 1998 (unaudited) and December 31, 1997...................................3
Consolidated Statements of Operations (unaudited) -
Three and Nine Months Ended September 30, 1998 and 1997................................4
Consolidated Statements of Cash Flows (unaudited) -
Nine Months Ended September 30, 1998 and 1997..........................................5
Notes to Consolidated Financial Statements.............................................6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations...................................12
PART II - OTHER INFORMATION
---------------------------
Item 5 - Other Information................................................................21
Item 6 - Exhibits and Reports on Form 8-K.................................................21
Signatures................................................................................22
</TABLE>
2
<PAGE>
SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 4,939 $ 5,382
Short-term investments 138,834
Receivables less allowances 257,882 187,385
Inventories 144,821 198,053
Other current assets 5,858 6,459
-------- --------
Total current assets 552,334 397,279
Property, Plant, and Equipment 137,638 105,188
Less accumulated depreciation and amortization (39,576) (28,221)
-------- --------
Total property, plant, and equipment, net 98,062 76,967
Other Assets
Investments 229,673 185,111
Notes and other receivables 30,187 21,035
Excess of cost over net assets of businesses acquired, net 77,147 26,168
Other 9,444 7,981
-------- --------
Total other assets 346,451 240,295
-------- --------
Total Assets $996,847 $714,541
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current debt obligations $ 4,815 $ 3,396
Accounts payable 130,218 74,025
Accrued expenses 133,869 91,857
-------- --------
Total current liabilities 268,902 169,278
Long-Term Debt 253,494 127,089
Deferred Taxes 10,478 20,044
Minority Interest and Other 104,389 100,179
Convertible Subordinated Notes 71,345 90,881
Shareholders' Equity
Common stock 3,280 3,280
Additional paid-in capital 61,608 49,952
Retained earnings 221,799 151,471
Treasury stock, at cost (13,446) (13,339)
Net unrealized appreciation on investments 14,998 15,706
-------- --------
Total shareholders' equity 288,239 207,070
-------- --------
Total Liabilities and Shareholders' Equity $996,847 $714,541
-------- --------
-------- --------
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------------- -----------------------------------
1998 1997 1998 1997
-------------- --------------- --------------- ---------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues
Net Sales
Product $535,850 $439,528 $1,449,220 $1,263,196
Services 73,203 65,784 204,265 192,398
-------------- --------------- --------------- ---------------
Total net sales 609,053 505,312 1,653,485 1,455,594
Securities and other gains, net 100,929 6,683 117,495 20,722
Other income 3,463 3,206 10,825 8,746
-------------- --------------- --------------- ---------------
Total revenues 713,445 515,201 1,781,805 1,485,062
Costs and Expenses
Cost of sales-product 482,128 393,160 1,295,217 1,128,157
Cost of sales-services 48,269 40,708 135,293 120,382
Selling and service 46,570 33,637 127,336 99,316
General and administrative 24,763 22,174 69,021 64,859
Depreciation and amortization 5,968 4,205 15,879 13,760
Interest and financing 8,651 5,998 21,145 16,321
(Income) loss from equity investments, net 4,714 (491) 467 (909)
-------------- --------------- --------------- ---------------
Total costs and expenses 621,063 499,391 1,664,358 1,441,886
-------------- --------------- --------------- ---------------
Earnings Before Minority Interest and
Taxes on Income 92,382 15,810 117,447 43,176
Minority interest (818) (7,035) (7,407) (17,519)
-------------- --------------- --------------- ---------------
Earnings Before Taxes On Income 91,564 8,775 110,040 25,657
Provision for taxes on income 32,322 3,510 39,712 10,264
-------------- --------------- --------------- ---------------
Net Earnings $ 59,242 $ 5,265 $ 70,328 $ 15,393
-------------- --------------- --------------- ---------------
-------------- --------------- --------------- ---------------
Earnings Per Share
Basic $ 1.85 $ .17 $ 2.20 $ .49
Diluted $ 1.71 $ .16 $ 2.04 $ .47
Average Common Shares Outstanding
Basic 32,010 31,291 31,920 31,247
Diluted 34,983 31,971 35,112 32,007
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30
-------------------------------
1998 1997
-------------- --------------
(UNAUDITED)
<S> <C> <C>
Operating Activities
Net earnings $ 70,328 $ 15,393
Adjustments to reconcile net earnings to cash provided (used)
by operating activities
Depreciation and amortization 15,879 13,760
Deferred income taxes (9,202) 2,767
(Income) loss from equity investments, net 467 (909)
Securities and other gains, net (117,495) (20,722)
Minority interest, net 4,444 10,511
Cash provided (used) by changes in working capital items
Receivables (153) 149,104
Inventories 62,799 63,711
Accounts payable, accrued expenses, and other 18,304 (128,084)
---------- ----------
Cash provided by operating activities 45,371 105,531
Proceeds from securities and other gains, net 36,811 50,347
---------- ----------
Cash provided by operating activities and
securities and other gains, net 82,182 155,878
Other Investing Activities
Investments and notes acquired, net (112,565) (50,414)
Capital expenditures (14,902) (26,019)
Business acquisitions, net of cash acquired (49,288)
Other, net (1,478) 1,036
---------- ----------
Cash used by other investing activities (178,233) (75,397)
Financing Activities
Net borrowings (repayments) on revolving credit facilities 100,483 (86,191)
Net borrowings on term debt 1,868 685
Repurchase of Company common stock (9,867) (6,152)
Issuance of Company common stock 2,386 1,498
Issuance of subsidiary common stock 738 2,176
---------- ----------
Cash provided (used) by financing activities 95,608 (87,984)
---------- ----------
Decrease in Cash and Cash Equivalents (443) (7,503)
Cash and Cash Equivalents - beginning of year 5,382 12,881
---------- ----------
Cash and Cash Equivalents - End of Period $ 4,939 $ 5,378
---------- ----------
---------- ----------
See notes to consolidated financial statements.
</TABLE>
5
<PAGE>
SAFEGUARD SCIENTIFICS, INC.
Notes to Consolidated Financial Statements
September 30, 1998
1. General
The accompanying unaudited interim consolidated financial statements were
prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. The Summary of Accounting
Policies and Notes to Consolidated Financial Statements included in the
1997 Form 10-K should be read in conjunction with the accompanying
statements. These statements include all adjustments (consisting only of
normal recurring adjustments) which the Company believes are necessary for
a fair presentation of the statements. The interim operating results are
not necessarily indicative of the results for a full year.
2. Comprehensive Income
The Company adopted Statement of Financial Accounting Standard No. 130,
"Reporting Comprehensive Income" (SFAS 130), which was effective for fiscal
years beginning after December 15, 1997. SFAS 130 establishes standards for
reporting and display of comprehensive income and its components in a full
set of general purpose financial statements. Comprehensive income is the
change in equity of a business enterprise during a period from transactions
and other events and circumstances from non-owner sources. Other than net
earnings, the Company's source of comprehensive income is from net
unrealized appreciation on its non-current investments which is
disclosed separately in the Shareholders' Equity section of the
Consolidated Balance Sheets. Total comprehensive income (the sum of net
earnings and the change in unrealized appreciation on investments) was
$45.2 million and $9.0 million for the three months ended September 30,
1998 and 1997, respectively, and $69.6 million and $24.3 million for the
nine months ended September 30, 1998 and 1997, respectively.
3. Reclassifications
Certain amounts in the 1997 financial statements have been reclassified to
conform with the 1998 presentation.
4. Sale of Coherent
On August 3, 1998, Coherent Communications Systems Corporation merged with
Tellabs, Inc. in a pooling of interests. Prior to the merger, the Company
owned 31% of Coherent and accounted for its investment on the equity
method. The Company received approximately 3.5 million shares of Tellabs in
exchange for all of its Coherent shares and recorded a book gain of $245.3
million in the third quarter of 1998.
The Company owns less than 5% of Tellabs and accounts for its investment in
Tellabs on the cost method. The Company's investment in Tellabs is
classified as a trading security (classified as Short-term Investments on
the Consolidated Balance Sheet) and is recorded at market value based on
quoted market prices. Unrealized holding gains and losses are reflected in
net earnings. Net unrealized holding losses on trading securities included
in net earnings for the three and nine months ended September 30, 1998 was
$123.8 million based on the market price of Tellabs common stock of $39.81
at September 30, 1998. The closing price of Tellabs on November 13, 1998
was $56.63. The Company has sold approximately 1.1 million shares of
Tellabs in the fourth quarter through November 13, 1998. The Company will
mark-to-market the value of its remaining Tellabs holdings (approximately
2.4 million shares at November 13, 1998) at the end of each quarter.
Fluctuations in the price of Tellabs stock may have a significant impact
on the Company's future reported earnings.
6
<PAGE>
5. Investments
The following summarizes the Company's non-current investments (in
thousands), which excludes trading securities (Tellabs)
classified as Short-Term Investments (see Note 4). Investments are
classified according to the applicable accounting method at
September 30, 1998. Market value reflects the price of publicly-traded
securities at the close of business at the respective date. Unrealized
appreciation reflects the net excess of market value over carrying value
of publicly-traded securities classified as available-for-sale.
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
----------------------------- ---------------------------
Carrying Market Carrying Market
Value Value Value Value
------------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Equity Investees
Cambridge $ 31,735 $191,829 $ 24,679 $371,394
ChromaVision 11,737 24,346 4,689 30,044
Coherent 14,799 135,008 (a)
OAO 16,306 23,232 13,887 43,716
Sanchez 10,050 72,314 7,196 89,068
USDATA 7,002 9,209 7,194 13,325
Non-public companies 28,281 18,453
----------- --------------
105,111 90,897
Diamond 1,526 15,752 1,526 14,717
DocuCorp 3,195 4,654 7,718
Integrated Systems Consulting Group 1,891 7,502 1,891 7,785
Other public companies 13,351 14,780 15,393 20,104
Unrealized appreciation 22,725 23,796
Non-public companies 81,874 43,890
----------- --------------
$229,673 $185,111
----------- --------------
----------- --------------
</TABLE>
(a) Coherent merged with Tellabs in August 1998. See Note 4.
The following sales information for unconsolidated investees at September
30, 1998 has been compiled from the unaudited financial statements of the
respective investees and reflects certain historical adjustments (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
1998 1997 1998 1997
------------ --------------- -------------- -----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Public companies $252,270 $202,478 $754,243 $552,442
Non-public companies:
Intellisource 35,740 29,760 97,713 83,943
Kanbay 10,056 5,129 25,882 13,348
Multigen 3,436 5,080 12,443 13,759
Pac-West Telecomm 9,500 7,998 29,432 19,411
Quest One 3,162 904 6,872 1,478
US Interactive 4,554 3,229 13,179 9,048
Other 13,196 12,814 39,000 32,239
----------- --------------- -------------- -----------------
79,644 64,914 224,521 173,226
----------- --------------- -------------- -----------------
Total Investee Sales $331,914 $267,392 $978,764 $725,668
----------- --------------- -------------- -----------------
----------- --------------- -------------- -----------------
</TABLE>
7
<PAGE>
6. Debt
In April 1998, the Company increased the availability under its bank
revolving credit facility to $200 million from $150 million. Of the $200
million, $150 million matures in May 2002 and is secured by certain equity
securities the Company holds of its publicly-traded partnership companies,
including CompuCom (the "Pledged Securities"). The remaining $50 million is
unsecured and matures in April 1999, with availability limited to the
lesser of $50 million or 10% of the value of the Pledged Securities. The
Company intends to renew the $50 million bank revolving credit facility in
1999. There was $108 million outstanding under the total facility at
September 30, 1998. Long-term debt consisted of (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
----------------- ----------------
(UNAUDITED)
<S> <C> <C>
Parent Company and Other Recourse Debt
Revolving credit facilities $127,261 $ 22,200
Other 16,044 7,822
----------------- ----------------
143,305 30,022
----------------- ----------------
Subsidiary Debt (Non-Recourse to Parent)
CompuCom 115,004 100,425
Other 38
----------------- ----------------
115,004 100,463
----------------- ----------------
Total debt 258,309 130,485
Current debt obligations (4,815) (3,396)
----------------- ----------------
Long-term debt $253,494 $127,089
----------------- ----------------
----------------- ----------------
</TABLE>
7. Earnings Per Share
The calculations of Earnings Per Share (EPS) were (in thousands except per
share amounts):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
1998 1997 1998 1997
----------- ---------- ---------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Basic EPS
Net earnings $59,242 $ 5,265 $70,328 $15,393
----------- ---------- ---------- -----------
----------- ---------- ---------- -----------
Average common shares outstanding 32,010 31,291 31,920 31,247
----------- ---------- ---------- -----------
----------- ---------- ---------- -----------
Basic EPS $ 1.85 $ .17 $ 2.20 $ .49
----------- ---------- ---------- -----------
----------- ---------- ---------- -----------
Diluted EPS
Net earnings $59,242 $ 5,265 $70,328 $15,393
Effect of: Public investees (a) (220) (39) (814) (218)
Dilutive securities (b) 725 2,269
----------- ---------- ---------- -----------
$59,747 $ 5,226 $71,783 $15,175
----------- ---------- ---------- -----------
----------- ---------- ---------- -----------
Average common shares outstanding 32,010 31,291 31,920 31,247
Effect of: Dilutive options 512 680 643 760
Dilutive securities (b) 2,461 2,549
----------- ---------- ---------- -----------
Average number of common shares assuming dilution 34,983 31,971 35,112 32,007
----------- ---------- ---------- -----------
----------- ---------- ---------- -----------
Diluted EPS $ 1.71 $ .16 $ 2.04 $ .47
----------- ---------- ---------- -----------
----------- ---------- ---------- -----------
</TABLE>
(a) Represents the dilutive effect of public investee common stock
equivalents and convertible securities.
(b) Represents the dilutive effect of the Company's 6% convertible
subordinated notes for the three and nine months ended September
30, 1998. The convertible subordinated notes were anti-dilutive
in 1997 and therefore they do not impact the calculation of
diluted EPS in 1997.
8
<PAGE>
8. Parent Company Financial Information
Condensed Financial Information is provided to reflect the results of
operations and financial position of the "Parent Company", or the Company
without the effect of consolidating its less than wholly-owned
subsidiaries.
The following summarizes the Parent Company Balance Sheets of Safeguard
Scientifics, Inc. and its wholly-owned subsidiaries (in thousands). These
Parent Company Balance Sheets differ from the Consolidated Balance Sheets
due to the exclusion of the assets and liabilities of the Company's less
than wholly-owned subsidiaries, primarily CompuCom and Tangram, with the
carrying value of these companies included in "Investments".
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Short-term investments $138,834
Other current assets 7,198 $ 11,710
Investments 359,090 310,877
Other 60,381 37,567
------------ -------------
Total assets $565,503 $360,154
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities $ 58,114 $ 18,525
Long-term debt 142,703 29,689
Other liabilities 5,102 13,989
Convertible subordinated notes 71,345 90,881
Shareholders' equity 288,239 207,070
------------ -------------
Total liabilities & shareholders' equity $565,503 $360,154
------------- -------------
------------- -------------
</TABLE>
The following summarizes the Parent Company's investments in less than
wholly-owned subsidiaries (in thousands). Market value reflects the price
of publicly-traded securities at the close of business at the respective
date.
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------------------- ------------------------------
Carrying Market Carrying Market
Value Value Value Value
------------- -------------- -------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CompuCom $126,710 $109,521 $122,613 $211,504
Tangram 2,707 36,571 3,153 68,570
Cambridge 31,735 191,829 24,679 371,394
Coherent 14,799 135,008
Other public 87,783 171,789 83,290 218,759
Other 110,155 62,343
------------- --------------
$359,090 $310,877
------------- --------------
------------- --------------
</TABLE>
9
<PAGE>
Parent Company Financial Information (continued)
The following summarizes the Parent Company Statements of Operations of
Safeguard Scientifics, Inc. and its wholly-owned subsidiaries (in
thousands). These Parent Company Statements of Operations differ from the
Consolidated Statements of Operations by excluding the revenues and related
costs and expenses of the Company's less than wholly-owned subsidiaries,
primarily CompuCom and Tangram, with the Company's share of the earnings or
losses of these companies reflected in the caption "Equity (income) loss,
net ". 1997 included net sales of $16.0 million and cost of sales and
operating expenses of $14.6 million, for the nine months ended September
30, 1997, related to Pioneer which was sold in mid-1997.
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- ------------------------------
1998 1997 1998 1997
--------------- ------------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues
Net sales $15,982
Securities and other gains, net $100,929 $5,830 $117,495 19,869
Other income 3,754 3,489 11,719 9,745
--------------- ------------- ------------- -------------
Total revenues 104,683 9,319 129,214 45,596
Costs and Expenses
Cost of sales and operating expenses 9,441 8,068 26,367 36,614
Equity (income) loss, net 4,111 (4,295) (3,871) (8,962)
--------------- ------------- ------------- -------------
Total costs and expenses 13,552 3,773 22,496 27,652
--------------- ------------- ------------- -------------
Earnings Before Taxes On Income 91,131 5,546 106,718 17,944
Provision for taxes on income 31,889 281 36,390 2,551
--------------- ------------- ------------- -------------
Net Earnings $ 59,242 $5,265 $ 70,328 $15,393
--------------- ------------- ------------- -------------
--------------- ------------- ------------- -------------
</TABLE>
9. Business Combinations
During the nine months ended September 30, 1998, CompuCom completed
three business combinations for approximately $49 million in cash. These
business combinations were accounted for as purchases and accordingly
the consolidated financial statements reflect the operations of the
acquired entities since the respective acquisition dates. CompuCom
has not completed the allocation of the purchase price for two
of these acquisitions; accordingly, the amount of goodwill recorded
could be adjusted once the allocation is finalized.
The following pro forma financial information (in thousands except per
share amounts) presents the combined results of operations of the Company
as if the acquisitions had occurred as of January 1, 1998, after giving
effect to certain adjustments, including amortization of goodwill,
increased interest expense on debt related to the acquisitions, and
related income tax effects.
<TABLE>
<CAPTION>
Pro Forma
Nine Months Ended
September 30, 1998
------------------
<S> <C>
Total Revenues $1,972,275
Net Earnings $67,470
Diluted earnings per share $1.96
</TABLE>
In management's opinion, the pro forma results of operations are not
indicative of the actual results that would have occurred had the
acquisitions been consummated at the beginning of the periods presented
and is not intended to be a projection of future results.
Pro forma adjustments that give effect to actions taken by CompuCom's
management or other efficiencies expected to be realized as a result of
the transactions, including termination of employees and closure of
facilities, are not reflected in the above pro forma results of
operations.
10
<PAGE>
10. Subsequent Event
On November 4, 1998, CompuCom announced a significant restructuring of its
operations for which CompuCom expects to record a one-time charge in the
fourth quarter of 1998. The restructuring is designed to reduce CompuCom's
product cost structure by closing branch facilities and reducing CompuCom's
workforce by approximately 10%. Although the restructuring plan has not
been finalized, CompuCom expects the charge to be approximately $20 to $25
million, the effect of which will be approximately $10 million to $12.5
million to the Company's net earnings, after recording Minority Interest.
11
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
General
The Company's business strategy is the development of primarily
information technology-oriented, entrepreneurially-driven partnership companies.
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's primary goal is to achieve superior returns for its shareholders by
bringing companies which it believes are ready for public ownership to its
shareholders through the rights offering process. This process gives
shareholders the opportunity to acquire direct ownership in selected
partnership companies at their initial public offering date.
If the Company's ownership in any of the partnership companies changes
significantly, the Company's consolidated revenues and related costs and
expenses may fluctuate primarily due to the applicable accounting method used
for recognizing its participation in the operating results of that company.
The revenues 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. Minority
interest adjusts consolidated earnings to reflect only the Company's share of
the earnings or losses of the partnership company. CompuCom Systems, Inc. and
Tangram Enterprise Solutions, Inc. are consolidated in 1998 and 1997. Premier
Solutions Ltd. and Pioneer Metal Finishing, which were sold in mid-1997, also
were included in the Company's consolidated operating results for the first six
months of 1997.
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. 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. On the equity method of accounting, a partnership
company's revenues 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) loss from equity investments, net" in the Consolidated Statements of
Operations.
The net effect of a partnership company's results of operations on the
Company's net earnings is the same under either consolidation accounting or the
equity method of accounting, as only the Company's share of the earnings or
losses of a partnership company is included in the Company's net earnings in the
Consolidated Statements of Operations.
Investments not consolidated or accounted for on the equity method are
accounted for on the cost method of accounting under which the Company's share
of the earnings or losses of such companies is not included in the Company's
Consolidated Statements of Operations. However, the effect of the change in
market value of cost method investments classified as trading securities
(Tellabs) is reflected in the Company's results of operations each reporting
period.
12
<PAGE>
As mentioned in Operations Overview, the Company's consolidated
revenues and related costs and expenses are significantly influenced by
CompuCom's results of operations. At September 30, 1998, the Company owns
approximately 51% of CompuCom's outstanding common stock and owns preferred
stock which gives it 60% of the vote for CompuCom's directors.
CompuCom competes in the computer reseller industry which has been
undergoing significant transformation and consolidation. Several of CompuCom's
competitors have been growing through acquisitions and others have been
acquired. In addition, companies previously engaged in the retail channel and
some of CompuCom's suppliers have begun to enter the corporate reseller market,
heightening the competition.
As a result, while growing internally, CompuCom is also looking to
strengthen its market share through acquisitions, including three
acquisitions which were completed in 1998. If CompuCom were to use its stock
for acquisitions or if some other dilutive event were to occur, the Company's
voting interest in CompuCom could decrease below 50%. Under current generally
accepted accounting principles, the Company would cease consolidating
CompuCom's results and instead would account for its investment in CompuCom
on the equity method provided the Company maintained the ability to exercise
significant influence over CompuCom's ordinary course of business. The
Company's share of CompuCom's earnings, on the equity method versus
consolidation, would differ only to the extent that the Company's ownership
of CompuCom changed. However, the presentation of the Consolidated Statements
of Operations and Balance Sheets would change dramatically.
Note 8 to the Company's Consolidated Financial Statements summarizes
the Parent Company Statements of Operations and Balance Sheets of the Company
for the same periods presented in the Consolidated Financial Statements. These
statements differ from the Consolidated Financial Statements by excluding the
revenues, costs, expenses, assets, and liabilities of the Company's less than
wholly-owned subsidiaries (primarily CompuCom and Tangram) and instead treating
these companies as if they were accounted for on the equity method. The
Company's share of the results of operations of less than wholly-owned
subsidiaries is included in "Equity (income) loss, net" and the carrying value
of these companies is included in "Investments" in the Parent Company Statements
of Operations and Balance Sheets, respectively.
Although the Parent Company Statements of Operations and Balance Sheets
presented in Note 8 are accurate relative to the Company's historical
Consolidated Financial Statements, they are not necessarily indicative of future
Parent Company Statements of Operations and Balance Sheets.
Restructuring
On November 4, 1998, CompuCom announced a restructuring plan
designed to reduce CompuCom's product cost structure by approximately 1.25%
to 1.5% of sales by closing branch facilities and reducing CompuCom's
workforce by approximately 10%. CompuCom intends to maintain local presence
in all current markets through the use of remote communications. The
restructuring charge will primarily consist of costs associated with closing
branch facilities and disposing of related fixed assets as well as employee
severance and benefits related to the reduction in workforce. The
restructuring plan has not been finalized and therefore CompuCom has not yet
calculated the final amount of the restructuring charge. However, CompuCom
expects the charge to be approximately $20 million to $25 million, the effect
of which will be approximately $10 million to $12.5 million to the Company's
net earnings, after recording Minority Interest. The Company expects to meet
its targeted earnings per share for the fourth quarter of 1998 prior to
recognizing its share of Compucom's restructuring charge and prior to any
unrealized gain or loss on the Company's remaining Tellabs holdings. The
Company's unrealized gain on its current Tellabs holdings would fully offset
its share of the restructuring charge if Tellabs closes in the $44-$45
range at December 31, 1998.
As a result of its recently announced restructuring plan, CompuCom's
management expects to realize reductions in operation expenses, primarily in
selling and general and administrative expenses. The reductions have not yet
been completely finalized and are not expected to be fully realized until the
first quarter of 1999.
Operations Overview
Net sales by industry segment were (in thousands):
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
1998 1997 1998 1997
-------------- -------------- -------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Information Technology
Microcomputer Systems and Services $603,330 $501,504 $1,638,639 $1,424,613
Information Solutions 5,723 3,808 14,846 14,999
-------------- -------------- -------------- --------------
609,053 505,312 1,653,485 1,439,612
Other 15,982
-------------- -------------- -------------- --------------
Total Net Sales $609,053 $505,312 $1,653,485 $1,455,594
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
</TABLE>
13
<PAGE>
Net sales increased for the three and nine months ended September 30,
1998 compared to the same periods in 1997 as CompuCom (Microcomputer Systems and
Services) experienced sales increases of 20% and 15%, respectively. The sales
increases at CompuCom were due primarily to increased product sales resulting
from the acquisitions of Computer Integration Corporation and Dataflex
Corporation during the second quarter of 1998. These acquisitions contributed
$98 million and $149 million of product sales for the three and nine months
ended September 30, 1998, respectively. CompuCom sold more desktop, laptop, and
server units in the three and nine months ended September 30, 1998 compared to
the same periods in 1997. However, a decline in the average sales prices of
these units lessened the impact of this unit growth on revenue. Although the
trend of declining average sales prices has slowed in 1998 compared to 1997,
CompuCom expects to be continually impacted by this trend in the short term, as
CompuCom must sell more units to generate the same amount of product sales.
Services sales increased 12% for the three months ended September 30, 1998
compared to the same period in 1997 due to increases in configuration and field
engineering, both of which have benefited from the increase in product unit
sales. CompuCom represented 99% of the Company's total consolidated net sales in
the third quarter of 1998 and 1997. 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.
The Company's net earnings increased primarily from higher securities
and other gains resulting from the gain on the merger of Coherent and Tellabs,
partially offset by unrealized losses resulting from the decline in the market
price of Tellabs subsequent to the merger. Additionally, net earnings were
positively impacted by increased earnings at Tangram, offset by decreased
earnings at CompuCom, increased general corporate expense to support the
increased activity at partnership companies, and decreased equity income.
CompuCom's net earnings decreased due to increased selling expenses, continued
investments in its service business through the hiring and training of
additional engineer and support personnel, lower services margins and, for the
three months ended September 30, 1998, lower product margins. Future
profitability at CompuCom will depend on its ability to effectively manage
inventory levels in response to changes in its major suppliers price protection
and return programs, its ability to effectively manage the utilization of
service personnel, its control of operating expenses, demand for product,
competition, manufacturer product availability, effective utilization of vendor
programs, its ability to successfully manage the implementation and operation of
the channel assembly programs of its major suppliers, its ability to adequately
integrate recent acquisitions, and its ability to implement the recently
announced virtual office strategy.
The following summarizes significant pre-tax securities and other gains (in
millions):
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
1998 1997 1998 1997
----------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Coherent/Tellabs, net $121.5 $121.5
Cambridge 1.6 $6.1 17.5 $18.1
ChromaVision 3.9 3.9
Premier 6.3
Venture Funds 3.3 1.5 9.5 2.0
Diamond 1.1 5.4
Sybase (2.2) (3.0)
Other (25.5) (5.9) (28.8) (12.0)
----------------- ---------------- ---------------- ----------------
$100.9 $6.7 $117.5 $20.7
----------------- ---------------- ---------------- ----------------
----------------- ---------------- ---------------- ----------------
</TABLE>
The Coherent/Tellabs net gain includes the $245.3 million gain on
the merger of Coherent and Tellabs, partially offset by unrealized losses
resulting from the decline in the market price of Tellabs subsequent to the
merger of $123.8 million through September 30, 1998. Securities and other gains
in 1998 also include the open market sales of a portion of the Company's
interest in Cambridge Technology Partners, and distributions from the Company's
associated Venture Funds. Partially offsetting these gains
14
<PAGE>
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 and other gains in 1997 included the open market sales of a portion
of the Company's interest in Cambridge, the sale of shares in the Diamond and
ChromaVision rights offerings, the sale of all of the assets of Premier
Solutions Ltd., and distributions from the Company's associated Venture Funds.
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 and other 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.
Income or loss from equity investments fluctuates with the Company's
ownership percentage and the operating results of investees accounted for on the
equity method. In the third quarter of 1998, the Company discontinued accounting
for its investment in Coherent on the equity method of accounting as a result of
the Coherent/Tellabs merger. In addition, the Company recorded its share of
merger-related charges at certain partnership companies. Primarily as a result
of these transactions, equity income decreased for the three months ended
September 30, 1998. For the nine months ended September 30, 1998, equity income
decreased as a result of the above transactions and increased losses at certain
partnership companies, partially offset by the continued strong overall
performance at Cambridge and Sanchez. The Company's public investments accounted
for on the equity method in the third quarter of 1998 include Cambridge,
ChromaVision Medical Systems, OAO Technology Solutions, Sanchez Computer
Associates and USDATA Corporation.
Cambridge reported increased sales and earnings of 31% and 47%,
respectively. The lower sales growth reflects downward pressure in its North
American Rapid Application Deployment (RAD) business. During the third quarter,
Cambridge completed the acquisition of Excell Data Corporation, a systems
integrator of Microsoft-centric solutions, which enhances Cambridge's service
offerings by providing additional resources for its RAD business. Safeguard owns
approximately 15% of Cambridge's common stock at September 30, 1998.
ChromaVision entered into an agreement with DAKO Corp., an
international diagnostics, reagent and systems manufacturing firm. Under the
agreement, the two firms will co-market ChromaVision's Automated Cellular
Imaging System (ACIS-TM-) in combination with DAKO's HercepTest-Registered
Trademark- kit in the United States as an integrated system for the guidance
of breast cancer therapy. Safeguard owns approximately 26% of ChromaVision's
common stock at September 30, 1998
OAO Technology Solutions completed the acquisition of a $60 million IT
staffing augmentation services company in July 1998. OAO reported an operating
profit of $.02 per share for the third quarter before certain adjustments,
including one-time write-offs and restructuring charges, which resulted in a net
loss of $.12 per share. Safeguard owns approximately 33% of OAO's common stock
at September 30, 1998.
Sanchez reported 43% and 70% increases in sales and earnings,
respectively, for the third quarter. Sanchez also announced in the quarter that
it signed a global partnership with IBM Corporation for the sales, marketing and
implementation of Sanchez's software products and a licensing agreement with
Citicorp, bringing to three the number of top ten global financial institutions
who have licensed Sanchez's products. Safeguard owns approximately 27% of
Sanchez's common stock at September 30, 1998.
15
<PAGE>
For the third quarter of 1998, USDATA reported a loss from
continuing operations (before taxes) of $1.8 million, an improvement over the
$2.1 million loss from continuing operations (before taxes) for the third
quarter of 1997. USDATA reported a 17% increase in software unit shipments in
the third quarter of 1998 over the same period in 1997. In July 1998, USDATA
announced the sale of its system integration and hardware servicing business
effective July 1, 1998. USDATA's third quarter revenues and operating
expenses reflect its ongoing software business. Safeguard owns approximately
26% of USDATA's common stock at September 30, 1998.
Costs and Expenses
The Company's overall gross margin was 12.9% and 13.5% in the three and
nine months ended September 30, 1998 compared to 14.1% and 14.2% for the
comparable periods of 1997. The decreases are primarily attributable to reduced
service gross margins at CompuCom and, for the three months ended September 30,
1998, reduced product margins at CompuCom. CompuCom's product gross margin for
the third quarter of 1998 was 9.3% compared to 10.1% for the same period in
1997. CompuCom attributes this to a decline in billed margins due to intense
competition from other corporate resellers and direct marketers. CompuCom's
product gross margin for the nine months ended September 30, 1998 and 1997 was
10.0%. For the nine month period, the decline in billed margins was offset by an
increase in the amount of manufacturer-sponsored incentives when compared to the
prior year. CompuCom's services gross margin was 32.3% and 31.9% in the three
and nine months ended September 30, 1998 compared to 36.3% and 36.5% for the
comparable periods of 1997. The decrease was primarily caused by lower billing
per engineer for CompuCom's service personnel, particularly in the systems
engineering group. 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.
Selling and service increased in absolute dollars and as a percentage
of sales for the three and nine months ended September 30, 1998 compared to 1997
primarily due to increased expenses at CompuCom. The increases at CompuCom were
primarily due to the hiring of additional sales representatives during the first
quarter of 1998, higher commission expense, an increase in the sales force as a
result of the CIC and Dataflex acquisitions, and increased spending on training
the Company's engineer force.
General and administrative expense increased in absolute dollars for
the three and nine months ended September 30, 1998 compared to 1997 primarily
due to increased expenses at CompuCom and increased corporate expenses incurred
to support the growing activities of the partnership companies. The increase for
the nine months ended September 30, 1998 was partially offset by the elimination
of expenses resulting from the sale of Premier and Pioneer in mid-1997. The
increases at CompuCom were primarily due to the costs associated with the
integration of CIC and Dataflex as well as CompuCom's ongoing campus recruitment
program. The campus recruits complete training and certification programs before
being added to CompuCom's billable workforce. CompuCom's general and
administrative expenses are reported net of reimbursements by certain
manufacturers for specific training, promotional and marketing programs. These
reimbursements offset the expenses incurred by CompuCom.
16
<PAGE>
Depreciation and amortization increased for the three and nine months
ended September 30, 1998 compared to 1997 primarily due to increased
depreciation at CompuCom. The increase for the nine months ended September 30,
1998 was partially offset by the elimination of depreciation and amortization
resulting from the sale of Premier and Pioneer in mid-1997. The increase at
CompuCom is associated with upgrading its hardware and software at headquarters
and branch locations, increased furniture and fixtures to support headcount
additions, depreciation related to CompuCom's headquarters and operations campus
which was placed in service during the third quarter of 1997, and an increase in
amortization expense as a result of acquisitions completed during the first half
of 1998.
Interest and financing expense increased for the three and nine months
ended September 30, 1998 compared to the same periods in 1997 primarily as a
result of increased borrowings at CompuCom to fund the acquisitions of CIC and
Dataflex, and increased borrowings by the Company primarily to fund investments
in new or existing partnership companies, partially offset by the elimination of
interest due to the conversion of $18.5 million of the Company's Convertible
Subordinated Notes into the Company's Common Stock in February 1998.
For the three and nine months ended September 30, 1998, the
effective tax rate was 35.3% and 36.1%, respectively, compared to 40.0% for
the three and nine months ended September 30, 1997. The effective rate
decreased due to the realization of previously unrecorded tax benefits
attributable to the difference between the book basis and tax basis of
certain of the Company's investments, as well as the application of lower tax
rates against realized investment gains.
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. Through September 1998,
approximately $43.7 million of Notes were converted into 1,506,119 shares of the
Company's Common Stock.
In April 1998, the Company increased the availability under its bank
revolving credit facility to $200 million from $150 million. Of the $200
million, $150 million matures in May 2002 and is secured by certain equity
securities the Company holds of its publicly-traded partnership companies,
including CompuCom (the "Pledged Securities"). The value of these Pledged
Securities significantly exceeds the total availability under the bank revolving
credit facility. The remaining $50 million is unsecured, matures in April 1999,
with availability limited to the lesser of $50 million or 10% of the value of
the Pledged Securities. The Company intends to renew the $50 million bank
revolving credit facility in 1999. There was $108 million outstanding under the
total facility at September 30, 1998.
The Company has revolving credit facilities with certain partnership
companies whereby the Company may borrow up to $20 million from these
partnership companies on a revolving basis at a rate that varies with the
Company's effective borrowing rate. At September 30, 1998, $19.3 million was
outstanding under these agreements.
17
<PAGE>
Availability under the Company's revolving credit facilities, proceeds
from the sales from time to time of selected publicly-traded securities, and
other internal sources of cash flow should be sufficient to fund the Company's
cash requirements for the next twelve months, including investments in new or
existing partnership companies, general corporate requirements, and the
repurchase of the Company's Common Stock from time to time in the open market.
In connection with certain investments, the Company is contingently obligated
for approximately $30 million of guarantee commitments. In addition, it has
committed capital of $77 million to various investments, venture funds and
private equity partnerships, to be funded over the next several years.
CompuCom maintains separate, independent financing arrangements, which
are non-recourse to the Company and are secured by certain assets of CompuCom.
During recent years, CompuCom has utilized operating earnings, bank financing
arrangements, long-term subordinated notes, and internally generated funds to
fund its cash requirements. CompuCom's financing arrangements consist of a $165
million working capital facility (increased from $125 million in June 1998), a
$175 million revolving Securitization Facility, and a $25 million real estate
loan (collectively, the "credit agreements"). At September 30, 1998,
approximately $109 million was outstanding under the working capital facility
and the real estate loan, and the Securitization Facility was fully utilized.
The credit agreements mature in November 2002, except for the real estate loan
which is due in quarterly installments beginning April 1999. Compucom is
currently evaluating other permanent financing options for the real estate
loan.
During the nine months ended September 30, 1998, CompuCom completed
three business combinations for approximately $49 million in cash. These
business combinations were accounted for as purchases.
Working capital increased to $283.4 million at September 30, 1998
compared to $228.0 million at December 31, 1997. The increase was primarily due
to the classification of the Company's Tellabs holdings as a trading security
following the Coherent/Tellabs merger in August 1998, and an increase in
accounts receivable at CompuCom as a result of two acquisitions completed in the
second quarter of 1998 which resulted in higher sales in the third quarter of
1998 compared to the fourth quarter of 1997. These increases were partially
offset by an increase in accounts payable at CompuCom resulting from enhanced
cash management, and a decrease in inventory due to ComuCom's effort to
reduce its risk associated with changes in its suppliers price protection and
return programs and increase its inventory turns.
Cash flow provided by operating activities decreased significantly in
1998 as operating cash flow for the nine months ended September 30, 1997
included the effect of CompuCom's Securitization Facility in which $100 million
of accounts receivable were sold with the proceeds used to pay down long-term
debt.
The Company has sold approximately 1.1 million shares of Tellabs in
the fourth quarter through November 13, 1998, generating proceeds of
approximately $53 million.
The Company's operations are not capital intensive, and capital
expenditures in any year normally would not be significant in relation to the
overall financial position of the Company. Capital asset requirements are
generally funded through bank credit facilities, internally generated funds, or
other financing sources. There are no material capital asset purchase
commitments at September 30, 1998.
18
<PAGE>
Year 2000
The Company is currently addressing the Year 2000 issue, which results
from the fact that many computer programs were previously written using two
digits rather than four to define the applicable year. Programs written in this
way may recognize a date ending in "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations. The Company has conducted an assessment of its
computer information systems and believes that it will not need to incur any
material extraordinary expense to correct its systems which are not Year 2000
compliant on a timely basis. The Company has also surveyed its majority-owned
and equity investee partnership companies regarding this issue. The Company's
most significant consolidated subsidiary, CompuCom, has completed initial
assessment of its computer information systems, and has plans in place to
complete remediation and begin testing by the end of 1998. CompuCom currently
anticipates that it will spend approximately $1.4 million on Year 2000
compliance, of which $800,000 has been spent through September 30, 1998. The
balance of the Company's partnership companies are in varying stages of
assessing, remediating, and testing for internal Year 2000 compliance and
assessing Year 2000 compliance of their vendors, business partners, and
customers. The Company's partnership companies in general do not yet have
contingency plans to operate in the event of a Year 2000 problem. The
partnership companies generally plan on developing contingency plans in 1999.
Most of the partnership companies are in the business of providing software
products, information technology consulting, or outsourcing services. Those
partnership companies which produce software or products with embedded
programming believe that the current version of their products either are Year
2000 compliant or will be revised to be compliant in 1998. Certain partnership
companies are continuing to determine the extent to which previously sold
software products and services were non-compliant. The total cost and time which
will be incurred by the partnership companies on the Year 2000 issue cannot
presently be determined. There can be no assurance that all necessary work will
be completed in time, or that such costs will not materially adversely impact
one or more of such partnership companies. In addition, required spending on the
Year 2000 effort will cause customers of most of the Company's partnership
companies to reallocate at least part of their information systems budgets.
Although several partnership companies have offerings which may be useful in
such efforts, such reallocations could materially adversely affect the results
of operations of many partnership companies.
Recently Issued Pronouncements
In 1997 and 1998, the Financial Accounting Standards Board (FASB)
issued pronouncements relating to the presentation and disclosure of information
related to segment data and the disclosure of information about pensions and
other postretirement benefits, respectively. The Company is required to adopt
the provisions of these pronouncements, if applicable, for the year ending
December 31, 1998. The adoption of these pronouncements will not have an impact
on the Company's financial position and results of operations, but may change
the presentation of certain of the Company's notes and data related to the
Consolidated Financial Statements.
19
<PAGE>
Certain statements in this Quarterly Report describing the plans,
goals, strategies, intentions, forecasts, and expectations of the Company or its
partnership companies constitute what are sometimes termed "forward-looking
statements." The following important factors could cause actual results to
differ materially from those in such forward-looking statements. The information
technology industry is highly competitive, characterized by rapid product
development cycles, frequent price reductions, and early product obsolescence,
and is generally dominated by companies with greater resources than the Company
and its partnership companies. Certain of the Company's partnership companies
offer complex products or services which have lengthy sales cycles, which makes
sales forecasts difficult to make, and can lead to substantial fluctuations in
quarterly operating results. Emerging technology companies, including many of
the Company's partnership companies, often encounter obstacles and delays in
developing products, service offerings, and markets. Such delays and obstacles
could affect the Company's ability to complete rights offerings when planned.
The Company is dependent on the financial market for information technology
companies in general and for initial public offerings of those companies in
particular. If the current uncertainty in those markets continues for an
extended period of time, the Company's ability to complete rights offerings when
planned, and the Company's ability to generate gains from sales of securities,
could be materially adversely affected. Clients of the Company's partnership
companies could reallocate part or all of their information systems budgets to
address the Year 2000 issue, which could materially reduce the demand for the
products and services of the Company's partnership companies. The Company's and
its partnership companies' business operations could be materially adversely
affected if they or their vendors, business partners, or customers do not timely
complete any necessary remediation efforts to their own systems and products.
There is likely to be an extraordinary amount of litigation regarding the Year
2000 issue over the next several years, and information technology providers may
be attractive targets for such litigation. Such litigation could have a material
adverse impact on the Company's and its partnership companies' operations and
financial conditions.
20
<PAGE>
Item 5. Other Information
In July 1998, Who? Vision, a technology company focused on the
development of fingerprint identification technologies, filed a registration
statement with the Securities and Exchange Commission for an initial public
offering of approximately 6,500,000 shares of Who? Vision common stock through a
rights offering to Safeguard's shareholders. Due to the uncertainties in the
stock market and the poor environment for IPOs, the Company presently intends to
delay commencement of additional rights offerings, including the Who? Vision
rights offering, until market conditions improve. The Who? Vision rights
offering is still in registration, and the decision on a revised target date
will be made as market conditions allow.
The merger of Coherent Communications Systems Corporation with Tellabs,
Inc. was completed on August 3, 1998. Under the terms of the merger agreement,
each share of Coherent Communications common stock held by the Company was
exchanged for 0.72 shares of Tellabs common stock.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Description
10.1 Amended and Restated Credit Agreement, dated April
17, 1998, among Safeguard Scientifics, Inc.,
Safeguard Scientifics (Delaware), Inc., Safeguard
Delaware, Inc. and PNC Bank, N.A. (exhibits omitted).
(1)
10.2 Amendment No. 1 to Amended and Restated Credit
Agreement, dated as of June 26, 1998, among CompuCom
Systems, Inc., certain lenders party hereto, and
NationsBank of Texas, N.A., as administrative lender
(exhibits omitted) (2)
10.3 Note Agreement dated October 6, 1998, between
Safeguard Delaware, Inc. (Lender) and Donald R.
Caldwell (Borrower)*
10.4 Stock Option Grant Agreement between Compucom
Systems, Inc. and Thomas C. Lynch, dated as of
October 22, 1998*
27 Financial Data Schedule (electronic filing only) *
* filed herewith
(1)Incorporated by reference from registrant's form 10-Q for
the quarter ended March 31, 1998 dated May 15, 1998 and
made a part hereof by such reference
(2) Incorporated by reference from registrant's form 10-Q for
the quarter ended June 30, 1998 dated August 14, 1998 and
made a part hereof by such reference
(b) No reports on Form 8-K have been filed by the Registrant
during the quarter ended September 30, 1998.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SAFEGUARD SCIENTIFICS, INC.
(Registrant)
Date: November 16, 1998 /s/ Donald R. Caldwell
----------------------
Donald R. Caldwell
President and Chief Operating Officer
Date: November 16, 1998 /s/ Michael W. Miles
--------------------
Michael W. Miles
Senior Vice President and Chief Financial
Officer (Principal Financial and
Principal Accounting Officer)
22
<PAGE>
Exhibit 10.3
NOTE
$500,000 October 6, 1998
In consideration of the loan (hereinafter referred to as a "Loan")
Safeguard Delaware, Inc., a Delaware corporation (the "Lender"), has made to
Donald R. Caldwell, an individual (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 103 Springer Building, 3411 Silverside Road, Wilmington,
Delaware 19803, 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 Five Hundred Thousand and
no/100 Dollars ($500,000).
The unpaid principal balance of the Note shall be paid one year from
the date hereof.
The Borrower hereby further promises to pay to the order of the Lender
interest on the outstanding principal amount from the date hereof, at an annual
rate equal to the (i) lesser of the effective lending rate that the Lender and
its parent corporation are charged from time to time by PNC Bank, N. A. or the
announced prime rate of PNC Bank, N.A. (the "Prime Rate") plus (ii) two percent
(2%). Such interest rate shall be changed when and as the effective rate or the
Prime Rate changes. In addition, the Borrower shall pay on demand interest on
any overdue payment of principal and interest (to the extent legally
enforceable) at the fluctuating Prime Rate plus four percent (4%).
Interest shall be payable when the unpaid principal balance of the Note
is paid.
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 and then to
principal. Interest payable hereunder shall be calculated for actual days
elapsed on the basis of a 360-day year. Accrued and unpaid interest shall be due
and payable upon maturity of this Note. After maturity or in the event of
default, interest shall continue to accrue on the Note at the rate set forth
above and shall be payable on demand of the Lender.
The outstanding principal amount of this Note may be prepaid by the
Borrower upon notice to the Lender in whole at any time or in part from time to
time without any prepayment penalty or premium; provided, that upon such payment
any interest due to the date of such prepayment on such prepaid amount shall
also be paid.
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.
<PAGE>
An event of default hereunder shall consist of:
(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 for borrowed money, beyond any applicable
notice and/or grace period;
(iii) 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 sixty (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 the Prime Rate plus four percent (4%),
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.
Any action, suit or proceeding where the amount in controversy as to at
least one party, exclusive of interest and costs, exceeds $1,000,000 ("Summary
Proceeding"), arising out of or relating to this Note, or the breach,
termination or validity thereof, shall be litigated exclusively in the Superior
Court of the State of Delaware (the "Delaware Superior Court") as a summary
proceeding pursuant to Rules 124-131 of the Delaware Superior Court, or any
successor rules (the "Summary Proceeding Rules"). Each of the parties hereto
hereby irrevocably and unconditionally (i) submits to the jurisdiction of the
Delaware Superior Court for any Summary Proceeding, (ii) agrees not to commence
any Summary Proceeding except in the Delaware Superior Court, (iii) waives, and
agrees not to plead or to make, any objection to the venue of any Summary
Proceeding in the Delaware Superior Court, (iv) waives, and agrees not to plead
or to make, any claim that any Summary Proceeding brought in the Delaware
Superior Court has been brought in an improper or otherwise inconvenient forum,
(v) waives, and agrees not to plead or to make, any claim that the Delaware
Superior Court lacks personal jurisdiction over it, (vi) waives its right to
remove any Summary Proceeding to the federal courts except where such courts are
vested with sole and exclusive jurisdiction by statute and (vii) understands and
agrees that it shall not seek a jury trial or punitive damages in any Summary
Proceeding based upon or arising out of or otherwise related to this Note and
waives any and all rights to any such jury trial or to seek punitive damages.
In the event any action, suit or proceeding where the amount in
controversy as to at least one party, exclusive of interest and costs, does not
exceed $1,000,000 (a "Proceeding"), arising out of or relating to this Note or
the breach, termination or validity thereof is brought, the parties to such
Proceeding agree to make application to the Delaware Superior Court to proceed
under the Summary Proceeding Rules. Until such time as such application is
rejected, such Proceeding
<PAGE>
shall be treated as a Summary Proceeding and all of the foregoing provisions of
this Section relating to Summary Proceedings shall apply to such Proceeding.
If a Summary Proceeding is not available to resolve any dispute
hereunder, the controversy or claim shall be settled by arbitration conducted on
a confidential basis, under the U.S. Arbitration Act, if applicable, and the
then current Commercial Arbitration Rules of the American Arbitration
Association (the "Association") strictly in accordance with the terms of this
Note and the substantive law of the State of Delaware. The arbitration shall be
conducted at the Association's regional office located closest to the Lender's
principal place of business by three arbitrators, at least one of whom shall be
knowledgeable in general business matters and one of whom shall be an attorney.
Judgment upon the arbitrators' award may be entered and enforced in any court of
competent jurisdiction. Neither party shall institute a proceeding hereunder
unless at least 60 days prior thereto such party shall have given written notice
to the other party of its intent to do so.
Neither party shall be precluded hereby from securing equitable
remedies in courts of any jurisdiction, including, but not limited to, temporary
restraining orders and preliminary injunctions to protect its rights and
interests but such remedies shall not be sought as a means to avoid or stay
arbitration or a Summary Proceeding.
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. Upon default hereunder the Lender shall have the right to offset the
amount owed by the Borrower against any amounts owed by the Lender in any
capacity to the Borrower, whether or not due, and the Lender shall be deemed to
have exercised such right of offset and to have made a charge against any such
account or amounts immediately upon the occurrence of an event of default
hereunder even though such charge is made or entered on the books of the Lender
subsequent thereto. 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.
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:
If to the Lender: Safeguard Delaware, Inc.
800 The Safeguard Building
435 Devon Park Drive
Wayne, Pennsylvania 19087
Attn: Chief Financial Officer
<PAGE>
If to the Borrower: Donald R. Caldwell
531 North Rose Lane
Haverford, Pennsylvania 19041
or to such other address, or in care of such other person, as the holder or the
Borrower shall hereafter specify to the other from time to time by due notice.
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. 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 State of Delaware.
IN WITNESS WHEREOF, the Borrower, intending to be legally bound
hereby, has duly executed this Note as of the date first written above.
/s/ Donald R. Caldwell
---------------------
Donald R. Caldwell
<PAGE>
STOCK OPTION GRANT AGREEMENT
CompuCom Systems, Inc., a Delaware corporation (the "Company"), hereby
grants to the grantee named below ("Grantee") an option (this "Option") to
purchase the total number of shares shown below of Common Stock of the Company
(the "Shares") at the exercise price per share set forth below, subject to all
of the terms and conditions contained in this Stock Option Grant Agreement.
Grant Date: October 22, 1998
Type of Option: Non-Qualified Stock Option
Shares Subject to Option: 500,000
Exercise Price Per Share: $3.1875
Term of Option: 10 years
Shares subject to issuance under this Option do not vest until the
first anniversary of the grant, and then shall vest according to the following
vesting schedule:
October 22, 1999 to October 21, 2000 25%
October 22, 2000 to October 21, 2001 50%
October 22, 2001 to October 21, 2002 75%
On or after October 22, 2002 100%
This Option shall become exercisable by Grantee at any time
following grant, subject to repurchase of any unvested Shares by the Company
in the event of Grantee's termination of employment for any reason prior to
the scheduled vesting date for such Shares. The purchase price for such
unvested Shares shall be equal to purchase price paid for such shares. In the
event Grantee exercises this Option to purchase unvested Shares, the
certificate(s) representing such Shares shall be held in escrow by the
Company until such time as the Shares become vested, and Grantee shall
deposit with the Company a duly executed assignment separate from certificate
containing a medallion signature guarantee.
Grantee acknowledges that the grant and exercise of this Option, and
the sale of Shares obtained through the exercise of this Option, may have tax
implications that could result in adverse tax consequences to the Grantee and
that Grantee is not relying on the Company for any tax, financial or legal
advice and will consult a tax adviser prior to such exercise or disposition.
1. Option Expiration. The Option shall automatically terminate upon the
happening of the first of the following events:
(a) The expiration of the three-month period after the Grantee ceases
to be employed by, or in the service of, the Company if the termination is for
any reason other than disability, death or cause;
(b) The expiration of the one-year period after the Grantee ceases to
be employed by, or in the service of, the Company on account of the Grantee's
disability;
(c) The expiration of the one-year period after the Grantee ceases to
be employed by, or in the service of, the Company, if the Grantee dies while
employed by the Company or within three months after the Grantee ceases to be so
employed or provide such services on account of a termination described in
subparagraph (a) above; or
1
<PAGE>
(d) The date on which the Grantee ceases to be employed by the Company
for cause. For purposes of this Option, cause shall mean, except to the extent
otherwise specified by the Committee, a finding by the Committee that the
Grantee has breached his employment or service contract, non-competition
agreement or other obligation with the Company, or has been engaged in
disloyalty to the Company, including without limitation, fraud, embezzlement,
theft, commission of a felony or proven dishonesty in the course of his
employment of service, or has disclosed trade secrets or confidential
information of the Company to persons not entitled to receive such information.
Notwithstanding the foregoing, in no event may the Option be exercised
after the expiration of the Term of Option specified herein. Any portion of the
Option that is not vested at the time the Grantee ceases to be employed by, or
in the service of, the Company shall immediately terminate.
In the event a Grantee ceases to be employed by the Company for cause,
the Grantee shall automatically forfeit all shares underlying any exercised
portion of an Option for which the Company has not yet delivered the share
certificates upon refund by the Company of the exercise price paid by the
Grantee for such shares.
2. Exercise Procedures.
(a) Subject to the provisions of this Stock Option Grant Agreement, the
Grantee may exercise part or all of the vested Option by giving the Company
written notice of intent to exercise in the manner provided in Paragraph 10
below, specifying the number of Shares as to which the Option is to be
exercised. On the delivery date, the Grantee shall pay the exercise price (i) in
cash, (ii) by delivering Shares of the Company (duly endorsed for transfer or
accompanied by stock powers signed in blank) which shall be valued at their fair
market value on the date of delivery, or (iii) by such other method as the
Committee may approve, including payment through a broker in accordance with
procedures permitted by Regulation T of the Federal Reserve Board or delivery of
a promissory note. The Board may impose from time to time such limitations as it
deems appropriate on the use of Shares of the Company to exercise the Option.
(b) The obligation of the Company to deliver Shares upon exercise of
the Option shall be subject to all applicable laws, rules, and regulations and
such approvals by governmental agencies as may be deemed appropriate by the
Board, including such actions as Company counsel shall deem necessary or
appropriate to comply with relevant securities laws and regulations. The Company
may require that the Grantee (or other person exercising the Option after the
Grantee's death) represent that the Grantee is purchasing Shares for the
Grantee's own account and not with a view to or for sale in connection with any
distribution of the Shares, or such other representation as the Board deems
appropriate. All obligations of the Company under this Stock Option Grant
Agreement shall be subject to the rights of the Company to withhold amounts
required to be withheld for any taxes, if applicable, or to deduct from other
wages paid by the Company the amount of any withholding taxes due with respect
to such Options. Subject to Committee approval, the Grantee may elect to satisfy
any income tax withholding obligation of the Company with respect to the Option
by having Shares withheld up to an amount that does not exceed the maximum
marginal tax rate for federal (including FICA), state and local tax liabilities.
3. Restrictions on Exercise. Only the Grantee may exercise the Option
during the Grantee's lifetime. After the Grantee's death, the Option shall be
exercisable solely by the legal representatives of the Grantee, or by the person
who acquires the right to exercise the Option by will or by the laws of descent
and distribution, to the extent that the Option is exercisable pursuant to this
Stock Option Grant Agreement. Notwithstanding anything in this Stock Option
Grant Agreement to the contrary, the Committee may provide, at or after grant,
that a Grantee may transfer non-qualified stock options pursuant to a domestic
relations order or to family members or other persons or entities on such terms
as the Committee may determine.
4. Grant Subject to Committee Authority. The grant and exercise of this
Option are subject to the interpretations, regulations and determinations
concerning this Option established from time to time by the Committee that
administers the Company's stock options, including, but not limited to,
provisions
2
<PAGE>
pertaining to (i) rights and obligations with respect to withholding taxes, (ii)
the registration, qualification or listing of the Shares, (iii) capital or other
changes of the Company, and (iv) other requirements of applicable law. The
Committee shall have the authority to interpret and construe the Option, and its
decisions shall be conclusive as to any questions arising hereunder.
5. No Employment Rights. The grant of the Option shall not confer upon
the Grantee any right to be retained by or in the employ or service of the
Company and shall not interfere in any way with the right of the Company to
terminate the Grantee's employment or service at any time. The right of the
Company to terminate at will the Grantee's employment or service at any time for
any reason is specifically reserved. No policies, procedures or statements of
any nature by or on behalf of the Company (whether written or oral, and whether
or not contained in any formal employee manual or handbook) shall be construed
to modify this Grant Agreement or to create express or implied obligations to
the Grantee of any nature.
6. No Stockholder Rights. Neither the Grantee, nor any person entitled
to exercise the Grantee's rights in the event of the Grantee's death, shall have
any of the rights and privileges of a stockholder with respect to the Shares
subject to the Option until certificates for Shares have been issued upon the
exercise of the Option.
7. No Disclosure. The Grantee acknowledges that the Company has no duty
to disclose to the Grantee any material information regarding the business of
the Company or affecting the value of the Shares before or at the time of a
termination of the Grantee's employment or service, including without limitation
any plans regarding a public offering or merger involving the Company.
8. Assignment and Transfers. The rights and interests of the Grantee
under this Stock Option Grant Agreement may not be sold, assigned, encumbered or
otherwise transferred except, in the event of the death of the Grantee, by will
or by the laws of descent and distribution. In the event of any attempt by the
Grantee to alienate, assign, pledge, hypothecate, or otherwise dispose of the
Option or any right hereunder, except as provided for in this Stock Option Grant
Agreement, or in the event of the levy or any attachment, execution or similar
process upon the rights or interests hereby conferred, the Company may terminate
the Option by notice to the Grantee, and the Option and all rights hereunder
shall thereupon become null and void. The rights and protections of the Company
hereunder shall extend to any successors or assigns of the Company and to the
Company's parents, subsidiaries, and affiliates. This Stock Option Grant
Agreement may be assigned by the Company without the Grantee's consent.
9. Applicable Law. The validity, construction, interpretation and
effect of this instrument shall be governed by and determined in accordance with
the laws of the State of Delaware.
10. Notice. Any notice to the Company provided for in this instrument
shall be addressed to the Company in care of the Chief Financial Officer at the
Company's headquarters and any notice to the Grantee shall be addressed to such
Grantee at the current address shown on the payroll of the Company, or to such
other address as the Grantee may designate to the Company in writing. Any notice
shall be delivered by hand, sent by telecopy or enclosed in a properly sealed
envelope addressed as stated above, registered and deposited, postage prepaid,
in a post office regularly maintained by the United States Postal Service.
In witness whereof, this Stock Option Grant Agreement has been executed
by the Company by a duly authorized officer as of the date specified herein.
CompuCom Systems, Inc. Accepted:
By: /s/ Edward R. Anderson By:/s/ Thomas C. Lynch
---------------------------------------- ----------------------
Edward R. Anderson Thomas C. Lynch, Optionee
President and Chief Executive Officer
3
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1998 AND THE CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,939
<SECURITIES> 138,834
<RECEIVABLES> 263,061
<ALLOWANCES> 5,179
<INVENTORY> 144,821
<CURRENT-ASSETS> 552,334
<PP&E> 137,638
<DEPRECIATION> 39,576
<TOTAL-ASSETS> 996,847
<CURRENT-LIABILITIES> 268,902
<BONDS> 324,839
0
0
<COMMON> 3,280
<OTHER-SE> 284,959
<TOTAL-LIABILITY-AND-EQUITY> 996,847
<SALES> 1,449,220
<TOTAL-REVENUES> 1,781,805
<CGS> 1,295,217
<TOTAL-COSTS> 1,430,510
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,145
<INCOME-PRETAX> 116,980
<INCOME-TAX> 39,712
<INCOME-CONTINUING> 70,328
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 70,328
<EPS-PRIMARY> 2.20
<EPS-DILUTED> 2.04
</TABLE>
