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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, 1998 Commission File Number 1-5620
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SAFEGUARD SCIENTIFICS, INC.
(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
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 _____
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. |_|
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Aggregate market value of common stock held by non-affiliates (based on the
closing price on the New York Stock Exchange) on March 25, 1999 was
approximately $1.84 billion. 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
stockholder that has informed Registrant by March 25, 1999 that it is the
beneficial owner of 10% or more of the outstanding common stock of Registrant.
The number of shares outstanding of the Registrant's Common Stock, as of March
25, 1999 was 32,149,402.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference in this Form 10-K:
PART I
Item 1(b) Note 15 on page 54 of the Annual Report to Stockholders
for the year ended December 31, 1998, which page is filed as
part of Exhibit 13 hereto.
PART II
Items 5, 6,
7 and 8 Pages 33 to 56 of the Annual Report to Stockholders for the
year ended December 31, 1998, 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 20, 1999 annual
meeting of stockholders of Registrant, to be filed within 120
days after the end of the year covered by this Form 10-K
Report.
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PART I
ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF THE BUSINESS
OVERVIEW
Safeguard Scientifics, Inc. is a diversified information technology company that
develops, operates and manages emerging growth information technology companies.
We are currently focusing on emerging opportunities in eCommerce, enterprise
applications, and network infrastructure, all of which are expected to benefit
from the growing use of the Internet as a fundamental business tool. We work
closely with our partnership companies to provide numerous operational and
management services to build value in preparation for public rights offerings
and beyond. These services include active strategic management, operating
guidance, merger and acquisition assistance, board and management recruitment,
and innovative financing. Safeguard operates as a long-term partner. Our
partnership companies include public and privately held companies that together
form a community of shared resources. Safeguard also participates in managing
and working with several venture capital funds.
We believe that Safeguard's strategy of operating through separate partnership
companies rather than through wholly owned subsidiaries or divisions enables us
to achieve superior returns for our stockholders. This strategy enables us to
partner with highly motivated entrepreneurs who have significant equity
ownership stakes in their companies and the chance to reap the rewards of taking
their companies public. We further enhance the returns to our stockholders by
taking selected partnership companies public through our rights offering
process. This process gives our stockholders the opportunity to acquire direct
ownership in selected partnership companies at their IPO price. Not all of our
private partnership companies are appropriate for a rights offering. We also
consider mergers, sales, and traditional IPOs in evaluating the best way to
enhance the value of our private companies. For traditional IPOs we are
considering a program to direct a part of the shares to be offered to Safeguard
stockholders. We currently refer to this as a "subscription offering." 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.
Safeguard is currently active in the Internet through the involvement of over 10
of our partnership companies, including Internet Capital Group. We recognized
the growing importance of the Internet early on, and we sponsored the formation
of Internet Capital Group in 1996 to focus exclusively on developing, operating,
and managing business-to-business eCommerce companies. Because of the tremendous
growth of the Internet in recent years and the success of Internet Capital
Group, we have recently decided to broaden Safeguard's involvement in Internet
markets in order to continue to build value for our stockholders. We are
concentrating on segments that we believe will have staying power in the
volatile Internet markets.
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We define eCommerce as the organization of information and the processing of
business transactions over the Internet (intranets and extranets). The
transactions can be of any type, including those between customers and sellers,
employers and employees, or organizations and their members. eCommerce can
extend existing business models or enable entirely new ones. eCommerce markets
we are seeking to develop include business-to-consumer interaction, content
aggregation and management, emerging technology areas such as intelligent
agent-based searching and tasking, and Internet professional services.
Enterprise applications are software solutions that integrate key operational
aspects of entire organizations. We are seeking to develop opportunities that
provide novel front office enterprise applications, professional services to
integrate, implement and support enterprise applications, and the hosting of
enterprise applications.
Network infrastructure products and services include computing and
communications tools that enable companies to deploy eCommerce and enterprise
applications. Many companies do not have the infrastructures in place to support
leading edge eCommerce and enterprise applications. Network infrastructure
markets we are seeking to develop include network security products and
services, companies that service the ISP market, telecommunications services
that enable eCommerce, products that optimize customers' existing investments in
eCommerce and enterprise applications, and infrastructure management solutions.
Many early and mid-stage Internet companies have operating losses. As we acquire
interests in more of these companies, we could experience significantly
increased equity losses from affiliates.
Safeguard's public partnership companies are: Cambridge Technology Partners,
Inc. (Nasdaq:CATP), ChromaVision Medical Systems, Inc. (Nasdaq:CVSN), CompuCom
Systems, Inc. (Nasdaq:CMPC), Diamond Technology Partners, Incorporated
(Nasdaq:DTPI), DocuCorp International, Inc. (Nasdaq:DOCC), OAO Technology
Solutions, Inc. (Nasdaq:OAOT), Sanchez Computer Associates, Inc.(Nasdaq:SCAI),
Tangram Enterprise Solutions, Inc. (Nasdaq:TESI), and USDATA Corporation
(Nasdaq:USDC).
Safeguard's private partnership companies include: 4anything.com, aligne, Arista
Knowledge Systems, Diablo Research Company, eMerge Vision Systems, Extant,
Integrated Visions, The Intellisource Group, Internet Capital Group, Kanbay,
MegaSystems, MultiGen-Paradigm, Pac-West Telecomm, Pacific Title/Mirage,
QuestOne Decision Sciences, US Interactive, Whisper Communications, Who? Vision
Systems, and XL Vision.
Safeguard also participates in management of the following venture funds:
EnerTech Capital Partners, Pennsylvania Early Stage Partners, Safeguard
International Fund, SCP Private Equity Partners, and TL Ventures I, II, and III.
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RECENT DEVELOPMENTS
Stock market conditions for much of 1998 negatively affected the IPO market. As
a result, Safeguard completed only one rights offering rather than three as
planned. Instead, Safeguard redirected its efforts to strengthening its existing
partnership companies and acquiring interests in new partnership companies.
o The rights offering for DocuCorp International was successfully
completed in the first quarter of 1998. DocuCorp is a provider of
enterprise-wide document automation software products and services.
o Safeguard acquired interests in seven new partnership companies
during 1998: Arista, Integrated Visions, Kanbay, Pennsylvania Early
Stage Partners, Pac-West Telecomm, US Interactive, and Who? Vision.
During the first quarter of 1999, Safeguard acquired interests in
4anything.com, Extant, and aligne.
o Coherent Communication Systems Corporation merged with Tellabs in
August 1998, and Safeguard received approximately 3.5 million shares
of Tellabs common stock in exchange for our holdings in Coherent.
o Integrated Systems Consulting Group merged with First Consulting
Group in December 1998, and Safeguard received common stock and
warrants in First Consulting Group common stock in exchange for our
holdings in ISCG.
o Sentry Technology Group was sold to the Meta Group Inc. in October
1998 for Meta stock and warrants.
o RMS Information Systems merged with Intellisource during the second
quarter of 1998, and Safeguard's shares in RMS were exchanged for
Intellisource shares.
o Our partnership companies completed twelve business acquisitions
during 1998.
o Pennsylvania Early Stage Partners was formed in early 1998 in
cooperation with the Commonwealth of Pennsylvania and the
Pennsylvania Public School Employees Retirement System to invest in
seed stage companies primarily in Pennsylvania.
o In late 1998 CompuCom announced a restructuring plan to move to a
virtual office model and a reduction in workforce, which should
result in significant operating cost savings.
ITEM 1 (b). FINANCIAL INFORMATION ABOUT OPERATING SEGMENTS
Information on net sales, operating profit, and assets employed for each
operating segment of Safeguard's business for the three year period ended
December 31, 1998 is contained in Note 15 to the Consolidated Financial
Statements on page 54 of Safeguard's Annual Report to
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Stockholders for the year ended December 31, 1998, which is filed as part of
Exhibit 13 hereto and is incorporated herein by reference.
ITEM 1 (c). NARRATIVE DESCRIPTION OF BUSINESS
OVERVIEW OF OPERATING SEGMENTS
In 1998, Safeguard adopted SFAS 131, which requires the reporting of operating
segments using the "management approach" versus the "industry approach"
previously required. Safeguard's reportable segments for 1998 consist of general
corporate operations, CompuCom, and Tangram. General corporate operations
consist of developing, operating, and managing emerging growth, information
technology partnership companies, excluding our majority-owned subsidiaries,
CompuCom and Tangram, and participating in the management of venture capital
funds. CompuCom's operations include sales of distributed desktop computer
products, and configuration, network integration, and technology support.
Tangram's operations include the design, development, sale, and implementation
of enterprise-wide asset tracking and software management solutions. CompuCom
and Tangram are majority-owned subsidiaries of Safeguard.
GENERAL CORPORATE OPERATIONS
Operating 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 support, financing, and market
knowledge. Safeguard generally seeks to acquire a large enough stake in a
partnership company to enable us to have significant influence over the
management and policies of the company and to realize a large enough return to
compensate us for our investment of management time and effort, as well as
capital.
We gain exposure to emerging companies through our reputation as a successful
developer and operator of information technology companies, referrals from our
existing partnership companies, our relationship with venture capital and
private equity funds, our sponsorship of such organizations as the Eastern
Technology Council, entrepreneurial centers at Lehigh University, Temple
University and the University of Pennsylvania, a new eCommerce center at Drexel
University, and the participation of our officers and employees in various
non-profit and charitable organizations. We consider our 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.
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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.
We believe that our relationship with our 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, we encourage emerging
companies to achieve the superior returns on investment 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 our unique process of taking
partnership companies public through rights offerings to Safeguard stockholders,
we continue our involvement with 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.
Our corporate staff provides hands-on assistance to the managers of our
partnership companies in the areas of management, financial, marketing, tax,
risk management, human resources, legal and technical services. We have assisted
partnership companies by providing or locating and structuring financing,
identifying and implementing strategic initiatives, providing marketing
assistance, identifying and recruiting executives and directors, 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.
We also provide a supportive environment to the managers of our 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 we gather the senior managers
of all of our partnership companies, both private and public, for a "Senior
Partners" conference. We also convene periodic "CFO Conferences" for senior
financial managers of the partnership companies and occasional sessions on more
specific topics, such as investor relations and human resources. While we
encourage our partnership companies to develop business opportunities with each
other, we do not require them to do so. Each partnership company is responsible
for its own success, and it must be free to work with other organizations that
will provide the maximum contribution to its success. Competition for business
even within Safeguard helps keep each partnership company focused on being the
best of breed in their market.
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In recent years, Safeguard has tended to acquire 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 our
associated venture funds, is the largest single stockholder, and exercises
significant influence over the company. We also generally obtain significant
board representation in these companies.
We believe that the entrepreneurial energy and creativity of the managers of our
partnership companies is an essential component of their success. Our business
strategy of keeping partnership companies as independent businesses with the
chance to go public, rather than folding them into the parent company, is
designed to maintain the necessary entrepreneurial environment. The
entrepreneurs and their teams retain or are granted equity ownership and
incentives in their own companies in order to keep them focused on creating
value for their stockholders, including Safeguard.
Our goal is to maximize the value of our partnership companies for Safeguard's
stockholders, often by taking 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 stockholders. It
involves the grant by a partnership company to Safeguard's stockholders of
transferable rights to buy shares of the partnership company's stock at the IPO
price. Safeguard stockholders 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. Safeguard generally retains a significant ownership in partnership
companies after taking them public and also generally retains significant
participation on each company's board of directors. Between our direct
continuing ownership interest in public partnership companies and the strong
identification in the public financial markets of the companies as "Safeguard
rights offering" companies, we retain 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 our
stockholders who continue to hold the shares purchased in the rights offering.
Not all of our private partnership companies are appropriate for a rights
offering. We also consider mergers, sales, and traditional IPOs in evaluating
the best way to enhance the value of our private companies. Each time one of our
partnership companies undertakes a traditional IPO, we presently intend to try
to direct a part of the shares to be offered to Safeguard stockholders. We are
presently referring to this as a "subscription offering."
Public Partnership Companies
Cambridge Technology Partners is an international management consulting and
systems integration firm. Cambridge combines management consulting, IT strategy
consulting, process innovation and implementation, custom and package software
deployment (including ERP applications), network services, Internet professional
services, and training to rapidly deliver end-to-end business solutions for
clients. Cambridge provides the majority of its services on a fixed-time,
fixed-price model with client involvement at all stages of the process. In
performing
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its services, Cambridge employs a rapid development methodology and conducts
facilitated workshops that bring together key client users, executives, and IT
professionals to achieve consensus on the business case, strategic objectives,
and functionality of a business solution. Cambridge believes that this approach
permits the delivery of results in unprecedented time frames -- typically within
three to twelve months. Upon completion of initial consulting engagements,
Cambridge typically designs and develops one or more strategic software
applications, which often include custom and third-party package software, and
then rolls-out such applications to the organization's end-users. A significant
portion of Cambridge's engagements include an eCommerce component. While the
early stages of a client engagement may result in a relatively small amount of
revenue, a client engagement which involves the design and development of a
strategic software application typically results in fees ranging from $1 million
to $6 million. 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 1998. Revenue growth has been negatively impacted by a
general slowdown in the growth of demand and increased competition. Cambridge
has 53 offices and more than 4,400 employees worldwide. Cambridge had 1998
revenues of $612 million, an increase of 40% over 1997. At March 22, 1999,
Safeguard owns approximately 13% of Cambridge's fully diluted common stock.
ChromaVision Medical Systems is a laboratory medical diagnostics company that
develops and manufactures an Automated Cellular Imaging System (ACIS(TM)) for a
wide variety of clinical and research applications. ChromaVision currently
markets the products to research centers and is previewing the system to
university medical centers and commercial laboratories in anticipation of
receiving clearance from the FDA for use of ACIS for immunohistochemical
applications based on a filing made in November 1998, which would result in
several commercialized applications. The ACIS and one application, leukocyte
alkaline phosphatase (LAP), were cleared in June 1997. The ChromaVision ACIS is
designed to identify cells with specific characteristics within a sample of
cells on a microscope slide by detecting color produced by the reaction between
common laboratory reagents and the cells of interest. The intelligent microscope
platform automates the scanning of patient samples and uses proprietary imaging
software to capture digital images of the cell samples to detect the presence,
count the number, and measure the intensity of targeted cells. The system offers
substantial flexibility because the software can be configured to identify
different stains and cellular staining characteristics, thereby allowing the
system to be adopted for use with different reagents to identify a broad range
of targeted cellular conditions.
ChromaVision believes that the ChromaVision ACIS will be attractive to
healthcare providers and beneficial to their patients because of its ability to
deliver superior diagnostic solutions, thus reducing the need for more invasive
or more costly procedures. Tests have demonstrated that the ChromaVision ACIS
can locate a single abnormal cell among 120 million normal cells. This improved
detection capability enables the ChromaVision ACIS to be applied to high-value
rare event detection procedures, including micrometastases/minimum residual
disease cancer detection.
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ChromaVision's initial targeted applications are:
o Breast cancer - ChromaVision is testing the ACIS for use with DAKO's
FDA-cleared HercepTest(TM) to measure the HER-2 protein, which is an
indicator for the use of Genentech's FDA-cleared Herceptin(TM)
breast cancer therapy.
o Micrometastases (MM) and minimum residual disease (MRD) - Clinical
tests indicate that the ACIS can be used to accurately and
cost-effectively detect and quantify MM and MRD, which would make
the ACIS a useful tool for detecting and monitoring various types of
cancer.
o Quantitative viral load for HIV.
o Triple Plus(TM) screen for Down syndrome in fetuses. Clinical trials
are still ongoing for this application.
ChromaVision has signed an exclusive distribution and development agreement with
Sigma Diagnostics for the Triple Plus(TM) and has signed an agreement with DAKO
Corporation to jointly develop, market and sell a tissue-based diagnostic
system, for which HercepTest will be the first application. ChromaVision intends
to offer its systems to hospitals and laboratories on a "per click" basis,
charging a fee for each time the laboratory uses the system to perform a
diagnostic procedure.
ChromaVision is currently marketing its products to physicians and researchers
throughout the world for research use, but it is still a development stage
company and had no material commercial revenues in 1998. Commencement of
commercial revenue generating activities will be contingent on successful
completion of clinical tests and, in most cases, obtaining FDA or foreign
regulatory approvals. ChromaVision is an XL Vision company. At March 22, 1999,
Safeguard owns 23% of ChromaVision's fully diluted stock.
Diamond Technology Partners is a management consulting firm that synthesizes
business strategy with information technology to deliver innovative "digital
strategies," business strategies for the digital age. Diamond delivers its
strategic consulting and information technology solutions through a single,
integrated multi-disciplinary team. Diamond serves clients across the U.S. and
internationally in financial services, consumer products, consumer services,
telecommunications, energy, insurance, and healthcare industries. Diamond had
revenues of $76.2 million for calendar year 1998 compared to $63.2 million for
calendar year 1997. At March 22, 1999, Safeguard owns approximately 7% of
Diamond's fully diluted stock.
DocuCorp is a leading provider of document automation software, professional
services, and process/print outsourcing with over 800 customers in the
insurance, utilities, financial services, and other information-intensive
industries. DocuCorp automates open-architecture, enterprise-wide, high-volume
creation, publishing, archival, and management (including workflow) of
strategic, personalized documents (such as bill presentment, insurance policies,
direct mail correspondence, invoices, and other customer-oriented documents) for
both print and electronic applications including the Internet. DocuCorp had
revenues of $25.2 million for the six months ended January 31, 1999, a 14%
increase over the same period in 1997. At March 22, 1999, Safeguard owns 9% of
the fully diluted stock of DocuCorp.
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OAO Technology Solutions is an enterprise information technology infrastructure
solution company. OAOT provides a wide range of outsourced information
technology ("IT") solutions and professional services, including the operation
of large-scale data center complexes and networks (high volume system of
computers and information networks), distributed systems management,
applications software development and maintenance, staffing services, enterprise
resource planning, integration, implementation and training services, and
software solutions for the managed care market. OAOT provides these solutions
and services, generally on a long-term, fixed-price contractual basis, to its
strategic customers which are global providers of IT outsourcing services. OAOT
works with these strategic customers as part of the IT outsourcing team in
providing services to a wide range end-user customers accepting delivery
responsibility for specific functional roles within the outsourcing engagements.
OAOT's primary strategic customers have been IBM's Global Services and Compaq
Computer Corporation, which accounted for 67% and 23.4% of OAOT's 1998 revenues,
respectively. OAOT acquired OAOT Services and Enterprise Technology Group in
1998 to expand its service offerings. Greg Pratt, formerly CEO of Enterprise
Technology Group, was named the new CEO of OAOT. In January 1999 the company
announced a large multi-year applications development and maintenance contract
with IBM Global Services. OAOT's revenues were $113.3 million in 1998, a 34%
increase from 1997. A significant part of the growth was from the July 1998
acquisition of OAOT Services, Inc.
OAOT's strategy is to build long-term relationships with strategic customers by
understanding their business needs and by providing specific services within
large-scale outsourcing engagements more cost-effectively than other
alternatives. By offering fixed-price contracts, OAOT reduces the execution and
pricing risk for its strategic customers in their large-scale outsourcing
engagements. OAOT has developed and is continuing to expand its international
service delivery capabilities in order to leverage its strategic customers'
increasingly global IT outsourcing efforts.
Large-scale outsourcing engagements typically involve the acquisition of IT
assets by the outsourcing provider from the engagement client. These assets can
range from fixed assets, such as entire data centers and computer networks, to
personnel, such as data center, help desk and programming staff. OAOT's role in
outsourcing engagements usually involves the retention of IT personnel from the
engagement client. By retaining employees as part of its new outsourcing
engagements, to date, OAOT's growth has not been impeded by the availability of
qualified technical personnel and OAOT has avoided the significant staffing
costs and expenses normally associated with new engagements within the IT
services industry. OAOT's future success is highly dependent on its
relationships with a small number of strategic customers and its ability to
effectively manage its fixed-price contracts. At March 22, 1999, Safeguard owns
27% of OAOT's outstanding stock.
Sanchez Computer Associates designs, develops, markets, implements, and supports
a comprehensive banking software system called PROFILE(R) for financial services
organizations worldwide. Sanchez's highly flexible PROFILE family of products is
comprised of several
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integrated modules which operate on open client-server platforms. The primary
module, called PROFILE/Anyware, is a highly flexible, multi-currency,
multi-language bank production system which supports deposit, loan, customer,
transaction processing and bank management requirements through multiple
distribution channels, including the Internet. In early 1999, Sanchez announced
a new service offering called e-PROFILE.com, designed to provide financial
institutions with the ability to offer differentiated direct banking services to
customers via a dedicated e-banking service center. The company will charge a
fee per account processed for its e-PROFILE service, as opposed to up front
license fees and, when used by the customer, implementation service fees and
annual maintenance fees for its PROFILE products.
The PROFILE system is currently licensed to 37 clients in 14 countries serving
in excess of 350 financial institutions. In any given year, the company
typically has three to four customers who each account for in excess of 10% of
its total annual revenues, although in 1998, only one customer exceeded 10% of
total revenues. Sanchez utilizes a direct sales force and strategic
relationships with Compaq, Hewlett-Packard, IBM, PricewaterhouseCoopers,
ComputerLand SA of Poland, and others to market, sell, implement, and support
its products worldwide. Currently, Sanchez is targeting three market segments:
the top-tier banking market (the top 1,000 global banks; the direct banking
market (the on line retail banking business conducted via alternate distribution
channels); and emerging market banks.
Sanchez had total revenues of $44.1 million for 1998, a 53% increase over 1997.
More than half of revenues were from software license fees, with the balance
primarily from implementation, consulting services, and maintenance fees.
Sanchez spent $11.7 million in 1998 on product development. At March 22, 1999,
Safeguard owns approximately 24% of Sanchez's fully diluted stock.
USDATA Corporation is a global supplier of real-time manufacturing application
development software and development tools and related consulting services that
enable an organization's information systems to supervise, monitor, and control
manufacturing and other automated processes and to interface with management
information systems. USDATA's family of software products, marketed under the
name FactoryLink(R), provides a powerful set of software tools designed for
users who are technically competent but who may not be experienced software
programmers.
Its real-time data management capabilities enable customers to reduce operating
costs, shorten cycle times, improve product quality, and increase productivity.
USDATA faces intense competition from larger businesses that offer broader
arrays of integrated solutions.
In mid-1998, USDATA sold its system integration and hardware servicing business.
This business has historically been 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.
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USDATA'S 1998 revenues from continuing operations were $22.9 million compared to
$22.4 million for 1997.
At March 22, 1999, Safeguard owns approximately 28% of USDATA's fully diluted
stock.
Private Partnership Companies
The following are Safeguard's significant private partnership companies.
4anything.com is a network of vertical community portals, with approximately
2,000 vertical portals. Its portals feature vertically integrated content,
commerce, search, and community. The company generates revenues from
advertising, directories, lead generation, and eCommerce. Pennsylvania Early
Stage Partners provided the first round of financing to 4anything.com in 1998,
and Safeguard acquired 20% of 4anything.com's fully diluted stock in the first
quarter of 1999. The company is still in the development stage and had nominal
revenues in 1998. It expects to commence a significant marketing launch in April
1999.
aligne incorporated is a strategic technology management consulting firm. Its
services include high level and in-depth evaluations of complex sourcing
alternatives, IT cost baselining and benchmarking, vendor/customer negotiations,
interim CIO services, IT strategy, and IT process reengineering. aligne's
clients include Fortune 500 companies in addition to a number of Safeguard
partnership companies. aligne was founded by Harry Wallaesa, now Safeguard's
President and COO. Safeguard acquired 80% of aligne's fully diluted stock in
February 1999.
Arista Knowledge Solutions provides complete solutions for the management of
information and knowledge in global applications. Arista's first product,
Accredix(TM), is under development and targets the Internet-based and
network-based distributed learning market, enabling users to deliver, manage,
and access any type of digital content, track activity with all learners,
accommodate commercial transactions, protect intellectual property rights, and
report learner activities and progress in extreme detail. Accredix can perform
these functions on a real-time basis while acting as a flexible, network-based
interface for learners, instructors, and managers. The company expects to
release the beta version of Accredix in the first half of 1999 and the
commercial version in the second or third quarter of 1999. The company's target
markets include corporate global learning customers, the education industry, and
the military. Arista is a development stage company with nominal revenues in
1998. At March 22, 1999, Safeguard owns approximately 40% of the fully diluted
stock of Arista.
Diablo Research Corporation is a contract engineering company with expertise in
data transmission and control, software and firmware design, digital and RF ASIC
design, functions/systems test design, design services for chip vendors, and
mechanical and industrial design. A number of Diablo's engagements result in the
creation of valuable technology assets which can potentially be spun out into
independent companies. Diablo has previously spun out Whisper Communications to
commercialize its two-way wireless automatic meter reading technology. Diablo
had 1998 revenues of $21.8 million. The company made management
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changes during 1998 to improve its internal processes and operations. At March
22, 1999, Safeguard owns units representing 17% of Diablo's fully diluted
ownership units. Diablo is a limited liability company.
eMerge Vision Systems provides a comprehensive package of eCommerce business
solutions and health management services to the food animal sciences industry.
eMerge Vision's Internet-based information system improves customers' ability to
manage multiple aspects of their business, including health, yield, and
inventory, through a "practice integrated website.(TM)" The company conducts
online cattle auctions which reduces the cost of buying livestock and improves
the health of the animals by reducing the number of times the animals are
transported. The company's infrared technology helps improve detection of sick
animals, and its feed supplements help restore the animals' health. eMerge
Vision's initial target market is the North American cattle industry. eMerge
Vision is an XL Vision company. eMerge Vision has refocused its business
strategy toward food animal sciences, and its 1998 revenues were primarily from
discontinued operations. At March 22, 1999, Safeguard owns 31% of eMerge
Vision's fully diluted stock.
Extant offers wholesale extranet and virtual private network services to
Competitive Local Exchange Carriers (CLECs) and Internet Service Providers
(ISPs). Extant acts as a market maker for CLECs and ISPs, providing a low cost
transport and internet protocol data network that significantly lowers the
information industry's barriers to entry. Extant brings together these
telecommunication providers as a community, offering a high quality, low cost,
responsive information network on which they can exchange traffic among
themselves at better than competitive rates and present to their customers the
appearance of a global footprint. Safeguard acquired 20% of Extant's fully
diluted stock in March 1999.
Integrated Visions is a provider of network security solutions based on
biometric authentication, initially to the healthcare industry. The company's
Privacy Curtain(TM) software enables secure and convenient access to
computerized patient records on intranets, extranets, and across the Internet
for telemedicine applications using biometrics, including fingerprint
identification technologies from Who? Vision Systems. The company's Clinical
Single Sign-On(TM) solution eliminates the need for multiple passwords and
provides compliance with patient record privacy legislation. Integrated Visions'
customers include The Mayo Clinic and Scott & White Medical Center. Integrated
Visions is an XL Vision company. Integrated Visions is a development stage
company and had nominal revenues in 1998. At March 22, 1999, Safeguard owns
approximately 47% of the fully diluted stock of Integrated Visions.
The Intellisource Group is a unique "Services Integrator(TM)" providing
integrated support for its customers' back-office activities, such as facilities
management, communications, accounting, human resources, document management,
etc. The company is the result of a merger in 1998 between two Safeguard
partnership companies, Intellisource, Inc. and RMS Information Systems, Inc.
Intellisource has a joint venture with Shell Services, which received a
long-term outsourcing contract for Shell Oil, and has obtained additional
long-term contracts from Oglethorpe Power, Avon, NASA, and others.
Intellisource's future success depends on its ability
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to effectively manage its fixed-price contracts and to leverage the resources in
its existing engagements to generate and support additional business.
Intellisource had combined 1998 revenues of $135.3 million compared to $112.2
million in 1997. The company is focused on strategies to help it achieve
profitability. At March 22, 1999, Safeguard owns 36% of the fully diluted stock
of Intellisource.
Internet Capital Group was organized in 1996 with Safeguard's sponsorship as the
first Internet operating company to partner exclusively with leading
business-to-business eCommerce firms. Like Safeguard, Internet Capital provides
operational assistance, capital support, expertise, and a strategic network of
business relationships intended to maximize the long-term potential of its
collaborative network of more than 25 business-to-business eCommerce partnership
companies. In February 1999, VerticalNet became Internet Capital's first
partnership company to complete an IPO. At March 22, 1999, Safeguard owns 24% of
the fully diluted stock of Internet Capital.
Kanbay is an IT consulting firm utilizing a multi-site approach to provide
competitively priced system integration solutions. It places project leadership
at the client site and leverages a large group of IT professionals located in
Pune, India. Kanbay assists organizations through IT development and support
outsourcing services, enterprise systems implementation, and systems compliance
and renovation projects. Kanbay also focuses on the implementation and
integration of packaged solutions for the financial industry as well as customer
care, billing, and customer retention for the telecommunications industry.
Kanbay was profitable on 1998 revenues of $35.7 million. At March 22, 1999,
Safeguard owns 28% of the fully diluted stock of Kanbay.
MegaSystems is a full service provider of products and services for the large
format movie theater industry. MegaSystems' technologically advanced large
format projection systems provide low cost, turn-key solutions to meet the needs
of large format theater operators. MegaSystems produced a large format motion
picture on the 1998 Winter Olympics under an exclusive license from the
International Olympic Committee. MegaSystems revenues for 1998 were $2.3
million. At March 22, 1999, Safeguard owns 49% of MegaSystems' fully diluted
stock.
MultiGen-Paradigm develops and markets leading real-time 3D authoring software
tools and turn-key image generator solutions, enabling commercial and military
customers to interactively create, edit, and view applications for visual
simulation, simulation-based training, game development, broadcasting, and urban
simulation. The company released WindowsNT versions of its products in 1998. The
company's Solutions Center provides customers with customized services,
including integration and content development. The company is the result of the
September 1998 merger between MultiGen, Inc. and Paradigm Simulation. The
company's combined 1998 revenues were $16.5 million. At March 22, 1999,
Safeguard owns 20% of MultiGen's fully diluted stock.
Pac-West Telecomm is a high growth, profitable, switch-based CLEC (Competitive
Local Exchange Carrier) with operations in California. The company has three
switches serving all of California and has points-of-presence in each of the 11
local access and transport areas (LATAs) in California, allowing it to originate
and terminate traffic in every LATA in the state. The
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company has also established a strong position in providing Internet Service
Providers (ISPs) with communications solutions. Pac-West Telecomm closed a $150
million debt offering in later 1998 to finance its expansion plans. The company
has over 41,000 ISP lines in service, and had 1998 revenues of $42.2 million. At
March 22, 1999, Safeguard owns 16% of the fully diluted stock of Pac-West
Telecomm.
Pacific Title/Mirage consists of two divisions: Optical and Digital. The Optical
Division provides traditional film effects and services to the majority of
today's motion pictures. The Digital Division provides digital effects and
character animation for the entertainment industry. The company's proprietary
Lifef/x(TM) technology can be used to digitally create photo-realistic animation
of real or fictional characters for use in film, television, and the Internet.
The company had 1998 revenues of $21.6 million compared to $18.6 million in
1997. A significant part of 1998 revenues were generated by a single project.
Other than that project, 1998 revenues were negatively affected by a slowdown in
the motion picture industry and management difficulties. The company is actively
pursuing restructuring alternatives to reduce its losses. At March 22, 1999,
Safeguard owns 49% of the fully diluted stock of Pacific Title/Mirage.
QuestOne Decision Sciences, formerly Technology Systems Corp. develops software
tools and support services that provide enterprise decision optimization
capabilities via breakthrough integrated financial-response time-resource
capacity analysis methods. Areas of application include product development,
product management, capital investments, strategic cycle time reduction, and
mission critical process improvement. QuestOne's client base includes several
Fortune 500 companies. QuestOne's 1998 revenues were $11.6 million compared to
$4.8 million in 1997. At March 22, 1999, Safeguard owns 34% of QuestOne's fully
diluted stock.
US Interactive is an Internet professional services company that draws on a
unique combination of business strategy, marketing, and technology disciplines
to engineer electronic enterprise solutions. The company completed a merger with
Digital Evolution in July 1998, and serves a number of Global 2000 clients. The
company had combined 1998 revenues of $16.6 million compared to $13.1 million in
1997. At March 22, 1999, Safeguard owns 14% of the fully diluted stock of US
Interactive.
Whisper Communications was formed as a spin-out from Diablo Research Company in
1996. Whisper has developed a patented two way, fixed base automatic 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. Whisper has a large multi-year supply contract as a
subcontractor to Schlumberger to provide automatic meter readers to Illinois
Power, which is currently in the final acceptance phase. Whisper is a
development stage company and had nominal revenues in 1998. At March 22, 1999,
Safeguard owns 27% of the fully diluted stock of Whisper.
Who? Vision Systems is a personal identification company that applies unique
fingerprint imaging technologies to create highly reliable, cost effective
network and eCommerce security products. Who? Vision, an XL Vision spin out in
1998, believes that the ability to e-thenticate(TM)
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- - bind transactions to a particular person, not just a particular machine - is a
critical need for the broader adoption of eCommerce. Who? Vision entered into a
strategic partnership with Philips Flat Display Systems to develop and market a
new line of flat fingerprint sensors. The company's proprietary patent pending
TactileSense(TM) technology, combined with patented and patent pending
technologies from Philips, gives it the ability to become a market-leading
provider of fingerprint sensors for use in portable net devices such as laptops,
PDAs, cell phones, and smart cards. Who? Vision is a development stage company
with no 1998 revenues. The company expects to begin commercial production of its
first-generation product in the second quarter of 1999 and its flat fingerprint
sensor in the second half of 1999. At March 22, 1999, Safeguard owns 27% of Who?
Vision's fully diluted stock.
XL Vision specializes in developing application-specific electronic imaging
solutions to meet specific customer needs and identifiable market needs. XL
Vision has refined its business model to invent, incubate, and spin out highly
differentiated, high-value imaging technology businesses. XL Vision's first spin
out company, ChromaVision Medical Systems (Nasdaq: CVSN), completed its initial
public offering as a Safeguard rights offering in 1997. XL Vision has also spun
out eMerge Vision Systems, Who? Vision Systems, and Integrated Visions. At March
22, 1999, Safeguard owns 55% of XL Vision's fully diluted stock.
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.
Venture Capital and Private Equity Funds
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 Safeguard'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 process industries, and later stage companies in
various industries. These funds made a total of 28 new investments in 1998 and
have a total of 104 companies in their portfolios at year end. Safeguard has
contributed a total of $41.8 million to these partnerships, and has received
total distributions of $28.1 million, including $12.3 million in 1998.
Technology Leaders I and Technology Leaders II are fully invested (including
reserves set aside for follow-on investments), and Radnor Venture Partners is
being closed out.
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Total Capital % Owned by Year
Name of Fund Commitments Safeguard(1) Established
- ------------ ----------- ------------ -----------
Technology Leaders I $ 61,000,000 4% 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 228,000,000 11% 1996
SCP Private Equity Partners 265,000,000 8% 1996
Pennsylvania Early Stage Partners 50,000,000 20% 1998
(1) Represents the percentage of the outstanding general and limited
partnership interests in each fund owned by Safeguard.
COMPUCOM
CompuCom is a leading provider of information technology products and technology
management services to large and medium sized businesses throughout the United
States. CompuCom helps Fortune 1000 companies manage information technology to
achieve their business goals by providing a wide range of services in
provisioning, support, and technology management. Products and technology
management services are sold through a direct sales force to over 6,000 business
customers nationwide. CompuCom's majority-owned subsidiary, ClientLink, offers
software application development services.
CompuCom is an authorized dealer of major distributed desktop computer products,
networking and related products, peripherals, and software for a number of
manufacturers, including Compaq Computer Corporation ("Compaq"), International
Business Machines Corporation ("IBM"), Hewlett-Packard Company ("HP"), Toshiba
America Information Systems, Intel Corporation, and Microsoft Corporation. To
further meet the needs of its customers, CompuCom provides a variety of services
including LAN/WAN project services, consulting, asset tracking, network
management, help desk, field engineering, configuration, software management,
distribution, and procurement utilizing network applications such as Novell
Netware, Windows NT, Windows 95 and Windows 98, and IBM OS/2 Warp.
CompuCom believes the key to improving its net revenue and net earnings
performance is the expansion of its higher margin services business, both
internally and through strategic acquisitions, as well as focusing on lowering
its cost structure through expense control and participation in programs
designed to increase inventory turns. 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.
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CompuCom's product sales accounted for 87% of Safeguard's total net sales in
1998, compared to 86% in 1997 and 88% in 1996. CompuCom's services sales
accounted for 12% of Safeguard's total net sales in 1998 and 1997, compared to
8% in 1996. CompuCom's business tends to be subject to seasonal fluctuations,
with the highest revenue levels generally occurring in the fourth quarter.
Backlog is not considered to be a meaningful indicator of CompuCom's future
business prospects due to the short order fulfillment cycle. Large corporate
businesses accounted for the majority of CompuCom's net sales in 1998. However,
no one customer accounted for more than 10% of such sales.
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. In late 1998,
CompuCom significantly restructured its operations by closing its physical
branch offices and moving to a virtual office model. The company also adopted a
plan to reduce its workforce by 10%. Sales and service representatives who
worked out of the branch offices continue to service customers in all of its
markets and the representatives access corporate information and support over
CompuCom's intranet and remote communications facilities.
CompuCom's customers generally require rapid fulfillment of product orders. To
meet these requirements and to assure itself of a continuous allotment of
products from its vendors, CompuCom maintains adequate levels of inventory
funded through credit facilities and vendor credit.
CompuCom provides product support to its customers primarily through inside
sales representatives ("ISRs") mostly based at its customer center, located in
Dallas, Texas. Each ISR works closely with CompuCom's direct sales
representatives. The primary goal of the customer center is to provide greater
support to CompuCom's customers while allowing CompuCom's direct sales force to
focus on soliciting new business and providing the necessary support for the
customers' more complex service needs. As of December 31, 1998, CompuCom
employed 335 full-time direct sales representatives and 400 customer center
personnel.
CompuCom configures and ships desktop products at its 300,000 square foot
distribution center in Paulsboro, NJ, its 104,000 square foot distribution
center in Stockton, CA, and its new 78,000 square foot center which is
co-located on the Compaq campus in Houston, TX. The company believes its
co-location arrangement with Compaq will further reduce its operating costs and
increase efficiency. The company is also beginning co-location programs with IBM
and Toshiba during the first half of 1999.
In order to remain profitable in the face of shrinking product gross margins,
CompuCom has continuously worked to improve its operating efficiency by
streamlining its business processes as evidenced by its recent restructuring and
its participation in co-location programs with its vendors. CompuCom is using
integrated enterprise-wide information systems to automate its operations,
including a corporate intranet for internal use and extranets to facilitate
eCommerce with its customers. CompuCom believes that this focus on business
process reengineering and
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technology-enhanced operations gives it one of the lowest operating cost
structures in its industry and provides a demonstration to its customers of the
benefits of its product and service offerings.
Product margins declined in 1998 compared to 1997 due primarily to heightened
competition from direct marketers and other resellers. CompuCom believes that
gross margins will continue to decline in 1999, and will be reactive to
industry-wide changes. Future profitability will depend on the ability to
effectively manage inventory in response to changes in suppliers price
protection and return programs, to retain and hire quality service personnel
while effectively managing the utilization of such personnel, to respond to
increased competition from its suppliers' direct selling initiatives, and to
continue to reduce operating expenses.
The computer reseller industry is characterized by intense competition,
primarily in the areas of price, product availability and breadth of product
line and service. CompuCom competes for potential clients, including national
accounts, with numerous resellers and distributors. Many established desktop
computer manufacturers (including some of the company's vendors), direct
marketers, systems integrators and resellers of distributed desktop or
networking products compete with the company in the configuration and
distribution of computer systems and equipment. In addition, direct marketers
have had a distinct pricing advantage over resellers such as CompuCom. In
response to the increased competition, particularly from direct marketers, a
number of the company's competitors have sought to increase their market share
through acquisitions. The company expects the consolidation in the industry will
continue in 1999. In order to keep pace, CompuCom expects to pursue additional
strategic acquisitions. To help combat the direct marketers' pricing advantage,
CompuCom and its major vendors are in the process of developing and implementing
strategies designed to reduce costs through reductions in inventory levels. In
the highly fragmented computer services business, CompuCom competes with several
larger competitors; other corporate resellers pursuing high-end service
opportunities, as well as smaller computer services companies. Some of these
competitors have financial, technical, manufacturing, sales, marketing and other
resources that are substantially greater than that of CompuCom. There can be no
assurance that CompuCom will be able to continue to compete successfully with
new or existing competition. If CompuCom uses its stock for acquisitions or if
some other dilutive event were to occur, Safeguard's voting interest in CompuCom
could be diluted below 50%, in which event Safeguard would no longer consolidate
CompuCom's financial results under current generally accepted accounting
principles. See "Management's Discussion and Analysis General" beginning on page
33 of Safeguard's Annual Report to Stockholders filed as part of Exhibit 13
hereto. CompuCom employed approximately 4,800 full-time employees as of December
31, 1998.
At March 22, 1999, Safeguard owns 56% of CompuCom's fully diluted stock.
TANGRAM
Tangram develops and markets asset tracking software and software distribution
solutions that enable automated enterprise-wide information system management.
The company markets to Fortune 1000 companies and their foreign equivalents and
to government agencies that are
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managing heterogeneous enterprises and mission-critical applications. Tangram's
primary product line is Asset Insight(R), an enterprise-wide asset tracking
solution that enables corporations to track current and historical information
about hardware, software and configuration changes and associate this
information with desktop users and departments across the enterprise. With this
information, decision makers can track changes in their hardware and software
assets, manage their Year 2000 risks, forward plan technology requirements
(including calculating the cost of software and hardware upgrades), optimize
end-user productivity, reduce total cost of asset ownership, identify missing
hardware components, and resolve desktop problems quickly.
Tangram markets Asset Insight through value added resellers, systems integrators
and other channel partners. Tangram markets and sells its other products and
services, including implementation of customized solutions incorporating its
AM:PM and other products, directly to its customers in North America and through
a network of independent distributors internationally.
Tangram spent $5.3 million for product development in 1998, compared to $5.0
million in 1997 and $3.4 million in 1996.
Because of its complexity, Asset Insight has a relatively long sales cycle.
Effective management of the sales process is critical to Tangram's future
success. 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 and offer integrated products
providing broader asset management solutions. At March 22, 1999, Safeguard owns
57% of Tangram's fully diluted stock.
Other Segment Information
Export sales in each segment for the three year period ended December 31, 1998
were less than 5% of the segment's total sales in each of those years. Backlog
is not considered to be a meaningful indication of future business prospects for
any of the Company's operating segments.
OTHER INFORMATION
The operations of Safeguard and its partnership companies are subject to
environmental laws and regulations. Safeguard 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 Safeguard.
EMPLOYEES
At December 31, 1998, Safeguard and its consolidated subsidiaries have
approximately 5,120 employees, of which approximately 94% are employed by
CompuCom. Safeguard believes relations with employees are good.
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RISK FACTORS REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this report describing the plans, goals, strategies,
intentions, and expectations of Safeguard or its partnership companies or
anticipated events, 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.
Competition to invest in or acquire successful emerging information technology
companies is substantial. 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 Safeguard and its partnership companies.
In addition, there is an overall scarcity of available employees with
information technology skills, which could lead to increased costs of operations
and restrict internal growth.
Certain of Safeguard'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 often encounter obstacles and delays in developing
products, service offerings, and markets. If Safeguard's private partnership
companies encounter more delays and obstacles than anticipated, Safeguard's
ability to complete rights offerings when planned could be delayed.
Safeguard is dependent on the market for information technology companies in
general and for initial public offerings of those companies in particular. If
such markets were to become weak for an extended period of time, Safeguard's
ability to complete rights offerings when planned, and Safeguard's ability to
generate gains from sales of securities, could be materially adversely affected.
In addition, Safeguard's ability to borrow under its revolving credit facilities
could be adversely affected as availability under these facilities is determined
by the value of the publicly traded securities pledged by Safeguard as
collateral. The market for securities of Internet-related companies is extremely
volatile, and Safeguard's participation in Internet-related companies could
cause Safeguard's stock to become more volatile.
The impact that the Year 2000 issue will have on the information technology
industry over the next few years is a material uncertainty. Businesses and
government agencies which are clients of Safeguard'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 Safeguard's partnership companies. In addition, Safeguard's and its
partnership companies' business operations could be materially adversely
affected if they do not timely complete any required remediation efforts or if
their vendors, business partners, or customers do not timely complete
remediation of any systems on which Safeguard or its partnership companies rely.
See also Item 7 - "Management's Discussion and Analysis of Financial Condition
and Results of Operations." In general, there is likely to be an extraordinary
amount of litigation regarding the Year 2000 issue over the next several years
and information technology providers could be attractive targets for such
litigation. This litigation could have a
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material adverse impact on Safeguard's and its partnership companies' operations
and financial conditions.
ITEM 1(d). FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND
EXPORT SALES
Safeguard does not believe that foreign or geographic area sales are material or
significant to an understanding of its business and operations during the
three-year period ended December 31, 1998. Where appropriate, information
concerning export sales of Safeguard's partnership companies is discussed in
Item 1(c) "Narrative Description of Business."
ITEM 1(e). EXECUTIVE OFFICERS
Information about Safeguard's executive officers can be found in Part III of
this report under "Item 10. Directors and Executive Officers of Registrant."
ITEM 2. PROPERTIES
Safeguard owns the office park in which its corporate headquarters and
administrative offices are 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 CompuCom and Tangram consisted of
the following as of March 22, 1999:
OPERATING SEGMENT/LOCATION TYPE OF FACILITY LEASE EXPIRES
COMPUCOM
Dallas, TX Corporate/Operations *
Paulsboro, NJ Distribution Center 2001(1)
Stockton, CA Distribution Center 1999
Houston, TX Compaq co-location 2000 (2)
facility
TANGRAM
Cary, NC Office/Distribution 2004
(*) Owned facility.
(1) CompuCom has a cancellation option exercisable at any time after August
1999.
(2) Terminable by either party on 60 days notice.
CompuCom expects to complete a sale-leaseback transaction on its corporate and
operations facility in the first quarter of 1999.
In the opinion of management, the properties are in good condition and repair
and are adequate for the particular operations for which they are used.
CompuCom's corporate/operations facility
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in Dallas contains 250,000 square feet of office space in two buildings on 20
acres. The other facilities of the company generally are capable of supporting
increased activity without any significant capital expenditures.
ITEM 3. LEGAL PROCEEDINGS
Safeguard 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
Safeguard'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 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Safeguard incorporates by reference the information contained under the caption
"Common Stock Data" on page 56 of its Annual Report to Stockholders for the year
ended December 31, 1998 which page is filed as part of Exhibit 13 hereto.
ITEM 6. SELECTED FINANCIAL DATA
Safeguard incorporates by reference the information contained under this caption
on page 33 of its Annual Report to Stockholders for the year ended December 31,
1998 which page is filed as part of Exhibit 13 hereto.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Safeguard incorporates by reference the information contained under this caption
on pages 33 through 39 of its Annual Report to Stockholders for the year ended
December 31, 1998 which pages are filed as part of Exhibit 13 hereto.
For the month of February 1999, CompuCom was out of compliance with one covenant
ratio of its existing receivables securitization facility. CompuCom does not
expect this violation to negatively impact negotiations relative to the
replacement securitization facility or to negatively impact its liquidity.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Safeguard is exposed to equity price risks on its securities in publicly traded
partnership companies, most of which we acquired as private companies and took
public through rights offerings. These securities are generally in companies in
the information technology industry sector. Many of the companies are considered
small capitalization stocks. As of December 31, 1998, we had not attempted to
reduce or eliminate our market exposure on these securities. A 20% decrease in
equity prices would result in an approximate $113 million decrease in the fair
value of our investments accounted for on the equity method or classified as
available-for-sale at the end of 1998. Approximately $190 million of the value
of these equity securities at the end of 1998 consisted of our holdings in
Cambridge. A 20% decrease in equity prices at the end of 1998 would result in an
approximate $29 million decrease in the fair value of our holdings in Tellabs,
which we acquired in the merger of Coherent into Tellabs. Our Tellabs shares are
classified as trading securities. Fluctuations in the market price of trading
securities are included in net earnings. In late March 1999, the Company
completed a hedging transaction to partially protect against possible declines
in the price of a portion of its Tellabs holdings.
Availability under Safeguard's bank credit facilities is determined by the
market value of the publicly traded partnership companies pledged as collateral.
At December 31, 1998, our ability to borrow would not be impacted unless equity
prices decreased more than 25%. A price decrease of 50% would reduce the
availability on our $200 million bank credit facilities by approximately $33
million. At December 31, 1998, $88.1 million was outstanding under the $200
million bank revolving credit facility.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Safeguard incorporates by reference the information on pages 40 through 56 of
its Annual Report to Stockholders for the year ended December 31, 1998 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
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS:
The following persons were executive officers of the Registrant at March 22,
1999:
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OFFICER
NAME AGE SINCE POSITION
- ---- --- ------- --------
Warren V. Musser 72 1953 Chairman of the Board and
Chief Executive Officer
Harry Wallaesa (1) 48 1999 President and Chief Operating Officer
Edward R. Anderson (2) 52 1994 President and Chief Executive
Officer, CompuCom Systems
Jerry L. Johnson (3) 51 1995 Executive Vice President
Thomas C. Lynch (4) 56 1995 Executive Vice President and Chief
Operating Officer, CompuCom Systems
Michael W. Miles (5) 41 1992 Senior Vice President and Chief
Financial Officer
James A. Ounsworth(6) 56 1991 Senior Vice President, General
Counsel and Secretary
Stephen J. Andriole (7) 49 1997 Senior Technology Officer
(1) Mr. Wallaesa became President and Chief Operating Officer of Safeguard in
March 1999. Before joining Safeguard, Mr. Wallaesa served as President and
Chief Executive Officer of aligne incorporated, a strategic technology
management consulting firm which he co-founded in 1996. From 1985 through
1995, Mr. Wallaesa was the Chief Information Officer and Vice President of
management information systems at Campbell Soup Company, a global
manufacturer and marketer of high quality, branded convenience food
products.
(2) Mr. Anderson has served as President and Chief Executive Officer of
CompuCom Systems, Inc., a subsidiary of Safeguard, 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 was promoted to Executive Vice President in March 1999. He
served as Senior Vice President from September 1995 until March 1999.
Prior to joining Safeguard, 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) Mr. Lynch joined CompuCom in October 1998. Prior to that time, Mr. Lynch
was Senior Vice President of Safeguard from 1995 through 1998. 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 of the Navy Staff 1994 through 1995.
(5) Mr. Miles was promoted to Senior Vice President in January 1998. He has
served as Vice President and Chief Financial Officer since January 1997
and has been with Safeguard
26
<PAGE>
since 1984 in various financial positions, including Vice President and
Corporate Controller.
(6) Mr. Ounsworth was promoted to Senior Vice President in November 1995. He
has served as Vice President, Secretary and General Counsel since December
1991. Prior to joining Safeguard, Mr. Ounsworth was a partner in the
Philadelphia law firm of Pepper, Hamilton & Scheetz, and before that he
was a nuclear engineer in the U.S. Navy.
(7) Dr. Andriole joined Safeguard in the Fall of 1997 from CIGNA Corporation,
where he was Senior Vice President for Technology Strategy & Chief
Technology Officer from 1995 to 1997. From 1990 to 1995, he was a
Professor of Information Systems & Computer & Electrical Engineering at
Drexel University. During the 1970s, Dr. Andriole was Director of
Cybernetics Technology at the Defense Advanced Research Projects Agency
(ARPA), the agency that developed much of the infrastructure for the
Internet.
DIRECTORS:
Safeguard incorporates by reference the information contained under the caption
"Election of Directors" in its definitive Proxy Statement relative to its May
20, 1999 annual meeting of stockholders, 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:
Safeguard 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 20, 1999 annual meeting of stockholders, 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
Safeguard incorporates by reference the information contained under the captions
"Board of Directors' --Additional Information" and "Executive Compensation and
Other Arrangements" in its definitive Proxy Statement relative to its May 20,
1999 annual meeting of stockholders, 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
Safeguard incorporates by reference the information contained under the caption
"Stock Ownership of Directors and Officers" in its definitive Proxy Statement
relative to its May 20,
27
<PAGE>
1999 annual meeting of stockholders, 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
Safeguard incorporates by reference the information contained under the caption
"Relationships and Related Transactions with Management and Others" in its
definitive Proxy Statement relative to its May 20, 1999 annual meeting of
stockholders, 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) The following Financial Statements and Schedules are filed as part of this
report:
Consolidated Financial Statements Balance Sheets - December 31, 1998 and 1997
Operations - years ended December 31, 1998, 1997, and 1996
Cash Flows - years ended December 31, 1998, 1997, and 1996
Stockholders' Equity - years ended December 31, 1998, 1997, and 1996
Comprehensive Income - years ended December 31, 1998, 1997, and 1996
Notes to Consolidated Financial Statements Independent Auditors' Report
Statement of Management's Financial Responsibility
Quarterly Financial Data
Financial Statement Schedules
Independent Auditors' Report
Schedule I - Condensed Consolidated Financial Information of Registrant
Schedule II - Valuation and Qualifying Accounts
(b) Reports on Form 8-K
None.
(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
28
<PAGE>
by reference. For exhibits incorporated by reference, the location of the
exhibit in the previous filing is indicated in parentheses.
EXHIBIT NO. EXHIBIT
- ----------- -------
3.1 Amended and Restated Articles of Incorporation of Safeguard
(20)(Exhibit 3.1)
3.2 By-laws of Safeguard, as amended (6)(Exhibit 3.2)
4.1** 1990 Stock Option Plan, as amended (20)(Exhibit 4.3)
4.2** Stock Option Plan for Non-Employee Directors (11) (Exhibit 4.8)
4.3** Safeguard Scientifics, Inc. Amended and Restated Stock Savings Plan
(14) (Exhibit 4.9)
4.4** First Amendment to Safeguard Scientifics, Inc. Stock Savings Plan
(20)(Exhibit 4.6)
4.5** Safeguard Scientifics, Inc. Stock Savings Plan Trust Agreement
(5)(Exhibit 4.2)
4.6 Trust Indenture Agreement dated February 1, 1996 (17) (Exhibit
10.34)
4.7 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 Purchase Pension
Plan (17) (Exhibit 10.4)
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** Safeguard Scientifics, Inc. Deferred Compensation Plan (2)(Exhibit
10.12)
29
<PAGE>
10.9** Form of Promissory Notes dated February 12, 1997 given by certain
executives for advances by Safeguard of income tax withholdings on
restricted stock grants (20)(Exhibit 10.11)
10.10** Form of Amendment to Promissory Notes dated , 1999 *
10.11 Asset Acquisition Agreement dated April 15, 1997 for the sale of
certain assets of Premier Solutions Ltd. to a subsidiary of Sungard
Data Systems Inc. (exhibits omitted) (21)(Exhibit 10.1)
10.12 Stock Exchange Agreement dated as of February 26, 1999 among
Safeguard Scientifics, Inc., aligne Incorporated, and the
shareholders of aligne Incorporated (exhibits and schedules
omitted)*
10.13 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)(25)(Exhibit 10.1)
10.14 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)
10.15 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
(20)(exhibit 10.16)
10.16 Amended and Restated Credit Agreement, dated as of November 3,
1997, among CompuCom Systems, Inc., certain lenders party hereto,
and NationsBank of Texas, N.A., as administrative lender (exhibits
and schedules omitted) (24)(Exhibit 10.27)
10.17 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)(26)(Exhibit 10.2)
10.18 Amended and Restated Receivables Purchase Agreement, dated as of
November 3, 1997, between CompuCom Systems, Inc. and CSI Funding,
Inc. (exhibits omitted) (24)(Exhibit 10.28)
10.19 Amended and Restated Transfer and Administration Agreement, dated
as of November 3, 1997, among CSI Funding, Inc., CompuCom Systems,
Inc., Enterprise Funding Corporation and NationsBank, N.A.
(exhibits omitted) (24)(Exhibit 10.29)
30
<PAGE>
10.20** Executive Employment Agreement dated October 24, 1997 between
Edward Anderson and CompuCom Systems, Inc. (24)(Exhibit 10.32)
10.21** Employment Agreement Amendment dated February 19, 1999 between
Edward Anderson and CompuCom Systems, Inc.*
10.22** Promissory Note dated February 12, 1997 from Edward Anderson to
CompuCom Systems, Inc. (20)(Exhibit 10.22)
10.23** First Amendment to Term Note dated February 19, 1999 from Edward
Anderson to CompuCom Systems, Inc.*
10.24** Pledge Agreement dated August 31, 1994 between Edward Anderson and
CompuCom Systems, Inc. (14) (Exhibit 10.27)
10.25** Term Note dated October 22, 1998 from Edward Anderson to CompuCom
Systems, Inc.*
10.26** Pledge Agreement dated October 22, 1998 from Edward Anderson to
CompuCom Systems, Inc.*
10.27** Stock Option Grant Agreement between CompuCom Systems, Inc. and
Thomas C. Lynch, dated as of October 22, 1998 (27)(Exhibit 10.4)
10.28** Term Note dated December 23, 1998 from Thomas Lynch to CompuCom
Systems, Inc.*
10.29** Pledge Agreement dated December 23, 1998 from Thomas Lynch to
CompuCom Systems, Inc.*
10.30** Term Note dated December 23, 1998 from Thomas Lynch to Safeguard
Scientifics, Inc.*
10.31** Security Agreement dated December 23, 1998 between Thomas Lynch and
Safeguard Scientifics, Inc.*
10.32** Note Agreement dated October 6, 1998, between Safeguard Delaware,
Inc. and Donald R. Caldwell (27)(Exhibit 10.3)
11 Computation of Per Share Earnings * (included in Note 7 to the
Consolidated Financial Statements on page 50 of Safeguard's Annual
Report to Stockholders for year ended December 31, 1998, which page
is filed as part of Exhibit 13 hereto)
13 Pages 33 to 56 of Annual Report to Stockholders for year ended
December 31, 1998 *
31
<PAGE>
21 List of Subsidiaries*
23.1 Consent of KPMG LLP, independent auditors*
23.2 Consent and Report of PricewaterhouseCoopers LLP, independent
auditors*
23.3 Consent and Report of PricewaterhouseCoopers LLP, independent
auditors*
23.4 Consent and Report of PricewaterhouseCoopers LLP, independent
auditors*
23.5 Consent and Report of Arthur Andersen LLP, independent auditors*
23.6 Consent and Report of Deloitte & Touche LLP, independent auditors*
27 Financial Data Schedule for the year ended December 31, 1998*
- ----------
* 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.
(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.
(11) Filed on March 30, 1994 as an exhibit to Form 10-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.
(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.
(20) Filed on March 31, 1997 as an exhibit to Form 10-K (No. 1-5620) and
incorporated herein by reference.
32
<PAGE>
(21) Filed May 15, 1997 as an exhibit to Form 10-Q (No. 1-5620) and
incorporated herein by reference.
(22) Filed August 14, 1997 as an exhibit to Form 10-Q (No. 1-5620) and
incorporated herein by reference.
(23) Filed November 14, 1997 as an exhibit to Form 10-Q (No. 1-5620) and
incorporated herein by reference.
(24) Filed March 31, 1998 as an exhibit to Form 10-K (No. 1-5620) and
incorporated herein by reference.
(25) Filed on May 15, 1998 as an exhibit to Form 10-Q (No. 1-5620) and
incorporated herein by reference.
(26) Filed August 14, 1998 as an exhibit to Form 10-Q (No. 1-5620) and
incorporated herein by reference.
(27) Filed November 16, 1998 as an exhibit to Form 10-Q (No. 1-5620) and
incorporated herein by reference.
33
<PAGE>
(d) Financial Statement Schedules
Independent Auditors' Report
The Board of Directors and Shareholders
Safeguard Scientifics, Inc.:
Under date of February 8, 1999, we reported on the consolidated balance sheets
of Safeguard Scientifics, Inc. and subsidiaries as of December 31, 1998 and
1997, and the related consolidated statements of operations, cash flows,
shareholders' equity and comprehensive income for each of the years in the
three-year period ended December 31, 1998, as contained in the 1998 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 1998. 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, based on our audits and the reports of other auditors, 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 LLP
Philadelphia, Pennsylvania
February 8, 1999
34
<PAGE>
Safeguard Scientifics, Inc.
Schedule I
Condensed Consolidated Balance Sheets
December 31, 1998 and 1997
(in thousands)
Assets
1998 1997
--------- ---------
Current Assets
Cash and cash equivalents $ 1,486 $ 680
Short-term investments 143,103 --
Notes and other receivables 27,783 6,157
Other current assets 1,497 4,873
--------- ---------
Total current assets 173,869 11,710
Property, Plant and Equipment, Net 24,455 13,142
Other Assets
Investments in unconsolidated subsidiaries and
affiliates 413,596 310,877
Notes and other receivables 22,069 21,669
Other 3,306 2,756
--------- ---------
Total other assets 438,971 335,302
========= =========
Total Assets $ 637,295 $ 360,154
========= =========
Liabilities and Shareholders' Equity
1998 1997
--------- ---------
Current Liabilities
Current debt obligations $ 866 $ 333
Accounts payable 383 888
Accrued expenses 79,575 17,304
--------- ---------
Total current liabilities 80,824 18,525
Long-Term Debt 123,115 29,689
Deferred Taxes 17,902 12,846
Other Liabilities 1,250 1,143
Convertible Subordinated Notes 71,345 90,881
Shareholders' Equity
Common stock 3,280 3,280
Additional paid-in capital 62,470 49,952
Retained earnings 261,594 151,471
Accumulated other comprehensive income 37,294 15,706
Treasury stock, at cost (21,779) (13,339)
--------- ---------
Total shareholders' equity 342,859 207,070
========= =========
Total Liabilities and Shareholders' Equity $ 637,295 $ 360,154
========= =========
See notes to condensed consolidated financial statements.
35
<PAGE>
Safeguard Scientifics, Inc.
Schedule I
Condensed Consolidated Statements of Operations
Years Ended December 31, 1998, 1997, and 1996
(in thousands except per share amounts)
1998 1997 1996
-------- -------- --------
Revenues
Net sales $ -- $ 15,982 $ 30,286
Securities and other gains, net 193,665 24,025 26,011
Other income 15,888 14,223 10,273
-------- -------- --------
Total revenues 209,553 54,230 66,570
Costs and Expenses
Cost of sales -- 10,908 19,223
Selling, general, and administrative 24,425 25,162 22,712
Depreciation and amortization 1,443 2,169 3,818
Interest 10,706 7,150 8,623
Equity in loss (income) of unconsolidated
subsidiaries and affiliates, net of taxes 1,846 (14,873) (12,345)
-------- -------- --------
Total costs and expenses 38,420 30,516 42,031
-------- -------- --------
Earnings Before Taxes on Income 171,133 23,714 24,539
Provision for taxes on income 61,010 2,213 4,612
-------- -------- --------
Net Earnings $110,123 $ 21,501 $ 19,927
======== ======== ========
Earnings Per Share
Basic $ 3.46 $ .69 $ .67
Diluted $ 3.22 $ .66 $ .61
Average Common Shares Outstanding
Basic 31,833 31,249 29,900
Diluted 34,914 31,996 31,348
See notes to condensed consolidated financial statements.
36
<PAGE>
Safeguard Scientifics, Inc.
Schedule I
Condensed Consolidated Statements of Cash Flows
Years Ended December 31, 1998, 1997, and 1996
(in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
--------- -------- ---------
<S> <C> <C> <C>
Operating Activities
Net earnings $ 110,123 $ 21,501 $ 19,927
Adjustments to reconcile net earnings to cash
provided (used) by operating activities
Depreciation and amortization 1,443 2,169 3,818
Deferred income taxes 41,447 (2,313) 109
Equity in loss (income) of unconsolidated
subsidiaries and affiliates, net of taxes 1,846 (14,873) (12,345)
Securities and other gains, net (193,665) (24,025) (26,011)
Cash provided (used) by changes in working capital items
Receivables (17,408) 3,349 (5,746)
Accounts payable, accrued expenses, and other 32,311 2,638 5,624
--------- -------- ---------
Cash (used) by operating activities (23,903) (11,554) (14,624)
Proceeds from securities and other gains, net 93,207 67,294 41,982
--------- -------- ---------
Cash provided by operating activities and securities
and other gains, net 69,304 55,740 27,358
Other Investing Activities
Investments and notes acquired, net (137,495) (80,518) (64,110)
Capital expenditures (3,142) (7,871) (5,985)
Other, net -- 3,408 (5,592)
--------- -------- ---------
Cash (used) by other investing activities (140,637) (84,981) (75,687)
Financing Activities
Net borrowings (repayments) on revolving credit facilities 85,907 22,200 (63,425)
Net borrowings on term debt 769 3,371 455
Issuance of Convertible Subordinated Notes, net -- -- 112,109
Repurchase of company common stock (18,672) (9,488) --
Issuance of company common stock 4,135 5,819 5,210
--------- -------- ---------
Cash provided by financing activities 72,139 21,902 54,349
--------- -------- ---------
Increase (Decrease) in Cash and Cash Equivalents 806 (7,339) 6,020
Cash and cash equivalents - beginning of year 680 8,019 1,999
--------- -------- ---------
Cash and Cash Equivalents - End of Year $ 1,486 $ 680 $ 8,019
========= ======== =========
</TABLE>
See notes to condensed consolidated financial statements.
37
<PAGE>
Notes to Condensed Consolidated Financial Statements
NOTE 1 - PRINCIPLES OF CONSOLIDATION
The Condensed Consolidated (also referred to as "Parent Company") Financial
Statements include the accounts of Safeguard Scientifics, Inc. (the Company) and
its wholly owned subsidiaries. These statements differ from the Consolidated
Financial Statements presented in the Company's Annual Report to Shareholders by
not consolidating 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 sold its Pioneer Metal Finishing division (Pioneer) in mid-1997. The
Condensed Consolidated Statements of Operations include net sales and costs and
expenses of $16.0 million and $14.6 million, respectively, in 1997, and $28.6
million and $26.3 million, respectively, in 1996, related to Pioneer.
Subsequent to the sale of Pioneer, the Company's revenues consist of securities
and other gains and other income, which consists primarily of administrative
service fees charged to partnership companies and associated venture funds and
interest income generally derived from loans to partnership companies.
NOTE 2 - DEBT
1998 1997
--------- --------
(in thousands)
Revolving credit facilities $ 108,107 $ 22,200
Mortgage note, 9.75%, payable monthly through 2002 3,420 3,456
Mortgage notes, 6.1% to 7.8%, payable monthly through 2017 4,954 4,045
Mortgage note, 7.75%, payable monthly through 2021 6,239
Other 1,261 321
--------- --------
Total debt 123,981 30,022
Current debt obligations (866) (333)
--------- --------
Long-term debt $ 123,115 $ 29,689
========= ========
Aggregate maturities of long-term debt during future years are as follows (in
millions): $0.9 - 1999; $0.7 - 2000; $0.7 - 2001; $108.9 - 2002; $1.2 - 2003;
and $11.6 - thereafter.
Interest paid in 1998, 1997, and 1996 was $11.5 million, $6.9 million, and $6.3
million, respectively, of which $4.9 million, $5.8 million, and $3.4 million in
1998, 1997, and 1996, respectively, related to the Company's Convertible
Subordinated Notes, and $1.1 million in 1996 related to commercial real estate
debt.
38
<PAGE>
Safeguard Scientifics, Inc. and Subsidiaries
Schedule II
Valuation and Qualifying Accounts
(in thousands)
<TABLE>
<CAPTION>
Balance Additions
Beginning Charged to Balance
DESCRIPTION of Year Operations Deductions Other End of Year
- ----------- ------- ---------- ---------- ----- -----------
(1)
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts
Year ended December 31, 1996 $ 2,644 $ 1,472 $ 995 $ (33) (2) $ 3,088
Year ended December 31, 1997 $ 3,088 $ 2,183 $ 1,829 $ (570) (3) $ 2,872
Year ended December 31, 1998 $ 2,872 $ 3,049 $ 1,350 $ 198 (4) $ 4,769
Inventory reserves
Year ended December 31, 1996 $ 9,524 $ 15,529 $ 16,119 $ 8,934
Year ended December 31, 1997 $ 8,934 $ 14,844 $ 13,854 $ 9,924
Year ended December 31, 1998 $ 9,924 $ 14,204 $ 16,326 $ 7,802
Investment reserves
Year ended December 31, 1996 $ 6,956 $ 4,461 $ 6,132 $ 802 $ 6,087
Year ended December 31, 1997 $ 6,087 $ 9,032 $ 6,701 $ 468 $ 8,886
Year ended December 31, 1998 $ 8,886 $ 31,773 $ 2,666 $ 37,993
Restructuring
Year ended December 31, 1998 $ - $ 16,437 $ - $ (2,349) (5) $ 14,088
</TABLE>
(1) Net write-offs.
(2) Sale of the Phoenix location of Pioneer Metal Finishing and the Commercial
Real Estate operations.
(3) Sale of Pioneer Metal Finishing and Premier Solutions Ltd.
(4) Acquisition of Dataflex.
(5) Payments against restructuring reserve.
39
<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 26, 1999 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 26, 1999 /s/ Warren V. Musser
------------------------------------
Warren V. Musser,
Chairman and Chief Executive Officer
(Principal Executive Officer)
Dated: March 26, 1999 /s/ Michael W. Miles
------------------------------------
Michael W. Miles,
Senior Vice President and Chief
Financial Officer (Principal
Financial and Accounting Officer)
Dated: March 26, 1999 /s/ Judith Areen
------------------------------------
Judith Areen, Director
Dated: March 26, 1999 /s/ Vincent G. Bell, Jr.
------------------------------------
Vincent G. Bell, Jr., Director
Dated: March 26, 1999
------------------------------------
Michael Emmi, Director
Dated: March 26, 1999 /s/ Robert A. Fox
------------------------------------
Robert A. Fox, Director
Dated: March 26, 1999 /s/ Delbert W. Johnson
------------------------------------
Delbert W. Johnson, Director
Dated: March 26, 1999 /s/ Robert E. Keith, Jr.
------------------------------------
Robert E. Keith, Jr., Director
Dated: March 26, 1999 /s/ Peter Likins
------------------------------------
Peter Likins, Director
<PAGE>
Dated: March 26, 1999 /s/ Jack L. Messman
------------------------------------
Jack L. Messman, Director
Dated: March 26, 1999 /s/ Russell E. Palmer
------------------------------------
Russell E. Palmer, Director
Dated: March 26, 1999 /s/ John W. Poduska, Sr.
------------------------------------
John W. Poduska Sr., Director
Dated: March 26, 1999 /s/ Heinz Schimmelbusch
------------------------------------
Heinz Schimmelbusch, Director
Dated: March 26, 1999 /s/ Hubert J.P. Schoemaker
------------------------------------
Hubert J. P. Schoemaker, Director
Dated: March 26, 1999 /s/ Harry Wallaesa
------------------------------------
Harry Wallaesa, Director
<PAGE>
EXHIBIT INDEX
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.
EXHIBIT
NO. EXHIBIT
- --- -------
3.1 Amended and Restated Articles of Incorporation of Safeguard
(20)(Exhibit 3.1)
3.2 By-laws of Safeguard, as amended (6)(Exhibit 3.2)
4.1** 1990 Stock Option Plan, as amended (20)(Exhibit 4.3)
4.2** Stock Option Plan for Non-Employee Directors (11) (Exhibit 4.8)
4.3** Safeguard Scientifics, Inc. Amended and Restated Stock Savings Plan
(14) (Exhibit 4.9)
4.4** First Amendment to Safeguard Scientifics, Inc. Stock Savings Plan
(20)(Exhibit 4.6)
4.5** Safeguard Scientifics, Inc. Stock Savings Plan Trust Agreement
(5)(Exhibit 4.2)
4.6 Trust Indenture Agreement dated February 1, 1996 (17) (Exhibit 10.34)
4.7 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 Purchase Pension Plan
(17) (Exhibit 10.4)
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)
<PAGE>
10.8** Safeguard Scientifics, Inc. Deferred Compensation Plan (2)(Exhibit
10.12)
10.9** Form of Promissory Notes dated February 12, 1997 given by certain
executives for advances by Safeguard of income tax withholdings on
restricted stock grants (20)(Exhibit 10.11)
10.10** Form of Amendment to Promissory Notes dated , 1999 *
10.11 Asset Acquisition Agreement dated April 15, 1997 for the sale of
certain assets of Premier Solutions Ltd. to a subsidiary of Sungard
Data Systems Inc. (exhibits omitted) (21)(Exhibit 10.1)
10.12 Stock Exchange Agreement dated as of February 26, 1999 among Safeguard
Scientifics, Inc., aligne Incorporated, and the shareholders of aligne
Incorporated (exhibits and schedules omitted)*
10.13 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)(25)(Exhibit 10.1)
10.14 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)
10.15 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 (20)(exhibit
10.16)
10.16 Amended and Restated Credit Agreement, dated as of November 3, 1997,
among CompuCom Systems, Inc., certain lenders party hereto, and
NationsBank of Texas, N.A., as administrative lender (exhibits and
schedules omitted) (24)(Exhibit 10.27)
10.17 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)(26)(Exhibit 10.2)
10.18 Amended and Restated Receivables Purchase Agreement, dated as of
November 3, 1997, between CompuCom Systems, Inc. and CSI Funding, Inc.
(exhibits omitted) (24)(Exhibit 10.28)
10.19 Amended and Restated Transfer and Administration Agreement, dated as
of November 3, 1997, among CSI Funding, Inc., CompuCom Systems, Inc.,
Enterprise Funding Corporation and NationsBank, N.A. (exhibits
omitted) (24)(Exhibit 10.29)
10.20** Executive Employment Agreement dated October 24, 1997 between Edward
Anderson and CompuCom Systems, Inc. (24)(Exhibit 10.32)
<PAGE>
10.21** Employment Agreement Amendment dated February 19, 1999 between Edward
Anderson and CompuCom Systems, Inc.*
10.22** Promissory Note dated February 12, 1997 from Edward Anderson to
CompuCom Systems, Inc. (20)(Exhibit 10.22)
10.23** First Amendment to Term Note dated February 19, 1999 from Edward
Anderson to CompuCom Systems, Inc.*
10.24** Pledge Agreement dated August 31, 1994 between Edward Anderson and
CompuCom Systems, Inc. (14) (Exhibit 10.27)
10.25** Term Note dated October 22, 1998 from Edward Anderson to CompuCom
Systems, Inc.*
10.26** Pledge Agreement dated October 22, 1998 from Edward Anderson to
CompuCom Systems, Inc.*
10.27** Stock Option Grant Agreement between CompuCom Systems, Inc. and Thomas
C. Lynch, dated as of October 22, 1998 (27)(Exhibit 10.4)
10.28** Term Note dated December 23, 1998 from Thomas Lynch to CompuCom
Systems, Inc.*
10.29** Pledge Agreement dated December 23, 1998 from Thomas Lynch to CompuCom
Systems, Inc.*
10.30** Term Note dated December 23, 1998 from Thomas Lynch to Safeguard
Scientifics, Inc.*
10.31** Security Agreement dated December 23, 1998 between Thomas Lynch and
Safeguard Scientifics, Inc.*
10.32** Note Agreement dated October 6, 1998, between Safeguard Delaware, Inc.
and Donald R. Caldwell (27)(Exhibit 10.3)
11 Computation of Per Share Earnings * (included in Note 7 to the
Consolidated Financial Statements on page 50 of Safeguard's Annual
Report to Stockholders for year ended December 31, 1998, which page is
filed as part of Exhibit 13 hereto)
13 Pages 33 to 56 of Annual Report to Stockholders for year ended
December 31, 1998 *
21 List of Subsidiaries*
23.1 Consent of KPMG LLP, independent auditors*
23.2 Consent and Report of PricewaterhouseCoopers LLP, independent
auditors*
23.3 Consent and Report of PricewaterhouseCoopers LLP, independent
auditors*
<PAGE>
23.4 Consent and Report of PricewaterhouseCoopers LLP, independent
auditors*
23.5 Consent and Report of Arthur Andersen LLP, independent auditors*
23.6 Consent and Report of Deloitte & Touche LLP, independent auditors*
27 Financial Data Schedule for the year ended December 31, 1998*
- ----------
* 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.
(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.
(11) Filed on March 30, 1994 as an exhibit to Form 10-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.
(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.
(20) Filed on March 31, 1997 as an exhibit to Form 10-K (No. 1-5620) and
incorporated herein by reference.
(21) Filed May 15, 1997 as an exhibit to Form 10-Q (No. 1-5620) and
incorporated herein by reference.
(22) Filed August 14, 1997 as an exhibit to Form 10-Q (No. 1-5620) and
incorporated herein by reference.
(23) Filed November 14, 1997 as an exhibit to Form 10-Q (No. 1-5620) and
incorporated herein by reference.
(24) Filed March 31, 1998 as an exhibit to Form 10-K (No. 1-5620) and
incorporated herein by reference.
(25) Filed on May 15, 1998 as an exhibit to Form 10-Q (No. 1-5620) and
incorporated herein by reference.
<PAGE>
(26) Filed August 14, 1998 as an exhibit to Form 10-Q (No. 1-5620) and
incorporated herein by reference.
(27) Filed November 16, 1998 as an exhibit to Form 10-Q (No. 1-5620) and
incorporated herein by reference.
<PAGE>
Exhibit 10.12
EXECUTION COPY
================================================================================
STOCK EXCHANGE AGREEMENT
among
SAFEGUARD SCIENTIFICS, INC.
(a Pennsylvania corporation),
ALIGNE INCORPORATED
(a Pennsylvania corporation),
and
THE SHAREHOLDERS OF
ALIGNE INCORPORATED
================================================================================
<PAGE>
TABLE OF CONTENTS
Section Page
- ------- ----
INTRODUCTION.................................................................-1-
BACKGROUND...................................................................-1-
1. Definitions...........................................................-1-
2. Exchange of Company Shares............................................-5-
2.1. Exchange of Company Shares...................................-5-
2.2. Post-Closing Adjustment......................................-5-
3. Closing...............................................................-7-
3.1. Location; Date. ............................................-7-
3.2. Consummation of the Transactions; Deliveries.................-7-
3.3. Termination..................................................-7-
3.4 Pre-Closing Transactions.....................................-7-
4. Representations and Warranties of the Company and the Shareholders-7-
4.1. Organization and Standing....................................-7-
4.2. Capitalization and Share Ownership...........................-7-
4.3. Authority and Binding Effect.................................-8-
4.4. Validity of the Transactions.................................-8-
4.5. Restrictions.................................................-8-
4.6. Third-Party Options..........................................-8-
4.7. Financial Statements.........................................-8-
4.8. Books of Account.............................................-9-
4.9. Taxes........................................................-9-
4.10. Undisclosed Liabilities.....................................-10-
4.11. No Manufacturing............................................-10-
4.12. Accounts Receivable.........................................-10-
4.13. Title to Assets.............................................-11-
4.14. All Tangible Assets.........................................-11-
4.15. Condition of Assets.........................................-11-
4.16. Real Property...............................................-11-
4.17. Intellectual Property.......................................-11-
4.18. Contracts...................................................-12-
4.19. Employees...................................................-13-
4.20. Licenses....................................................-13-
4.21. Compliance with Law and Court Orders........................-13-
4.22. Claims......................................................-13-
4.23. Insurance...................................................-14-
4.24. Labor Matters...............................................-14-
4.25. Employee Benefit Plans......................................-14-
4.26. Transactions with Affiliates................................-16-
4.27. Absence of Certain Changes..................................-16-
4.28. Hazardous Substances........................................-17-
4.29. Additional Information......................................-17-
4.30. Corporate Records...........................................-17-
5. Representations and Warranties of Safeguard..........................-17-
5.1. Organization and Standing...................................-17-
5.2. Authority and Binding Effect................................-17-
-ii-
<PAGE>
5.3. Validity of Contemplated Transactions.......................-17-
5.4. Issuance of Safeguard Shares...............................-18-
5.5. Investment Intent...........................................-18-
6. Shareholder Matters..................................................-18-
6.1. Private Placement...........................................-18-
6.2. Certificate Legend..........................................-18-
6.3. Shareholder Sophistication..................................-18-
6.4. Tax Treatment...............................................-19-
6.5. Survival of Representation and Warranties...................-19-
7. Indemnification......................................................-19-
7.1. By the Shareholders.........................................-19-
7.2. By Safeguard................................................-20-
7.3. Procedure for Claims........................................-20-
7.4. Claims Period...............................................-21-
7.5. Third Party Claims..........................................-21-
7.6. Losses Net of Insurance, Etc................................-22-
8. Post-Closing Covenants...............................................-22-
8.1. Covenant Not to Compete.....................................-22-
8.2. Confidential Information....................................-22-
8.3. Nonsolicitation.............................................-22-
8.4. Hiring of the Company's Employees...........................-23-
8.5. Affiliates..................................................-23-
8.6. Injunctive Relief...........................................-23-
8.7. Certain Taxes and Expenses..................................-23-
8.8. Seller Party Affiliates.....................................-23-
9. Conditions Precedent to Obligations of Safeguard. ...................-23-
9.1. Required Consents...........................................-23-
9.2. Ancillary Documents.........................................-23-
9.3. Certificate.................................................-24-
9.4. Legal Opinion...............................................-24-
10. Conditions Precedent to Obligations of the Seller Parties............-24-
10.1. Ancillary Documents.........................................-24-
10.2. Directors...................................................-24-
10.3. Certificate.................................................-24-
11. Public Announcements.................................................-24-
12. Contents of Agreement................................................-24-
13. Amendment, Parties in Interest, Assignment, Etc......................-24-
14. Interpretation.......................................................-25-
15. Sole Remedy..........................................................-25-
16. Dispute Resolution...................................................-25-
16.1. Good-Faith Negotiations .................................-25-
16.2. Resolution of Disputes ..................................-26-
17. Notices..............................................................-26-
18. Governing Law........................................................-28-
19. Counterparts.........................................................-28-
STOCK EXCHANGE AGREEMENT
-iii-
<PAGE>
INTRODUCTION
This STOCK EXCHANGE AGREEMENT is dated as of February 26, 1999. The
parties are ALIGNE INCORPORATED, a Pennsylvania corporation (the "Company"),
those persons listed on Exhibit A (individually, each a "Shareholder" and
collectively, the "Shareholders"), being the owners of all of the issued and
outstanding shares of capital stock of the Company, and SAFEGUARD SCIENTIFICS,
INC., a Pennsylvania corporation ("Safeguard").
BACKGROUND
The Shareholders own all of the issued and outstanding shares of
common stock, par value $.01 per share, of the Company (the "Company
Shares"), with each Shareholder owning the number of Company Shares set
forth after such Shareholder's name in column B of Exhibit A. Safeguard
desires to exchange with the Shareholders, and the Shareholders desire to
exchange with Safeguard, the number of Company Shares set forth opposite
their respective names in column C of Exhibit A, on the terms and
conditions set forth herein in exchange for shares of common stock, par
value $.10 per share, of Safeguard ("Safeguard Shares"). The exchange of
the Company Shares by Safeguard is intended to constitute a reorganization
within the meaning of Section 368(a) of the Internal Revenue Code of 1986,
as amended (the "Code"). Certain other terms are used herein as defined
below in Section 1 or elsewhere in this Agreement.
NOW, THEREFORE, in consideration of the respective covenants,
representations and warranties herein contained, and intending to be legally
bound hereby, the parties hereto agree as follows:
1. Definitions
For convenience, certain terms used in more than one part of this
Agreement are listed in alphabetical order and defined or referred to below
(such terms as well as any other terms defined elsewhere in this Agreement shall
be equally applicable to both the singular and plural forms of the terms
defined).
"Accounts Receivable" means, as of any specified date, any trade accounts
receivable, notes receivable, bid or performance deposits, employee advances and
other miscellaneous receivables of the Company.
"Administrative Services Agreement" means the agreement for certain
services between the Company and Safeguard in the form of Exhibit B.
"Affiliates" means, with respect to a particular party, Persons
controlling, controlled by or under common control with that party, as well as
any officers, directors and majority-owned entities of that
4
<PAGE>
party and of its other Affiliates. For the purposes of the foregoing, ownership,
directly or indirectly, of 20% or more of the voting stock or other equity
interest shall be deemed to constitute control.
"Agreement" means this Stock Exchange Agreement, including all schedules,
annexes and exhibits hereto.
"Assets" means all of the Company's assets, properties, business, goodwill
and rights of every kind and description, real and personal, tangible and
intangible, wherever situated and whether or not reflected on the 1998 Balance
Sheet.
"Business" means the existing and prospective business, operations,
facilities and other Assets, financial condition, results of operations,
finances, markets, products, competitive position, raw materials and other
supplies, customers and customer relations and personnel of the Company.
"Business Day" means any calendar day which is not a Saturday, Sunday or
public holiday under the laws of the Commonwealth of Pennsylvania.
"Balance Sheet Date" is defined in Section 4.7.
"1998 Balance Sheet" is defined in Section 4.7.
"Charter Documents" means an entity's certificate or articles of
incorporation, certificate defining the rights and preferences of securities,
articles of organization, general or limited partnership agreement, certificate
of limited partnership, joint venture agreement or similar document governing
the entity.
"Closing" is defined in Section 3.1.
"Closing Date" is defined in Section 3.1.
"Confidential Information" means any information of a party, including a
formula, pattern, list, compilation, device, method, technique or process that
derives independent economic value, actual or potential, from not being
generally known to the public or to other Persons who can obtain economic value
from its disclosure or use.
"Contract" means any written or oral contract, agreement, lease, plan,
instrument or other document, commitment, arrangement, undertaking, practice or
authorization that is or may be binding on any Person or its property under
applicable Law.
"Copyrights" means copyrights, registered or unregistered, and copyright
applications on both published and unpublished works.
"Court Order" means any judgment, decree, injunction, order or ruling of
any federal, state, local or foreign court or governmental or regulatory body or
authority that is binding on any Person or its property under applicable Law.
"Customer Contracts" means all Contracts which provide for the performance
of services by the Company for its customers.
-5-
<PAGE>
"Default" means (i) a breach, default or violation, (ii) the occurrence of
an event that with or without the passage of time or the giving of notice, or
both, would constitute a breach, default or violation or (iii) with respect to
any Contract, the occurrence of an event that with or without the passage of
time or the giving of notice, or both, would give rise to a right of
termination, renegotiation or acceleration.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"GAAP" means generally accepted accounting principles, consistently
applied.
"Hazardous Substances" means any toxic or hazardous gaseous, liquid or
solid material or waste, pollution or contamination including (i) any "hazardous
substances" as defined by the federal Comprehensive Environmental Response,
Compensation and Liability Act, 42 U.S.C. ss.ss. 9601 et seq., (ii) any
"extremely hazardous substance," "hazardous chemical," or "toxic chemical" as
those terms are defined by the federal Emergency Planning and Community
Right-to-Know Act, 42 U.S.C. ss.ss. 11001 et seq., (iii) any "hazardous waste,"
as defined under the federal Solid Waste Disposal Act, as amended by the
Resource Conservation and Recovery Act, 42 U.S.C. ss.ss. 6901 et seq., (iv) any
"pollutant," as defined under the federal Water Pollution Control Act, 33 U.S.C.
ss.ss. 1251 et seq., as any of such laws in clauses (i) through (iv) exist as of
Closing, and (v) any regulated substance or waste under any Laws or Court Orders
that currently exist and are applicable to the operation of the Company; but
excluding office or maintenance supplies used in the operation of the Company.
"Inception Date" is defined in Section 4.9(e).
"Intellectual Property" means any Copyrights, Patents, Trademarks, Trade
Secrets, technology rights and licenses, franchises, inventions and other
similar property.
"Law" means any statute, law, ordinance, regulation, order or rule of any
federal, state, local or, foreign governmental or regulatory body or authority,
including those covering environmental, energy, safety, health, information
technology, transportation, bribery, recordkeeping, zoning, antidiscrimination,
antitrust, wage and hour, and price and wage control matters.
"Liability" means any direct or indirect liability, indebtedness,
obligation, expense, claim, loss, damage, deficiency, guaranty or endorsement of
or by any Person, absolute or contingent, accrued or unaccrued, due or to become
due, liquidated or unliquidated.
"Licenses" means any permits, licenses, franchises, registrations,
certificates, variances, exemptions, consents, approvals and other
authorizations granted by any governmental or regulatory body or authority.
"Liens" means any lien, mortgage, security interest, pledge, restriction
on transferability, defect of title or other claim, charge or encumbrance of any
nature whatsoever on any property or property interest.
-6-
<PAGE>
"Litigation" means any lawsuit, action, arbitration, administrative or
other proceeding, criminal prosecution or governmental investigation or inquiry.
"Material Adverse Effect" means a material adverse effect on the Company
or the Business, Assets, financial condition, results of operations, prospects,
liquidity, products, competitive position, customers and customer relations of
the Company or the Business.
"Ordinary course" or "ordinary course of business" means the ordinary
course of business that is consistent with past practices.
"Patents" means all patents and patent applications.
"Permitted Liens" means (i) liens for taxes, assessments or similar
charges; (ii) liens of mechanics, materialmen, warehousemen, carriers, or other
like liens securing obligations incurred in the ordinary course of the Business;
(iii) easements, rights of way, claims, objections, defects, reservations,
consents, tenancies, licenses and the like affecting any real property, in each
case of record, visible upon a physical inspection of the real property or
otherwise made known to Safeguard; (iv) liens, encumbrances, restrictions, and
adverse claims of any nature whatsoever which are not material in amount and
which do not adversely affect the Company's use of the property subject thereto;
and (v) any other liens, encumbrances, restrictions, and adverse claims of any
nature whatsoever which are set forth on Schedule 4.13.
"Person" means any natural person, corporation, partnership,
proprietorship, association, joint venture, trust or other legal entity.
"Plans" is defined in Section 4.24.
"Prime Rate" means the prime lending rate as reported in The Wall Street
Journal from time to time as the base rate on corporate loans by at least a
certain portion of the largest banks in the US.
"Rule 144" means Rule 144, 17 CFR ss. 230.144, promulgated under the
Securities Act.
"Securities Act" means the Securities Act of 1933, as amended.
"Seller Parties" means the Company and the Shareholders.
"Shareholders' Agreement" means the Shareholders' Agreement among the
Company and certain shareholders of the Company in the form of Exhibit C hereto.
"Taxes" shall mean all taxes, duties, charges, fees, levies or other
assessment imposed by any taxing authority, including income, gross receipts,
value-added, excise, withholding, personal property, real estate, sale, use, ad
valorem, license, lease, service, severance, stamp, transfer, payroll,
employment, customs, duties, alternative, add-on minimum, estimated and
franchise taxes (including any interest, penalties or additions attributable to
or imposed on or with respect to any such assessment).
"Tax Returns" means all reports, returns, statements (including estimated
reports, returns or statements) and other similar filings required to be filed
by a party with respect to any Taxes.
-7-
<PAGE>
"Trademarks" means the name "aligne incorporated," all fictitious business
names, trading names, registered and unregistered trademarks, registered and
unregistered service marks and applications for any of the foregoing.
"Trade Secrets" means all proprietary know-how, trade secrets, customer
and supplier lists, software (including any related source code or object codes
therefor or documentation relating thereto), technical information, data,
processes, technology, plan, drawings and blue prints owned, used or licensed
(as licensor or licensee) by a party, except for any such item that is generally
available to the public.
"Transaction Documents" means this Agreement, the Administrative Services
Agreement and the Shareholders' Agreement.
"Transactions" means the purchase and sale of the Company Shares by the
Shareholders to Safeguard as described herein and the other transactions
contemplated by the Transaction Documents.
"US" means the United States of America.
2. Exchange of Company Shares.
2.1. Exchange of Company Shares. Subject to the terms and conditions
hereinafter set forth and on the basis of and in reliance upon the
representations, warranties, covenants and agreements set forth herein, at the
Closing each Shareholder shall exchange with Safeguard, and Safeguard shall
exchange with each Shareholder, the number of Company Shares to be exchanged by
such Shareholder set forth in column C of Exhibit A in exchange for the delivery
to such Shareholder of a number of fully paid and non-assessable Safeguard
Shares equal to the Fixed Number (hereinafter defined) for such Shareholder and,
if and to the extent payable pursuant to Section 2.2 hereof, the Contingent
Number (hereinafter defined) for such Shareholder. The Fixed Number for a
Shareholder shall mean the number set forth opposite such Shareholder's name in
column E of Exhibit A. The Contingent Number for a Shareholder shall mean the
number set forth opposite such Shareholder's name in column F of Exhibit A.
2.2. Post-Closing Adjustment.
(a) At the Closing, Safeguard shall issue and register in the name
of each Shareholder three certificates, the first representing the Fixed Number
of Safeguard Shares for such Shareholder, the second representing one-half of
the Contingent Number of Safeguard Shares for such Shareholder and the third
representing the remaining one-half of the Contingent Number of Safeguard Shares
for such Shareholder. Each Shareholder shall promptly deliver to Safeguard the
two stock certificates evidencing in the aggregate the Contingent Number of
Safeguard Shares for such Shareholder, together with a stock power, duly signed
by such Shareholder in blank. Safeguard shall hold such certificates and powers
as custodian and during the period that such Contingent Number of Safeguard
Shares are held by Safeguard, such Shareholder shall have the right to receive
all dividends and distributions with respect to such Contingent Number of
Safeguard Shares and shall be entitled to vote such Contingent Number of
Safeguard Shares and to exercise all other rights with respect to such
Contingent Number of Safeguard Shares except the right to possession and
transfer or alienation.
-8-
<PAGE>
(b) If the Company fails to recognize, in accordance with GAAP,
gross revenues during the year ending December 31, 1999 of $6,500,000 (the "Year
1 Financial Targets"), all of the Contingent Number of Safeguard Shares for all
Shareholders shall promptly be transferred to Safeguard and the Shareholders
shall have no further rights with respect thereto. If the Company achieves the
Year 1 Financial Targets, Safeguard shall deliver to each Shareholder one-half
of the Contingent Number of Safeguard Shares for such Shareholder.
(c) If the Company fails to recognize, in accordance with GAAP,
gross revenues during the year ending December 31, 2000 of $7,000,000 (the "Year
2 Financial Targets"), the remaining one-half of the Contingent Number of
Safeguard Shares for all Shareholders shall promptly be transferred to Safeguard
and the Shareholders shall have no further rights with respect thereto. If the
Company achieves the Year 2 Financial Targets, Safeguard shall deliver to each
Shareholder the remaining one-half of the Contingent Number of Safeguard Shares
for such Shareholder then held by Safeguard.
(d) All Safeguard Shares or other securities received by Safeguard
with respect to the Contingent Number of Safeguard Shares held by Safeguard
pursuant to this Section 2.2 as a result of stock splits, stock dividends, stock
combinations, stock reclassifications and similar transactions shall become a
part of the of the Contingent Number of Safeguard Shares and all delivery
obligations under Sections 2.2(b) and 2.2(c) shall be appropriately adjusted to
reflect all stock splits, stock dividends, stock combinations, stock
reclassifications and similar transactions.
(e) Notwithstanding anything to the contrary herein, if at any time
during the period commencing on the date hereof and ending on December 31, 1999
there occurs a Company Control Event (hereinafter defined), the Company shall be
deemed to have satisfied both the Year 1 Financial Targets and the Year 2
Financial Targets and Safeguard shall, as promptly after the occurrence of such
Company Control Event as possible, deliver to each Shareholder all of the
Contingent Number of Safeguard Shares of such Shareholder then held by Safeguard
hereunder. Notwithstanding anything to the contrary herein, if at any time
during the period commencing on January 1, 2000 and ending on December 31, 2000
there occurs a Company Control Event, the Company shall be deemed to have
satisfied the Year 2 Financial Targets and Safeguard shall, as promptly after
the occurrence of such Company Control Event as possible, deliver to each
Shareholder the Contingent Number of Safeguard Shares of such Shareholder to
which such Shareholder would be entitled under Section 2.2(c) hereof. A "Company
Control Event" shall be deemed to have occurred if (1) there is an Approved Sale
(as defined in the Shareholders' Agreement) to a Person who is not an Affiliate
of Safeguard or a Permitted Transferee or (2) Safeguard together with its
Affiliates shall cease to own at least a majority of the Stock (as defined in
the Shareholders' Agreement) of the Company (determined on a fully-diluted
basis, but excluding from the number of such fully-diluted shares, all shares of
Common Stock and options issued or granted to employees of the Company after the
date hereof). Any delivery of shares under this paragraph (e) shall terminate
all obligations of Safeguard under Section 2.2(b) and Section 2.2(c).
3. Closing.
3.1. Location; Date. The closing for the Transactions (the "Closing")
shall be held at the offices of Morgan, Lewis & Bockius LLP in Philadelphia on
the date hereof or at such other date and place as may be mutually agreed by the
parties (the "Closing Date").
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3.2. Consummation of the Transactions; Deliveries. At the Closing, subject
to the provisions of this Agreement, each Shareholder shall deliver to
Safeguard, free and clear of all Liens, the certificates for the Company Shares
to be sold by such Shareholder in negotiable form, duly endorsed in blank, or
with separate stock transfer powers attached thereto and signed in blank, in
exchange for (a) the delivery by Safeguard to such Shareholder of certificate
evidencing Safeguard Shares to which such Shareholder is entitled pursuant to
Section 2.1 hereof, subject to such Shareholder's obligation to deliver
certificates evidencing the Retained Shares to Safeguard in accordance with
Section 2.2. At the Closing, the Shareholders will make available to Safeguard
the written resignations of all such directors and officers of the Company as
Safeguard shall direct in writing prior to the Closing. At the Closing, the
Shareholders shall also deliver to Safeguard, and Safeguard shall deliver to the
Shareholders, the certificates, opinions and other instruments and documents
referred to in Sections 9 and 10.
3.3. Termination. In the event that the Closing shall not have taken place
on or before February 26, 1999 or such later date as shall be mutually agreed to
in writing by Safeguard and the Shareholders, all of the rights and obligations
of the parties under this Agreement shall terminate without Liability, except
for Liability if the Closing does not occur and this Agreement terminates by
reason of a default or breach by any party hereto.
3.4. Pre-Closing Transactions. The parties acknowledge that on February
25, 1999, the Company declared and paid a dividend to the Shareholders, in
respect of the Company Shares held by such Shareholders, the aggregate amount of
$1,573,438. Contemporaneously on February 25, 1999, Safeguard made a loan to the
Company in the initial aggregate principal amount of $2,000,000, which was
evidenced by a promissory note of the Company, dated February 25, 1999. All
representations and warranties contained herein are hereby modified to the
extent necessary to disclose such distribution and loan.
4. Representations and Warranties of the Company and the Shareholders. The
Company and the Shareholders hereby jointly and severally represent and warrant
to Safeguard as follows:
4.1. Organization and Standing. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the
Commonwealth of Pennsylvania, having full power and authority to carry on the
Business as it has been and is now being conducted and to own, lease and operate
the Assets. The Company is duly qualified to do business and is in good standing
in every jurisdiction in which the Business or the character of the Assets
requires such qualification, all of which jurisdictions are disclosed in
Schedule 4.1. The Company has no Subsidiaries and no stock or other equity or
ownership interest (whether controlling or not) in any corporation, association,
partnership, joint venture, trust or other legal entity.
4.2. Capitalization and Share Ownership. The Company's authorized capital
stock consists of 1,000 shares of common stock, par value $.01 per share. There
are 300 shares of the Company's common stock presently outstanding (previously
defined as the "Company Shares"), which Company Shares are owned by the
Shareholders in the respective amounts set forth opposite their names in column
A of Exhibit A, free and clear of any Liens. All of the Company Shares have been
duly authorized and validly issued, are fully paid and nonassessable, were not
issued in violation of the terms of any Contract binding upon the Company, and
were issued in compliance with all applicable Charter Documents of the Company
and all applicable federal and state securities or "blue sky" laws and
regulations. No equity securities of the Company, other than the Company Shares,
are issued or outstanding. There are, and have been, no preemptive rights with
respect to the issuance of the Company Shares. Except as set forth
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in Schedule 4.2, there are: (a) no existing Contracts, subscriptions, options,
warrants, calls, commitments or rights of any character to purchase or otherwise
acquire from any Shareholder or the Company at any time, or upon the happening
of any stated event, any capital stock or other securities of the Company,
whether or not presently issued or outstanding; (b) no outstanding securities of
the Company that are convertible into or exchangeable for capital stock or other
securities of the Company; and (c) no Contracts, subscriptions, options,
warrants, calls, commitments or rights to purchase or otherwise acquire from the
Company any such convertible or exchangeable securities.
4.3. Authority and Binding Effect. Each of the Company and the
Shareholders has the full power and authority to execute, deliver and perform
this Agreement and the other Transaction Documents and, except as set forth in
Schedule 4.3, has taken all actions necessary to secure all approvals required
in connection therewith. The execution and delivery of this Agreement and the
consummation of the Transactions will not contravene or violate the Charter
Documents of the Company. This Agreement constitutes, and the other Transaction
Documents will constitute, the legal, valid and binding obligation of each of
the Company and the Shareholders, as the case may be, enforceable against each
of them in accordance with their respective terms.
4.4. Validity of the Transactions. Except for any consents specified in
Schedule 4.4 (the "Required Consents"), neither the execution and delivery of
this Agreement by the Company or any Shareholder nor the consummation of the
Transactions (i) will contravene or violate any Law or Court Order which is
applicable to the Company or any Shareholder, (ii) will result in a Default
under, or require the consent or approval of any party to, any Contract
(including any Customer Contract) relating to the Business or the Assets or to
or by which the Company or any Shareholder is a party or otherwise bound or
affected, or (iii) require the Company or any Shareholder to notify or obtain
any License from any federal, state, local or other court or governmental agency
or body or from any other regulatory authority, except in the case of any of the
foregoing clauses (i)-(iii) for any contravention, violation, failure to give
notice or obtain, or Default which, in the aggregate, has not had and cannot
reasonably be expected to have, a Material Adverse Effect.
4.5. Restrictions. Neither the Company nor any Shareholder is a party to
any Contract (including any Customer Contract) or subject to any restriction or
any Court Order or Law which adversely affects the Company, the Assets or the
Business or affects or restricts the ability of the Company or any Shareholder
to consummate the Transactions.
4.6. Third-Party Options. There are no existing Contracts, options,
commitments or rights with, to or in any third party to acquire the Company, any
of the Assets or any interest therein or in the Business.
4.7. Financial Statements. The Company and the Shareholders have delivered
to Safeguard (a) the Company's audited balance sheet (the "1998 Balance Sheet")
at December 31, 1998 (the "Balance Sheet Date"), (b) its related statements of
income, changes in Shareholders' equity and statements of cash flow for the
fiscal period then ended, and (c) all related notes and schedules (the "1998
Financial Statements"). Except as described in Schedule 4.7, the 1998 Financial
Statements were prepared in accordance with GAAP and, subject to any
qualifications set forth in the applicable notes and schedules, fairly present
the financial position and results of operations of the Company at the dates and
for the periods covered. Except as described in Schedule 4.7, all Liabilities of
the Company at the Balance Sheet Date required to be reflected or reserved for
by GAAP are fully reflected or reserved for in the 1998 Balance Sheet.
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4.8. Books of Account. The books of account of the Company fairly reflect
in all material respects, in accordance with GAAP, (a) all transactions relating
to the Company and (b) all items of income and expense, assets and liabilities
and accruals relating to the Company. The Company has not engaged in any
material transaction, maintained any bank account or used any corporate funds
except for transactions, bank accounts and funds which have been and are
reflected in the normally maintained books and records of the Company.
4.9. Taxes.
(a) The Company has timely filed all material Tax Returns due on or
before the Closing Date and all such Tax Returns are true, correct and complete
in all material respects.
(b) The Company has paid in full on a timely basis all material
Taxes owed by it, whether or not shown on any Tax Return.
(c) The amount of the Company's liability for unpaid Taxes as of the
Balance Sheet Date did not exceed the amount of the current liability accruals
for Taxes (excluding reserves for deferred Taxes) shown on the 1998 Balance
Sheet, and the amount of the Company's liability for unpaid Taxes for all
periods or portions thereof ending on or before the Closing Date will not exceed
the amount of the current liability accruals for Taxes (excluding reserves for
deferred Taxes) as such accruals are reflected on the books and records of the
Company on the Closing Date.
(d) There are no ongoing examinations or claims against the Company
for Taxes, and no written notice of any audit, examination or claim for Taxes,
whether pending or threatened, has been received.
(e) The Company has a taxable year ended on December 31, in each
year since its inception on December 20, 1996 (the "Inception Date").
(f) The Company currently utilizes the cash method of accounting for
income Tax purposes and such method of accounting has not changed since the
Inception Date.
(g) The Company has withheld and paid over to the proper taxing
authorities all material Taxes required to have been withheld and paid over, and
complied in all material respects with all information reporting and backup
withholding requirements, including maintenance of required records with respect
thereto.
(h) Copies of (i) any Tax examinations, (ii) extensions of statutory
limitations for the collection or assessment of Taxes and (iii) the material Tax
Returns of the Company for the last three fiscal years have been delivered to
Safeguard.
(i) There are (and as of immediately following the Closing there
will be) no Liens on the Assets of the Company relating to or attributable to
Taxes.
(j) There is no basis for the assertion of any claim relating to or
attributable to Taxes which, if adversely determined, would result in any
material Lien on the Assets of the Company or otherwise have a Material Adverse
Effect.
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(k) There are no Contracts, including the provisions of this
Agreement, covering any employee or former employee of the Company that,
individually or collectively, could give rise to any payment (or portion
thereof) that would not be deductible pursuant to Sections 280G, 404 or 162 of
the Code.
(l) The Company is not, and has not been at any time, a party to a
Tax sharing, Tax indemnity or Tax allocation agreement, and the Company has not
assumed the Tax liability of any other person under any Contract.
(m) The Company has, since the Inception Date, been an S corporation
within the meaning of Section 1361 of the Code. The Company does not have a net
recognized built-in gain within the meaning of Section 1374 of the Code
4.10. Undisclosed Liabilities. Except as disclosed in Schedule 4.10, the
Company does not have any Liabilities except for:
(a) those Liabilities adequately and specifically set forth or
reserved for on the 1998 Balance Sheet and not heretofore paid or discharged;
(b) those Liabilities arising in the ordinary course of business
under any Contract (including Customer Contracts) specifically disclosed on a
Schedule to this Agreement (or not required to be disclosed because of the term
or amount involved);
(c) those Liabilities incurred in the ordinary course of business
since the Balance Sheet Date and not heretofore paid or discharged; and
(d) as disclosed in writing to Safeguard since January 1, 1999 and
prior to the date hereof.
4.11. No Manufacturing. The Company does not manufacture and has not
manufactured any product for sale.
4.12. Accounts Receivable. All Accounts Receivable as set forth on the
1998 Balance Sheet or arising since the 1998 Balance Sheet Date (a) have arisen
only in the ordinary course of business for goods sold and delivered or services
performed and (b) are collectible in full at the recorded amounts thereof, net
of any allowance for doubtful accounts specifically established therefor, (free
of any, and subject to no, defenses, setoffs or counterclaims) in the ordinary
course of business (without resort to Litigation or assignment to a collection
agency), but in no event later than 180 days after the Closing Date.
4.13. Title to Assets. The Company owns outright all of the Assets,
including the assets and properties set forth on the 1998 Balance Sheet (except
for such as may have been disposed of in the ordinary course of business since
the Balance Sheet Date), free and clear of all Liens, except Permitted Liens and
for property leased pursuant to leases disclosed on any Schedule hereto.
4.14. All Tangible Assets. Schedule 4.14 sets forth accurate lists and
summary descriptions of all tangible Assets owned by the Company where the value
of an individual item exceeds $1,000 or
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where an aggregate of similar items exceeds $5,000, and of all leases, Licenses
and other Contracts to which the Company is a party or is otherwise bound which
relate in whole or in part to the foregoing. In Schedule 4.14, the Assets listed
have been grouped by type and assigned location.
4.15. Condition of Assets. The equipment and all other tangible assets and
properties which are part of the Assets are in good operating condition and
repair and are usable in the ordinary course of the Business and conform in all
material respects to all applicable Laws relating to their use and operation as
such Assets are currently used in the conduct of the Business. Except pursuant
to leases described on any Schedule hereto, no person other than the Company
owns any vehicles, equipment or other tangible Assets situated on the facilities
used by the Company in the Business (other than immaterial items of personal
property owned by the Company's employees) which are necessary to the operation
of the Business.
4.16. Real Property. All real property (including, all interests in and
rights to real property) and improvements located thereon which are leased by
the Company are listed on Schedule 4.16. The Company has no ownership interest
of any kind in, or rights to, any real property or improvements, except solely
for leasehold interests in the real property and improvements listed on Schedule
4.16 pursuant to the leases described on Schedule 4.16.
4.17. Intellectual Property. (a) Schedule 4.17 contains a complete and
accurate list and summary description of (i) all Intellectual Property owned by
or used in the Business and (ii) all Contracts relating to the Intellectual
Property to which the Company is a party or by which the Company is bound,
except for any License implied by the sale of a product and perpetual, paid-up
licenses for software programs with a value of less than $5,000 under which the
Company is licensee. The Intellectual Property and Contracts relating to the
Intellectual Property constitute all of the Intellectual Property and Contracts
relating to the Intellectual Property that are necessary for the operation of
the Business as it is currently conducted. Except as described on Schedule 4.17
and except for technology supplied by Safeguard, the Company is the owner of all
right, title and interest in and to each item of the Intellectual Property, free
and clear of any Liens, or has the right to use all of the Intellectual
Property. To the knowledge of any Seller Party, no Intellectual Property is
infringed or has been challenged or threatened in any way. No Seller Party has
any knowledge that any Intellectual Property used by the Company infringes or is
alleged to infringe any rights of any other Person.
(b) The Company has used its best efforts to ensure that as of the
Closing Date, all of the software, databases, computer firmware, computer
hardware (whether general or special purpose), and other similar or related
items of automated, computerized, and/or software system(s) that are used or
relied on by the Company in the conduct of its business ("Company Technology")
will not malfunction, will not cease to function, will not generate incorrect
data, and will not provide incorrect results when processing, providing and/or
receiving date-related data with respect to any dates after December 31, 1999,
to the extent that the other information technology used in conjunction with the
Company Technology is itself Year 2000 compliant and accurately processes and
exchanges date/time data.
4.18. Contracts.
(a) Schedule 4.18 sets forth complete and accurate lists or
descriptions of all Customer Contracts, except for Customer Contracts lasting
for a period of less than 30 days or involving amounts of less than $5,000, and
all forms of Customer Contracts are attached to Schedule 4.18.
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(b) Except as described in Schedule 4.18 or pursuant to leases which
are reflected in the 1998 Financial Statements, none of the Assets is leased by
the Company from any third party, whether affiliated or unaffiliated with the
Company.
(c) Except as listed in Schedule 4.18, the Company is not a party to
any:
(i) Contract with any present or former employee or consultant;
(ii) Contract for the future purchase of, or payment for, supplies,
products, Intellectual Property or services or the use thereof,
excluding however unfulfilled purchase orders for a period of less
than 30 days or involving amounts of less than $5,000;
(iii) Contract to sell or supply products, or to perform services,
excluding however unfulfilled purchase orders for a period of less
than 30 days or involving amounts of less than $5,000;
(iv) Representative or sales agency Contract;
(v) Contract limiting or restraining it from engaging or competing
in any lines or business with any Person;
(vi) license, franchise, distributorship or other similar agreement;
or
(vii) material Contract not otherwise disclosed herein, excluding
however unfulfilled purchase orders for a period of less than 30
days or involving amounts of less than $5,000.
(d) All of the Contracts (including all Customer Contracts) to which
the Company is a party or by which it or any of the Assets is bound or affected
are valid, binding and enforceable in accordance with their terms. The Company
has fulfilled, and have taken all action necessary to enable it to fulfill when
due, all of their obligations under each of such Contracts. Except as may be
disclosed on Schedule 4.18, all parties to such Contracts have complied with the
provisions thereof in all material respects, no party is in Default thereunder
in any material respect and no notice of any claim of Default has been given to
the Company. To the knowledge of any Seller Party, there are no provisions of,
or developments materially affecting, any such Contract which might prevent the
Company from realizing the benefits thereof whether before or after the
completion of the Transactions. With respect to any of such Contracts that are
leases, the Company has not received any notice of cancellation or termination
under any material option or right reserved to the lessor, or any notice of
material Default, thereunder.
4.19. Employees. Schedule 4.19 sets forth the names and current annual
salary rates or current hourly wages of all present employees of the Company,
together with the average number of hours worked per week, the date of the last
salary increase, the date of commencement of employment of each employee with
the Company or its predecessor, and a summary of salary, bonuses and other
compensation, if any, paid or payable to each of such persons for or in respect
of that portion of the 1999 calendar year ending on January 31, 1999. Schedule
4.19 also sets forth the 1998 earnings for each of such employees as reflected
on Form W-2 for the 1998 calendar year.
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4.20. Licenses. Schedule 4.20 sets forth a complete list of all material
Licenses used in the operation of the Business or otherwise held by the Company
other than arrangements with Safeguard. The Company owns, possesses or lawfully
uses in the operation of its Business all Licenses which are necessary to
conduct the Business as now or previously conducted or to the ownership of the
Assets, free and clear of all Liens except Permitted Liens. The Company is not
in Default in any material respect, nor has it received any notice of any claim
of Default, with respect to any such License. Except as otherwise governed by
Law, all such Licenses are renewable by their terms or in the ordinary course of
business without the need to comply with any special qualification procedures or
to pay any amounts other than routine filing fees and, except as disclosed in
Schedule 4.20, will not be adversely affected by the completion of the
Transactions. No present or former shareholder, director, officer or employee of
the Company, any Affiliates of any of them, or any other Person owns or has any
proprietary, financial or other interest (direct or indirect) in any License
which the Company owns, possesses or uses.
4.21. Compliance with Law and Court Orders. The Company is not in
violation of any Law or Court Order in any material respect, and the Assets have
not been used or operated by the Company or any other Person in violation of any
Law or Court Order. All Court Orders to which the Company is a party or subject
are listed in Schedule 4.21. The Company has made all filings or notifications
required to be made by them under any Laws applicable to the Company, the
Business or the Assets. Neither the Company nor any Shareholder, and to the
knowledge of any Seller Party, no officer, employee or agent of, or any
consultant to the Company (a) has used any corporate funds of the Company to
make any payment to any officer or employee of any government, or to any
political party or official thereof, where such payment either (i) was, at the
time, unlawful under laws applicable thereto; or (ii) was, at the time, unlawful
under the Foreign Corrupt Practices Act of 1977, as amended; or (b) has made or
received an illegal payment, bribe, kickback, political contribution or other
similar questionable illegal payment in connection with the operation of the
Business.
4.22. Claims. Except as disclosed in Schedule 4.22: (a) there is no
Litigation pending or threatened against the Company, the Business or the
Assets; (b) there is no dispute or disagreement pending or threatened in writing
between the Company and any of its customers or suppliers; (c) no Seller Party
knows of any event that has occurred, and no claim has been asserted, that might
result in Litigation against the Company, the Business or the Assets; and (d) to
the knowledge of any Seller Party, there is no reasonable basis for any such
claim. All pending or threatened Litigation is fully covered by insurance except
to the extent described in Schedule 4.22.
4.23. Insurance. Schedule 4.23 hereto lists all policies of fire,
liability, workmen's compensation, life, property and casualty and other
insurance owned or held by the Company, copies of which have been made available
to Safeguard. All such policies are in full force and effect and the Company has
not committed any material Default thereunder. No written notice of cancellation
or non-renewal has been received by the Company with respect to such policies.
4.24. Labor Matters. The Company has not, has not had or is not
negotiating any collective bargaining agreements with any labor union or other
representative of employees. No strike, slowdown, picketing or work stoppage by
any union or other group of employees against the Company or the Assets wherever
located, and no secondary boycott with respect to their products, lockout by
them of any of their employees or any other labor trouble or other occurrence,
event or condition of a similar character, has occurred or been threatened.
4.25. Employee Benefit Plans.
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(a) Attached hereto as Schedule 4.25 are a list and complete and
accurate copies of all employee benefit plans, all employee welfare benefit
plans, all employee pension benefit plans, all multiemployer plans and all
multiple employer welfare arrangements (as defined in Sections 3(3), (1),
(2), (37) and (40), respectively, of ERISA, which are currently maintained
and/or sponsored by the Company, or to which the Company currently
contributes, or has or has had an obligation to contribute in the past,
present or future (including, any such plan or arrangement created by any
agreements, including any employment agreements and any other agreements
containing "golden parachute" provisions and deferred compensation agreements
disclosed in Schedule 4.18), together with copies of any trusts related
thereto and a classification of employees covered thereby (collectively, the
"Plan"). Schedule 4.25 sets forth each plan or arrangement that would have
been an employee pension or welfare benefit plan but for its termination
within the past three years.
(b) All Plans are in material compliance with all applicable
provisions of ERISA and the regulations issued thereunder, as well as with all
other applicable Laws, and have been administered, operated and managed in
substantial accordance with their governing documents. All Plans that are
intended to qualify (the "Qualified Plans") under Section 401(a) of the Code
have been determined by the Internal Revenue Service to be so qualified, and
copies of the current plan determination letters, most recent actuarial
valuation reports, if any, most recent Form 5500, or, as applicable, Form
5500-C/R filed with respect to each such Qualified Plan or employee welfare
benefit plan and most recent trustee or custodian report have been made
available to Safeguard. All reports and other documents required to be filed
with any governmental agency or distributed to plan participants or
beneficiaries (including, annual reports, summary annual reports, actuarial
reports, PBGC-1 Forms, audits or Tax Returns) have been timely filed or
distributed. None of any Shareholder or, to the knowledge of any Seller Party,
any Plan or the Company has engaged in any transaction prohibited under the
provisions of Section 4975 of the Code or Section 406 of ERISA for which an
exemption is not available. No Plan has incurred an accumulated funding
deficiency, as defined in Section 412(a) of the Code and Section 302(a)(2) of
ERISA; and the Company does not currently have (nor at the Closing Date will
have) any Liability whatsoever (including being subject to any statutory Lien to
secure payment of any such Liability), to the Pension Benefit Guaranty
Corporation ("PBGC") with respect to any such Plan under Title IV of ERISA or to
the Internal Revenue Service for any excise tax or penalty with respect to any
such Plan; and neither the Company nor any member of a "controlled group" with
the Company (as defined in ERISA Section 4001(a)(3)) currently has (or at the
Closing Date will have) any obligation whatsoever to contribute to any
"multiemployer pension plan" (as defined in ERISA Section 4001(a)(14), nor has
any withdrawal Liability whatsoever (whether or not yet assessed) arising under
or capable of assertion under Title IV of ERISA (including, Sections 4201, 4202,
4203, 4204, or 4205 thereof) been incurred directly or indirectly by the
Company.
(c) Except as set forth on Schedule 4.25:
(i) there have been no terminations, partial terminations or
discontinuance of contributions to any Qualified Plan without notice
to and issuance of a favorable determination letter by the Internal
Revenue Service;
(ii) no Plan which is subject to the provisions of Title IV of
ERISA has been terminated;
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(iii) there have been no "reportable events" (as that phrase
is defined in Section 4043 of ERISA) with respect to any Plan which
were not properly reported;
(iv) the valuation of assets of any Qualified Plan subject to
Title IV of ERISA, as of the Closing Date, shall exceed the
actuarial present value of all accrued pension benefits under such
Qualified Plan in accordance with the assumptions contained in the
Laws of the PBGC governing the funding of terminated defined benefit
plans;
(v) with respect to Plans which qualify as "group health
plans" under Section 5000(b)(1) of the Code and Sections 607(1) and
733(a) of ERISA and related regulations, the Company has materially
complied (and on the Closing Date will have complied) with all
reporting, disclosure, notice, election, coverage and other benefit
requirements imposed under Sections 4980B and 9801-9833 of the Code
and Sections 601-734 of ERISA as and when applicable to such plans,
and the Company does not have any direct or indirect material
liability or is (and will be) subject to any material loss,
assessment, excise tax, penalty, loss of federal income tax
deduction or other sanction, arising on account of or in respect of
any direct or indirect failure by the Company, at any time prior to
the Closing Date, to comply with any such federal or state
requirement, which is capable of being assessed or asserted before
or after the Closing Date directly or indirectly against the Company
or the Shareholders with respect to such group health plans;
(vi) the Company is not now nor within the past five years has
it been a member of a "controlled group" as defined in ERISA Section
4001(a)(14);
(vii) there is no pending or, to the knowledge of any Seller
Party, threatened Litigation, investigation, or disputed claim,
settlement or adjudication with respect to any Plan, or (other than
routine claims for benefits) with respect to any fiduciary,
administrator, party in interest or sponsor thereof (in their
capacities as such);
(viii) as required in accordance with GAAP, the Financial
Statements as of the Balance Sheet Date reflect the approximate
total pension, medical and other benefit expense for all Plans as of
the date thereof; and
(ix) the Company has not incurred Liability under Section
4062, 4063 or 4064 of ERISA.
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4.26. Transactions with Affiliates. Except as disclosed in Schedule 4.26,
no Affiliate of the Company or any Shareholder has: (a) borrowed money or loaned
money to the Company which remains outstanding; or (b) any material contractual
arrangements with the Company.
4.27. Absence of Certain Changes. Except as contemplated by this Agreement
or as set forth on Schedule 4.27, since the Balance Sheet Date, the Company has
conducted its Business in the ordinary course and there has not been with
respect to its Business:
(a) any change that has had or is reasonably likely to have a
Material Adverse Effect;
(b) any increase in the compensation payable or to become payable to
any director or non-manager employee, except for increases for such directors or
employees made in the ordinary course of business;
(c) any other change in any employment or consulting arrangement,
except for such changes made in the ordinary course;
(d) any payment to any agent or management employee not in
accordance with such agent's or employee's 1998 compensation levels;
(e) any sale, assignment or transfer of Assets, or any additions to
or transactions involving any Assets, other than those made in the ordinary
course of business;
(f) other than in the ordinary course of business, any waiver or
release of any claim or right or cancellation of any debt held;
(g) any distributions or payments to any Affiliate of the Company,
except as set forth in Section 3.4;
(h) any capital expenditure involving in any individual case more
than $5,000;
(i) declaration or payment of any dividend or other distribution on
its capital stock; or
(j) any incurrence of any debts for money borrowed.
4.28. Hazardous Substances. Except as disclosed in Schedule 4.28, the
Company now generates, transports, stores, disposes of or treats, or has ever
generated, transported, stored, disposed of or treated, any regulated quantities
of any Hazardous Substance.
4.29. Additional Information. Schedule 4.29 contains, to the extent not
described in some other Schedule hereto, or in the case of subsections (a) and
(b) hereof to the extent not made available, accurate lists and summary
descriptions of the following:
(a) the names of all present officers and directors of the Company;
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(b) the names and addresses of every bank and other financial
institution in which the Company maintains an account (whether checking, savings
or otherwise), lock box or safe deposit box, and the account numbers and names
of Persons having signing authority or other access thereto;
(c) the names of all Persons authorized to borrow money or incur or
guarantee indebtedness on behalf of the Company;
(d) the names of all Persons holding powers of attorney from the
Company and a summary statement of the terms thereof; and
(e) all names under which the Company has conducted any Business or
which it has otherwise used since the Inception Date.
4.30. Corporate Records. The minute book of the Company is current and
contain correct and complete copies of all Charter Documents of the Company,
including all amendments thereto and restatements thereof, and of all minutes of
meetings, resolutions and other actions and proceedings of its shareholders and
board of directors and all committees thereof, duly signed by the secretary or
an assistant secretary, and the stock record book of the Company is also
current, correct and complete and reflects the issuance of all of the Company
Shares to the Shareholders.
5. Representations and Warranties of Safeguard. Safeguard hereby
represents and warrants to the Company and the Shareholders as follows:
5.1. Organization and Standing. Safeguard is a corporation duly organized,
validly existing and in good standing under the laws of the Commonwealth of
Pennsylvania, having all requisite corporate power and authority to perform its
obligations under this Agreement.
5.2. Authority and Binding Effect. Safeguard has full power and authority
to execute, deliver and perform this Agreement and the other Transaction
Documents and has taken all actions necessary to secure all approvals required
in connection therewith. The execution, delivery and performance of this
Agreement and the consummation of the Transactions by Safeguard has been duly
authorized by all necessary corporation action. This Agreement constitutes the
legal, valid and binding obligation of Safeguard, enforceable against it in
accordance with its terms.
5.3. Validity of Contemplated Transactions. Neither the execution and
delivery of this Agreement by Safeguard nor the consummation of the Transactions
by Safeguard will contravene or violate any Court Order which is applicable to
Safeguard, or the Charter Documents of Safeguard, or will result in a Default
under any Contract to which Safeguard is a party or by which it is otherwise
bound.
5.4. Issuance of Safeguard Shares. The Safeguard Shares to be issued
pursuant to this Agreement will, upon delivery to the Shareholders, be duly
authorized and validly issued, fully paid and nonassessable.
5.5. Investment Intent. Safeguard is acquiring the shares of the Company
for investment purposes only, for its own account and not as a nominee or agent
for any other Person, and not with a view to or for resale in connection with
any distribution thereof within the meaning of the Securities Act, and can bear
the economic risk of an investment in the shares of the Company and can afford a
complete loss of such investment.
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6. Shareholder Matters.
6.1. Private Placement. Each of the Shareholders represents and warrants
that if the Transactions are consummated, he (a) will acquire the Safeguard
Shares for his own account, as principal and not on behalf of other persons and
for investment and not with a view to the resale or distribution of all or any
part of such shares; (b) understands that the Safeguard Shares are "restricted
securities" within the meaning of the rules and regulations promulgated under
the Securities Act, and that a stop-transfer instruction will be issued by
Safeguard to its transfer agent with respect to the Safeguard Shares, that the
Safeguard Shares will not be initially registered under the Securities Act and
cannot be sold by him unless they are registered under the Securities Act or
unless an exemption from registration is available, and that Safeguard has no
obligation to register the Safeguard Shares under the Securities Act; (c) is
aware that Rule 144 affords a limited exemption from registration under the Act
for the public resale of restricted securities and that under the terms of Rule
144, as currently in effect, the Safeguard Shares may be sold to the public
without registration thereof only after a period of one year has elapsed from
the date of the exchange and then only in limited amounts upon compliance with
all of the other requirements of Rule 144 and the Securities Act.
6.2. Certificate Legend. Each of the Shareholders acknowledges that the
certificate representing the Safeguard Shares will bear the following legend:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, AND APPLICABLE STATE SECURITIES
LAWS. SUCH SHARES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD,
TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF IN THE ABSENCE
OF AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH SHARES UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND APPLICABLE STATE SECURITIES LAWS,
UNLESS, IN THE OPINION (WHICH SHALL BE IN FORM AND SUBSTANCE REASONABLY
SATISFACTORY TO THE CORPORATION) OF COUNSEL REASONABLY SATISFACTORY TO THE
CORPORATION, SUCH REGISTRATION IS NOT REQUIRED.
6.3. Shareholder Sophistication. In connection with the Transactions, each
of the Shareholders hereby individually represent and acknowledge that he has
such knowledge and experience in financial and business matters and that he is
capable of evaluating the merits and risks of the prospective investment in
Safeguard Shares; that such Shareholder's principal residence during the past
two years has been located in the state set forth beneath the Shareholder's name
in column A on Exhibit A hereto; and that he has received a copy of an
information statement entitled "Materials Presented to the Shareholders of
aligne incorporated" dated the date hereof, which includes, among other
disclosures, (a) Safeguard's Annual Report to Shareholders for 1997, (b)
Safeguard's Proxy Statement for the Annual Meeting of Shareholders held on May
7, 1998, and (c) Safeguard's Annual Report on Form 10-K for the year ended
December 31, 1997 and Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1998, June 30, 1998 and September 30, 1998; and that such Shareholder
has obtained and reviewed financial statements referred to therein. Each of the
Shareholders understands that he may ask questions and receive answers
concerning the terms and conditions of the Transactions and that he is entitled
to request any additional information which such Shareholder feels is necessary
to verify, clarify or
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supplement the materials already received and that Safeguard will make every
effort to supply this information, unless it would require unreasonable effort
or expense.
6.4. Tax Treatment. The parties intend that the exchange of the Company
Shares for Safeguard Shares hereunder will be treated as a reorganization
pursuant to Section 368(a)(1)(B) of the Code for federal income tax purposes,
and each party agrees that it will report the transaction in accordance with
that treatment for all tax purposes. However, Safeguard makes no representations
regarding the tax consequences to the Shareholders of the Transactions, or any
representations that this transaction will qualify as a tax free reorganization
within the meaning of Section 368(a) of the Code. The Shareholders acknowledge
that they have been advised of the tax consequences of the transactions
contemplated by this Agreement by their own tax advisers, and that they are
relying on their tax advisers in determining their respective tax consequences
in connection with the Transactions. Safeguard will take no actions following
the Closing that would cause the exchange of the Company Shares for Safeguard
Shares hereunder to fail to be treated as a reorganization within the meaning of
Section 368(a)(1) for federal income tax purposes.
6.5. Survival of Representation and Warranties. All of the representations
and warranties made by each party in this Agreement or in any attachment,
exhibit, schedule, certificate, document or list delivered by any such party
pursuant hereto or in connection with the Transactions shall survive until the
first anniversary of the Closing, except for representations and warranties
relating to Taxes, which shall survive until the expiration of applicable
statute of limitations with respect to such Taxes, and each party hereto (taking
the Shareholders as a single party) shall be entitled to rely upon the
representations and warranties of the other party set forth in this Agreement.
7. Indemnification.
7.1. By the Shareholders. To the extent provided in this Section 7, the
Shareholders shall jointly and severally indemnify and hold harmless Safeguard,
and its successors and assigns, and its officers, directors, employees,
Shareholders, agents, Affiliates and any Person who controls Safeguard within
the meaning of the Securities Act or the Exchange Act (each, an "Indemnified
Safeguard Party") from and against any Liabilities, claims, demands, judgments,
losses, costs, damages or expenses whatsoever (including reasonable attorneys',
consultants' and other professional fees and disbursements of every kind, nature
and description incurred by such Indemnified Safeguard Party in connection
therewith) (collectively, "Damages") that such Indemnified Safeguard Party may
sustain, suffer or incur and that result from, arise out of or relate to (a) any
breach of any representation or warranty of any Seller Party contained in this
Agreement, or (b) any breach of any covenant or agreement of any Seller Party
contained in this Agreement. Notwithstanding any thing to the contrary, each
Shareholder shall be jointly and severally liable only up to the product of
$39.86250 multiplied by the sum of Fixed Number for such Shareholder plus the
Contingent Number of Safeguard Shares that such Shareholder actually receives.
7.2. By Safeguard. From and after the Closing Date, to the extent provided
in this Section 7, Safeguard shall indemnify and hold harmless any Seller Party,
its successors and assigns, and its officers, directors, employees,
Shareholders, agents, affiliates and any Person who controls any Seller Party
within the meaning of the Securities Act or the Exchange Act (each, an
"Indemnified Seller Party") from and against any Damages that such Indemnified
Seller Party may sustain, suffer or incur and that result from, arise out of or
relate to (a) any breach of any representation or warranty of Safeguard
contained in
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this Agreement, or (b) any breach of any covenant or agreement of Safeguard
contained in this Agreement.
7.3. Procedure for Claims.
(a) An Indemnified Safeguard Party or an Indemnified Seller Party
that desires to seek indemnification under any part of this Section 7 (each, an
"Indemnified Party") shall give notice (a "Claim Notice") to each party
responsible or alleged to be responsible for indemnification hereunder (an
"Indemnitor") prior to any applicable Expiration Date specified below. Such
notice shall briefly explain the nature of the claim and the parties known to be
involved, and shall specify the amount thereof. If the matter to which a claim
relates shall not have been resolved as of the date of the Claim Notice, the
Indemnified Party shall estimate the amount of the claim in the Claim Notice,
but also specify therein that the claim has not yet been liquidated (an
"Unliquidated Claim"). If an Indemnified Party gives a Claim Notice for an
Unliquidated Claim, the Indemnified Party shall also give a second Claim Notice
(the "Liquidated Claim Notice") within 60 days after the matter giving rise to
the claim becomes finally resolved, and the Liquidated Claim Notice shall
specify the amount of the claim. Each Indemnitor to which a Claim Notice is
given shall respond to any Indemnified Party that has given a Claim Notice (a
"Claim Response") within 20 days (the "Response Period") after the later of (i)
the date that the Claim Notice is given and (ii) if a Claim Notice is first
given with respect to an Unliquidated Claim, the date on which the Liquidated
Claim Notice is given. Any Claim Notice or Claim Response shall be given in
accordance with the notice requirements hereunder, and any Claim Response shall
specify whether or not the Indemnitor giving the Claim Response disputes the
claim described in the Claim Notice. If any Indemnitor fails to give a Claim
Response within the Response Period, such Indemnitor shall be deemed not to
dispute the claim described in the related Claim Notice. If any Indemnitor
elects not to dispute a claim described in a Claim Notice, whether by failing to
give a timely Claim Response or otherwise, then the amount of such claim shall
be conclusively deemed to be an obligation of such Indemnitor.
(b) If any Indemnitor shall be obligated to indemnify an Indemnified
Party hereunder, such Indemnitor shall pay to such Indemnified Party within 30
days after the last day of the Response Period the amount to which such
Indemnified Party shall be entitled. If there shall be a dispute as to the
amount or manner of indemnification under this Section 7, the Indemnified Party
may pursue whatever legal remedies may be available for recovery of the Damages
claimed from any Indemnitor, but any dispute shall be resolved in accordance
with Section 16 to the extent that it may be applicable. If any Indemnitor fails
to pay all or part of any indemnification obligation when due, then such
Indemnitor shall also be obligated to pay to the applicable Indemnified Party
interest on the unpaid amount for each day during which the obligation remains
unpaid at an annual rate equal to the Prime Rate, and the Prime Rate in effect
on the first Business Day of each calendar quarter shall apply to the amount of
the unpaid obligation during such calendar quarter.
(c) Notwithstanding any other provision of this Section 7, an
Indemnified Party shall be entitled to indemnification hereunder only when the
aggregate of all Damages to such Indemnified Party exceeds $250,000 (the
"Threshold Amount") and then such Indemnified Party shall be entitled to
indemnification for all of its Damages, including the Damages counted in
achieving the Threshold Amount. In no event shall the Shareholders be obligated
to indemnify Safeguard for amounts in excess of the Aggregate Purchase Price.
The limitations of this paragraph (c), however, shall not apply to any covenants
or agreements to be performed by an Indemnitor after the Closing. In addition,
the calculation of the Deductible Amount shall include any Damages incurred by
an Indemnified Party for which the Indemnified Party would have been entitled to
claim indemnification under this Section 7
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with respect to a breach of representation or warranty but for such
representation or warranty being qualified by materiality, the knowledge of a
particular party or related exceptions.
7.4. Claims Period. Any claim for indemnification under this Section 7
shall be made by giving a Claim Notice under Section 7.3 on or before the
applicable "Expiration Date" specified below in this Section 7.4, or the claim
under this Section shall be invalid. "Expiration Date" means:
1. the date on which the applicable statute of limitations expires
with respect to any claim for Damages related to (i) a breach of any covenant or
agreement to be performed at least in part after the Closing Date, or (ii) a
breach of any representations or warranties of a party to this Agreement that
relate to Taxes or that were untrue when made with an actual intent to mislead
or defraud; and
2. for all other claims, the earlier to occur of (i) the first
anniversary of the Closing Date and (ii) the tenth Business day following
receipt by the Company of an audit of the Company's financial statements for the
period ending December 31, 1999.
If more than one of such Expiration Dates applies to a particular claim, the
latest of such Expiration Dates shall be the controlling Expiration Date for
such claim. So long as an Indemnified Party gives a Claim Notice for an
Unliquidated Claim on or before the applicable Expiration Date, such Indemnified
Party shall be entitled to pursue its rights to indemnification regardless of
the date on which such Indemnified Party gives the related Liquidated Claim
Notice.
7.5. Third Party Claims. An Indemnified Party that desires to seek
indemnification under any part of this Section 7 with respect to any actions,
suits or other administrative or judicial proceedings (each, an "Action") that
may be instituted by a third party shall give each Indemnitor prompt notice of a
third party's institution of such Action. After such notice, any Indemnitor may,
or if so requested by such Indemnified Party, any Indemnitor shall, participate
in such Action or assume the defense thereof, with counsel satisfactory to such
Indemnified Party; provided, however, that such Indemnified Party shall have the
right to participate at its own expense in the defense of such Action; and
provided, further, that the Indemnitor shall not consent to the entry of any
judgment or enter into any settlement, except with the written consent of such
Indemnified Party (which consent shall not be unreasonably withheld). Any
failure to give prompt notice under this Section 7.5 shall not bar an
Indemnified Party's right to claim indemnification under this Section 7, except
to the extent that an Indemnitor shall have been materially harmed by such
failure.
7.6. Losses Net of Insurance, Etc. The amount of any Damages for which
indemnification is provided under Sections 7.1 or 7.2 shall be net of (i) any
amounts recovered by the indemnified party pursuant to any indemnification by or
indemnification agreement with any third party, (ii) any insurance proceeds or
other cash receipts or sources of reimbursement received as an offset against
such Damages (and no right of subrogation shall accrue to any insurer or third
party indemnitor hereunder) and (iii) an amount equal to the present value of
the tax benefit, if any, attributable to such Damages. Each of Safeguard and the
Seller Parties agree to make any claims for indemnification from a third party
or insurance proceeds available to offset against such Damages specified in the
preceding sentence and for which it will seek indemnification hereunder and to
pursue such claims in good faith. If the amount to be netted hereunder from any
payment required under Sections 7.1 or 7.2 is determined after payment by the
indemnifying party of any amount otherwise required to be paid to an indemnified
party to this Article 7, the indemnified party shall repay to the indemnifying
party, promptly after such determination,
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any amount that the indemnifying party would not have had to pay pursuant to
this Article 7 had such determination been made at the time of such payment.
8. Post-Closing Covenants.
8.1. Covenant Not to Compete. No Restricted Party (defined below) shall,
at any time within the Restricted Period (defined below), directly or
indirectly, engage in, or have any interest on behalf of itself or others in any
person, firm, corporation or business (whether as an employee, officer,
director, agent, security holder, creditor, partner, joint venturer, beneficiary
under a trust, investor, consultant or otherwise) that engages within the
Restricted Territory (defined below) any of those business activities in which
the Company has been engaged in the last 12 months, including evaluating
information technology sourcing alternatives and managing clients' transitions
from in-house to outsourced information technology functions. The term
"Restricted Party" means each of the Shareholders and any Affiliate that any
Shareholder controls. The term "Restricted Period" means the period beginning on
the date hereof and ending on the second anniversary of the Closing Date. The
"Restricted Territory" means the area comprising the eastern region of United
States of America. In the event of Litigation involving this Agreement, if a
court of competent jurisdiction determines that the scope of this Section 8.1 is
too broad in any respect, then the scope shall be deemed to be reduced or
narrowed to such scope as is found lawful and reasonable by such court. Each
Seller Party acknowledges, however, that this Section 8.1 has been negotiated by
the parties and that the geographical and time limitations, as well as the
limitation on activities, are reasonable in light of the circumstances
pertaining to the Company and the Business. Notwithstanding the foregoing, and
provided that such activities do not interfere with the fulfillment of the
Shareholders' obligations, each Shareholder may acquire solely as an investment
not more than 5% of any class of securities of any entity that has a class of
securities registered pursuant to the Exchange Act so long as he remains a
passive investor in such entity.
8.2. Confidential Information. For an indefinite period after the Closing,
no Restricted Party shall divulge, communicate or use in any way, any
Confidential Information of the Company or the Business.
8.3. Nonsolicitation. Each of the Shareholders agrees that, for the
Restricted Period, such Shareholder will not, directly or indirectly, call on or
solicit for the purpose of selling the services offered by the Company during
the 12-month period prior to the Closing Date, or divert or take away from the
Company or the business of (including, by divulging to any competitor or
potential competitor of the Company or Safeguard the name of), any Person, who
or which at the Closing Date was, or at any time during the one year preceding
the Closing Date had been, a customer of the Company or whose identity is known
to any of the Shareholders at the Closing Date as one whom the Company intends
to solicit within the succeeding year. Nothing contained in this Section 8.3
shall be deemed to limit or impair, or be limited or impaired by, any other
provision of this Agreement.
8.4. Hiring of the Company's Employees. During the Restricted Period, no
Shareholder will (directly or indirectly) solicit for employment, or hire or
offer employment to, any employee of the Company whose employment is continued
by the Company or Safeguard after the Closing Date unless the Company or
Safeguard first terminates the employment of such employee. Nothing contained in
this Section 8.4 shall affect or be deemed to affect in any manner any other
provision of this Agreement.
8.5. Affiliates. To the extent that any Restricted Party is not a party to
this Agreement, the terms of this Section 8 shall apply to such Restricted Party
as if he, she or it were a party hereto, and the
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Shareholders shall take whatever actions may be necessary to cause any such
Restricted Party to adhere to the terms of this Section 8.
8.6. Injunctive Relief. In the event of any breach or threatened breach by
any Restricted Party of any provision of this Section 8, Safeguard shall be
entitled to injunctive or other equitable relief, restraining such party from
using or disclosing any Confidential Information in whole or in part, or from
engaging in conduct that would constitute a breach of the obligations of a
Restricted Party under this Section 8. Such relief shall be in addition to and
not in lieu of any other remedies that may be available, including an action for
the recovery of damages.
8.7. Certain Taxes and Expenses. The Seller Parties shall pay any sales,
use, transfer, real property transfer, documentary stamp and other similar taxes
and all recording, filing and other fees and costs with respect to the transfer
of the Company Shares. The Seller Parties and Safeguard shall each bear its
respective accounting, legal, financial advisory and other expenses incurred in
connection with the Transactions.
8.8. Seller Party Affliates. Each Seller Party shall cause their
respective Affiliates to comply with the terms and conditions of this Agreement
and the other Transaction Documents to the same extent as if they were parties
to this Agreement and the other Transaction Documents to the extent necessary to
consummate the Transactions in accordance with the Transaction Documents.
9. Conditions Precedent to Obligations of Safeguard.
All obligations of Safeguard to consummate the Transactions are subject to
the satisfaction (or waiver by Safeguard) prior thereto of each of the following
conditions:
9.1. Required Consents. The Seller Parties shall have obtained the
Required Consents without any modification that Safeguard deems unacceptable.
9.2. Ancillary Documents. The parties other than Safeguard shall have
tendered executed copies of the respective Transaction Documents to which they
are intended to be parties, including the Shareholders' Agreement and the
Administrative Services Agreement.
9.3. Certificate. The President of the Company and each Shareholder shall
have tendered a certificate by which they certify to Safeguard that the
conditions set forth in this Section 9 have been satisfied, and such certificate
shall be deemed to be a representation of the Seller Parties hereunder.
9.4. Legal Opinion. The Seller Parties shall have tendered a legal opinion
of Dechert, Price & Rhoads, counsel to the Seller Parties, in the form of that
agreed to as of the date hereof.
10. Conditions Precedent to Obligations of the Seller Parties.
All obligations of the Seller Parties to consummate the Transactions are
subject to the satisfaction (or waiver by each Seller Party to which the
condition relates) prior thereto of each of the following conditions, but any
particular condition that requires action by any Seller Party shall not
constitute a condition to the obligations of such Seller Party:
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10.1. Ancillary Documents. Safeguard shall have tendered executed copies
of the respective Transaction Documents to which it is intended to be a party,
including the Administrative Services Agreement and Shareholders' Agreement.
10.2. Directors. Each of the Shareholders shall have been elected to the
Board of Directors of the Company.
10.3. Certificates. Safeguard shall have tendered a certificate by which
it certifies to the Seller Parties that the conditions set forth in this Section
10 have been satisfied, and such certificate shall be deemed to be
representation of Safeguard.
11. Public Announcements.
The Seller Parties and Safeguard will consult with each other before
issuing any press release or making any public statement with respect to this
Agreement and the Transactions and, except as may be required by applicable Law
or any applicable stock exchange regulations, the Seller Parties and Safeguard
will not issue any such press release or make any such public statement without
the consent of the other parties hereto.
12. Contents of Agreement.
This Agreement, together with the other Transaction Documents, sets forth
the entire understanding of the parties hereto with respect to the Transactions
and supersedes all prior agreements or understandings among the parties
regarding those matters.
13. Amendment, Parties in Interest, Assignment, Etc.
This Agreement may be amended, modified or supplemented only by a written
instrument duly executed by each of the parties hereto. If any provision of this
Agreement shall for any reason be held to be invalid, illegal, or unenforceable
in any respect, such invalidity, illegality, or unenforceability shall not
affect any other provision hereof, and this Agreement shall be construed as if
such invalid, illegal or unenforceable provision had never been contained
herein. This Agreement shall be binding upon and inure to the benefit of and be
enforceable by the respective heirs, legal representatives, successors and
permitted assigns of the parties hereto. No party hereto shall assign this
Agreement or any right, benefit or obligation hereunder, except that Safeguard
shall be entitled to assign its rights and obligations hereunder to one or more
Persons (an "Assignee") provided (a) the Assignee executes and delivers to the
Seller Parties a document by which the Assignee agrees to be bound by the terms
and conditions applicable to Safeguard under this Agreement, and (b) Safeguard
shall remain obligated to purchase any Company Shares to be purchased by an
Assignee hereunder and to fulfill the Assignee's other obligations hereunder to
the extent that the Assignee fails to do so hereunder. Any term or provision of
this Agreement may be waived at any time by the party entitled to the benefit
thereof by a written instrument duly executed by such party. The parties hereto
shall execute and deliver any and all documents and take any and all other
actions that may be deemed reasonably necessary by their respective counsel to
complete the Transactions.
14. Interpretation.
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Unless the context of this Agreement clearly requires otherwise, (a)
references to the plural include the singular, the singular the plural, the part
the whole, (b) references to any gender include all genders, (c) "or" has the
inclusive meaning frequently identified with the phrase "and/or," (d)
"including" has the inclusive meaning frequently identified with the phrase "but
not limited to," (e) references to "hereunder" or "herein" relate to this
Agreement, and (f) references as to whether any Seller Party "knows" or has
"knowledge" of a given fact, circumstance or condition shall include the
knowledge of any Shareholder or any director, officer or supervising employee of
the Company The section and other headings contained in this Agreement are for
reference purposes only and shall not control or affect the construction of this
Agreement or the interpretation thereof in any respect. Section, subsection,
schedule and exhibit references are to this Agreement unless otherwise
specified. Each accounting term used herein that is not specifically defined
herein shall have the meaning given to it under GAAP.
15. Sole Remedy.
The parties hereto acknowledge and agree that the remedies provided for in
this Agreement shall be the parties' sole and exclusive remedy with respect to
breaches of the representations and warranties contained in this Agreement. In
furtherance of the foregoing with respect to breaches of the representations and
warranties contained in this Agreement, the parties hereby waive, to the fullest
extent permitted by applicable Law, any and all other rights, claims and causes
of action (including rights of contribution, if any) known or unknown, foreseen
or unforeseen, which exist or may arise in the future, that it may have against
a Seller Party or any of its Affiliates, or Safeguard or any of its Affiliates,
as the case may be, arising under or based upon any Law (including, any such
Law, relating to environmental matters or arising under or based upon any
securities law, common law or otherwise).
16. Dispute Resolution.
16.1. Good-Faith Negotiations. If after the Closing any dispute arises
under this Agreement with respect to a claim for Damages that is not settled
promptly in the ordinary course of business, the parties shall seek to resolve
any such dispute between them, first, by negotiating promptly with each other in
good faith in face-to-face negotiations. These face-to-face negotiations shall
be conducted by the respective designated senior management representative of
each party or the Shareholders. If the parties are unable to resolve such
dispute between them within 20 business days (or such period as the parties
shall otherwise agree) through these face-to-face negotiations, then any such
dispute shall be resolved in the manner set forth in this Section.
16.2. Resolution of Disputes. Any controversy or claim shall be settled by
arbitration conducted on a confidential basis, under the US 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 Agreement and the substantive law of the State of Delaware. The
arbitration shall be conducted at the Association's regional office located in
the Philadelphia, Pennsylvania area by three arbitrators, at least one of whom
shall be knowledgeable in the computer and outsourcing services industry, one of
whom shall be an attorney and one of whom shall be a member of an accounting
firm familiar with businesses engaged in software design, programming and
implementation. 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
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temporary restraining orders and preliminary injunctions to protect its rights
and interests, but neither party shall seek any such equitable remedies as a
means to avoid or stay arbitration.
17. Notices.
All notices that are required or permitted hereunder shall be in writing
and shall be sufficient if personally delivered or sent by mail, facsimile
message or Federal Express or other delivery service. Any notices shall be
deemed given upon the earlier of the date when received at, or the third day
after the date when sent by registered or certified mail or the day after the
date when sent by Federal Express to, the address or fax number set forth below,
unless such address or fax number is changed by notice to the other party
hereto:
If to Safeguard:
Safeguard Scientifics, Inc.
800 The Safeguard Building
435 Devon Park Drive
Wayne, PA 19087
FAX: (610) 293-0601
Attention: Senior Vice President, Finance
with a required copy at the same address to:
General Counsel
and with a required copy to:
Morgan, Lewis & Bockius LLP
1701 Market Street
Philadelphia, PA 19103
FAX: 215-963-5299
Attention: N. Jeffrey Klauder
If to the Company:
aligne incorporated
800 The Safeguard Building
435 Devon Park Drive
Wayne, PA 19087
FAX: (610) 254-4266
Attention: Peter Pijawka
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with a required copy to:
Dechert, Price & Rhoads
4000 Bell Atlantic Tower
1717 Arch Street
Philadelphia, PA 19103-2793
Fax: (215) 994-2222
Attention: James J. Lawless, Jr.
If to Wallaesa:
Mr. Harry Wallaesa
116 Calvary Court
Wayne, PA 19087
with a required copy to:
Dechert, Price & Rhoads
4000 Bell Atlantic Tower
1717 Arch Street
Philadelphia, PA 19103-2793
Fax: (215) 994-2222
Attention: James J. Lawless, Jr.
If to Pijawka:
Mr. Peter Pijawka
1 Treble Lane
Malvern, PA 19355
-30-
<PAGE>
with a required copy to:
Dechert, Price & Rhoads
4000 Bell Atlantic Tower
1717 Arch Street
Philadelphia, PA 19103-2793
Fax: (215) 994-2222
Attention: James J. Lawless, Jr.
If to Zodtner:
Mr. Steven Zodtner
856 Montieth Drive
Wayne, PA 19087
with a required copy to:
Dechert, Price & Rhoads
4000 Bell Atlantic Tower
1717 Arch Street
Philadelphia, PA 19103-2793
Fax: (215) 994-222
Attention: James J. Lawless, Jr.
18. Governing Law.
This Agreement shall be construed and interpreted in accordance with the
laws of the Commonwealth of Pennsylvania without regard to its provisions
concerning conflict of laws.
19. Counterparts.
This Agreement may be executed in two or more counterparts, each of which
shall be binding as of the date first written above, and all of which shall
constitute one and the same instrument. Each such copy shall be deemed an
original, and it shall not be necessary in making proof of this Agreement to
produce or account for more than one such counterpart.
-31-
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed by the parties hereto
as of the day and year first written above.
ALIGNE INCORPORATED
By: /s/ Harry Wallaesa
------------------
Title: President
SAFEGUARD SCIENTIFICS, INC.
By: /s/ Glenn Rieger
----------------
Title: SVP
/s/ Harry Wallaesa
------------------
Harry Wallaesa
/s/ Steven Zodtner
------------------
Steven Zodtner
/s/ Peter Pijawka
-----------------
Peter Pijawka
-32-
<PAGE>
EXHIBIT A
Schedule of Shareholders
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
(A) (B) (C) (D) (E) (F)
- ---------------------------------------------------------------------------------------------------
Name of Shareholder Number of Number of Number of Number of Number of
(State of Residence) Company Company Company Safeguard Safeguard
Shares Shares to Shares Shares to be Shares to be
Owned be Sold Owned Received in Received in
After respect of the respect of the
Closing Fixed Contingent
Number Number
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Harry Wallaesa 100 100 0 91,984 91,982
(Pennsylvania)
- --------------------------------------------------------------------------------------------------
Steven Zodtner 100 70 30 64,388 64,388
(Pennsylvania)
- --------------------------------------------------------------------------------------------------
Peter Pijawka 100 70 30 64,388 64,388
(Pennsylvania)
- --------------------------------------------------------------------------------------------------
Total: 300 240 60 220,760 220,758
- --------------------------------------------------------------------------------------------------
</TABLE>
-1-
<PAGE>
Exhibit 10.21
EMPLOYMENT AGREEMENT AMENDMENT
This is an amendment to that certain employment agreement between Edward R.
Anderson and CompuCom Systems, Inc. dated October 24, 1997. It is agreed that
the provision in Section 2.1 pertaining to additional compensation of $175,000
each year during the first three years of employment shall be deleted. It is
also agreed that Mr. Anderson's base salary shall be increased by $175,000
effective January 1, 1999 and that he will receive a lump sum payment of
$109,375 representing the prorated amount due from May 16, 1998 through December
31, 1998.
Agreed to this 19th day of February, 1999.
CompuCom Systems, Inc.
/s/ Edward R. Anderson By /s/ M. Lazane Smith
- ----------------------- ----------------------
Edward R. Anderson Its: SVP/CFO
<PAGE>
Exhibit 10.23
FIRST AMENDMENT TO TERM NOTE
This is an amendment to that certain Term Note dated February 12, 1997 in
the original principal amount of $1,181,250.00 payable by Edward R. Anderson to
the order of CompuCom Systems, Inc. (the Note). The parties agree that Section
3.3(a) of the Note is hereby amended in its entirety to read as follows:
a. The principal amount outstanding under this Note (currently
$900,000) shall be due and payable on October 22, 2001. Accrued
interest shall be payable at the same time as the payment of
principal on this Note, and upon payment of this Note in full.
The parties hereby acknowledge and agree that except as amended as
provided above, all other terms and provisions of the Note remain in full force
and effect.
Agreed to as of this 19th day of February, 1999.
CompuCom Systems, Inc.
/s/ Edward R. Anderson By: /s/ M. Lazane Smith
- ---------------------- --------------------
Edward R. Anderson Its: SVP/CFO
<PAGE>
Exhibit 10.25
TERM NOTE
$2,021,875.00 Dallas, Texas October 22, 1998
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
Two Million, Twenty-one Thousand, Eight Hundred, Seventy-five Dollars
($2,021,875.00), 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 dated October 22, 1998, 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 BankAmerica Corp. (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 weekly ceiling as described in
Tex.Rev.Civ.Stat.Ann. art. 5069-ID.003, 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 5.1%.
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 October 22, 2003. Interest shall be payable annually on October 22nd
of each year during the term hereof, commencing October 22, 1999, and upon
payment of this Note in full.
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
Initialed for Identification
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
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, notice of intent to accelerate or notice of acceleration, all 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.
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 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
Initialed for Identification
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
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 346 of the Texas Finance Code 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. Pledge Agreement. This Note is the Note referred to in the Pledge
Agreement dated October 22, 1998, and is entitled to the benefits thereof and
the security as provided for therein. Reference is made to the Pledge 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.
/s/ Edward R. Anderson
-----------------------
Edward R. Anderson
Initialed for Identification
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
Exhibit 10.26
PLEDGE AGREEMENT
PLEDGE AGREEMENT ("Pledge Agreement") made as of the 22nd day of October,
1998, between Edward R. Anderson ("Pledgor"), and CompuCom Systems, Inc., a
Delaware corporation ("Secured Party").
1. Definitions. In addition to the terms defined elsewhere in this Pledge
Agreement, the following terms shall have the following meanings for
purposes of this Pledge Agreement:
(a) The term "Event of Default" shall have the meaning ascribed thereto
in Section 9 of this Pledge Agreement.
(b) The term "Note" means and includes that certain Note, dated of even
date herewith, in the original principal amount of $2,021,875, which
Pledgor has executed, or is in the process of executing payable to
the order of Secured Party, together with any and all concurrent or
subsequent extensions, amendments, or modifications thereto.
(c) The term "Obligations" means and includes all obligations of Pledgor
to Secured Party pursuant to the terms of the Note and this Pledge
Agreement.
(d) The term "Option Shares" means 647,000 shares of capital stock of
Secured Party being purchased by Pledgor with the proceeds of the
Note pursuant to the exercise of certain Non Qualified Stock Options
and Incentive Stock Options granted to Pledgor by Secured Party.
2. Pledge. Upon the terms hereof, Pledgor hereby pledges and grants to
Secured Party a lien on and security interest (the "Security Interest") in
and to all of the following instruments and property of Pledgor (all of
the following being herein sometimes called the "Collateral"):
(a) Six hundred forty-seven thousand shares of capital stock of Secured
Party as described on Exhibit A attached hereto and incorporated
herein for all purposes representing the Option Shares being
purchased by Pledgor with the proceeds of the Note, together with
all certificates, options, rights or other distributions issued as
an addition to, in substitution or in exchange for, or on account
of, any such shares (collectively, the "Stock");
(b) All securities and other property, rights or interests of any
description at any time issued or issuable as an addition to, in
substitution or exchange for, with respect to, incident to or in
lieu of such shares described in Section 2(a) hereof or with respect
to, incident to or in lieu of the Collateral (i) due to any
dividend, stock-split, stock dividend or distribution on
dissolution, on partial or total liquidation, or other corporate
reorganization or for any other reason; (ii) in connection with a
reduction of capital, capital surplus or paid-in surplus; or (iii)
in connection with any spin-off, split-off, reclassification,
readjustment, merger, consolidation, sale of assets, combination of
shares or any other plan of distribution affecting the companies
which have issued the shares described in Section 2(a) hereof;
(c) Any and all proceeds, monies, income and benefits arising from or by
virtue of, and all dividends and distributions (cash or otherwise)
payable and/or distributable with respect to, all or any of the
shares or other securities and rights and interests described in
clauses (a) through (c) of this Section 2.
3. Obligations Secured. This Pledge Agreement and the Security Interest
granted hereby secure the prompt satisfaction of the Obligations.
Page 1
<PAGE>
4. Warranties. Pledgor represents and warrants that each of the following
statements is true and correct: (a) Pledgor is the legal and beneficial
owner of the Stock; (b) the Collateral is owned by Pledgor free of any
pledge, mortgage, hypothecation, lien, charge, encumbrance or security
interest or purchase right or option on the part of any third person in
such Collateral, except the Security Interest; (c) Pledgor has the full
power, authority and legal right to transfer and pledge the Collateral
free of any encumbrances and without obtaining the consent of any other
person or entity; and (d) upon delivery of the Collateral to Secured
Party, this Pledge Agreement will create a valid and perfected first
priority lien upon, and security interest in, the Collateral and the
proceeds thereof, securing the payment of the Obligations. The delivery at
any time by Pledgor to Secured Party of Collateral shall constitute a
representation and warranty by Pledgor under this Pledge Agreement that,
with respect to the Collateral and each item thereof, Pledgor is the owner
of the Collateral and the matters heretofore warranted in clauses (a)
through (d) of this Section 4 are true and correct.
5. Covenants. Pledgor covenants to do or not to do, as the case may be, each
of the following; provided, however, in the case of a negative covenant,
Pledgor will not undertake any of the proscribed activities without the
prior written consent of Secured Party: (a) from time to time to do all
other acts or things as Secured Party may reasonably request in order more
fully to evidence and perfect the Security Interest; (b) after the
occurrence of an Event of Default, to promptly pay to Secured Party the
amount of all court costs and reasonable attorneys' fees incurred by
Secured Party hereunder; and (c) except as otherwise provided herein, to
promptly deliver to Secured Party, in the exact form received, all
securities and other property described in Section 2(b) and Section 2(c)
hereof which come into the possession, custody or control of Pledgor.
Pledgor further covenants and agrees that, without the prior written
consent of Secured Party, Pledgor shall not assign or transfer Pledgor's
rights in the Collateral, or create any other lien or security interest in
or otherwise encumber any of the Collateral, or permit any of the
Collateral to ever be or become subject to any lien, attachment,
execution, sequestration, other legal or equitable process, or any lien or
encumbrance of any kind. Notwithstanding anything contained in the
preceding sentence to the contrary, Pledgor shall be free to sell the
Stock provided that Pledgor complies with all applicable laws in effecting
such sale and in the event of any such sale the shares of Stock will be
released from the Security Interest created pursuant to this Pledge
Agreement upon payment to Secured Party of $3.125 for each share of Stock
sold. All assignments and endorsements by Pledgor shall be in such form
and substance as may be satisfactory to Secured Party. Should any
covenant, duty or agreement of Pledgor fail to be performed in accordance
with its terms hereunder, Secured Party may, but shall never be obligated
to, perform or attempt to perform such covenant, duty or agreement on
behalf of Pledgor, and any amount expended by Secured Party in such
performance or attempted performance shall become part of the Obligations,
except to the extent prohibited by applicable law, and Pledgor agrees to
pay such amount promptly to Secured Party.
6. Adjustments and Distributions Concerning Collateral. Should the
Collateral, or any part thereof, ever be converted in any manner by its
issuer into another type of property or any money or other proceeds ever
be paid or delivered to Pledgor as a result of Pledgor's rights in the
Collateral, then in any such event (except as provided in Section 7
hereof), all such property, money and other proceeds shall immediately be
and become part of the Collateral, and Pledgor covenants to forthwith pay
and deliver all such property, money or other proceeds so received to
Secured Party; and, if Secured Party deems it necessary and so requests,
to endorse properly or assign any and all such other proceeds to Secured
Party and to deliver to Secured Party any and all such other proceeds
which require perfection by possession under the Uniform Commercial Code
of the State of Texas or other appropriate jurisdiction (the "UCC"). With
respect to any of such property of a kind requiring an additional security
agreement, financing statement or other writing to perfect a security
interest therein in favor of Secured Party, Pledgor will forthwith execute
and deliver to Secured Party whatever Secured Party shall deem necessary
or proper for such purpose.
Page 2
<PAGE>
7. Cash Dividends and Voting Rights. Unless an Event of Default has occurred
and shall not have been waived by Secured Party, Pledgor is entitled, (a)
to exercise all voting rights with respect to the Collateral and (b) to
receive for his own use cash dividends on the Collateral. Upon the
occurrence of an Event of Default, Secured Party may exercise all voting
rights with respect to the Collateral subject to all applicable rules and
regulations and may require any such cash dividends to be delivered to
Secured Party as additional Collateral hereunder or applied toward the
satisfaction of the Obligations.
8. Registration of Collateral in Name of Secured Party. Upon the occurrence
of an Event of Default, Secured Party, at its option, may have any or all
of the Collateral registered in its name or that of its nominee.
Immediately and without further notice, upon the occurrence of an Event of
Default, whether or not the Collateral has been registered in the name of
Secured Party or its nominee, Secured Party or its nominee shall have,
with respect to the Collateral, the right to exercise all voting rights
and all conversion, exchange, subscription or other rights, privileges or
options pertaining thereto including, without limitation, the right to
exchange any or all of the Collateral upon the merger, consolidation,
reorganization, recapitalization or other readjustment of the issuer
thereof, or upon the exercise by such issuer of any right, privilege, or
option pertaining to any of the Collateral, and, in connection therewith,
to deliver any of the Collateral to any committee, depositary, transfer
agent, registrar or other designated agency upon such terms and conditions
as it may determine, all without liability except to account for property
actually received by it; but Secured Party shall have no duty to exercise
any of the aforesaid rights, privileges or options and shall not be
responsible for any failure to do so, delay in doing so, or depreciation
in the value of the Collateral by reason of doing so. Thereafter, at such
time as (a) all Events of Defaults have been cured, and (b) there exists
no condition, event or act which, with the giving of notice or lapse of
time, or both, would constitute an Event of Default, then the right to
exercise all voting rights with respect to the Collateral shall revert to
Pledgor.
9. Events of Default. The occurrence of any one or more of the following
shall constitute an Event of Default: (a) the failure of Pledgor to make
timely payment of any portion of the principal or interest of the Note or
any portion of the Obligations when due subject to any applicable cure
periods; (b) the failure of Pledgor to perform fully, faithfully and
promptly any material agreements, covenants and conditions contained in
this Pledge Agreement; (c) the levy against the Collateral, or any
substantial part thereof, or any execution, attachment, sequestration,
distraint warrant or other like or similar writ or the attachment to the
Collateral of any lien other than the Security Interest; (d) the entry of
a decree or order for relief by a court having jurisdiction in the
premises in respect of Pledgor in an involuntary case under the United
States bankruptcy laws, as now or hereafter constituted, or any other
applicable federal or state bankruptcy, insolvency or other similar law,
or appointing a receiver, liquidator, assignee, custodian, trustee,
sequestrator (or similar official) of Pledgor or of any substantial part
of Pledgor's property, or ordering the winding-up or liquidation of the
affairs of Pledgor and the continuance of any such decree or order
unstayed and in effect for a period of thirty (30) consecutive days; or
(e) the commencement by Pledgor of a voluntary case under the United
States bankruptcy laws, as now constituted or hereafter amended, or any
other applicable federal or state bankruptcy, insolvency or other similar
law, or the consent by Pledgor to the appointment of or taking possession
by a receiver, liquidator, assignee, trustee, custodian, sequestrator (or
other similar official) of Pledgor for any substantial part of Pledgor's
property, or the making by Pledgor of any assignment for the benefit of
creditors, or the inability of Pledgor generally to pay his debts as such
debts become due, or the taking of any action by Pledgor in furtherance of
any of the foregoing.
10. Remedies. Upon the occurrence of an Event of Default, Secured Party may
then exercise any and all rights to which it is entitled under the UCC or
otherwise. Pledgor hereby grants to Secured Party an irrevocable proxy
coupled with an interest to exercise as to such Collateral, upon the
occurrence of an Event of Default, all rights, powers and remedies of an
owner and all of the rights, powers and remedies hereinabove set forth,
the proxy herein granted to exist until all of the Obligations have been
paid and performed in full.
Page 3
<PAGE>
11. Application of Proceeds. The proceeds of any disposition of the Collateral
or other action by Secured Party shall be applied (a) first, to the cost
and expenses incurred in connection therewith or incidental thereto or to
the care or safekeeping of any of the Collateral or in any way relating to
the rights of Secured Party hereunder, including reasonable attorneys'
fees and legal expenses; (b) then, to the satisfaction of the Obligations
in such order and to such portions as Secured Party may elect; (c) then,
to the payment of any other amounts required by applicable law; and (d)
then, to Pledgor to the extent of any surplus proceeds. Secured Party
shall be under no duty to exercise or to withhold the exercise of any of
the rights, powers, privileges and options expressly or implicitly granted
to Secured Party in this Pledge Agreement, and shall not be responsible
for any failure to do so or delay in so doing.
12. Notification of Sale. Reasonable notification of the time and place of any
public sale of the Collateral, or reasonable notification of the time
after which any private sale or other intended disposition of the
Collateral is to be made, shall be sent to Pledgor and to any other person
entitled under the UCC to notice; provided that if any of the Collateral
threatens to decline speedily in value or is of the type customarily sold
on a recognized market, Secured Party may sell or otherwise dispose of the
Collateral without notification, advertisement, or other notice of any
kind. It is agreed that notice sent or given not less than five (5)
calendar days prior to the taking of the action to which the notice
relates is reasonable notification and notice for the purposes of this
paragraph.
13. Satisfaction of Obligations and Release of Collateral. Upon the
satisfaction in full of the Obligations, and the satisfaction of all
additional costs and expenses of Secured Party as provided herein, this
Pledge Agreement shall terminate, and Secured Party shall deliver to
Pledgor, at Pledgor's expense, such of the Collateral as shall not have
been sold or otherwise applied pursuant to this Pledge Agreement which
Secured Party shall have in its possession. In addition and
notwithstanding any provision contained in this Pledge Agreement to the
contrary, Pledgor shall be entitled to obtain the release of shares of
Stock from the Security Interest created hereby by paying to Secured Party
the sum of $3.125 for each share of Stock which Pledgor desires be
released from the terms hereof and upon receipt of such payment, Secured
Party will promptly release the applicable number of shares of Stock to
Pledgor.
14. Notices. Any notice required or permitted by this Pledge Agreement shall
be deemed to have been given or made when deposited in the United States
Mail, postage prepaid, certified mail, return receipt requested, addressed
to the parties at the addresses set forth opposite their respective
signatures below, or, if hand delivered, upon actual receipt.
15. Duties of Secured Party. Secured Party's duty with respect to any
Collateral now or hereafter in the possession of Secured Party is solely
to use reasonable care in the custody and preservation of the Collateral.
Secured Party shall be deemed to have exercised reasonable care in the
custody and preservation of the Collateral if the Collateral is accorded
treatment substantially equal to that which Secured Party accords its own
property, its being understood that Secured Party shall not have any
responsibility for ascertaining or taking action with respect to calls,
conversions, exchanges, maturities, tenders or other matters relative to
any Collateral or for informing Pledgor of such matters whether or not
Secured Party has or is deemed to have any knowledge of such matters.
Secured Party shall not be required to take any steps necessary to
preserve any rights in the Collateral against prior parties or to protect,
perfect, preserve or maintain any security interest given to secure the
Collateral, nor to invest any cash constituting Collateral in any account
or security or otherwise.
16. Indemnification. Pledgor hereby agrees to indemnify and to hold Secured
Party harmless from and against any loss (excluding any loss attributable
to a diminution in the value of the Stock), claim, demand or expense
(including attorneys' fees) by reason, or in any manner related to, the
Collateral, including any such claim as may arise by reason of any alleged
breach of warranty concerning the
Page 4
<PAGE>
Collateral, by reason of the failure of Pledgor to comply with any
applicable state, federal or foreign statute, rule, regulation, order or
decree, or by reason of Secured Party's efforts to enforce payment of the
Obligations, including expenses incurred in satisfying any applicable
securities laws.
17. Expenses. Pledgor will upon demand pay to Secured Party the amount of any
and all reasonable expenses, including the reasonable fees and expenses of
its counsel and of any experts and agents, which Secured Party may incur
in connection with the custody or preservation of, or the sale of,
collection from, or other realization upon, any of the Collateral, the
exercise or enforcement of any of the rights of Secured Party hereunder,
or the failure by Pledgor to perform or observe any of the provisions
hereof.
18. Security Interest Absolute. All rights of Secured Party and the pledge and
Security Interest hereunder, and all obligations of Pledgor hereunder,
shall be absolute and unconditional in all respects and shall not be
released, diminished, impaired, or affected for any reason, including
without limitation the occurrence of any one or more of the following
events: (a) the taking or accepting of any other security or assurance for
any or all of the Obligations; (b) any change in the time, manner or place
of payment of, or in any other term of, all or any of the Obligations; (c)
any exchange, release, subordination, surrender, loss or nonperfection of
any other collateral at any time existing in connection with any or all of
the Obligations, or any release or amendment or waiver of or consent to
departure from any guaranty, or other security, for all or any of the
Obligations; (d) any neglect, delay, omission, failure, or refusal of
Secured Party to take or prosecute any action in connection with this
Pledge Agreement; (e) the insolvency or bankruptcy of Pledgor; or (f) any
other circumstance which might otherwise constitute a defense available to
a discharge of Pledgor in respect of the Obligations of Pledgor in respect
of this Pledge Agreement.
19. Waivers. Except as otherwise required by the terms hereof or by applicable
law, Pledgor hereby waives all notices, including but not limited to
demand, presentment for payment, notice of nonpayment, protest, notice of
protest, notice of intent to accelerate, notice of acceleration and all
other notices.
20. Remedies Cumulative. The rights and remedies provided herein are
cumulative and are in addition to and not exclusive of any rights or
remedies provided by law, including, but without limitation, the rights
and remedies of a secured party under the UCC.
21. Amendment. This Pledge Agreement may be amended only by written instrument
signed by all parties.
22. Invalidity of Any Provision. The invalidity of any one or more phrases,
sentences, clauses, paragraphs or sections hereof shall not affect the
remaining portions of this Pledge Agreement, all of which are being
inserted conditionally on its being held legally valid. In the event that
any one or more of the phrases, sentences, clauses, paragraphs or sections
contained herein should be invalid, or should operate to render this
Pledge Agreement invalid, then this Pledge Agreement shall be construed as
if such invalid phrase or phrases, sentence or sentences, clause or
clauses, paragraph or paragraphs, or section or sections had not been
inserted.
23. Assignment. This Pledge Agreement shall apply to, inure to the benefit of
and be binding upon and enforceable against the parties hereto and their
respective legal representatives, successors and assigns, except that the
rights and obligations of Pledgor contained herein shall not be
assignable.
24. Governing Law. The substantive laws of the State of Texas shall govern the
validity, construction, enforcement and interpretation of this Pledge
Agreement, unless the laws of another state or jurisdiction require the
application of the laws of such state or jurisdiction. This Pledge
Agreement is performable in Dallas County, Texas.
Page 5
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Pledge Agreement as of
the date and year first above written.
PLEDGOR:
Address: /s/ Edward R. Anderson
----------------------
Edward R. Anderson
7171 Forest Lane
Dallas, Texas 75230
SECURED PARTY:
Address: COMPUCOM SYSTEMS, INC.
7171 Forest Lane
Dallas, Texas 75230 By: /s/ M. Lazane Smith
-------------------
Its: SVP/CFO
Page 6
<PAGE>
EXHIBIT A
STOCK NUMBER OF
CERTIFICATE NO. SHARES
--------------- ---------
#0405 10/22/98 615,000
#0404 10/22/98 32,000
<PAGE>
Exhibit 10.28
TERM NOTE
(Thomas C. Lynch)
CompuCom Systems
$796,875 December 23, 1998
In consideration of the loan (hereinafter referred to as a "Loan")
CompuCom Systems, Inc., a Delaware corporation (the "Lender"), has made to
Thomas C. Lynch, (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
7171 Forest Lane, Dallas, Texas, 75230 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
$796,875.
The unpaid principal balance of the Note shall be paid in full on December
31, 2001. The Borrower hereby further promises to pay to the order of the Lender
interest on the outstanding principal amount from the date hereof, at a per
annum rate equal to 4.33% (the "Loan Rate"). The Borrower shall pay on demand
interest on any overdue payment of principal and interest (to the extent legally
enforceable) at the Loan Rate plus three percent (3%). In the event of
Borrower's termination of employment, the unpaid principal balance and all
accrued interest thereon shall be paid in full.
Interest shall be paid upon maturity or early repayment of the entire
outstanding principal balance of the Note.
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. All 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 in whole or
in part without any prepayment penalty or premium at any time or from time to
time by Borrower upon notice to
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<PAGE>
the Lender; provided, that any prepayment shall be applied first to any interest
due to the date of such prepayment on this Note.
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 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:
(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 or
failure to perform any agreements hereunder; or
(ii) an event of default under the Pledge Agreement dated, as of December
23, 1998 between Borrower and the Lender or an event of default under the
Security Agreement, dated as of December 23, 1998 between Borrower and
Safeguard Scientifics, Inc.; or
(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 an event of default hereunder, this Note shall
automatically without any action or notice by Lender, be accelerated and become
immediately due and payable, and Lender shall have all of the rights and
remedies provided for herein or otherwise available at law or in equity, all of
which remedies shall be cumulative.
Neither the reference to nor the provisions of any agreement or document
referred to herein shall affect or impair the absolute and unconditional
obligation of the Borrower to pay the principal of and interest on this Note as
herein provided.
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 Agreement, the Pledge Agreement
or the Security Agreement 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
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<PAGE>
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 Agreement
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 Agreement
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 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 Agreement 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 a single arbitrator. Judgment upon the arbitrator's 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 shall not be sought as a means to avoid or stay arbitration or
Summary Proceedings.
Each of the parties hereto hereby irrevocably designates and appoints
Corporation Service Company (the "Service Agent") with offices on the date
hereof at 1013 Centre Road, Wilmington, Delaware 19805, as its agent to receive
service of process in any Proceeding or Summary Proceeding. Each of the parties
hereto further covenants and agrees that, so long as this Agreement or the
Pledge Agreement shall be in effect, each such party shall maintain a duly
appointed agent for the service of summonses and other legal processes in the
State of Delaware
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<PAGE>
and will notify the other parties hereto of the name and address of such agent
if it is no longer the Service Agent.
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: CompuCom Systems, Inc.
Attn: Chief Financial Officer
7171 Forest Lane
Dallas, TX 75230
If to the Borrower: Thomas C. Lynch
1236 Denbigh Lane
Radnor, PA 19087
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.
This Note shall be governed by and interpreted in accordance with the laws
of the State of Delaware.
4
<PAGE>
IN WITNESS WHEREOF, the Borrower has duly executed this Term Note as of
the date first written above.
/s/ Thomas C. Lynch
-------------------
THOMAS C. LYNCH
5
<PAGE>
Exhibit 10.29
PLEDGE AGREEMENT
For good and valuable consideration and intending to be legally bound,
Thomas C. Lynch ("Pledgor") hereby assigns, pledges and grants to CompuCom
Systems, Inc., a Delaware corporation ("Lender"), a security interest in the
shares of capital stock and/or other securities of Lender, now owned by or
standing in the name of Pledgor or in which Pledgor has a legal or beneficial
interest, which are described on Schedule A attached hereto and made a part
hereof (collectively, the "Securities"), together with all (a) additional
property issued by Lender in respect of or related to the Securities and from
time to time acquired by Pledgor in any manner, and the certificates or
instruments representing such additional property, and all dividends, interest,
cash, instruments, and other property from time to time received, receivable, or
otherwise distributed or distributable in respect of or in exchange for any or
all of such additional property; and (b) cash and non-cash proceeds,
distributions, additions, substitutions, exchanges, redemptions and replacements
of, on or by reason of any of the foregoing (collectively, the "Collateral"), as
security for the payment and performance of all indebtedness, liabilities and
obligations of Pledgor (primary, secondary, direct, contingent, related,
unrelated, sole, joint or several) to Lender, whether for principal, interest,
fees, expenses or otherwise, (the "Obligations"), arising under that certain
promissory note, dated of even date herewith, issued by Lender in the principal
amount of $798,875 (the "Note"), all on the following terms and conditions.
A. Representations and Warranties. Pledgor represents and warrants that:
1. Pledgor has good title to the Securities free and clear of all
liens and encumbrances except the security interest created hereby.
2. Pledgor has delivered to Lender all stock certificates
representing or evidencing the Securities, accompanied by corresponding
assignment or transfer powers duly executed in blank by Pledgor, and this Pledge
Agreement and such powers have been duly and validly executed and are binding
and enforceable against Pledgor in accordance with their terms; and the pledge
of the Securities in accordance with the terms hereof creates a valid and
perfected first priority security interest in the Securities securing payment of
the Obligations.
3. No authorization, approval, consent, or other action by, and no
notice to or filing with, any governmental authority, regulatory body or other
person or entity is required either (i) for the pledge by Pledgor of the
Collateral pursuant to this Pledge Agreement or for the execution, delivery or
performance of this Pledge Agreement by Pledgor, or (ii) for the exercise by
Lender of the voting or other rights provided for in this Pledge Agreement or
the remedies in respect of the Collateral pursuant to this Pledge Agreement
(except as may be required in connection with such disposition by laws affecting
the offering and sale of securities generally).
B. Negative Pledge. Pledgor agrees not to (i) sell or otherwise dispose
of, or grant any option with respect to, any of the Collateral, or (ii) create
or permit to exist any lien, security
<PAGE>
interest or other charge or encumbrance upon or with respect to any of the
Collateral, except the security interest under this Pledge Agreement.
C. Additional Collateral. Prior to the full payment and performance of the
Obligations, Pledgor shall pledge hereunder, as additional Collateral, and shall
forthwith transfer and deliver to Lender immediately upon acquisition (directly
or indirectly) thereof, any and all additional shares of stock or other
securities of Borrower and any other property of any kind received, receivable,
or otherwise distributed or distributable on or by reason of the Collateral,
whether in the form of or by way of stock dividends, warrants, partial
liquidation, conversion, prepayments or redemptions (in whole or in part),
liquidation or otherwise with the sole exception of normal, regularly declared
cash dividends or cash interest payments (as the case may be) paid in respect of
the Collateral.
D. Pledgor's Rights in the Pledged Collateral Before Default. So long as
no Event of Default (as such term is defined in the Note) shall have occurred
and be continuing and Pledgor is in full compliance with the terms hereof:
1. Pledgor shall be entitled to receive and retain any normal,
regularly declared cash dividends or cash interest payments (as the case may be)
paid in respect of the Collateral, if such dividends and payments are permitted
under the Note.
2. Pledgor may exercise all voting rights, if any, pertaining to the
Collateral for any purpose not inconsistent with the terms hereof or of the
Obligations or Note. In the event any Collateral has been transferred into the
name of Lender or a nominee or nominees of Lender prior to the occurrence of
such Event of Default, Lender or its nominee shall execute and deliver upon
request of Pledgor an appropriate proxy in order to permit Pledgor to vote, if
applicable, the same.
E. Further Assurances. Pledgor shall from time to time promptly take all
actions (and execute, deliver and record all instruments and documents)
necessary or appropriate or requested by Lender, to continue the validity,
enforceability and perfected status of the pledge of the Collateral hereunder or
to enable Lender to exercise and enforce the rights and remedies hereunder with
respect to any of the Pledged Collateral.
F. Lender's Duties Toward Collateral. Lender shall be under no obligation
to take any actions and shall have no liability (except for gross negligence or
willful misconduct) with respect to the preservation or protection of the
Collateral or any underlying interests represented thereby as against any prior
or other parties. In the event Pledgor requests that Lender take or omit to take
action(s) with respect to the Collateral, Lender may refuse so to do with
impunity if Pledgor does not, upon request of Lender, post sufficient,
creditworthy indemnities with Lender which, in Lender's sole discretion, are
sufficient to hold it harmless from any possible liability of any kind in
connection therewith.
2
<PAGE>
G. Waivers by Pledgor. Pledgor agrees that Lender, at any time and without
affecting its rights in the Collateral and without notice to Pledgor, may grant
any extensions, releases or other modifications of any kind respecting the Note,
the Obligations and any Collateral. Pledgor, except as otherwise provided herein
or in the Note, waives all notices of any kind in connection with the
Obligations, the Note and any changes therein or defaults or enforcements
proceedings thereunder, whether against Pledgor or any other party. Pledgor
hereby waives any rights it has at equity or in law to require Lender to apply
any rights of marshalling or other equitable doctrines in such circumstances.
H. Remedies Upon Default. After the occurrence of any Event of Default (as
defined in the Note) or if any representation, warranty or agreement of Pledgor
hereunder is breached or proves to be false, erroneous or misleading in any
material respect:
1. Lender may transfer or cause to be transferred any of the
Collateral into its own or a nominee's or nominees' names.
2. Lender shall be entitled to receive and apply in payment of the
Obligations any cash dividends, interest or other payment on the Collateral.
3. Lender shall be entitled to exercise in Lender's discretion all
voting rights, if any, pertaining to the Collateral, and in connection therewith
and at the written request of Lender, Pledgor shall promptly execute any
appropriate dividend, payment or brokerage orders or proxies.
4. Pledgor shall promptly take any action necessary or required or
requested by Lender, in order to allow Lender fully to enforce the pledge of the
Collateral hereunder and realize thereon to the fullest possible extent
including, but not limited to, the filing of any claims with any court,
liquidator or trustee, custodian, receiver or other like person or party.
5. Lender shall have all the rights and remedies granted or
available to it hereunder, under the Uniform Commercial Code as in effect from
time to time in Delaware, under any other statute or the common law, or under
any of the Loan Documents, including without limitation the right to sell the
Collateral or any portion thereof at one or more public or private sales upon
ten (10) days' written notice and to bid thereat or purchase any part or all
thereof in its own or a nominee's or nominees' names, free and clear of any
equity of redemption; and to apply the net proceeds of the sale, after deduction
for any expenses of sale, including without limitation the payment of all
Lender's reasonable attorneys' fees in connection with the Obligations and the
sale, to the payment of the Obligations in any manner or order which Lender in
its sole discretion may elect, without further notice to or consent of Pledgor
and without regard to any equitable principles of marshalling or other like
equitable doctrines.
6. Lender may increase, in its sole discretion, but shall not be
required to do so, the Obligations by making additional advances or incurring
expenses for the account of Pledgor deemed appropriate or desirable by Lender in
order to protect, enhance, preserve or
3
<PAGE>
otherwise further the sale or disposition of the Collateral or any other
property it holds as security for the Obligations.
I. Dispositions of Collateral. Pledgor recognizes that Lender may be
unable to effect a sale to the public of all or part of the Collateral by reason
of certain prohibitions or restrictions in the federal or state securities laws
and regulations (collectively, the "Securities Laws"), or the provisions of
other federal and state laws, regulations or rulings, but may be compelled to
resort to one or more private sales to a restricted group of purchasers who will
be required to agree to acquire the Collateral for their own account, for
investment and not with a view to the further distribution or resale thereof
without restriction. Pledgor agrees that any sales(s) so made may be at prices
and on other terms less favorable to Pledgor than if the Collateral was sold to
the public, and that Lender has no obligation to delay sale of the Collateral
for period(s) of time necessary to permit the issuer thereof to register the
Collateral for sale to the public under any of the Securities Laws. Pledgor
agrees that negotiated sales whether for cash or credit made under the foregoing
circumstances shall not be deemed for that reason not to have been made in a
commercially reasonable manner. Pledgor shall cooperate with Lender and shall
satisfy any requirements under the Securities Laws applicable to the sale or
transfer of the Collateral by Lender.
In connection with any sale or disposition of the Collateral, Lender
is authorized to comply with any limitation or restriction as it may be advised
by its counsel is necessary or desirable in order to avoid any violation of
applicable law or to obtain any required approval of the purchaser(s) by any
governmental regulatory body or officer and it is agreed that such compliance
shall not result in such sale being considered not to have been made in a
commercially reasonable manner nor shall Lender be liable or accountable by
reason of the fact that the proceeds obtained at such sale(s) are less than
might otherwise have been obtained.
Lender may elect to obtain the advice of any independent
nationally-known investment banking firm, which is a member firm of the New York
Stock Exchange, with respect to the method and manner of sale or other
disposition of any of the Collateral, the best price reasonably obtainable
therefor, the consideration of cash and/or credit terms, or any other details
concerning such sale or disposition. Lender, in its sole discretion, may elect
to sell on such credit terms which it deems reasonable.
J. Lender's Expenses. Pledgor shall pay Lender on demand all costs and
expenses incurred by Lender (including, without limitation, counsel fees and
expenses) in connection with (i) the preparation, negotiation, and closing of
this Pledge Agreement, and any modifications hereto, (ii) the custody,
preservation, sale or collection or realization of the Collateral, and (iii) the
exercise or enforcement of Lender's rights hereunder.
K. Successors and Assigns. This Pledge Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective heirs,
personal representatives, successors and assigns and shall be governed as to its
validity, interpretation and effect by the
4
<PAGE>
laws of the State of Delaware; and any terms used herein which are defined in
the Uniform Commercial Code as enacted in Delaware shall have the meanings
therein set forth.
L. Amendments and Waivers. No amendment or waiver of any provision of this
Agreement nor consent to any departure by Pledgor herefrom shall in any event be
effective unless the same shall be in writing and signed by Lender, and then
such amendment, waiver or consent shall be effective only in the specific
instance and for the specific purpose for which given. No failure or delay on
the part of Lender in the exercise of any right, power, or remedy under this
Pledge Agreement or the Note shall under any circumstances constitute or be
deemed to be a waiver thereof, or prevent the exercise thereof in that or any
other instance.
M. Attorney-in-Fact. Pledgor hereby irrevocably appoints Lender as its
attorney-in-fact, in the name of Pledgor or otherwise, from time to time in
Lender's discretion and at Pledgor's expense, to take any action and to execute,
deliver and record any instruments or documents in connection with the
Collateral which Lender may deem necessary or advisable to accomplish the
purposes of this Pledge Agreement including, without limitation, to receive,
endorse, and collect all instruments made payable to Pledgor representing any
dividend, interest, or other distribution in respect of the Pledged Collateral
or any part thereof and to give full discharge for the same. Lender shall not,
in its capacity as such attorney-in-fact, be liable for any acts or omissions,
nor for any error of judgment or mistake of fact or law, but only for gross
negligence or willful misconduct.
N. Entire Agreement. This Pledge Agreement, and all agreements and
instruments to be delivered by the parties pursuant hereto or in connection
herewith, represent the entire understanding of the parties with respect to the
subject matter hereof. Except as otherwise indicated, all agreements defined
herein refer to the same as from time to time amended or supplemented or the
terms thereof waived or modified in accordance herewith and therewith. Any
provision hereof found to be illegal, invalid or unenforceable for any reason
whatsoever shall not affect the legality, validity or enforceability of the
remainder hereof.
P. Joint and Several Obligations. If more than one Pledgor signs this
Pledge Agreement, all references herein to Pledgor shall include all such
Pledgors and each shall be jointly and severally bound by the terms and
provisions hereof.
Q. Notices. All notices, demands or other communications required or
permitted hereunder shall be in writing and shall be given as provided in the
Note, using Pledgor's address as indicated below.
R. Partial Releases; Termination. Any of the Collateral may be released
from this Pledge Agreement without altering, varying, or diminishing in any way
this Pledge Agreement or the security interest granted hereby as to the
Collateral not expressly released, and this Pledge Agreement and such security
interest shall continue in full force and effect as to all of the Collateral not
expressly released. This Pledge Agreement and Lender's rights in the Collateral
shall cease, terminate and be void upon the repayment in full of the
Obligations. Upon such
5
<PAGE>
repayment and termination, Lender shall execute such documents as may reasonably
be required by Pledgor to release Lender's security interest in the Collateral.
IN WITNESS WHEREOF, Pledgor has executed this Pledge Agreement as of the
23rd day of December, 1998.
WITNESS OR ATTEST: PLEDGOR:
/s/ M. Lazane Smith /s/ Thomas C. Lynch
- ------------------------- -------------------------
Name: Thomas C. Lynch
Address: 1236 Denbigh Lane
Radnor, PA 19087
Fax No.: 972-856-5395
6
<PAGE>
Schedule A
Description of Pledged Securities
================================================================================
Stock No. of
Issuer Class of Stock Certificate No. Shares
================================================================================
CompuCom Systems, Inc. Common Stock 500,000
================================================================================
7
<PAGE>
Exhibit 10.30
TERM NOTE
(Thomas C. Lynch)
Safeguard Scientifics
$806,078.13 December 23, 1998
In consideration of the loan (hereinafter referred to as a "Loan")
Safeguard Scientifics, Inc., a Pennsylvania corporation (the "Lender"), has made
to Thomas C. Lynch, (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 $806,078.13.
The unpaid principal balance of the Note shall be paid in full on December
31, 2001. The Borrower hereby further promises to pay to the order of the Lender
interest on the outstanding principal amount from the date hereof, at a per
annum rate equal to 4.33% (the "Loan Rate"). The Borrower shall pay on demand
interest on any overdue payment of principal and interest (to the extent legally
enforceable) at the Loan Rate plus three percent (3%). In the event of
Borrower's termination of employment with CompuCom Systems, Inc., the unpaid
principal balance and all accrued interest thereon shall be paid in full.
Interest shall be payable upon maturity or early repayment of the entire
outstanding principal balance of the Note.
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. All 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 in whole or
in part without any prepayment penalty or premium at any time or from time to
time by Borrower upon notice to the Lender; provided, that any prepayment shall
be applied first to any interest due to the date of such prepayment on this
Note.
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
<PAGE>
maximum allowable rate, and any excess payment of interest made by 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:
(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 or
failure to perform any agreements hereunder; or
(ii) an event of default under the Pledge Agreement dated as of December
23, 1998 between Borrower and CompuCom Systems, Inc., a Delaware corporation
or an event of default under the Security Agreement, dated as of December 23,
1998, between Borrower and the Lender; or
(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 an event of default hereunder, this Note shall
automatically without any action or notice by Lender, be accelerated and become
immediately due and payable, and Lender shall have all of the rights and
remedies provided for herein or otherwise available at law or in equity, all of
which remedies shall be cumulative.
Neither the reference to nor the provisions of any agreement or document
referred to herein shall affect or impair the absolute and unconditional
obligation of the Borrower to pay the principal of and interest on this Note as
herein provided.
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 Agreement, the Pledge Agreement
or the Security Agreement 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
<PAGE>
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 Agreement 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 Agreement
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 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 Agreement 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 a single arbitrator. Judgment upon the arbitrator's 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 shall not be sought as a means to avoid or stay arbitration or
Summary Proceedings.
Each of the parties hereto hereby irrevocably designates and appoints
Corporation Service Company (the "Service Agent") with offices on the date
hereof at 1013 Centre Road, Wilmington, Delaware 19805, as its agent to receive
service of process in any Proceeding or Summary Proceeding. Each of the parties
hereto further covenants and agrees that, so long as this Agreement shall be in
effect, each such party shall maintain a duly appointed agent for the service of
summonses and other legal processes in the State of Delaware and will notify the
other parties hereto of the name and address of such agent if it is no longer
the Service Agent.
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
<PAGE>
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 Scientifics, Inc.
800 The Safeguard Building
435 Devon Park Drive
Wayne, PA 19087-1945
Attn: General Counsel
If to the Borrower: Thomas C. Lynch
1236 Denbigh Lane
Radnor, PA 19087
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.
This Note shall be governed by and interpreted in accordance with the laws
of the State of Delaware.
IN WITNESS WHEREOF, the Borrower has duly executed this Term Note as of
the date first written above.
<PAGE>
/s/ Thomas C. Lynch
-------------------
THOMAS C. LYNCH
<PAGE>
Exhibit 10.31
SECURITY AGREEMENT
For good and valuable consideration and intending to be legally bound,
Thomas C. Lynch ("Pledgor") hereby assigns, pledges and grants to Safeguard
Scientifics, Inc., a Pennsylvania corporation ("Lender"), a security interest in
the interests of Pledgor in the Long Term Incentive Plan ("LTIP") of the Lender,
now or hereafter owned by or standing in the name of Pledgor or in which Pledgor
has a legal or beneficial interest, which present interests are described on
Schedule A attached hereto and made a part hereof (collectively, the
"Securities"), together with all (a) additional property relating to or in
respect of the Securities issued by the Lender and from time to time acquired by
Pledgor in any manner, and the certificates or instruments representing such
additional property, and all dividends, interest, cash, instruments, and other
property from time to time received, receivable, or otherwise distributed or
distributable in respect of or in exchange for any or all of such additional
property; and (b) cash and non-cash proceeds, distributions, additions,
substitutions, exchanges, redemptions and replacements of, on or by reason of
any of the foregoing (collectively, the "Collateral"), as security for the
payment and performance of all indebtedness, liabilities and obligations of the
Pledgor (primary, secondary, direct, contingent, related, unrelated, sole, joint
or several) to Lender, whether for principal, interest, fees, expenses or
otherwise, (the "Obligations"), arising under that certain promissory note,
dated of even date herewith, issued by the Pledgor in the principal amount of
$806,078.13 (the "Note"), all on the following terms and conditions.
A. Representations and Warranties. Pledgor represents and warrants that:
1. Pledgor has good title to the Securities free and clear of all
liens and encumbrances except the security interest created hereby and except
for vesting and those general restrictions applicable to all participants in the
said LTIP.
2. No authorization, approval, consent, or other action by, and no
notice to or filing with, any governmental authority, regulatory body or other
person or entity is required either (i) for the pledge by Pledgor of the
Collateral pursuant to this Pledge Agreement or for the execution, delivery or
performance of this Pledge Agreement by Pledgor, or (ii) for the exercise by
Lender of the other rights provided for in this Pledge Agreement or the remedies
in respect of the Collateral pursuant to this Pledge Agreement (except as may be
required in connection with such disposition by laws affecting the offering and
sale of securities generally).
B. Negative Pledge as to Collateral and Certain Property. Pledgor agrees
not to (i) sell or otherwise dispose of, or grant any option with respect to,
any of the Collateral, or (ii) create or permit to exist any lien, security
interest or other charge or encumbrance upon or with respect to any of the
Collateral, except the security interest under this Pledge Agreement. In
addition, without the prior consent of Lender, Pledgor will not sell his
interest in the property located at 1236 Denbigh Lane, Radnor PA.
<PAGE>
C. Further Assurances. Pledgor shall from time to time promptly take all
actions (and execute, deliver and record all instruments and documents)
necessary or appropriate or requested by Lender, to continue the validity,
enforceability and perfected status of the pledge of the Collateral hereunder or
to enable Lender to exercise and enforce the rights and remedies hereunder with
respect to any of the Collateral.
D. Lender's Duties Toward Collateral. Lender shall be under no obligation
to take any actions and shall have no liability (except for gross negligence or
willful misconduct) with respect to the preservation or protection of the
Collateral or any underlying interests represented thereby as against any prior
or other parties. In the event Pledgor requests that Lender take or omit to take
action(s) with respect to the Collateral, Lender may refuse so to do with
impunity if Pledgor does not, upon request of Lender, post sufficient,
creditworthy indemnities with Lender which, in Lender's sole discretion, are
sufficient to hold it harmless from any possible liability of any kind in
connection therewith.
E. Waivers by Pledgor. Pledgor agrees that Lender, at any time and without
affecting its rights in the Collateral and without notice to Pledgor, may grant
any extensions, releases or other modifications of any kind respecting the Note,
the Obligations and any Collateral. Pledgor, except as otherwise provided herein
or in the Note, waives all notices of any kind in connection with the
Obligations, the Note and any changes therein or defaults or enforcements
proceedings thereunder, whether against Pledgor or any other party. Pledgor
hereby waives any rights it has at equity or in law to require Lender to apply
any rights of marshalling or other equitable doctrines in such circumstances.
F. Remedies Upon Default. After the occurrence of any Event of Default (as
defined in the Note) or if any representation, warranty or agreement of Pledgor
hereunder is breached or proves to be false, erroneous or misleading in any
material respect:
1. Lender may transfer or cause to be transferred any of the
Collateral into its own or a nominee's or nominees' names.
2. Lender shall be entitled to receive and apply in payment of the
Obligations any cash dividends, interest or other payment on the Collateral.
3. Lender shall be entitled to exercise in Lender's discretion all
voting rights, if any, pertaining to the Collateral, and in connection therewith
and at the written request of Lender, Pledgor shall promptly execute any
appropriate dividend, payment or brokerage orders or proxies.
4. Pledgor shall promptly take any action necessary or required or
requested by Lender, in order to allow Lender fully to enforce the pledge of the
Collateral hereunder and realize thereon to the fullest possible extent
including, but not limited to, the filing of any claims with any court,
liquidator or trustee, custodian, receiver or other like person or party.
2
<PAGE>
5. Lender shall have all the rights and remedies granted or
available to it hereunder, under the Uniform Commercial Code as in effect from
time to time in Delaware, under any other statute or the common law, or under
any of the Loan Documents, including without limitation the right to sell the
Collateral or any portion thereof at one or more public or private sales upon
ten (10) days' written notice and to bid thereat or purchase any part or all
thereof in its own or a nominee's or nominees' names, free and clear of any
equity of redemption; and to apply the net proceeds of the sale, after deduction
for any expenses of sale, including without limitation the payment of all
Lender's reasonable attorneys' fees in connection with the Obligations and the
sale, to the payment of the Obligations in any manner or order which Lender in
its sole discretion may elect, without further notice to or consent of Pledgor
and without regard to any equitable principles of marshalling or other like
equitable doctrines.
6. Lender may increase, in its sole discretion, but shall not be
required to do so, the Obligations by making additional advances or incurring
expenses for the account of Pledgor deemed appropriate or desirable by Lender in
order to protect, enhance, preserve or otherwise further the sale or disposition
of the Collateral or any other property it holds as security for the
Obligations.
G. Dispositions of Collateral. Pledgor recognizes that Lender may be
unable to effect a sale to the public of all or part of the Collateral by reason
of certain prohibitions or restrictions in the federal or state securities laws
and regulations (collectively, the "Securities Laws"), or the provisions of
other federal and state laws, regulations or rulings, but may be compelled to
resort to one or more private sales to a restricted group of purchasers who will
be required to agree to acquire the Collateral for their own account, for
investment and not with a view to the further distribution or resale thereof
without restriction. Pledgor agrees that any sales(s) so made may be at prices
and on other terms less favorable to Pledgor than if the Collateral was sold to
the public, and that Lender has no obligation to delay sale of the Collateral
for period(s) of time necessary to permit the issuer thereof to register the
Collateral for sale to the public under any of the Securities Laws. Pledgor
agrees that negotiated sales whether for cash or credit made under the foregoing
circumstances shall not be deemed for that reason not to have been made in a
commercially reasonable manner. Pledgor shall cooperate with Lender and shall
satisfy any requirements under the Securities Laws applicable to the sale or
transfer of the Collateral by Lender.
In connection with any sale or disposition of the Collateral, Lender
is authorized to comply with any limitation or restriction as it may be advised
by its counsel is necessary or desirable in order to avoid any violation of
applicable law or to obtain any required approval of the purchaser(s) by any
governmental regulatory body or officer and it is agreed that such compliance
shall not result in such sale being considered not to have been made in a
commercially reasonable manner nor shall Lender be liable or accountable by
reason of the fact that the proceeds obtained at such sale(s) are less than
might otherwise have been obtained.
Lender may elect to obtain the advice of any independent
nationally-known investment banking firm, which is a member firm of the New York
Stock Exchange, with respect
3
<PAGE>
to the method and manner of sale or other disposition of any of the Collateral,
the best price reasonably obtainable therefor, the consideration of cash and/or
credit terms, or any other details concerning such sale or disposition. Lender,
in its sole discretion, may elect to sell on such credit terms which it deems
reasonable.
H. Lender's Expenses. Pledgor shall pay Lender on demand all costs and
expenses incurred by Lender (including, without limitation, counsel fees and
expenses) in connection with (i) the preparation, negotiation, and closing of
this Pledge Agreement, and any modifications hereto, (ii) the custody,
preservation, sale or collection or realization of the Collateral, and (iii) the
exercise or enforcement of Lender's rights hereunder.
I. Successors and Assigns. This Pledge Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective heirs,
personal representatives, successors and assigns and shall be governed as to its
validity, interpretation and effect by the laws of the State of Delaware; and
any terms used herein which are defined in the Uniform Commercial Code as
enacted in Delaware shall have the meanings therein set forth.
J. Amendments and Waivers. No amendment or waiver of any provision of this
Agreement nor consent to any departure by Pledgor herefrom shall in any event be
effective unless the same shall be in writing and signed by Lender, and then
such amendment, waiver or consent shall be effective only in the specific
instance and for the specific purpose for which given. No failure or delay on
the part of Lender in the exercise of any right, power, or remedy under this
Pledge Agreement or any of the Note shall under any circumstances constitute or
be deemed to be a waiver thereof, or prevent the exercise thereof in that or any
other instance.
K. Attorney-in-Fact. Pledgor hereby irrevocably appoints Lender as its
attorney-in-fact, in the name of Pledgor or otherwise, from time to time in
Lender's discretion and at Pledgor's expense, to take any action and to execute,
deliver and record any instruments or documents in connection with the
Collateral which Lender may deem necessary or advisable to accomplish the
purposes of this Pledge Agreement including, without limitation, to receive,
endorse, and collect all instruments made payable to Pledgor representing any
dividend, interest, or other distribution in respect of the Pledged Collateral
or any part thereof and to give full discharge for the same. Lender shall not,
in its capacity as such attorney-in-fact, be liable for any acts or omissions,
nor for any error of judgment or mistake of fact or law, but only for gross
negligence or willful misconduct.
L. Entire Agreement. This Pledge Agreement, and all agreements and
instruments to be delivered by the parties pursuant hereto or in connection
herewith, represent the entire understanding of the parties with respect to the
subject matter hereof. Except as otherwise indicated, all agreements defined
herein refer to the same as from time to time amended or supplemented or the
terms thereof waived or modified in accordance herewith and therewith. Any
provision hereof found to be illegal, invalid or unenforceable for any reason
whatsoever shall not affect the legality, validity or enforceability of the
remainder hereof.
4
<PAGE>
M. Joint and Several Obligations. If more than one Pledgor signs this
Pledge Agreement, all references herein to Pledgor shall include all such
Pledgors and each shall be jointly and severally bound by the terms and
provisions hereof.
N. Notices. All notices, demands or other communications required or
permitted hereunder shall be in writing and shall be given as provided in the
Note, using Pledgor's address as indicated below.
O. Partial Releases; Termination. Any of the Collateral may be released
from this Pledge Agreement without altering, varying, or diminishing in any way
this Pledge Agreement or the security interest granted hereby as to the
Collateral not expressly released, and this Pledge Agreement and such security
interest shall continue in full force and effect as to all of the Collateral not
expressly released. This Pledge Agreement and Lender's rights in the Collateral
shall cease, terminate and be void upon the repayment in full of the
Obligations. Upon such repayment and termination, Lender shall execute such
documents as may reasonably be required by Pledgor to release Lender's security
interest in the Collateral.
IN WITNESS WHEREOF, Pledgor has executed this Pledge Agreement as of the
23rd day of December, 1998.
WITNESS OR ATTEST: PLEDGOR:
/s/ M. Lazane Smith /s/ Thomas C. Lynch
- ------------------------ ------------------------
Name: Thomas C. Lynch
Address: 1236 Denbigh Lane
Radnor, PA 19087
Fax No.: 972-856-5395
5
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net sales............................................. $2,275,143 $1,985,225 $2,062,809 $1,517,740 $1,412,026
Net earnings.......................................... 110,123(1) 21,501 19,927 18,263 15,740
Earnings per share
Basic............................................. 3.46(1) .69 .67 .63 .56
Diluted........................................... 3.22(1) .66 .61 .53 .47
Total assets.......................................... 1,068,690(2) 714,541(3) 936,070 742,874 617,155
Long-term debt, including current portion
CompuCom.......................................... 83,429 100,425(3) 239,946 123,461 137,310
Other............................................. 123,981 30,060 21,419 110,835 98,838
Convertible subordinated notes........................ 71,345 90,881 102,131 -- --
Shareholders' equity.................................. 342,859(1) 207,070 169,011 154,309 110,547
</TABLE>
No cash dividends have been declared in any of the years presented, and the
Company has no present intention to declare cash dividends.
(1) Increase relates primarily to net securities gains from Coherent/Tellabs
transactions (see Note 2 to the Consolidated Financial Statements).
(2) Increase relates primarily to recording the Company's investment in Tellabs
at fair value, increased investments, and increased assets at CompuCom resulting
from acquisitions in 1998 (see Notes 2 and 10 to the Consolidated Financial
Statements).
(3) Reflects the effect of $175 million in off-balance sheet financing at
CompuCom which reduced accounts receivable and long-term debt (see Note 3 to the
Consolidated Financial
Statements).
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Safeguard Scientifics, Inc. (the Company) develops and operates emerging
growth information technology companies. The Company's present emphasis is in
eCommerce, enterprise applications, and network infrastructure, all of which
are expected to benefit from the growing use of the Internet as a fundamental
business tool. The Company operates as a long-term partner, working closely
with its partnership companies to provide various operational and management
services to build value in preparation for public rights offerings and
beyond. The Company's partnership companies include privately held companies
and public companies that together form a community of shared resources. The
Company also assists in managing and working with several venture capital
funds. 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 price. Not
all of the Company's private holdings are appropriate for this process;
therefore, the Company also considers mergers, sales, traditional initial
public offerings, and subscription offerings.
Consistent with its past approach, the Company plans to acquire
interests in early to mid-stage companies that can become leaders in their
respective markets. The Company is already active in the Internet through the
involvement of over 10 of its partnership companies, including Internet
Capital Group. Recognizing the growing importance of the Internet, the
Company sponsored the formation of Internet Capital in 1996 to focus
exclusively on owning, operating, and managing business-to-business eCommerce
companies. The Company owns approximately 26% of Internet Capital's
outstanding voting securities at December 31, 1998.
The Company feels the best way to build future value for its
shareholders is to be involved in Internet markets. As the Company acquires
interests in more Internet-related companies, it could experience increased
volatility in its earnings, as many early stage Internet companies have
operating losses. For several years, the Company has had a financial model of
exceeding the prior year's quarterly earnings per share (EPS) by $.01. This
was essentially accomplished through sales of shares of publicly traded
partnership companies. Given the volatility of the technology market,
especially Internet-related stocks, the Company will no longer sell shares of
publicly traded partnership companies solely to achieve a targeted EPS. As a
result, the Company's net earnings could fluctuate significantly from quarter
to quarter, depending on when the Company decides to sell those securities.
There can be no guarantee that the Company will report net earnings in each
period.
EFFECT OF VARIOUS ACCOUNTING METHODS ON THE
CONSOLIDATED FINANCIAL STATEMENTS
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 share-holders 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 net 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 1997, also were included
<PAGE>
in the Company's consolidated operating results through their
respective sale dates.
Partnership 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% of the voting
interest when 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 "Equity in losses (income) of affiliates" 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.
Partnership companies 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 is reflected in the Company's results of operations each
reporting period.
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.
As mentioned in Operations Overview, the Company's consolidated
revenues and related costs and expenses are significantly influenced by the
results of operations of CompuCom. At December 31, 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 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 the 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 14 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 loss (income)" 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 14 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.
OPERATIONS OVERVIEW
The Company's operations have been classified into the following business
segments: CompuCom, Tangram, general corporate operations, and other.
CompuCom's operations are further defined into two segments-sales of
distributed desktop computer products (product) and configuration, network
integration, and technology support (service). Tangram's operations include
the design, development, sale, and implementation of enterprise-wide asset
tracking and software management solutions. General corporate operations
consists of developing and operating partnership companies, most of which are
engaged in information technology businesses. Other primarily includes
Pioneer and Premier which were sold during 1997 and Commercial Real Estate
which was sold during 1996.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED
DECEMBER 31, 1997
Net sales increased 15% to $2.3 billion in 1998 compared to $2.0 billion in
1997 as CompuCom experienced a 16% sales increase. The increase at CompuCom
was due primarily to a 17% product sales increase resulting from the
acquisitions of Computer Integration Corporation (CIC) and Dataflex
Corporation (the acquisitions) during the second quarter of 1998. Excluding
the acquisitions, CompuCom's product sales increased approximately 4% in
1998, and CompuCom sold 26% more desktop, laptop, and server units. However,
a decline in the average sales prices of these units as a result of
manufacturer price reductions lessened the impact of this unit growth on
sales. Although the trend of declining average sales prices continued to slow
in 1998 relative to 1997, CompuCom expects to be
<PAGE>
continually impacted by this trend in the short-term, as CompuCom must sell
more units to generate the same amount of product sales. CompuCom's service
sales increased 9% to $257.9 million in 1998 from $236.2 million in 1997,
which was primarily due to increases in field engineering, which is driven in
part by product unit sales volume and by the acquisitions. Excluding the
acquisitions, service sales increased approximately 5%. CompuCom represented
99% of the Company's total consolidated net sales in 1998.
The Company's overall gross margin was 13.3% in 1998 compared to 14.4%
in 1997. The decrease is primarily attributable to reduced gross margins at
CompuCom. CompuCom's product gross margin decreased to 9.8% in 1998 compared
to 10.4% in 1997. CompuCom attributes this to a decline in billed margins due
to heightened competition from other corporate resellers and direct
marketers. CompuCom expects to continue to experience declining product gross
margins in the short-term. CompuCom's service gross margin was 32.0% in 1998
compared to 35.7% in 1997. The decrease was primarily caused by lower billing
per engineer for CompuCom's service personnel, particularly in the systems
engineering group. CompuCom does not expect to see improvement in its service
gross margin percentage in the short-term.
Securities and other gains in 1998 include a $245.3 million gain on the
merger of Coherent Communications Systems Corporation and Tellabs, Inc.,
partially offset by a $48.6 million loss comprised of unrealized losses
resulting from the decline in the market price of Tellabs subsequent to the
merger and gains on the sales of Tellabs stock. Securities and other gains in
1998 also include the open market sales of a portion of the Company's
interest in Cambridge Technology Partners, the gain resulting from the merger
of Integrated Systems Consulting Group with First Consulting Group, and
distributions received from the Company's associated venture funds.
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 of Diamond
Technology Partners and ChromaVision Medical Systems in rights offerings to
the Company's shareholders, and distributions received from the Company's
associated venture funds. The Company also recorded gains in 1997 from the
sale of Premier and Pioneer. Partially offsetting securities and other gains
in these years 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 certain partnership companies, 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.
Equity in losses (income) of affiliates fluctuates with the Company's
ownership percentage and the operating results of partnership companies
accounted for on the equity method. In 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 and other one-time charges at certain partnership
companies. Equity income decreased as a result of the above transactions as
well as increased operating losses at certain partnership companies,
partially offset by the continued strong overall performances at Cambridge
and Sanchez Computer Associates, and increased earnings at Internet Capital
resulting from securities sales. In 1998, the Company's public investments
accounted for on the equity method include Cambridge, ChromaVision, OAO
Technology Solutions (OAOT), Sanchez, and USDATA Corporation. The Company
expects certain of its partnership companies to continue to invest in their
products and services and to recognize operating losses. Additionally, the
Company expects to acquire interests in more Internet-related companies, and
many early stage Internet companies have operating losses. As a result,
equity losses of affiliates could increase significantly.
Cambridge reported 40% revenue growth in 1998 with earnings up 50%,
excluding business combination costs. At year end, approximately 50% of its
projects worldwide contained an Internet or interactive component. The
Company owns approximately 15% of Cambridge's common stock at December 31,
1998.
ChromaVision is making significant progress with clinical trials for its
Automated Cellular Imaging System (ACIS-TM-). ChromaVision submitted an
application to the FDA in November 1998 to use the ACIS-TM- for
Immunohistochemical (IHC) applications. Clearance from the FDA, which is
expected in the first quarter of 1999, would rapidly accelerate expansion of
the spectrum of clinical tests that can be performed on the ACIS-TM-
platform. The Company's increased losses primarily resulted from the
increased level of development and costs associated with the FDA application.
The Company owns approximately 26% of ChromaVision's common stock at
December 31, 1998.
OAOT initiated management and cost restructurings in 1998 which are
expected to result in annualized pretax savings in excess of $3 million.
Combined with two acquisitions in 1998, a $60 million IT staffing
augmentation services company and an Enterprise Resource Planning integrator,
OAOT is targeting higher margin service business in 1999. It also announced a
10-year contract for approximately $150 million with IBM Global Services to
provide application development and maintenance services in support of IBM's
application outsourcing contract with AT&T. The Company owns approximately
34% of OAOT's common stock at December 31, 1998.
Sanchez reported an 84% increase in earnings per share in 1998 with 53%
revenue growth. Sanchez also recently announced the formation of a dedicated
electronic banking service center through an agreement to purchase a banking
technology center near Pittsburgh. The new service offering, called
e-Profile.com, will allow leading financial institutions to launch new direct
banks from an operations and technology perspective in 30 to 90 days with
little or no up-front capital. The Company owns approximately 27% of
Sanchez's common stock at December 31, 1998.
USDATA announced its return to profitability in the fourth quarter of
1998 following 7 quarters of losses. USDATA also sold its hardware business
during 1998. The Company owns approximately 26% of USDATA's common stock at
December 31, 1998.
In October 1998, CompuCom's Board of Directors approved a restructuring
plan designed to reduce CompuCom's cost structure by approximately 1.25% to
1.5% of sales by closing branch facilities and reducing CompuCom's workforce
by approximately 10%. As a result, CompuCom recorded a restructuring charge
in the fourth quarter 1998 of $16.4 million (pretax), the effect of which is
approximately
<PAGE>
$8.1 million (pretax) to the Company's earnings, after recording minority
interest. The charge primarily consists of costs associated with the closing
of certain facilities and disposing of related fixed assets, as well as
employee severance and benefits related to the reduction in workforce.
CompuCom continues to maintain a local presence in all current markets
through the use of its virtual office strategy. As a result of its fourth
quarter 1998 restructuring, CompuCom expects to realize reductions in
operating expenses, primarily in selling and general and administrative
expenses, from its fourth quarter 1998 levels. These reductions may not
result in lower operating expenses in comparison to the respective period of
the prior year (see Note 5 to the Consolidated Financial Statements).
Selling and service expenses increased in absolute dollars and as a
percentage of sales in 1998 primarily due to increased expenses at CompuCom.
The increases at CompuCom were primarily due to an increase in the sales
force as a result of the CIC and Dataflex acquisitions, the hiring of
additional sales representatives, higher commission expense, growth in its
service business, and increased spending on training as a result of the
increase in the size of the engineering force.
General and administrative expenses increased in absolute dollars
primarily due to increased expenses at CompuCom and increased corporate
expenses incurred to support the growing activities of the partnership
companies. The increase was partially offset by the elimination of expenses
resulting from the sale of Pioneer in 1997. The increases at CompuCom were
primarily due to expenditures to broaden its eCommerce capabilities, costs
related to its ongoing campus recruiting program, and costs associated with
the integration of CIC and Dataflex. 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.
Depreciation and amortization increased primarily due to an increase at
CompuCom, which was partially offset by the elimination of depreciation and
amortization resulting from the sale of Premier and Pioneer in 1997. The
increase at CompuCom is associated with upgrading its hardware and software
and increased depreciation and amortization as a result of the acquisitions
completed during the first half of 1998. As a result of CompuCom's fourth
quarter 1998 restructuring, CompuCom expects to realize a slight decrease in
depreciation expense associated with the closing of branch facilities and
disposal of those related depreciable assets.
Interest and financing expenses increased in 1998 compared to 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 interests in new or existing partnership companies,
partially offset by the elimination of interest due to the conversion of
$19.5 million of the Company's Convertible Subordinated Notes (Notes) into
the Company's Common Stock in 1998.
Minority interest decreased as a result of decreased earnings at
CompuCom, including its fourth quarter 1998 restructuring charge. 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, and its ability to respond to increased
competition from its suppliers' direct selling initiatives. It also depends
on CompuCom's ability to reduce operating expenses, demand for product,
competition, manufacturer product availability, effective utilization of
vendor programs, and its ability to implement its virtual office strategy as
part of its fourth quarter 1998 restructuring.
The effective tax rate decreased to 35.8% in 1998 compared to 40% for
1997 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.
The Company's net earnings increased significantly in 1998 compared to
1997 primarily due to higher securities and other gains related to
Coherent/Tellabs transactions, partially offset by decreased earnings at
CompuCom. Securities and other gains of varying magnitude have been realized
in recent years. The Company's net earnings could fluctuate significantly
from period to period, depending on when the Company decides to sell shares
of publicly traded partnership companies. There can be no guarantee that the
Company will report net earnings in each period.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED
DECEMBER 31, 1996
Net sales decreased 4% in 1997 compared to 1996 primarily attributable to
the sale of Premier and Pioneer during 1997 and decreased product sales at
CompuCom as CompuCom primarily focused on increasing earnings through growth
in its higher-margin service business in 1997. In addition, CompuCom believes
the decrease in product sales is also attributable to an increase in direct
marketers' market share and CompuCom's efforts during much of 1997 to reduce
the amount of low-margin product business. CompuCom's total sales decreased
2% for the year with service sales increasing 40% while product sales
decreased 6%. CompuCom represented 98% and 97% of the Company's total
consolidated net sales in 1997 and 1996, respectively.
The Company's overall gross margin was 14.4% in 1997 compared to 13.1%
for 1996. The increase is attributable to increased product margins at
CompuCom as well as increased service sales at CompuCom which generated
higher gross margins relative to product sales. Product margins increased to
10.4% in 1997 compared to 10.0% in 1996 primarily due to a reduction in the
relative volume of sales to some of CompuCom's larger customers, which
typically generate lower product margins, and an increase in the amount of
manufacturer-sponsored incentives in 1997 compared to 1996. Service gross
margin increased to 35.7% in 1997 from 33.3% in 1996 primarily due to
increased productivity of CompuCom's service engineers.
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 of Diamond
and ChromaVision in rights offerings to the Company's shareholders, and
distributions received from the Company's associated venture funds. The
Company also recorded gains in 1997 from the sale of Premier and Pioneer.
Securities and other gains in 1996 included the open market sales of a
portion of the Company's interests in Coherent and Cambridge, and the sale of
shares of Integrated Systems
<PAGE>
and Sanchez in rights offerings to the Company's shareholders. Securities and
other gains in 1996 also included the sale of the Company's remaining
interest in Gandalf Technologies and the Company's share of CompuCom's gain
from the sale of substantially all of its holdings in PC Service Source.
Partially offsetting securities and other gains in these years 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 partnership companies, and provisions for other investments
and notes.
Increased equity income from most of the Company's public investments in
1997 was more than offset by the Company's share of losses at certain
private, early stage equity affiliates and increased amortization of the
excess of carrying value of equity affiliates over the Company's share of the
underlying net assets. The Company's public equity investments accounted for
on the equity method in 1997 included Cambridge, ChromaVision, Coherent,
OAOT, Sanchez, and USDATA.
Selling and service expenses increased in 1997 compared to 1996
primarily due to CompuCom's costs to manage and expand its growing service
business. General and administrative expenses, in absolute dollars and as a
percentage of sales, increased in 1997 compared to 1996 primarily due to
CompuCom's continued investment in its information system resources required
to broaden eCommerce capabilities and improve efficiency within its customer
center, Tangram's investment in workforce and research and development for
Asset Insight-TM-, and increased corporate expenses incurred to support the
growing activities of the partnership companies. These increases were
partially offset by the elimination of expenses resulting from the sale of
Premier and Pioneer in 1997.
Depreciation and amortization decreased in 1997 primarily due to the
sale of Premier and Pioneer in 1997 and the Company's commercial real estate
operations in 1996, partially offset by increased depreciation at CompuCom.
The increase at CompuCom is primarily associated with its new corporate
headquarters and operations campus and enhancements to CompuCom's information
systems.
Interest and financing expenses decreased slightly in l997 compared to
1996 primarily as a result of the conversion of approximately $24.2 million
of the Company's Notes in the fourth quarter of 1996 and the first quarter of
1997 into the Company's Common Stock and the elimination of interest
resulting from the sale of Premier and Pioneer in 1997 and the Company's
commercial real estate operations in 1996, partially offset by increased
borrowings by the Company. CompuCom's borrowing levels, including the
receivables securitization facility, were slightly higher in 1997 when
compared to 1996; however, this was offset by a lower effective rate for 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically used its bank credit facility and proceeds from
sales of publicly traded partnership companies to fund its cash requirements.
In addition, in February 1996, the Company issued $115 million of 6%
Convertible Subordinated 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 the
outstanding indebtedness under its bank revolving credit facility at that
date. Through March 1999, approximately $43.7 million of Notes have been
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
(the Pledged Securities), including CompuCom. The value of these Pledged
Securities exceeds the total availability under the bank revolving credit
facility. 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 $88.1 million outstanding under
the total facility at December 31, 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 December 31, 1998, $20 million was
outstanding under these agreements.
During 1998, the Company invested approximately $48 million in seven new
partnership companies, including US Interactive, Kanbay, Pac-West Telecomm,
Integrated Visions, and Who? Vision. The Company invested approximately $73
million during 1998 in its existing private partnership companies and
associated venture funds. The Company also purchased approximately $20
million of shares of its publicly traded partnership companies, and
repurchased 765,000 shares of the Company's Common Stock in the open market
for approximately $19 million. The Company received approximately 3.5 million
shares of Tellabs in connection with the merger of Coherent with Tellabs and
received approximately 451,000 shares of First Consulting in connection with
the merger of Integrated Systems with First Consulting. During 1998, the
Company sold a portion of its interests in Cambridge and Tellabs for net
proceeds totaling $87 million.
Availability under the Company's revolving credit facilities, proceeds
from the sales from time to time of selected publicly traded partnership
companies, and other internal sources of cash flow are expected to be
sufficient to fund the Company's cash requirements through 1999, including
commitments to 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. The Company is contingently obligated for
approximately $30 million of guarantee commitments, and has committed capital
of approximately $100 million to various partnership companies, venture
funds, and private equity partnerships, to be funded over the next several
years.
Availability under the Company's bank credit facility is determined by
the market value of the publicly traded partnership companies pledged as
collateral. If the stock markets experience a significant decline,
availability under the credit facilities could be reduced significantly and
could have an adverse effect on the Company's ability to borrow under the
facilities. In addition, the Company's ability to raise proceeds from sales
of publicly traded partnership companies could also be adversely effected. As
a result, the Company's ability to acquire interests in new partnership compa-
<PAGE>
nies and support its existing partnership companies with additional funding
could be limited.
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, and internally generated funds to fund its cash
requirements. CompuCom's liquidity has been negatively impacted by the
increase in the dollar volume of the rebate programs of its principal
suppliers. Under these programs, CompuCom is required to pay a higher initial
price for product and claim a rebate to reduce that price. The collection of
these rebates can take several months. Due to the increased volume of product
sold under these programs, CompuCom's initial price for the product is often
higher than the sales price CompuCom can obtain from its customers. At
December 31, 1998, these programs are a major factor in CompuCom's financing
needs.
CompuCom's financing arrangements consist of a $165 million working
capital facility (increased from $125 million in June 1998), a $175 million
receivables securitization facility, and a $25 million real estate loan
(collectively, the "credit agreements"). At December 31, 1998, approximately
$81.1 million was outstanding under the working capital facility and the real
estate loan, and the receivables securitization facility was fully utilized.
The working capital facility matures in November 2002 and the real estate
loan is due in quarterly installments beginning April 1999. The receivables
securitization facility expires on April 15, 1999.
At December 31, 1998, CompuCom was not in compliance with certain
financial covenants under the credit agreements. However, CompuCom received
an amendment related to such covenants from its lenders up to and including
April 15, 1999. CompuCom is currently negotiating a replacement receivables
securitization and working capital facility and expects to execute
agreements prior to April 15, 1999. Although these facilities are expected to
contain provisions that could result in lower interest rates as CompuCom's
financial performance improves, the initial interest rates are expected to be
higher than CompuCom's current effective interest rates. If CompuCom is not
successful in implementing the replacement facilities, its management
believes there are a number of viable alternatives to ensure continued
financing. CompuCom also expects to complete a sale/leaseback on its
headquarters building during the first quarter of 1999, with the proceeds
used to payoff the real estate loan and pay down a portion of the working
capital facility.
In 1998, CompuCom completed three business combinations for
approximately $49 million in cash. These business combinations were accounted
for as purchases.
Consolidated working capital increased to $252 million at December 31,
1998, compared to $228 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, as
well as 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 fourth 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 the timing of product receipts and the mix of
vendors, and a decrease in inventory due to CompuCom'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 in 1998 as
operating cash flow for 1997 included the effect of CompuCom's receivables
securitization facility in which $175 million of accounts receivable were
sold with the proceeds used to pay down long-term debt.
The Company has sold approximately 300,000 shares of Tellabs in the
first quarter through March 5, 1999, generating proceeds of approximately $24
million. The Company is considering certain hedging strategies to partially
protect against possible declines in the price of its Tellabs holdings.
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 were no material capital asset purchase
commitments at December 31, 1998.
YEAR 2000 READINESS DISCLOSURE
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 completed its assessment of its
computer information systems. The Company has replaced or is replacing during
the first quarter of 1999 all computer systems and software which were
determined to be non-compliant. These replacements were generally part of
the Company's program of regularly upgrading its computer systems, and the
Company has not incurred and does not expect to incur any material
extraordinary expense to remediate its systems. The Company will perform
testing and complete implementation of its computer systems during the second
quarter of 1999. The Company is in the process of surveying its vendors of
non-information systems including telecommunications and security systems,
and expects to complete remediation, if necessary, during 1999. If the
Company determines that its non-information systems are non-compliant and are
at risk to not be remedied in time, it will develop a contingency plan.
The Company has engaged in a regular program of surveying its
partnership companies regarding their Year 2000 readiness. The Company's most
significant consolidated subsidiary, CompuCom, has completed initial
assessment of its computer information systems, and plans to complete
remediation and testing by June 1999. Initial assessment and remediation of
CompuCom's non-information systems is currently expected to be completed
during the first quarter of 1999. CompuCom completed three business
acquisitions during 1998. CompuCom has integrated the operations of those
companies, including replacing their major information systems with
CompuCom's information systems. CompuCom has surveyed its vendors and
suppliers regarding their Year 2000 readiness, and has
<PAGE>
received confirmation of compliance for 85% of the systems currently in use.
CompuCom plans to upgrade or replace any systems which are not Year 2000
compliant during the second quarter of 1999. As a reseller of computer products,
CompuCom only passes through to its customers the applicable vendor's
warranties; it makes no warranties regarding Year 2000 compliance on any of the
products it resells. However, if one of CompuCom's major vendors or suppliers is
found to be Year 2000 non-compliant, CompuCom could experience a material loss
of revenues and earnings. CompuCom is currently developing a contingency plan to
operate in the event its computer systems or those of its vendors, suppliers, or
customers are not Year 2000 compliant. CompuCom currently anticipates that it
will spend approximately $1.4 million on Year 2000 compliance, of which
approximately $800,000 has been spent through December 31, 1998.
Almost all of the balance of the Company's partnership companies have
completed assessing their internal Year 2000 readiness, and the rest expect
to complete assessment in the first quarter of 1999. The partnership
companies are in varying stages of remediating and testing their internal
systems and assessing Year 2000 readiness of their vendors, business
partners, and customers. The partnership companies are also in varying stages
of developing contingency plans to operate in the event of a Year 2000
problem. Most of the partnership companies are in the business of providing
software products, information technology services, or outsourcing services.
Those partnership companies which produce software or products with embedded
programming believe that the current version of their products are Year 2000
compliant. Certain partnership companies are continuing to determine the
extent to which previously sold software products and services were
non-compliant. Some older companies may not be able to assess products sold
many years ago. The partnership companies generally have attempted to enter
into software license agreements and service agreements with their customers
that limit their liability, including for Year 2000 problems. Many of the
software companies' customers have maintenance agreements under which the
company will upgrade previously sold software to Year 2000 compliant
versions. They are generally encouraging their other customers to upgrade
older non-compliant versions to new compliant versions. The total cost and
time which will be incurred by the partnership companies on the Year 2000
readiness effort 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.
SAFE HARBOR STATEMENT
Certain statements in this annual 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 part-nership 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.
Competition to invest in or acquire successful emerging information
technology companies is substantial, particularly in the areas the Company is
targeting. The Company may not be able to invest in companies in the targeted
areas at valuations it considers to be reasonable. 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 publicly traded partnership companies
could be materially adversely affected. In addition, the Company's ability to
borrow under its revolving credit facilities could be adversely affected as
availability under these facilities is determined by the value of the
publicly traded securities pledged by the Company as collateral. As a result,
the Company's ability to acquire interests in new partnership companies and
support its existing partnership companies with additional funding could be
limited. The market for securities of Internet-related companies is extremely
volatile, and the Company's participation in Internet-related companies could
cause the Company's stock to become more volatile.
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.
<PAGE>
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
December 31 1998 1997
- ----------- ---------- ----------
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents.......................................................................... $ 6,257 $ 5,382
Short-term investments............................................................................. 143,103 --
Receivables less allowances ($4,769-1998; $2,872-1997)............................................. 296,093 187,385
Inventories........................................................................................ 138,551 198,053
Other current assets............................................................................... 5,006 6,459
- ----------- ---------- ----------
Total current assets............................................................................. 589,010 397,279
Property, Plant, and Equipment, Net.................................................................... 96,840 76,967
Other Assets
Investments........................................................................................ 288,336 185,111
Notes and other receivables........................................................................ 20,182 21,035
Excess of cost over net assets of businesses acquired, net......................................... 65,137 26,168
Other.............................................................................................. 9,185 7,981
- ----------- ---------- ----------
Total other assets............................................................................... 382,840 240,295
---------- ----------
Total Assets........................................................................................... $1,068,690 $ 714,541
---------- ----------
---------- ----------
Liabilities and Shareholders' Equity
Current Liabilities
Current debt obligations........................................................................... $ 2,366 $ 3,396
Accounts payable................................................................................... 161,700 74,025
Accrued expenses................................................................................... 172,953 91,857
---------- ----------
Total current liabilities........................................................................ 337,019 169,278
Long-Term Debt....................................................................................... 205,044 127,089
Deferred Taxes....................................................................................... 12,562 20,044
Minority Interest and Other.......................................................................... 99,861 100,179
Convertible Subordinated Notes....................................................................... 71,345 90,881
Shareholders' Equity
Common stock, par value $.10 per share
Authorized 100,000,000 shares; Issued 32,799,342 shares........................................... 3,280 3,280
Additional paid-in capital......................................................................... 62,470 49,952
Retained earnings.................................................................................. 261,594 151,471
Accumulated other comprehensive income............................................................. 37,294 15,706
Treasury stock, at cost (1,252,995 shares-1998; 1,563,626 shares-1997)............................. (21,779) (13,339)
---------- ----------
Total shareholders' equity....................................................................... 342,859 207,070
---------- ----------
Total Liabilities and Shareholders' Equity............................................................. $1,068,690 $ 714,541
---------- ----------
---------- ----------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- ----------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Revenues
Net sales
Product....................................................................... $1,994,965 $1,724,220 $1,856,889
Service....................................................................... 280,178 261,005 205,920
---------- ---------- ----------
Total net sales................................................................. 2,275,143 1,985,225 2,062,809
Securities and other gains, net................................................. 193,665 26,857 30,373
Other income.................................................................... 14,691 12,932 8,646
---------- ---------- ----------
Total revenues.............................................................. 2,483,499 2,025,014 2,101,828
Costs and Expenses
Cost of sales-product........................................................... 1,787,370 1,534,310 1,655,893
Cost of sales-service........................................................... 185,561 164,882 137,065
Selling and service............................................................. 172,349 136,646 128,467
General and administrative...................................................... 96,647 87,538 84,235
Depreciation and amortization................................................... 21,738 18,132 20,645
Interest and financing.......................................................... 29,720 22,359 23,916
Equity in losses (income) of affiliates......................................... 2,083 (417) (1,539)
Restructuring................................................................... 16,437 -- --
---------- ---------- ----------
Total costs and expenses.................................................... 2,311,905 1,963,450 2,048,682
---------- ---------- ----------
Earnings Before Minority Interest and Taxes on Income............................. 171,594 61,564 53,146
Minority interest............................................................... (47) (25,727) (19,934)
---------- ---------- ----------
Earnings Before Taxes on Income................................................... 171,547 35,837 33,212
Provision for taxes on income................................................... 61,424 14,336 13,285
---------- ---------- ----------
Net Earnings...................................................................... $ 110,123 $ 21,501 $ 19,927
---------- ---------- ----------
Earnings Per Share
Basic........................................................................... $ 3.46 $ .69 $ .67
Diluted......................................................................... $ 3.22 $ .66 $ .61
Average Common Shares Outstanding
Basic........................................................................... 31,833 31,249 29,900
Diluted......................................................................... 34,914 31,996 31,348
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- ---------------------- ---------- --------- ----------
<S> <C> <C> <C>
Operating Activities
Net earnings.................................................................... $ 110,123 $ 21,501 $ 19,927
Adjustments to reconcile net earnings to cash provided (used) by
operating activities
Depreciation and amortization................................................. 21,738 18,132 20,645
Deferred income taxes......................................................... 28,909 (2,566) 1,910
Equity in losses (income) of affiliates....................................... 2,083 (417) (1,539)
Securities and other gains, net............................................... (193,665) (26,857) (30,373)
Minority interest, net........................................................ 28 15,436 11,960
Cash provided (used) by changes in working capital items
Receivables................................................................... (32,301) 210,578 (113,719)
Inventories................................................................... 68,840 35,498 (36,595)
Accounts payable, accrued expenses, and other................................. 69,313 (123,759) 38,454
---------- --------- ----------
Cash provided (used) by operating activities.................................... 75,068 147,546 (89,330)
Proceeds from securities and other gains, net................................... 94,838 71,318 53,350
---------- --------- ----------
Cash provided (used) by operating activities and
securities and other gains, net.................................................. 169,906 218,864 (35,980)
Other Investing Activities
Investments and notes acquired, net............................................. (137,375) (78,412) (59,270)
Business acquisitions, net of cash acquired..................................... (49,679) -- (6,937)
Capital expenditures............................................................ (17,582) (31,314) (49,984)
Other, net...................................................................... (1,988) 449 (14,197)
---------- --------- ----------
Cash used by other investing activities........................................... (206,624) (109,277) (130,388)
Financing Activities
Net borrowings (repayments) on revolving credit facilities...................... 52,754 (117,766) 27,131
Net (repayments) borrowings on term debt........................................ (2,269) (168) 24,165
Issuance of convertible subordinated notes, net................................. -- -- 112,109
Repurchase of Company common stock.............................................. (18,672) (9,488) --
Issuance of Company common stock................................................ 4,135 5,819 5,210
Issuance of subsidiary common stock............................................. 1,645 4,517 3,367
---------- --------- ----------
Cash provided (used) by financing activities...................................... 37,593 (117,086) 171,982
---------- --------- ----------
Increase (Decrease) in Cash and Cash Equivalents.................................. 875 (7,499) 5,614
Cash and cash equivalents-beginning of year....................................... 5,382 12,881 7,267
---------- --------- ----------
Cash and Cash Equivalents-End of Year............................................. $ 6,257 $ 5,382 $ 12,881
---------- --------- ----------
---------- --------- ----------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other Treasury Stock
-------------------- Paid-In Retained Comprehensive ---------------------
Shares Amount Capital Earnings Income Shares Amount
---------- ------ ---------- -------- ------------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance--December 31, 1995..................... 32,799,342 $3,280 $20,709 $110,043 $30,748 3,434,828 $(10,471)
Net earnings................................... 19,927
Stock options exercised, net................... 3,323 (759,011) 1,887
Conversion of convertible
subordinated notes............................ 11,364 (443,988) 1,419
Subsidiaries' equity transactions.............. 170
Other comprehensive loss....................... (23,388)
Balance--December 31, 1996..................... 32,799,342 3,280 35,566 129,970 7,360 2,231,829 (7,165)
Net earnings................................... 21,501
Stock options exercised, net................... 3,784 (670,649) 2,035
Repurchase of common stock..................... 390,577 (9,488)
Conversion of convertible
subordinated notes............................ 9,731 (388,131) 1,279
Subsidiaries' equity transactions.............. 871
Other comprehensive income..................... 8,346
Balance--December 31, 1997..................... 32,799,342 3,280 49,952 151,471 15,706 1,563,626 (13,339)
Net earnings................................... 110,123
Stock options exercised, net................... (66) (401,631) 4,201
Repurchase of common stock..................... 765,000 (18,672)
Conversion of convertible
subordinated notes............................ 13,189 (674,000) 6,031
Subsidiaries' equity transactions.............. (605)
Other comprehensive income..................... 21,588
Balance--December 31, 1998..................... 32,799,342 $3,280 $62,470 $261,594 $37,294 1,252,995 $(21,779)
</TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- ---------------------- --------- -------- ---------
<S> <C> <C> <C>
Net Earnings....................................................... $110,123 $21,501 $ 19,927
--------- -------- ---------
Other Comprehensive Income (Loss), Before Taxes:
Unrealized holding gains (losses) on investments............... 43,676 10,706 (39,937)
Reclassification adjustments................................... (10,103) 1,940 4,500
Related Tax (Expense) Benefit:
Unrealized holding gains (losses) on investments............... (15,591) (3,640) 13,579
Reclassification adjustments................................... 3,606 (660) (1,530)
--------- -------- ---------
Other Comprehensive Income (Loss).................................. 21,588 8,346 (23,388)
--------- -------- ---------
Comprehensive Income (Loss)........................................ $131,711 $29,847 $ (3,461)
--------- -------- ---------
--------- -------- ---------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE COMPANY--Safeguard Scientifics, Inc. (the Company) is an
operating company that develops and operates partnership companies. Most of
the partnership companies are engaged in information technology businesses,
broadly defined to include all activities related to the acquisition,
processing, and dissemination of information and related technology and
services to improve business and personal productivity.
The most significant of the Company's partnership companies provides
computing and communications infrastructure services. This includes the
procurement and configuration of personal computers and servers as well as
application software development, implementation, and desktop/network
support services. They also provide IT strategy consultation. Almost half of
the partnership companies are involved with the Internet in aspects that
include the development of eCommerce models; the design, development,
hosting, and support of distributed eCommerce applications; and the provision
of security products and services to virtual enterprises. Many of the
Company's partnership companies operate in multiple vertical industries,
including healthcare, insurance, and financial services. The remaining
partnership companies are principally engaged in the development, sale, and
implementation of strategic business software, document management, and
multimedia and telecommunications technology and services. The Company also
has a robust incubation strategy which will increasingly focus on the
companies in the areas of eCommerce, enterprise applications, and network
infrastructure.
PRINCIPLES OF CONSOLIDATION--The Consolidated Financial Statements include
the accounts of the Company and its majority-owned subsidiaries, primarily
CompuCom Systems, Inc. and Tangram Enterprise Solutions, Inc. All significant
intercompany accounts and transactions have been eliminated. The effect of
adjustments to the Company's carrying values of these subsidiaries resulting
from the subsidiaries' underlying equity transactions is included in the
Company's Additional Paid-In Capital.
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% of the voting
interest when it exerts significant influence through representation on those
companies' Boards of Directors and other means. The amount by which the
Company's carrying value exceeds its share of the underlying net assets of
equity affiliates is amortized on a straightline basis which adjusts the
Company's share of the affiliates' earnings or losses.
All other investments are accounted for on the cost method. Certain cost
method investments are classified as available-for-sale and are recorded at
fair value, based on quoted market prices, with the unrealized gains or
losses, net of tax, included as a separate component of shareholders' equity.
The Company's investment in Tellabs, Inc. is classified as a trading security
and is reported at fair value, based on quoted market prices, with the net
gain or loss included in net earnings. All other investments are stated at
the lower of cost or net realizable value.
The Company continually evaluates investments for indications of
impairment based on the market value of each investment relative to cost,
financial condition, near-term prospects of the investment, and other
relative factors.
In 1997, the Company sold its Pioneer Metal Finishing division and all
of the assets of Premier Solutions Ltd. As a result, these entities are only
included in the Company's Consolidated Financial Statements through their
respective sale dates.
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 an original maturity of 90 days or less at the time of
purchase to be cash equivalents.
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 includes $75.2 million and $57.7 million of
land, buildings, and improvements and $65.1 million and $47.5 million of
machinery and equipment at December 31, 1998 and 1997, respectively.
Property, plant, and equipment are carried at cost less accumulated
depreciation and amortization of $43.5 million and $28.2 million at December
31, 1998 and 1997, respectively. The provision for depreciation and
amortization is based on the estimated useful lives of the assets (buildings
and improvements--3 to 40 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 (goodwill) is amortized
on a straight-line basis primarily over 7 to 20 years. Accumulated
amortization at December 31, 1998 and 1997, was $29.1 million and $24.0
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).
<PAGE>
RECEIVABLES SECURITIZATION--CompuCom has an agreement with a financial
institution that allows CompuCom to sell, on a revolving basis, an interest
in a portion of its accounts receivable. During 1997, the receivables
securitization facility was amended such that the sale is required to be
accounted for in accordance with Statement of Financial Accounting Standards
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" (SFAS 125), which requires these transactions
to be accounted for as a sale of receivables. Sales of receivables are
reflected as a reduction in "Receivables less allowances" on the Consolidated
Balance Sheets. CompuCom is retained as servicer of the receivables; however,
the cost to service the receivables is not material.
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.
FINANCIAL INSTRUMENTS--The Company's financial instruments, principally cash,
accounts receivable, accounts payable, and accrued expenses, are carried at
cost which approximates fair value due to the short-term maturity of these
instruments. The Company's long-term debt is carried at cost which
approximates fair value as the debt bears interest at rates approximating
current market rates. At December 31, 1998, the market value of the Company's
Convertible Subordinated Notes was approximately $72.8 million based on
quoted market prices.
EARNINGS PER SHARE (EPS) is computed on net earnings using the weighted
average number of common shares outstanding during each year. Dilutive EPS
includes common stock equivalents (unless anti-dilutive) which would arise
from the exercise of stock options and conversion of other convertible
securities and is adjusted, if applicable, for the effect on net earnings of
such transactions. Dilutive EPS calculations adjust net earnings for the
dilutive effect of common stock equivalents and convertible securities issued
by the Company's public subsidiary or equity affiliates.
REVENUE RECOGNITION--Product sales are generally recognized upon shipment
with provisions made for anticipated returns, which historically have not
been material. Service 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 as a
reduction of cost of sales when earned. CompuCom also receives manufacturer
reimbursements for certain training, promotional, and marketing activities
that offset the expenses incurred by CompuCom.
STOCK-BASED COMPENSATION--The Company applies Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) for stock
options and other stock-based awards while disclosing pro forma net earnings
and net earnings per share as if the fair value method had been applied in
accordance with Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123).
COMPREHENSIVE INCOME--In 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130),
which requires companies to report and display comprehensive income and its
components in 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. Excluding net earnings, the
Company's source of other comprehensive income is from net unrealized
appreciation on its investments classified as available-for-sale.
Reclassification adjustments result from the recognition in net earnings of
gains or losses that were included in comprehensive income in prior periods.
SEGMENT INFORMATION--At December 31, 1998, the Company adopted Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS 131), which requires companies to
present financial and descriptive segment information (see Note 15).
2. INVESTMENTS
SHORT-TERM INVESTMENTS
In August 1998, Coherent Communications Systems Corporation merged with
Tellabs. 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 pretax book gain of $245.3 million in 1998. At December 31, 1998,
the Company owns approximately 2.1 million shares of Tellabs.
The Company's investment in Tellabs is classified as a trading security
(classified as "Short-term investments" on the Consolidated Balance Sheets).
<PAGE>
NON-CURRENT INVESTMENTS
The following summarizes the Company's non-current investments (in
thousands). Investments are classified according to the applicable accounting
method at December 31, 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. The table
excludes the Company's holdings in Tellabs (classified as "Short-term
investments" on the Consolidated Balance Sheets), which has a market value of
$143.1 million at December 31, 1998.
<TABLE>
<CAPTION>
December 31 1998 1997
- ----------- -------------------- ---------------------
Carrying Market Carrying Market
Value Value Value Value
--------- -------- ---------- --------
<S> <C> <C> <C> <C>
Equity Affiliates (voting %)
Cambridge Technology Partners (15%)........................... $ 35,248 $190,217 $ 24,679 $371,394
ChromaVision Medical Systems (26%)............................ 11,304 22,419 4,689 30,044
Coherent Communications Systems Corporation................... -- -- 14,799 135,008
OAO Technology Solutions (34%)................................ 16,472 16,551 13,887 43,716
Sanchez Computer Associates (27%)............................. 10,620 91,965 7,196 89,068
USDATA Corporation (26%)...................................... 7,053 5,545 7,194 13,325
Non-public companies.......................................... 23,784 18,453
-------- --------
104,481 90,897
Other
Diamond Technology Partners................................... 3,120 21,337 1,526 14,717
DocuCorp International........................................ 3,226 8,035 7,718 7,718(b)
First Consulting Group(a)..................................... 8,490 11,308 1,891 7,785
e4L (formerly National Media)................................. 2,035 32,299 2,035 1,563
Other public companies........................................ 10,388 11,648 13,358 18,541
Unrealized appreciation....................................... 57,368 23,796
Non-public companies.......................................... 99,228 43,890
-------- --------
$288,336 $185,111
</TABLE>
(a) First Consulting Group merged with Integrated Systems Consulting Group in
December 1998.
(b) The market value of DocuCorp equals its carrying value at December 31,
1997 since DocuCorp was not publicly traded until 1998.
The following summarized financial information for investees accounted for on
the equity method at December 31, 1998, has been compiled from the unaudited
financial statements of the respective investees and reflects certain
historical adjustments (in thousands):
Balance Sheets
<TABLE>
<CAPTION>
December 31 1998 1997
- ----------- -------- --------
<S> <C> <C>
Current assets................................. $453,829 $344,400
Non-current assets............................. 187,797 105,898
-------- --------
Total assets................................... $641,626 $450,298
-------- --------
-------- --------
Current liabilities............................ $198,683 $138,871
Non-current liabilities........................ 26,106 27,036
Shareholders' equity........................... 416,837 284,391
-------- --------
Total liabilities and
shareholders' equity.......................... $641,626 $450,298
-------- --------
-------- --------
</TABLE>
Results of Operations
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- ---------------------- -------- -------- --------
<S> <C> <C> <C>
Net Sales
Public companies............................... $792,320 $574,267 $394,816
Non-public companies:
MultiGen-Paradigm............................ 16,530 18,387 14,105
QuestOne..................................... 11,571 4,794 2,671
Other........................................ 21,633 18,616 --
-------- -------- --------
$842,054 $616,064 $411,592
-------- -------- --------
Net Income....................................... $ 7,503 $ 11,857 $ 12,267
-------- -------- --------
-------- -------- --------
</TABLE>
<PAGE>
The following summarized sales information for selected investments
accounted for on the cost method at December 31, 1998, has been compiled from
the unaudited financial statements of the respective companies and reflects
certain historical adjustments (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- ---------------------- -------- -------- --------
<S> <C> <C> <C>
Net Sales
Public companies................................ $121,471 $ 91,578 $ 65,999
Non-public companies:
Intellisource................................. 135,291 112,182 85,273
Kanbay........................................ 35,700 19,563 12,235
Pac-West Telecomm............................. 42,211 29,551 12,969
US Interactive................................ 16,645 13,095 4,455
Other......................................... 28,289 27,649 9,862
-------- -------- --------
$379,607 $293,618 $190,793
-------- -------- --------
-------- -------- --------
</TABLE>
Average cost is generally used to compute securities and other gains.
Pretax securities gains related to Coherent/Tellabs transactions for the year
ended December 31, 1998, were $196.7 million, which consists of the $245.3
million gain on the merger, partially offset by a $48.6 million loss
comprised of unrealized losses resulting from the decline in the market price
of Tellabs subsequent to the merger and gains on the sales of 1.4 million
shares of Tellabs stock (for net proceeds of $71.0 million). Fluctuations in
the price of Tellabs stock may have a significant impact on the Company's
future reported net earnings.
Securities and other gains in 1998 also include the open market sales of
a portion of the Company's interest in Cambridge, the gain resulting from the
merger of Integrated Systems with First Consulting, and distributions
received from the Company's associated venture funds. 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 of Diamond and ChromaVision in
rights offerings to the Company's shareholders, and distributions received
from the Company's associated venture funds. The Company also recorded gains
in 1997 from the sale of Premier and Pioneer. Securities and other gains in
1996 included the open market sales of a portion of the Company's interest in
Cambridge and Coherent and the sale of shares of Sanchez in a rights offering
to the Company's shareholders. Partially offsetting securities and other
gains in each year 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 partnership companies, and provisions
for other investments and notes receivable.
3. DEBT
The following is a summary of long-term debt (in thousands):
<TABLE>
<CAPTION>
December 31 1998 1997
- ----------- -------- --------
<S> <C> <C>
Parent Company and Other
Recourse Debt
Revolving credit facilities............................... $108,107 $ 22,200
Other..................................................... 15,874 7,822
-------- --------
123,981 30,022
Subsidiary Debt
(Non-Recourse to Parent)
CompuCom.................................................. 83,429 100,425
Other..................................................... -- 38
-------- --------
83,429 100,463
-------- --------
Total debt................................................ 207,410 130,485
Current debt obligations.................................. (2,366) (3,396)
-------- --------
Long-term debt............................................ $205,044 $127,089
-------- --------
-------- --------
</TABLE>
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
(the Pledged Securities), including CompuCom. 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. The
bank revolving credit facility bears interest at the prime rate and/or, at
the Company's option, at LIBOR (approximately 5.06% at December 31, 1998)
plus 1.25% and is subject to a commitment fee ranging from 0.2% to 0.3% on
the unused portion. At December 31, 1998, $88.1 million is outstanding under
the bank revolving credit facility. The Company borrowed a maximum of $123.2
million and $15.8 million during 1998 and 1997, respectively.
The Company had aggregate indebtedness of $20 million under revolving
credit facilities to certain partnership companies as of December 31, 1998.
These facilities are payable on demand and bear interest at the Company's
effective borrowing rate less .75%. The Company has the intent and ability,
if necessary, to repay these facilities with proceeds from its bank
revolving credit facility; accordingly, they are classified as long-term.
CompuCom has $365 million of separate, independent financing
arrangements which are secured by certain assets of CompuCom and consist of a
$165 million working capital facility, a $175 million receivables
securitization facility, and a $25 million real estate loan. In 1998,
CompuCom amended its working capital facility, increasing the availability to
$165 million from $125 million. The interest rates on the working capital
facility and the real estate loan are currently LIBOR plus 1.375%, subject to
adjustment based on certain performance criteria. There was $56.1 million and
$25.0 million outstanding under the working capital facility and the real
estate
<PAGE>
loan, respectively, at December 31, 1998. The working capital facility
matures in November 2002; the real estate loan is due in quarterly
installments beginning April 1999.
The interest rate applicable to CompuCom's receivables securitization
facility is based upon the bank's commercial paper rate (4.95% at December
31, 1998) plus 85 basis points. Discounts associated with the sale of
receivables totaled $10.8 million and $4.7 million for 1998 and 1997,
respectively, and are included in "Interest and financing" in the
Consolidated Statements of Operations. At December 31, 1998, $173.6 million
was outstanding under this facility. The receivables securitization facility
expires on April 15, 1999. CompuCom is currently negotiating a replacement
receivables securitization facility and expects to execute an agreement prior
to April 15, 1999.
The credit facilities of the Company and CompuCom 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. At December
31, 1998, CompuCom was not in compliance with certain financial covenants
under its credit facilities. CompuCom received an amendment related to such
covenants from its lenders for periods up to and including April 15, 1999.
CompuCom is currently negotiating a replacement working capital facility and
expects to execute an agreement prior to April 15, 1999.
The aggregate net assets of subsidiaries which are restricted and
unavailable for dividends at December 31, 1998, is approximately $106 million.
Aggregate maturities of long-term debt during future years are (in
millions): $2.4-1999; $5.0-2000; $8.7-2001; $178.5-2002; $1.2-2003; and
$11.6-thereafter.
Interest paid in 1998, 1997, and 1996 was $31.5 million, $21.9 million,
and $22.0 million, respectively, of which $4.9 million, $5.8 million, and
$3.4 million in 1998, 1997, and 1996, respectively, related to the Company's
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. The Notes are redeemable in whole or in part at the option of
the Company on or after February 2, 1999, for a maximum of 104% of face value
depending on the date of redemption and subject to certain restrictions.
In 1998, 1997, and 1996, approximately $19.5 million, $11.3 million, and
$12.9 million of notes, respectively, were converted into 674,000, 388,131,
and 443,988 shares, respectively, of the Company's Common Stock. The Company
recorded in shareholders' equity the principal amount of the converted notes
as well as forfeited interest and a proportionate share of the related
unamortized deferred charges.
5. RESTRUCTURING
In October 1998, CompuCom's Board of Directors approved a restructuring plan
designed to reduce CompuCom's cost structure by closing certain facilities
and reducing its workforce. As a result, CompuCom has recorded a
restructuring charge in the fourth quarter of 1998 in the amount of $16.4
million, the effect of which is approximately $8.1 million to the Company's
pretax earnings, after recording minority interest.
The restructuring charge of $16.4 million consists primarily of costs
associated with the closing of facilities and disposing of related fixed
assets as well as employee severance and benefits related to the reduction in
workforce. Of the total amount, approximately $2.4 million had been paid
through December 31, 1998. The remainder is included in "Accrued expenses" on
the Consolidated Balance Sheets. The following is a summary of the components
of the restructuring charge (in thousands):
<TABLE>
<CAPTION>
Expensed in Accrued at
1998 December 31, 1998
----------- -----------------
<S> <C> <C>
Lease termination costs........................... $ 7,259 $ 6,415
Employee severance and
related benefits................................ 3,804 2,986
Disposal of assets, net of
estimated proceeds.............................. 3,044 2,907
Other............................................. 2,330 1,780
----------- -----------------
$16,437 $14,088
----------- -----------------
----------- -----------------
</TABLE>
Severance is paid based on associates' years of service as well as their
level within the organization. The reduction in workforce includes 457
associates, of which two were executive officers.
The amount accrued at December 31, 1998, for lease termination costs is
the estimated cost for 65 facilities throughout the country to fulfill
CompuCom's obligations under signed lease contracts, to sublet certain
facilities, or to pay to terminate lease contracts before the end of their
terms. CompuCom has consulted with a professional real estate firm with
knowledge of market rent rates in all applicable markets where CompuCom has
space. Assumptions have been used for market rent rates and the estimated
amount of time to sublet certain facilities. Payments, net of proceeds
derived from subleases, are being charged against the accrual as incurred.
The amount accrued at December 31, 1998, for disposal of fixed assets
includes an estimate of proceeds to be received from the sale of those
assets. The assets primarily consist of furniture, fixtures, and computer
equipment associated with the facilities being closed.
Other restructuring charges primarily include amounts such as the
write-off of leasehold improvements, estimated legal expense, estimated costs
to ship fixed assets to CompuCom's headquarters in Dallas, and estimated
commissions to be paid to the real estate firm for subleasing activity.
As the majority of CompuCom's restructuring related charges in 1998 are
estimates and have not yet been paid, the actual amounts paid could differ
from those estimates. Any differences between the estimated amounts and
actual amounts paid will be reflected in operating expenses in future periods.
<PAGE>
6. INCOME TAXES
The provision for income taxes is comprised of the following (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- ---------------------- ------- -------- -------
<S> <C> <C> <C>
Current...................................... $32,515 $16,902 $11,375
Deferred..................................... 28,909 (2,566) 1,910
------- -------- -------
$61,424 $14,336 $13,285
------- -------- -------
State taxes on income included above......... $ 776 $ 2,235 $ 1,607
------- -------- -------
------- -------- -------
</TABLE>
Total income tax expense differed from the amounts computed by applying the
U.S. Federal income tax rate of 35% to earnings before income taxes as a
result of the following:
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- ---------------------- ------- ------- ------
<S> <C> <C> <C>
Statutory tax provision...................................... 35.0% 35.0% 35.0%
Increase (decrease) in taxes resulting from:
Non-deductible goodwill amortization....................... 0.9 3.4 4.1
Book/tax basis difference on securities sold............... (0.4) -- (0.9)
State taxes, net of federal tax benefit.................... 0.4 4.1 3.1
Income taxed at rates other than statutory rate............ (0.1) (2.5) (1.3)
------- ------- ------
35.8% 40.0% 40.0%
------- ------- ------
------- ------- ------
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the non-current deferred tax assets and deferred tax liabilities
are presented below (in thousands):
<TABLE>
<CAPTION>
December 31 1998 1997
- ----------- ------- --------
<S> <C> <C>
Deferred tax assets:
Subsidiary/investee carrying values..................... $ 3,656 $ 3,539
Accounts receivable allowances.......................... 1,227 1,034
Inventories, reserves and tax
capitalized costs..................................... 15,905 5,141
Other................................................... 15,865 2,522
------- --------
Gross deferred tax assets............................... 36,653 12,236
Less valuation allowance................................ (850) (1,600)
------- --------
Deferred tax assets..................................... 35,803 10,636
------- --------
Deferred tax liabilities:
Subsidiary/investee carrying values..................... (16,472) (11,522)
Accelerated depreciation................................ (3,252) (4,521)
Unrealized appreciation
on investments........................................ (20,075) (8,091)
Other................................................... (8,566) (6,546)
------- --------
Deferred tax liabilities................................ (48,365) (30,680)
------- --------
Net deferred tax liabilities............................ $(12,562) $(20,044)
------- --------
------- --------
</TABLE>
The above table excludes $48.4 million of current deferred tax
liabilities attributable to the difference between the book basis and tax
basis of the Company's investment in Tellabs, which is included in "Accrued
expenses" on the Consolidated Balance Sheets.
The valuation allowance relates to the uncertainty surrounding the
realization of tax benefits attributable to the difference between the book
basis and tax basis of certain of the Company's investments. Tax benefits
relating to changes in the valuation allowance for deferred tax assets are
reported as an income tax benefit in the Consolidated Statements of
Operations in the period recognized. Management believes it is more likely
than not that the remaining deferred tax assets will be realized through
future taxable earnings or implementation of tax planning strategies.
Income taxes paid were $9.8 million, $13.5 million, and $18.4 million in
1998, 1997, and 1996, respectively.
The Company has not recognized a deferred tax liability for the
difference between the book basis and tax basis of its investment in the
common stock of its subsidiaries (such difference relates primarily to
unremitted earnings of the subsidiaries), because the Company does not expect
this basis difference to become subject to tax at the parent level. The
Company believes it can implement certain tax strategies to recover its
investment in these subsidiaries tax-free.
<PAGE>
7. EARNINGS PER SHARE
The calculations of EPS were (in thousands except per share amounts):
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- ---------------------- -------- ------- --------
<S> <C> <C> <C>
Basic:
Net earnings................................. $110,123 $21,501 $19,927
-------- ------- --------
Average common shares outstanding............ 31,833 31,249 29,900
-------- ------- --------
Basic EPS.................................... $ 3.46 $ .69 $ .67
-------- ------- --------
Diluted:
Net earnings................................. $110,123 $21,501 $19,927
Effect of: Public investees(a)............... (606) (328) (779)
Dilutive securities(b)............ 2,967 -- --
-------- ------- --------
Adjusted earnings............................ $112,484 $21,173 $19,148
-------- ------- --------
Average common shares outstanding............ 31,833 31,249 29,900
Effect of: Dilutive options.................. 554 747 1,448
Dilutive securities(b)............ 2,527 -- --
-------- ------- --------
Average number of common shares
assuming dilution.......................... 34,914 31,996 31,348
-------- ------- --------
Diluted EPS.................................. $ 3.22 $ .66 $ .61
-------- ------- --------
-------- ------- --------
</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 year ended December 31, 1998. For the years
ended December 31, 1997 and 1996, the Convertible Subordinated Notes
were anti-dilutive; therefore, they do not impact the calculation of
diluted EPS in these years.
At December 31, 1998, 1997, and 1996, outstanding options to purchase
approximately 80,000, 502,000, and 91,000 shares of Common Stock at an
average price of $35.35, $32.56, and $35.07 per share were anti-dilutive and
are not included in the calculations of diluted EPS, because the options'
exercise price was greater than the average market price of common shares for
each respective period.
The Company repurchased $18.6 million and $9.8 million of its Common
Stock in the open market in 1998 and 1997, respectively, at an average price
of $24.33 in 1998 and $24.46 in 1997. The Company is authorized to purchase
up to an additional $18.4 million at December 31, 1998.
8. PREFERRED STOCK
Shares of Preferred Stock, par value $10 per 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, 1998 and 1997, there were 55,423 shares authorized and none
outstanding.
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, 1998, the
Company reserved approximately 2.1 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.
<PAGE>
Option activity under the Company's plans is summarized below (in thousands
except per share amounts):
<TABLE>
<CAPTION>
1998 1997 1996
------------------ ------------------ ----------------
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............................ 1,737 $17.58 2,078 $10.82 2,702 $ 7.11
Options granted............................................. 312 27.36 350 31.59 190 32.96
Options exercised........................................... (441) 6.12 (673) 4.56 (774) 2.86
Options canceled............................................ (11) 35.98 (18) 22.88 (40) 19.24
------ -------- ------ ---------- ------ --------
Outstanding at end of year.................................. 1,597 $22.09 1,737 $17.58 2,078 $10.82
------ -------- ------ ---------- ------ --------
------ -------- ------ ---------- ------ --------
Options exercisable at year-end............................. 863 867 1,150
Shares available for future grant........................... 506 807 1,139
------ -------- ------ ---------- ------ --------
------ -------- ------ ---------- ------ --------
</TABLE>
The following summarizes information about the Company's stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ----------------------------------------------------------------------------------------------- ---------------------------
Weighted Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Life Exercise Exercisable Exercise
Prices (in thousands) (in years) Price (in thousands) Price
- ---------------------------------------------- -------------- ----------------- --------- --------------- ---------
<S> <C> <C> <C> <C> <C>
$ 2.04 - $ 3.92................................ 222 2.12 $ 2.91 222 $ 2.91
4.31 - 5.75................................ 152 3.24 4.73 152 4.73
21.00 - 23.50................................ 425 4.88 22.62 314 22.61
26.13 - 29.25................................ 287 7.79 26.66 8 26.32
31.00 - 42.63................................ 511 6.52 32.56 167 32.77
------------- ----------------- --------- -------------- --------
$ 2.04 - $42.63................................ 1,597 5.39 $22.09 863 $16.38
------------- ----------------- --------- -------------- --------
------------- ----------------- --------- -------------- --------
</TABLE>
In February 1999, the Company's Board of Directors approved the 1999
Equity Compensation Plan, which will provide for the grant of stock options
to participating employees, directors, and consultants of the Company.
Initially, 3,000,000 shares will be reserved for issuance under the new plan,
which is subject to shareholder approval at the Company's Annual Meeting in
May 1999. In March 1999, the Company granted options to purchase 500,000
shares of the Company's Common Stock to its new president and chief operating
officer, including 100,000 options granted outside of existing stock option
plans. The option price is equal to the fair market value of the Company's
stock on the date of grant.
The Company, its subsidiaries, and its affiliates 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 (in
thousands except per share amounts):
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- ---------------------- -------- ------- -------
<S> <C> <C> <C> <C>
Consolidated net earnings As reported $110,123 $21,501 $19,927
Pro forma $ 99,411 $17,314 $15,986
Earnings per share
Basic As reported $ 3.46 $ .69 $ .67
Pro forma $ 3.12 $ .55 $ .53
Diluted As reported $ 3.22 $ .66 $ .61
Pro forma $ 2.92 $ .53 $ .48
Per share weighted average fair value of
stock options issued on date of grant $ 13.14 $ 14.97 $ 14.64
</TABLE>
<PAGE>
The following range of assumptions were used by the Company, its
subsidiaries, and its affiliates accounted for on the equity method to
determine the fair value of stock options granted in 1998, 1997, and 1996
using the Black-Scholes option-pricing model:
<TABLE>
<CAPTION>
Subsidiaries and
Company Affiliates
------------ -----------------
<S> <C> <C>
Dividend yield...................... 0% 0%
Expected volatility................. 40% to 48% 30% to 75%
Average expected
option life........................ 5 years 3.5 to 6 years
Risk-free interest rate............ 4.4% to 6.8% 4.2% to 7.1%
</TABLE>
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.
10. BUSINESS COMBINATIONS
In 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 final allocation of the purchase price for these acquisitions;
accordingly, the amount of goodwill could be adjusted once the allocation is
finalized.
11. RELATED PARTY TRANSACTIONS
In 1998, the Company loaned an officer and director of the Company $500,000
evidenced by a term note receivable. Interest on the note accrues at the rate of
4.33% per annum. The note was fully repaid in March 1999.
In 1998, CompuCom loaned two officers and directors $796,875 and $2.0
million evidenced by term notes receivable. Interest on the notes accrue at
rates of 4.3% and 5.1% per annum, respectively. Principal on the notes is due
on December 31, 2001, and October 22, 2003, respectively. The loan proceeds
were used to exercise stock options. In January 1999, the Company loaned an
officer of CompuCom $806,078 to exercise CompuCom stock options. Interest on
the note accrues at a rate of 4.3% per annum, and principal on the note is
due on December 31, 2001.
As discussed in Note 3, the Company had aggregate indebtedness of $20
million under revolving credit facilities to certain partnership companies as
of December 31, 1998.
12. LEASES
The Company and its subsidiaries conduct 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, 1998, are (in
millions): $4.6-1999; $3.7-2000; $2.4-2001; $0.8-2002; $0.6-2003; and
$0.6-thereafter.
Total rental expense under operating leases was $11.7 million, $10.2
million, and $14.5 million in 1998, 1997, and 1996, respectively.
13. 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 interests in certain partnership companies, the
Company is contingently obligated for approximately $30 million of guarantee
commitments. In addition, it has committed capital of approximately $100
million to various partnership companies, venture funds, and private equity
partnerships, to be funded over the next several years.
14. 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 Company presents complete Condensed Financial Information in Schedule I
to its Form 10-K.
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 carrying
values of these companies included in "Investments."
<TABLE>
<CAPTION>
Balance Sheets
December 31 1998 1997
- --------------- -------- ---------
<S> <C> <C>
Assets
Short-term investments............................. $143,103 $ --
Other current assets............................... 30,766 11,710
Investments........................................ 413,596 310,877
Other.............................................. 49,830 37,567
-------- ---------
Total assets......................................... $637,295 $360,154
-------- ---------
-------- ---------
Liabilities and Shareholders' Equity
Current liabilities................................ $ 80,824 $ 18,525
Long-term debt..................................... 123,115 29,689
Other liabilities.................................. 19,152 13,989
Convertible subordinated notes..................... 71,345 90,881
Shareholders' equity............................... 342,859 207,070
-------- ---------
Total liabilities and
shareholders' equity................................ $637,295 $360,154
-------- ---------
-------- ---------
</TABLE>
<PAGE>
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 on December 31 of each
year. The table excludes the Company's holdings in Tellabs (classified as
"Short-term investments" on the Consolidated Balance Sheets), which has a
market value of $143.1 million at December 31, 1998.
<TABLE>
<CAPTION>
December 31 1998 1997
- ----------- -------------------- -------------------
Carrying Market Carrying Market
Value Value Value Value
--------- -------- --------- --------
<S> <C> <C> <C> <C>
CompuCom................................ $121,832 $ 98,538 $122,613 $211,504
Tangram................................. 3,428 41,795 3,153 68,570
Cambridge............................... 35,248 190,217 24,679 371,394
Coherent................................ -- -- 14,799 135,008
Other public............................ 130,076 221,107 83,290 226,477
Other................................... 123,012 62,343
--------- --------
$413,596 $310,877
</TABLE>
The market value of the Company's holdings in CompuCom increased to
approximately $122 million at March 1, 1999.
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 loss (income)." 1997
included net sales and cost of sales and operating expenses of $16.0 million
and $14.6 million, respectively, related to Pioneer which was sold in
mid-1997.
<TABLE>
<CAPTION>
Statements of Operations
Year Ended December 31 1998 1997 1996
- ---------------------- --------- -------- --------
<S> <C> <C> <C>
Revenues
Net sales.................................... $ -- $ 15,982 $ 30,286
Securities and other gains, net.............. 193,665 24,025 26,011
Other income................................. 15,888 14,223 10,273
--------- -------- --------
Total revenues............................ 209,553 54,230 66,570
--------- -------- --------
Costs and Expenses
Cost of sales and operating expenses......... 36,574 45,389 54,376
Equity loss (income)......................... 1,846 (14,873) (12,345)
--------- -------- --------
Total costs and expenses.................. 38,420 30,516 42,031
--------- -------- --------
Earnings Before Taxes on Income................ 171,133 23,714 24,539
Provision for taxes on income................ 61,010 2,213 4,612
--------- -------- --------
Net Earnings................................... $110,123 $ 21,501 $ 19,927
--------- -------- --------
--------- -------- --------
</TABLE>
<PAGE>
15. OPERATING SEGMENTS
In 1998, the Company adopted SFAS 131, which requires the reporting of
operating segments using the "management approach" versus the "industry
approach" previously required. The Company's reportable segments consist of
CompuCom, Tangram, general corporate operations, and other. CompuCom's
operations are defined into two segments--sales of distributed desktop
computer products (product) and configuration, network integration, and
technology support (service). Tangram's operations include the design,
development, sale, and implementation of enterprise-wide asset tracking and
software management solutions. General corporate operations consists of
developing and operating partnership companies, most of which are engaged in
information technology businesses. Other includes Pioneer and Premier which
were sold during 1997, Commercial Real Estate which was sold during 1996, and
other reconciling items.
The following summarizes information related to the Company's segments
(in thousands). All significant intersegment activity has been eliminated.
Assets are the owned or allocated assets used by each operating segment.
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- ---------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Net Sales
CompuCom
Product....................................... $1,980,578 $1,699,268 $1,816,504
Service....................................... 273,887 250,534 178,686
---------- ---------- ----------
2,254,465 1,949,802 1,995,190
Tangram......................................... 20,678 14,074 11,142
Other........................................... -- 21,349 56,477
---------- ---------- ----------
$2,275,143 $1,985,225 $2,062,809
---------- ---------- ----------
---------- ---------- ----------
Gross Margin(a)
CompuCom
Product....................................... $ 193,727 $ 176,234 $ 180,851
Service....................................... 90,233 91,311 60,112
---------- ---------- ----------
283,960 267,545 240,963
Tangram......................................... 18,252 12,123 8,733
Other........................................... -- 6,365 20,155
---------- ---------- ----------
$ 302,212 $ 286,033 $ 269,851
---------- ---------- ----------
---------- ---------- ----------
Operating Profit (Loss)
CompuCom
Product....................................... $ 17,852 $ 38,073 $ 55,545
Service....................................... 17,995 28,860 159
---------- ---------- ----------
35,847 66,933 55,704
Interest and financing, net................... (18,742) (14,947) (14,764)
Restructuring................................. (16,437) -- --
---------- ---------- ----------
668 51,986 40,940
---------- ---------- ----------
Tangram......................................... 1,764 (2,256) (625)
---------- ---------- ----------
General Corporate
Securities and other gains, net............... 193,665 26,857 30,373
Equity in (losses) income of affiliates....... (2,083) 417 1,539
Interest and financing, net................... (10,978) (7,412) (9,152)
General corporate expense, net................ (10,345) (9,612) (8,661)
Minority interest............................. (47) (25,727) (19,934)
---------- ---------- ----------
170,212 (15,477) (5,835)
---------- ---------- ----------
Other........................................... (1,097) 1,584 (1,268)
---------- ---------- ----------
Earnings Before Taxes on Income................. $ 171,547 $ 35,837 $ 33,212
---------- ---------- ----------
---------- ---------- ----------
Total Assets
CompuCom
Product....................................... $ 339,778 $ 323,970 $ 542,970
Service....................................... 212,403 146,812 157,803
---------- ---------- ----------
552,181 470,782 700,773
Tangram......................................... 15,170 14,077 12,946
General Corporate............................... 501,339 229,682 172,781
Other........................................... -- -- 49,570
---------- ---------- ----------
$1,068,690 $ 714,541 $ 936,070
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
(a) Total gross margin reconciles to the Consolidated Statements of
Operations by subtracting cost of sales from net sales.
<PAGE>
Independent Auditors' Report
The Board of Directors and Shareholders
Safeguard Scientifics, Inc.
Wayne, Pennsylvania
We have audited the accompanying consolidated balance sheets of Safeguard
Scientifics, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations, cash flows, shareholders' equity,
and comprehensive income for each of the years in the three year period ended
December 31, 1998. 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 did
not audit the financial statements of certain nonsubsidiary investee companies.
The Company's investment in these nonsubsidiary investee companies at December
31, 1998 and 1997, was $69.4 million and $75.8 million, respectively, and its
equity in earnings of these nonsubsidiary investee companies was $7.8 million
and $6.0 million for the years ended December 31, 1998 and 1997, respectively.
The financial statements of these nonsubsidiary investee companies were audited
by other auditors whose reports have been furnished to us, and our opinion,
insofar as it relates to the amounts included for these nonsubsidiary investee
companies, is based solely on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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 and the reports
of the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other
auditors, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Safeguard
Scientifics, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three year period ended December 31, 1998, in conformity with generally
accepted accounting principles.
KPMG LLP
Philadelphia, Pennsylvania
February 8, 1999
Statement of Management's
Financial Responsibility
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 LLP is engaged to render an opinion as to whether management's
financial statements present fairly, in all material respects, Safeguard
Scientifics, Inc.'s 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
Senior Vice President and Chief Financial Officer
<PAGE>
QUARTERLY FINANCIAL DATA
The following table presents unaudited supplementary quarterly financial data
for the years ended December 31, 1998 and 1997 (in thousands, except per
share data):
<TABLE>
<CAPTION>
Quarters Ended
-----------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
--------- --------- ----------- ----------
<S> <C> <C> <C> <C>
1998
Net Sales................................................. $441,898 $602,534 $609,053 $621,658
After-tax Operating Earnings (Losses)(1).................. 2,214 2,885 (5,130) (14,137)
After-tax Securities and Other Gains, Net................. 4,711 5,228 65,154(2) 49,228(2)
Net Earnings.............................................. 5,060 6,026 59,242(2) 39,795(2)
Earnings Per Share
Basic................................................. .16 .19 1.85 1.26
Diluted............................................... .15 .18 1.71 1.18
1997
Net Sales................................................. $447,576 $502,706 $505,312 $529,631
After-tax Operating Earnings(1)........................... 2,559 5,437 5,476 7,351
After-tax Securities and Other Gains, Net................. 4,321 4,103 4,010 3,680
Net Earnings.............................................. 4,492 5,636 5,265 6,108
Earnings Per Share
Basic................................................. .14 .18 .17 .20
Diluted............................................... .14 .17 .16 .19
</TABLE>
(1) Before securities and other gains and minority interest.
(2) Increase relates primarily to net securities gains from Coherent/Tellabs
transactions (see Note 2 to the Consolidated Financial Statements).
Net 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.
Earnings per share calculations for each of the quarters are based on the
weighted average number of shares outstanding in each period. Diluted
earnings per share calculations adjust net earnings for the dilutive effect
of public investee common stock equivalents and convertible securities. The
Company's Convertible Subordinated Notes were dilutive for the quarters ended
September 30 and December 31, 1998, but were anti-dilutive for all other
periods presented. Therefore, the sum of the quarters may not necessarily
equal the year to date earnings per share.
COMMON STOCK DATA
The Company's Common Stock is listed on the New York Stock Exchange (Symbol:
SFE). As of March 1, 1999, there were approximately 25,000 beneficial holders
of the Company's Common Stock. The high and low sale prices reported within
each quarter for the years ended December 31, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
High Low High Low
------- ------ ------ ------
<S> <C> <C> <C> <C>
First Quarter............................ $38.44 $30.13 $32.63 $16.88
Second Quarter........................... 45.38 34.63 33.00 19.75
Third Quarter............................ 41.44 23.50 32.06 25.00
Fourth Quarter........................... 31.75 17.13 36.50 27.50
</TABLE>
The high and low sale prices reported in 1999 through March 1 were $47.25 and
$27.50, respectively, and the last sale price reported on March 1, 1999, was
$37.06. No cash dividends have been declared in any of the years presented,
and the Company has no present intention to declare cash dividends.
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF SAFEGUARD SCIENTIFICS, INC.
Exclusive of immaterial subsidiaries and companies in which Registrant
holds a minority interest, Registrant as of March 26, 1999 had the following
subsidiaries:
<TABLE>
<CAPTION>
PLACE OF
NAME INCORPORATION
- ---- -------------
<S> <C>
aligne Incorporated Pennsylvania
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
Dataflex Corporation Florida
Computer Integration Corporation Delaware
Compushop Incorporated Delaware
DRC Holdings, Inc. Delaware
Mobile Broadcasting Corporation Delaware
Penn-Sylvan Management, Inc. Pennsylvania
Pennsylvania Early Stage Partners GP, L.L.C. Pennsylvania
Radnor Venture Management Company Pennsylvania
Safeguard Scientifics (Delaware), Inc. Delaware
Safeguard Delaware, Inc. Delaware
Safeguard 97 Capital L.P. Delaware
Safeguard 98 Capital L.P. Delaware
Safeguard 99 Capital L.P. Delaware
Safeguard Partners Capital L.P. Delaware
Safeguard XL Capital L.P. Delaware
Safeguard Capital Management, Inc. Delaware
Safeguard International Group, Inc. Delaware
Safeguard Technologies, Inc. Delaware
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
SFINT, Inc. Delaware
SSIB, Inc. Delaware
SSI Buttonwood, Inc. Delaware
SSI Management Company, Inc. Delaware
SSIP (Delaware), Inc. Delaware
SSI Partnership Holdings, Inc. Delaware
SSI Partnership Holdings (Pennsylvania), Inc. Pennsylvania
Tangram Enterprise Solutioins, Inc. Pennsylvania
Technology Leaders Management, Inc. Delaware
XL Realty corp. Delaware
</TABLE>
<PAGE>
Exhibit 23.1
Consent of Independent Auditors
The Board of Directors
Safeguard Scientifics, Inc.:
We consent to incorporation by reference in the Registration Statements (No.
33-41853, No. 33-48579, No. 33-48462, No. 2-72362, No. 33-72559 and No.
33-72560) on Form S-8 of Safeguard Scientifics, Inc. of our report dated
February 8, 1999, relating to the consolidated balance sheets of Safeguard
Scientifics, Inc. and subsidiaries as of December 31, 1998 and 1997, the
related consolidated statements of operations, cash flows, shareholders'
equity and comprehensive income for each of the years in the three-year
period ended December 31, 1998 and related schedules, which reports are
included or incorporated by reference in the December 31, 1998 annual report
on Form 10-K of Safeguard Scientifics, Inc.
/s/ KPMG LLP
Philadelphia, Pennsylvania
March 25, 1999
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statements on Form S-8 (No. 33-41853,
No. 33-48579, No. 33-48462, No. 2-72362, No. 33-72559 and No. 33-72560) of
Safeguard Scientifics, Inc. (Safeguard) of our report dated February 12,
1999, relating to the consolidated financial statements of USDATA Corporation
as of December 31, 1998 and 1997, and for the three years ended December 31,
1998, which opinion is included in this Safeguard 1998 Annual Report on
Form 10-K.
/s/ PricewaterhouseCoopers LLP
Dallas, Texas
March 25, 1999
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of USDATA Corporation
In our opinion, the consolidated balance sheets and related consolidated
statements of operations and comprehensive income, of stockholders' equity and
of cash flows listed in the index appearing under Item 14(a)(1) and (2) on page
15 present fairly, in all material respects, the financial position of USDATA
Corporation and its subsidiaries (the "Company") at December 31, 1998 and 1997,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Dallas, Texas
February 12, 1999
<PAGE>
Exhibit 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statements on Form S-8 (No. 33-41853,
No. 33-48579, No. 33-48462, No. 2-72362, No. 33-72559 and No. 33-72560) of
Safeguard Scientifics, Inc. (Safeguard) of our report dated September 9,
1998, relating to the consolidated financial statements of DocuCorp
International, Inc. as of July 31, 1998 and 1997, and for the three years
ended July 31, 1998, which opinion is included in this Safeguard 1998 Annual
Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
Dallas, Texas
March 25, 1999
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of DocuCorp International, Inc.
In our opinion, the accompanying consolidated balance sheets and related
consolidated statements of operations, of cash flows and of changes in
stockholders' equity present fairly, in all material respects, the financial
position of DocuCorp International, Inc, and its subsidiaries at July 31,
1998 and 1997, and the results of their operations and their cash flows for
each of the three years in the period ended July 31, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted
our audits of these statements in accordance with generally accepted auditing
standards which 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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Dallas, Texas
September 9, 1998
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements
of Safeguard Scientifics, Inc. on Form S-8 (File Nos. 33-41853, 33-48579,
33-48462, 2-72362, 33-72559 and 33-72560) of our report dated February 2,
1999, except for Note R as to which the date is March 22, 1999, on our audits
of the consolidated financial statements of Cambridge Technology Partners
(Massachusetts), Inc. as of December 31, 1998 and 1997, and for the two years
then ended, which report is included in the annual report of Safeguard
Scientifics, Inc. on Form 10-K.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
March 29, 1999
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Cambridge Technology Partners (Massachusetts), Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of Cambridge
Technology Partners (Massachusetts), Inc. (the "Company") at December 31,
1998 and December 31, 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 2, 1999, except for Note R,
as to which the date is March 22, 1999
<PAGE>
EXHIBIT 23.5
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report dated February 5, 1999 included in Sanchez Computer Associates,
Inc.'s Form 10-K for the year ended December 31, 1998 and included in this
Form 10-K of Safeguard Scientifics, Inc., into Safeguard Scientific, Inc.'s
previously filed Form S-8 Registration Statements File Nos. 33-41853,
33-48579, 33-48462, 2-72362, 33-72559 and 33-72560.
/s/ Arthur Andersen LLP
Philadelphia, Pa.,
March 29, 1999
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Sanchez Computer Associates, Inc.:
We have audited the consolidated balance sheet, which is not presented
herein, of Sanchez Computer Associates, Inc. (a Pennsylvania corporation) and
subsidiaries as of December 31, 1998, and the related consolidated statements
of operations, shareholders' equity and cash flows for the year then ended,
which are also not presented herein. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sanchez Computer Associates,
Inc. and subsidiaries as of December 31, 1998, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ Arthur Andersen LLP
Philadelphia, Pennsylvania
February 5, 1999
<PAGE>
EXHIBIT 23.6
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statements
(No. 33-41853, No. 33-48579, No. 33-48462, No. 2-72362, No. 33-72559 and No.
33-72560) on Form S-8 of Safeguard Scientifics, Inc. of our report dated
February 24, 1999 (relating to the financial statements of OAO Technology
Solutions, Inc.) which report is included as an exhibit to the Annual Report
on Form 10-K of Safeguard Scientifics, Inc. for the year ended December 31,
1998.
/s/ Deloitte & Touche LLP
Washington, D.C.
March 29, 1999
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
OAO Technology Solutions, Inc.:
We have audited the accompanying consolidated balance sheets of OAO
Technology Solutions, Inc. and subsidiaries as of December 31, 1998 and 1997,
and the related consolidated statements of operations and comprehensive
income, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1998. Our audit also included the financial
statement schedule on page 43. These financial statements and the financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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, such consolidated financial statements present fairly, in
all material respects, the financial position of OAO Technology Solutions,
Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted
accounting principles. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly in all material respects, the
information set forth herein.
/s/ Deloitte & Touche L.L.P.
Washington, D.C.
February 24, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTIANS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998 AND THE CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998, AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 6,257
<SECURITIES> 143,103
<RECEIVABLES> 300,862
<ALLOWANCES> 4,769
<INVENTORY> 138,551
<CURRENT-ASSETS> 589,010
<PP&E> 140,332
<DEPRECIATION> 43,492
<TOTAL-ASSETS> 1,068,690
<CURRENT-LIABILITIES> 337,019
<BONDS> 276,389
0
0
<COMMON> 3,280
<OTHER-SE> 339,579
<TOTAL-LIABILITY-AND-EQUITY> 1,068,690
<SALES> 1,994,965
<TOTAL-REVENUES> 2,483,499
<CGS> 1,787,370
<TOTAL-COSTS> 1,972,931
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 3,049
<INTEREST-EXPENSE> 29,720
<INCOME-PRETAX> 173,677
<INCOME-TAX> 61,424
<INCOME-CONTINUING> 110,123
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 110,123
<EPS-PRIMARY> 3.46
<EPS-DILUTED> 3.22
</TABLE>
