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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, 1999 Commission File Number 1-5620
SAFEGUARD SCIENTIFICS, INC.
(Exact name of Registrant as specified in its charter)
PENNSYLVANIA 23-1609753
(State or other jurisdiction of (I.R.S. Employer ID No.)
incorporation or organization)
800 THE SAFEGUARD BUILDING
435 DEVON PARK DRIVE, WAYNE, PA 19087
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610) 293-0600
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Name of each exchange
Title of Each Class on which registered
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<S> <C>
COMMON STOCK ($.10 PAR VALUE) NEW YORK STOCK EXCHANGE
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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.
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Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of common stock held by non-affiliates (based on the
closing price on the New York Stock Exchange) on March 17, 2000 was
approximately $9.3 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 17, 2000 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
17, 2000 was 107,329,089, taking into account a 3-for-1 split of our Common
Stock effective March 20, 2000. Unless otherwise specifically stated, the
information in this report reflects this 3-for-1 split.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference in this Form 10-K:
PART I
Item 1(b) Note 20 on pages 69-71 of the Annual Report to
Stockholders for the year ended December 31, 1999, which pages
are filed as part of Exhibit 13 hereto.
PART II
Items 5, 6,
7 and 8 Pages 35 to 74 of the Annual Report to Stockholders for the
year ended December 31, 1999, 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 11, 2000 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
Safeguard is a leader in incubating and operating what we believe to be the
premier developing technology companies in the Internet infrastructure market
with a focus on three sectors: software, communications and eServices. We
believe that the depth of our experience developing technology companies, our
focus on and expertise in the Internet infrastructure industry, and the reach of
our network, enable us to identify and attract companies with significant
potential for success in our target sectors. We intend to achieve our goal of
operating the premier network of Internet infrastructure companies by continuing
to build and refine our network to offer solutions, seamless connectivity and
eServices to businesses engaged in electronic commerce. As of March 17, 2000,
our network was comprised of over 200 companies, including partner companies of
Internet Capital Group and our Internet holding companies, incubators and
private equity funds.
For the past twenty years, Safeguard has been developing, operating and
integrating leading-edge entrepreneurial technology companies into our network
of partner companies. We have successfully capitalized on the major trends in
successive waves of innovations in information technology. We founded and built
Novell, Inc. in the 1980s to lead the computer networking industry, Cambridge
Technology Partners (Massachusetts), Inc. in the 1990s to lead the client/server
systems integration industry, and Internet Capital Group in the late 1990s to
lead the Internet business-to-business electronic commerce industry. We are now
building the next generation of partner companies to lead the Internet
infrastructure industry.
During 1999 we expanded our network by acquiring interests in 12 new partner
companies, including EXTANT, iMedium, Opus 360, SOTAS, and Vitts, for an
aggregate purchase price of $139 million. We also purchased 80% of aligne in
exchange for stock. In February 2000 we purchased the remaining 20% of aligne.
We successfully restructured our rights offering program for IPOs of our partner
companies in order to have the partner company offer shares to our shareholders
simultaneously with a traditional underwritten IPO. We renamed the program the
"Safeguard Subscription Program." Four of our partner companies have gone public
to date with a Safeguard Subscription Program as part of the IPO: Internet
Capital Group, US Interactive, Pac-West Telecomm, and eMerge Interactive.
Two of our companies announced the creation of new Internet-oriented
subsidiaries during 1999. Sanchez created eProfile, and USDATA created eMake.
SOTAS completed the acquisition of S3Net in January 2000.
In December 1999, Pacific Title/Mirage completed a merger with a public shell
company, raised $18 million in a private placement, and change its name to
LifeF/X.
Diable Research Corp. was sold for cash during 1999, and MultiGen-Paradigm
agreed in February 2000 to a sale of all of its stock for cash. That transaction
is currently pending.
In March 2000, we closed the sale to Textron Inc. 2,181,819 shares of our
common stock for $100 million in
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a private placement. Safeguard and Textron intend to work together to offer
consulting services to each other and their respective partner companies and
subsidiaries and explore a variety of potential strategic relationships with
each other.
Since January 1, 2000, we have acquired or agreed to acquire interests in 13
new partner companies, including the following. In February 2000, we acquired a
29% interest in fob.com. fob.com is a developer, builder and manager of vertical
purchasing hub sites that enable the electronic procurement of manufacturing
materials. In February 2000, we acquired a 39% interest in NexTone
Communications. NexTone is a developer of an Internet-based system that
integrates voice and data communications. In March 2000, we acquired a 42%
interest in WebTelecom, a provider of voice, chat, video and collaboration for
Web-based customer contact. In March 2000, we acquired a 45% interest in
Wireless Online, a provider of smart antenna solutions for wireless data
networks worldwide. In March 2000, we agreed to acquire a 38% interest in Mi8
Corporation, an application service provider that rents leading business
software applications over the Internet.
INDUSTRY OVERVIEW
Growth of the Internet and Electronic Commerce
The Internet is fundamentally changing the competitive landscape of
virtually every industry, creating enormous opportunities for companies to
expand and improve their businesses. Companies have begun to use the Internet to
create business-to-consumer and business-to-business networks to streamline
complex processes, purchase and sell goods, and exchange information among
fragmented groups of customers, manufacturers and distributors. As a result,
companies are increasingly realizing the value of a global online marketplace
that aggregates purchasers and sellers.
While the business-to-consumer electronic commerce market is significant in
size, estimated by IDC at $15 billion in 1998, the business-to-business
electronic commerce market is larger and is predicted to grow much more
dramatically. Forrester Research estimates that United States
business-to-business electronic commerce will grow from $109 billion in 1999 to
$1.3 trillion in 2003, accounting for 90% of the dollar value of electronic
commerce in the United States by 2003. Forrester Research estimates that the
total electronic commerce market worldwide will reach $3.2 trillion by 2003.
We believe that advances in Internet infrastructure technology are driving
the rapid growth in business-to-consumer and business-to-business electronic
commerce. As Internet infrastructure develops, companies will increasingly be
able to use fast, reliable and secure networks to connect themselves with their
customers and business partners to reduce sales, marketing and related expenses,
and to integrate their systems more efficiently.
Internet Infrastructure is Driving Growth in Electronic Commerce
The Internet provides a platform that enables the creation of efficient,
cost-effective applications and networks that facilitate electronic commerce.
The increasing functionality of Internet infrastructure is enabling the
automation and integration of established business processes. Businesses are
compelled to rapidly adopt these technological advances in order to retain their
competitive position. Moreover, the development of increasingly powerful
Internet electronic commerce solutions is redefining the markets in which
businesses compete. Sellers are able to cost-effectively access global markets,
streamline their sales, marketing and distribution operations, reduce their time
to market and efficiently distribute updated product information. Buyers can
improve their purchasing process and easily access current product information
and a broad range of
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products and services. We believe that Internet infrastructure technology has
enabled this efficient interaction with business partners and customers, which
is leading to dramatic growth in electronic commerce.
Electronic commerce depends upon a highly functional, fast, reliable and
secure Internet infrastructure. Accordingly, both electronic commerce companies
and established businesses are investing significant amounts in developing and
deploying their Internet infrastructure platforms. IDC estimates that worldwide
Internet infrastructure spending will grow from $366 billion in 1999 to $1.5
trillion in 2003. To meet these needs, a growing number of new companies
exclusively devoted to developing Internet infrastructure products and services
are being formed and funded. In addition, established businesses are committing
significant resources to developing Internet infrastructure businesses.
Opportunities for Developing Internet Infrastructure Companies
We believe there are significant opportunities for companies that create the
infrastructure that enables electronic commerce. We call these companies
Internet infrastructure companies. These companies provide Internet technology
and services to support electronic commerce with the goal of maintaining and
expanding their customers' competitive advantage by improving operating
efficiencies, decreasing time-to-market and creating new market opportunities.
We believe that the following sectors of the Internet infrastructure market
provide the most significant opportunities:
- Software. Software providers develop and market software applications,
tools and related services that support electronic commerce and integrate
business functions. These include procurement platforms, distributed
content management, web-based customer relationship management and supply
chain management applications, dynamic pricing platforms, enterprise and
Internet application integration, billing and payment systems and
additional applications that enable electronic commerce.
- Communications. Communications providers develop networks and design and
market products and services to support the communications infrastructure
required for all electronic commerce. Products and services provided by
these companies include network security and quality measurement software,
communications services including wireline and wireless broadband access
to Internet protocol networks, optical and Internet protocol-based network
infrastructure software and network management and optimization solutions.
- eServices. Providers of Internet-related services, or eServices, develop,
deploy and manage applications and Web sites to enable electronic commerce
and automate business processes. eService providers may also offer the
infrastructure to host applications from a centrally managed site.
Services provided by these companies also include strategic guidance and
implementation services that enable companies to take competitive
advantage of the Internet.
Challenges Facing Developing Internet Infrastructure Companies
We believe that to succeed in this rapidly evolving and highly competitive
market, developing Internet infrastructure companies with leading-edge
technologies and solutions need to understand the electronic commerce market for
Internet infrastructure products and services. In order to
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establish market leadership, these companies must accelerate the process of
developing a sustainable enterprise, commercializing their core product or
service offerings and bringing these products and services to market. In
addition to capital, these companies require the resources to address the
following challenges in establishing market leadership:
- Technology. The strategic assessment of technology market opportunities
and the design, development and commercialization of proprietary
technology solutions, as well as access to complementary technologies and
strategic partnerships.
- Management. The recruitment and retention of an effective senior
management team.
- Legal and Financial. The development of appropriate corporate, legal and
financial structures and the expertise to execute transactions.
- Marketing. The identification of the company's strategic market position
and the implementation of effective branding, launch and marketing
strategies.
- Operations. The establishment of facilities and administrative processes
to support the growing enterprise.
- Business Development. The creation of relationships that provide initial
reference customers, external marketing channels and growth through
strategic partnerships, joint ventures or acquisitions.
We believe that inadequate resources to address these challenges prevent
many companies with leading-edge technology from capitalizing on their potential
opportunity. To date, venture capital firms, the traditional source of capital
for emerging technology companies, have primarily focused on providing capital
and have not generally offered significant operational resources and support to
entrepreneurs. In addition, because venture capital firms generally possess a
short term investment strategy designed to quickly capitalize on their
investments, their companies often do not develop the type of collaboration that
promotes the interests and development of the other companies in which they have
investments.
OUR SOLUTION AND STRATEGY
Our objective is to partner with, incubate, operate and integrate into our
network the leading companies in the Internet infrastructure market. We believe
that our experience in developing technology companies, our focus on and
expertise in Internet infrastructure, and the reach of our network, which
includes Internet Capital Group's network of business-to-business electronic
commerce partner companies, enable us to identify and attract companies with the
greatest potential for success in this market and to assist these companies to
become market leaders. In addition, we believe our affiliation with Internet
Capital Group helps us strengthen our own business model and provides us insight
into the fast-evolving business-to-business electronic commerce market. As a
result, we are better able to anticipate the industry's needs for new Internet
infrastructure products and services, and we can use that knowledge to guide our
existing partner companies and to select new Internet infrastructure companies
to fill out our network. We believe that our network of 45 partner companies and
over 160 associated companies in which we hold indirect interests through
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our Internet holding companies, incubators and private equity funds is a unique
resource that provides us with competitive advantages in the development of
Internet infrastructure companies. The Safeguard network is broad and deep and
supports our development process from beginning to end.
Our strategy is to utilize our extensive network to meet the strategic and
operational needs of developing Internet infrastructure companies. In addition
to providing our partner companies with capital, we draw on our network
resources to offer strategic and operational services in a collaborative
environment that serves to accelerate their development and allows them to
rapidly capitalize on market opportunities. We are also able to make connections
for our infrastructure partner companies with potential customers because our
network includes a large number of business-to-business and other electronic
commerce companies, including companies in Internet Capital Group's network.
After a company achieves market success, we operate as a long-term partner,
providing our partners with ongoing access to our network resources and industry
relationships.
We dedicate teams to each of the three Internet infrastructure sectors that
we target. Each team is led by a senior executive with extensive industry
experience in that sector. Each team is responsible for all elements of the
acquisition and development of our partner companies, providing consistency to
the relationship between Safeguard and the developing company and between the
developing company and our network resources. In the execution of each element
of our development process, the sector team coordinates the use of our network
resources to leverage Safeguard's own capital and management resources.
Our process for identifying, developing and operating the leading Internet
infrastructure companies consists of the following five elements: sourcing,
selection, planning, execution, and operation. The first two, sourcing and
selection, refer to our methodology for identifying and assessing acquisition
opportunities. The last three, planning, execution and operation, refer to our
post-acquisition process for enhancing the value of our partner companies.
Sourcing
We primarily partner with companies that are focused on providing Internet
infrastructure solutions. We believe the knowledge base of our management team,
the sector expertise and relationships of our business teams, and the market
presence of the companies in our broad network, including the networks of
Internet Capital Group and our other Internet holding companies, incubators and
private equity funds, enable us to understand industry and technology trends in
order to target potential infrastructure technology leaders. Our software,
communications and eServices teams identify compelling market segments and have
the mandate to acquire interests in companies with technologies that best
address the needs in that segment.
We identify potential candidates through three types of sourcing processes.
Acquisition opportunities may be directly sourced, co-sourced or outsourced. We
estimate that the acquisitions that we have made over the past two years have
been derived in approximately equal numbers from each of these three sourcing
processes. Directly sourced opportunities are identified through the efforts of
the Safeguard management team and their network of industry and financial
contacts. Co-sourced opportunities are developed with Safeguard's incubators and
private equity funds or result
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from spinouts from existing partner companies. eMerge Interactive, Inc., which
was incubated by XL Vision, Inc., is an example of a co-sourced deal. OPUS360
Corporation is another example of co-sourcing, where an early stage investment
was made by one of our affiliated private equity funds, prior to Safeguard
participating in a second round financing. Our relationships with 11 private
equity funds, 10 of which are located on our campus, significantly expand our
universe of co-sourced partner company acquisition opportunities. Outsourced
opportunities come from the referrals, contacts and relationships of companies,
entrepreneurs, managers and consultants that comprise our network of industry
relationships. The technology professionals employed by our eService partner
companies are particularly effective resources of our outsourced network.
Selection
Our infrastructure sector teams rapidly identify and acquire those companies
which we believe have the potential to be a leader in their market and are
potentially synergistic with our network. Our ability to quickly and accurately
screen business plans and select the ones we believe are the most likely to
succeed is enhanced by our focus on Internet infrastructure companies and the
sectoral expertise of our business teams. This selection process is supported by
Safeguard's internal market research and trend analysis. On a monthly basis, we
evaluate external analyses and reporting, applying a proprietary methodology,
based on content analysis, to identify and anticipate emerging trends in the
Internet infrastructure market. This input is used to refine our selection
criteria for our three business sector teams.
When we identify a company that appears to meet our current criteria, we
evaluate the company's potential, relying on both our management's own expertise
and rapid input from sources of expertise within our network. For example, we
may call upon the specific expertise or experience of management at our partner
companies or funds, or we may call upon one of our partner service companies,
such as aligne incorporated, US Interactive, Inc. or Cambridge Technology
Partners, to perform a rigorous technology assessment. We may also call upon a
company in our network to implement and evaluate a promising technology on a
trial basis. We believe that these resources permit us to make highly informed
judgments concerning a company's potential more rapidly than competitors that do
not have similar resources. As a result of our business model and extensive
experience, we believe that we are able to complete acquisitions quickly and
efficiently.
We screen potential partner companies using the following primary criteria:
- Industry-Leading Technology. We focus on companies which we believe have
the potential to be leaders in their market and whose technology or
processes provide them with a competitive advantage which prevents
competitors from easily entering their market. In addition, we look for
companies with accomplished technical teams that we believe have the
skills to bring their concept to market quickly.
- Markets. We focus on companies that offer products and services to large
and rapidly growing markets. We favor markets that are sufficiently
developed for the company to start aggressively building its customer
base, although we will also acquire companies whose market opportunity
anticipates important trends that we have identified. We attempt to
assess a company's potential market share within its addressable market
by evaluating the level of competition presented by other infrastructure
companies, traditional businesses and potential
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market entrants. We favor companies with strong competitive positions
where there is no dominant Internet infrastructure participant in that
company's addressable market.
- Compelling Business Model. We place an emphasis on companies with
compelling, sustainable business models that exploit the low variable
cost structure enabled by the Internet. We target companies that we
believe have the potential to achieve and sustain high profit margins.
- Management. We believe that entrepreneurial leadership is essential. The
identification and development of entrepreneurs is central to our
history and culture. We target entrepreneurs who we believe demonstrate
the leadership skills required to guide the strategy and development of
an early- stage company. In addition, we target companies with highly
qualified executive teams that will be able to manage the rapid
organizational development that we expect our partner companies to
achieve.
- Fit with Safeguard Network. As we continue to build our network, we look
for companies which will complement our existing partner companies and
fill out our offering of Internet infrastructure services and products.
In addition, we look for companies that can create synergy with and
provide support to other companies in our network.
Among the companies that satisfy these criteria, we focus on acquiring
interests in companies that can benefit from services provided by us and our
network. In view of the operating resources we devote to the development of
companies, we seek opportunities to take a meaningful ownership position and
exercise significant operational influence. Our objective is to maintain an
interest of more than 30%, either directly or through our affiliated partner
companies or funds, while ensuring that management and key personnel still
retain a significant equity stake in the company, although where necessary, we
can structure solutions to achieve significant influence with lower ownership
levels. Generally, we are the largest single shareholder, exercise significant
influence over the company and obtain significant board representation. We
believe that by limiting our acquisitions to situations in which we can
establish a substantial economic and operational relationship, we are able to
make more efficient use of our capital and management resources and derive a
greater benefit from the addition of new partner companies to our network.
Planning
Once we acquire an interest in a partner company, we take an active role in
its strategic direction and provide operational support. Through our experience
in incubating and operating technology companies, we have developed a
methodology for accelerating our partner companies' success. This methodology
begins with the creation of a plan for accelerated development that we call our
120 Day Plan. Prior to closing an acquisition, we begin to work with a
prospective partner company to:
- define its near term strategic goals;
- identify the key milestones to reaching these goals;
- identify the business metrics that will be applied by Safeguard and the
markets to measure their success; and
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- identify potential synergies with Safeguard's network of companies.
To implement the partner company's 120 Day Plan, we conduct a needs
assessment to determine the nature and timing of the resources required to help
the company achieve its goals. We then either provide the company with
appropriate services and support from within Safeguard and its network or help
them identify and negotiate to obtain these services from third-party suppliers
or strategic partners. During the 120-day period, we help our partner companies
measure their progress and continually reassess their objectives and
requirements. By helping our partner companies' management teams remain focused
on their critical objectives and providing them with resources not typically
available to early stage companies, we believe we are able to significantly
accelerate their development and success.
Once a company has completed its early development process, we engage in an
ongoing planning and assessment process. Safeguard executives serve on the board
of directors of each of our partner companies and work with them to develop
their annual strategic plans. Achievement of their annual plans is monitored
through monthly reporting of strategic performance metrics and financial results
through the Safeguard intranet, in a standard format that we call a performance
dashboard. This planning and reporting system for our more mature partner
companies provides an efficient means for our management to identify when
additional involvement and support may be required.
Execution
Our objective in the execution of a new partner company's 120 Day Plan is to
permit the entrepreneur to remain focused on the company's core business
objectives. If the partner company does not have sufficient access to the
resources required to execute its plan, the Safeguard business partner
responsible for the company will seek to utilize our network to obtain the
required resources. We believe these services provide our partner companies with
significant competitive advantages in competing in their individual markets. The
resources our partner companies draw upon to accelerate their development
include the following:
Technology. Our history as a developer of technology companies provides us
with ample resources to support the technology development of a new partner
company. We and our partner companies frequently call upon our eService
providers such as aligne, US Interactive and Cambridge Technology Partners to
perform strategic and operational technology assessments and to provide support
for the commercialization of technology solutions. In light of the demand for
qualified technology workers, the hundreds of consultants, developers,
integration experts and other Internet and information technology specialists
within our network provide our partner companies with a unique competitive
advantage. They also permit us to acquire companies that possess break-through
technologies that require substantial development to reach commercialization.
Through our network we are also able to identify and provide preferred access to
complementary technologies and promote strategic partnerships with technology
leaders.
Management. Through our network, we have access to a depth and breadth of
entrepreneurial and operational talent that is frequently called upon to serve
on the board of directors or advisory boards of our partner companies, or in
temporary executive capacities during the rapid development of a new partner
company. We call these management resources our "virtual bench." We may also
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call upon our virtual bench when existing management needs to be augmented or
replaced. To respond to growth of the network and the increasing challenge of
acquiring top-quality management, we have designated a full time executive to
manage our virtual bench and to assist our partner companies in acquiring
top-quality management. We can also assist a partner company to respond to
temporary demands for additional highly qualified personnel through our
consulting and service companies. To manage additional project-based demand for
knowledge workers across our network, we are planning to install the human
resources enterprise application and exchange products of our partner company,
OPUS360.
Legal and Financial. In addition to the business partner responsible for the
acquisition and overall development of each partner company, we assign a
financial and legal partner to each new partner company. These professional
partners are involved in the due diligence preceding the acquisition and are
responsible for assessing financial and legal issues to be addressed during the
execution of the 120 Day Plan, including the recommendation of best practices
within their areas of expertise. The expertise of dedicated professional
partners remains available to our partner companies when they are seeking to
execute major corporate or other financial transactions.
Marketing. We provide our partner companies with strategic guidance
regarding market positioning, product launch and marketing and public relations.
Insights concerning market position are obtained from our internal research and
trend analysis and the collective intelligence of the companies within our
network concerning the development of the Internet infrastructure market. We
have hired a full-time executive to manage our network's marketing and public
relations needs and to coordinate our marketing efforts. This coordination is
expected to include underwriting a portion of our partner companies' expense for
co-branded marketing initiatives. In addition, we have acquired an interest in
Zero to Five, a marketing consulting firm focused on supporting early-stage
technology companies.
Incubation Facilities. Our incubation facilities partner, TechSpace, is
developing flexible, technologically supported incubation space currently in New
York, with additional U.S. and international locations to be established this
year. Our corporate campus in suburban Philadelphia hosts 115,000 square feet of
flexible office space that is home to Safeguard, Internet Capital Group, 10
private equity funds, the Eastern Technology Council, and from time to time,
resident entrepreneurs.
Business Development. Our business and professional partners offer
assistance in identifying, evaluating, structuring and negotiating joint
ventures, strategic alliances, joint marketing agreements, acquisitions and
other corporate transactions. In addition, we offer our partner companies a
variety of services designed to reduce their operating costs, enable them to
focus on product development and marketing and accelerate their time-to-market
with new products and services. Most importantly, our network of approximately
200 companies provides opportunities for synergistic business development to new
partner companies. As part of the 120 Day Plan, new partner companies are asked
to identify and prioritize the business relationships that they would like to
establish within our network. Our business partners then work closely with the
partner company to support the formation of these relationships. This active
promotion of collaborative opportunities within our network is central to our
operating strategy and continues well beyond the 120 Day Plan.
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Operation
Our business model is to incubate, integrate and operate a network of
leading Internet infrastructure partner companies. We believe our operating
model gives us and each of our partner companies an advantage over other
developing companies that do not have access to the same network of resources.
We also believe our model provides advantages over large established companies
that do not have the necessary entrepreneurial agility to compete in an
emerging, rapidly changing market like the Internet infrastructure market. By
operating through independent companies, we can attract talented entrepreneurs
to run our businesses and we can partner with emerging companies that are
creating ground-breaking technologies and services. We insist that our
entrepreneurs own significant equity stakes in their companies to provide
maximum financial incentive for excellence to each member of our network. We
operate as partners, in a horizontal organizational structure, in order to
encourage our partners' entrepreneurial energy and creative talents.
We believe that our collaborative network is particularly effective in
benefiting Internet infrastructure companies. We promote the sharing of
knowledge, industry experience and business contacts that serve to accelerate
technology development and encourage cross-selling and marketing opportunities.
We believe that the sharing of information and development of strategic
relationships among our partner companies provides them with a competitive
advantage in the Internet infrastructure market. For example, CompuCom Systems,
Inc. and Cambridge Technology Partners have a substantial number of well
established customer relationships with businesses implementing electronic
commerce strategies, and can act as powerful marketing and distribution partners
for our Internet infrastructure partner companies. In addition, we seek to
leverage the aggregate purchasing power of our network of partner companies to
reduce their individual costs of obtaining third party services and products.
Our partner companies also capitalize on the industry relationships of our
management team and board of directors to facilitate strategic partnerships,
technology licensing agreements, distribution arrangements and co-marketing
relationships with other technology companies. In addition, we promote
collaboration through making introductions, conducting seminars and conferences,
identifying prospective alliances and monitoring the ongoing relationships among
our partner companies. Safeguard arranges several annual conferences for its
partner companies, including the "Think Again" annual conference, the annual
senior partners meeting, the annual chief financial officers' conference and
smaller on-campus and off-site conferences. We promote communication among our
partner companies through our extranet which we are continuing to develop to
more efficiently manage available resources and aggregate demand across our
network of partner companies.
We continually seek to promote ways for our more mature companies to
contribute to the strength of our network. Unlike venture capital funds, we
maintain significant ownership in and participate in the operations of our
partner companies after they go public, and we continue to engage them in our
network of companies. We may acquire additional interests in our public partner
companies if we believe they are undervalued, and have recently supported the
creation of public partner company spin-offs and development funds. We believe
our business model grows more effective with the addition of each new partner
company to our operating network.
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THE SAFEGUARD NETWORK
Our network consists of over 200 companies. We hold direct interests in 45
companies, which we call partner companies, and indirect interests in over 160
additional companies, which we call network companies, through Internet Capital
Group and our other Internet holding companies, incubators and private equity
funds.
Of our 45 partner companies, 26 companies are primarily engaged in the
Internet infrastructure business. Many of the remaining companies are engaged in
businesses which add value to our network or are repositioning to focus on the
Internet infrastructure business. The following overview provides a summary of
our Internet infrastructure companies, which are core to our operating strategy
and representative of our future acquisition strategy. This overview also
describes the role of our other partner companies in our strategy, including our
business-to-business electronic commerce companies, the companies that enhance
our operations, and the Internet holding companies, incubators and private
equity funds that, through their own growth strategies, continue to expand our
network.
We focus on developing and operating three types of Internet infrastructure
companies: software providers, communications providers, and eServices
providers. As of March 17, 2000, the following are our core Internet
infrastructure partner companies:
Software Communications eServices
Arista Extant aligne
e-Profile Integrated Visions Cambridge Technology Partners
eMake NexTone Communications iMedium
fob.com Pac-West Telecomm Mi8 Corporation
LifeF/X PrivaSeek OPUS360
RealTIME Media SOTAS TechSpace LLC
Sanchez Vitts Networks US Interactive
USDATA Who? Vision Zero to Five
WebTelecom
Wireless Online
e-Profile is currently a wholly-owned subsidiary of Sanchez and eMake is
currently a wholly-owned subsidiary of USDATA.
The following tables provide a summary of our Internet infrastructure
partner companies in our three core sectors. Our ownership positions in the
following tables have been calculated as of March 17, 2000, based on the issued
and outstanding voting securities of each partner company, assuming the issuance
of voting securities on the conversion or exercise of non-voting preferred
stock, but excluding the effect of options, warrants and convertible debt. Our
ownership percentages in certain of the partner companies described below
include equity interests that we have granted to our management subject to the
restrictions of our long-term incentive plan. Our ownership percentage assumes
the purchase by Safeguard of equity securities upon satisfaction or waiver of
all partner company funding conditions. See Notes 4, 5 and 18 of Notes to
Consolidated Financial Statements for information about the market value as of
December 31, 1999 of our holdings in our publicly traded partner companies and
publicly traded companies that we account for as available for
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sale.
Software
Software providers develop and market software applications, tools and
related services that support electronic commerce and integrate business
functions. These include distributed content management, web-based customer
relationship management applications and supply chain management applications,
procurement platforms, dynamic pricing platforms, enterprise and Internet
application integration, billing and payment systems and additional applications
that enable electronic commerce.
<TABLE>
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% OWNED
COMPANY DESCRIPTION OF BUSINESS BY US
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<S> <C> <C>
Arista Knowledge A provider of web-based infrastructure technology which 45%
Systems, Inc............... enables enterprises and web businesses to manage,
(www.aristasys.com) distribute, track, and sell educational and training content
in a user-friendly environment. The company is a
development stage company.
eMake Corporation.......... A wholly-owned subsidiary of USDATA that provides 38%(a)
(www.emake.com) Internet-based real-time manufacturing process control
applications to help manufacturers to determine what to
produce and the optimal way to produce, and to gain
insight into production processes along the supply chain.
The company commenced operations during the third
quarter of 1999 and has begun delivering its applications to
customers. The company currently plans to provide
application hosting services for companies that prefer not
to implement the application internally.
e-Profile, Inc............. A wholly-owned subsidiary of Sanchez Computer 26%(a)
(www.e-profile.com) Associates that provides outsourced data processing
operations, bank operations and vendor and integration
management services to direct and Internet banks based on
Sanchez's PROFILE/Anyware software. The company's
services enable a bank to become operational with Internet
banking services in as few as 90 days.
fob.com Inc................ A developer, builder and manager of business-to-business 29%
(www.fob.com) purchasing hub web sites that enable the electronic
procurement of manufacturing materials. The company's
proprietary software, called "Centralized Aggregate
Purchasing System," powers its purchasing hubs. The
company's first purchasing hub, fobchemicals.com, began
operations in November 1999 and currently plans to
introduce its second purchasing hub, fobpaper.com, in March 2000.
LifeF/X, Inc............... The successor to Pacific Title/Mirage, the company is 23%
(www.pactitle.com) developing a "face" for the Internet through photo-realistic
(OTC BB: LEFX.OB) digital human images, called "standins," that can be
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quickly downloaded from the company's web site and can
communicate over the Internet in real time at rates as low
as 28.8 kilobits per second. The company plans to offer
these standins to provide electronic commerce businesses
an increased level of customer service and personalization.
The company also currently plans to offer standins for use
by consumers as personalized models for chat, instant
message and email environments.
RealTIME Media, Inc........ A full-service online direct marketing company that uses 43%
(www.realtimemedia.com) innovative promotional techniques to create awareness,
build traffic, and generate leads for its Internet and
traditional clients. The company was originally formed
to be an Internet promotional services company and is an
industry pioneer in online promotions, instant-win, and
sweepstakes technologies. Since then, the company has
evolved into a full solution provider for attracting and
keeping customers for both online and combination
online/offline companies.
Sanchez Computer A global provider of comprehensive enterprise banking 26%
Associates, Inc............ software called PROFILE(R) for financial services
(www.sanchez.com) organizations worldwide. The primary module, called
(Nasdaq: SCAI) PROFILE/Anyware, is a multi-currency, multi-language,
multi-bank transaction processing system which supports
deposit, loan, customer and bank management requirements
through multiple distribution channels, including
the Internet.
USDATA Corporation......... A global supplier of component-based production software 38%
(www.usdata.com) designed to help customers reduce operating costs, shorten
(Nasdaq: USDC) cycle times and improve product quality in their
manufacturing operations. The company's software enables
manufacturers to access accurate and timely information -
whether they are on the plant floor, in the office, or
around the globe.
</TABLE>
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(a) This company is a wholly-owned subsidiary of an existing partner company.
Our ownership percentage reflects our ownership position in its parent.
Communications
Communications providers develop networks and design and market products and
services to support the communications infrastructure required for all
electronic commerce. Products and services provided by these companies include
network security and quality measurement software, communications services
including wireline and wireless broadband access to Internet protocol networks,
optical and Internet protocol-based network infrastructure software and network
management and optimization solutions.
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<TABLE>
<CAPTION>
% OWNED
COMPANY DESCRIPTION OF BUSINESS BY US
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<S> <C> <C>
Extant, Inc............. A global facilities-based provider of wholesale fiber 21%
(www.extant.net) backbone service, telecommunications interconnectivity and
clearinghouse solutions to a variety of communications
providers and Internet service providers. The company
offers its customer community simple ways to grow
their business, drive revenues and profits, and improve
performance.
Integrated Visions, An XL Vision company that provides network security 49%
Inc..................... solutions using biometric authentication, initially to the
(www.integratedvisions.com) healthcare industry. The company's solutions enable secure
and convenient access to computerized patient information
on intranets, extranets, and across the Internet. The
company's suite of products simplifies logon to
applications while increasing security. The company is
in the early stages of commercializing its products
and solutions.
NexTone A developer of an Internet-based system that allows 39%
Communications communications service providers to offer voice-data
Inc..................... integration services over broadband connections in a simple
(www.nextone.com) and cost-effective way. These value-added services include
Internet-based virtual private networks, distributed
private branch exchanges (PBXs) and PBX extensions.
The company is currently a development-stage company.
Pac-West An integrated communications provider committed to 7%
Telecomm, Inc........... providing usage-intensive customers, including Internet
(www.pacwest.com) service providers, medium and small businesses and enhanced
(Nasdaq: PACW) communications service providers, a single source for all
their communications needs. Pac-West provides Internet
access and other Internet infrastructure services to
Internet service providers, who can either co- locate
and maintain their own equipment at Pac-West's switching
sites, or subscribe to an integrated managed modems
service that includes access lines, modems, routers,
authentication service, and technical support. The
company currently offers service in California, Nevada and
Washington, and currently plans to continue to expand
its operations to cover the western U.S.
PrivaSeek, Inc.......... A provider of permission marketing and privacy management 33%
(www.privaseek.com) solutions for electronic commerce. PrivaSeek designs,
builds and manages systems and services that bring
businesses and consumers together in a permission-based
relationship. These systems and services enable
businesses to benefit from richer, more accurate consumer
information, thus optimizing the effectiveness of their
marketing investment. Consumers are empowered to
control, manage and benefit from this information exchange.
SOTAS, Inc.............. A provider of end-to-end telecommunications network 75%
(www.sotasinc.com) monitoring and integrity testing solutions that measure the
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quality and efficiency of service provided by communications
and Internet access providers. SOTAS provides flexible
and powerful information-based solutions in the network
signaling, data management and bandwidth management
arenas. bandwidth management arenas.
Vitts Networks, Inc..... An integrated communications provider that offers single 48%
(www.vitts.com) source business data communications services, including
high-speed Internet access, web and server hosting,
network management and outsourcing services and continuous
network monitoring coupled with technical support. The
company distributes its services through a direct sales
force, affiliated resellers and Internet service
providers and is deploying its advanced technology
Protected Service Network, which currently serves
customers throughout the New England area of the U.S.
WebTelecom, Inc. A provider of voice, chat, video, and collaboration for 42%
(www.webtele.com) Web-based customer contact. WebTelecom's ASP service
deploys voice-based customer support over the Internet.
This full-featured, standards-based service is
non-intrusive and delivers natural real-time voice
conversation.
Who? Vision An XL Vision company that is a provider of secure 29%
Systems, Inc............ identification technology that enables individuals to
(www.whovision.com) electronically authenticate ("e-Thenticate"(TM)) their
identities to access digital networks and maintain
digital privacy. The company applies patented imaging
technologies to create reliable, cost-effective
fingerprint authentication solutions and a secure
platform that manages digital identities including
digital certificate management for business-to-consumer
and business-to-business transactions. The company
is currently in the development stage.
Wireless Online, A provider of smart antenna solutions for wireless data 45%
Inc. networks worldwide. The company's solutions combine
(www.wireless- advance digital signal processing and radio frequency
online.com) technologies, next generation antenna design, and
proprietary software and electronics, enabling wireless
data service providers to greatly improve the coverage,
quality, and capacity of their networks.
</TABLE>
eServices
Providers of Internet-related services, or eServices, develop, deploy and
manage applications and Web sites to enable electronic commerce and automate
business processes. eService providers may also offer the infrastructure to host
applications from a centrally managed site. Services provided by these companies
also include strategic guidance and implementation services that enable
companies to take competitive advantage of the Internet.
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<TABLE>
<CAPTION>
% OWNED
COMPANY DESCRIPTION OF BUSINESS BY US
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<S> <C> <C>
aligne incorporated... An information technology management consulting firm that 100%
(www.aligne.com) assists senior executives in optimizing their companies'
investments in technology. aligne offers businesses a
variety of services ranging from electronic
business/electronic commerce strategy development
to applications development and infrastructure support
by leveraging the capabilities of the Safeguard partner
companies as an end-to-end solutions provider for
small, medium and large enterprises.
Cambridge A global provider of Internet professional services, 16%
Technology management consulting and system integration services to
Partners transform its clients into electronic businesses. Cambridge
(Massachusetts), believes it combines a deep understanding of electronic
Inc................... commerce issues with integrated, end-to-end services and a
(www.ctp.com) record of shared risk and rapid, guaranteed delivery.
(Nasdaq: CATP)
iMedium, Inc.......... A developer of an interactive visual platform for 30%
(www.imedium.com) conducting commerce on the Internet. Through its
patent-pending, proprietary see!Commerce(TM) technology,
iMedium's business-to-business and business-to-customer
customers can embed electronic commerce and advertising
links into contextual scenes, photos or still images on
the Internet, as well as in other visual content such
as product catalogs and technical illustrations. iMedium's
commerce infrastructure centrally manages the network
of content, merchant and advertiser links and hosts
all related media assets. This enables customers to
manage the deployment of their interactive presence
across the Internet through a single extranet
application and point of contact.
Mi8 Corporation An Application Service Provider (ASP) that rents leading 38%
(www.mi8.com) business software applications over the Internet. Mi8
supports access to such applications via secure, high
speed Internet connections and wireless devices. Mi8's
initial target market is small and medium sized
businesses. Working with Safeguard partner companies
including CompuCom and Extant, Mi8 is developing
a turnkey solution for netsourced IT, including
hardware, applications, connectivity, help desk services,
training and lease financing.
OPUS360 A provider of an integrated, web-based solution for putting 9%
Corporation........... people and projects together across the labor supply chain.
(www.opus360.com) The company provides a business-to-business electronic
commerce platform that enables free agents, such as
independent professionals, consultants and other
knowledge workers with technology, creative, strategic
consulting and
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other expertise, to connect with buyers of project-based
resources. The company also maintains a website,
freeagent.com, based on its solution, which operates as an
on-line marketplace for companies and workers. OPUS360 is
currently in registration for its initial public offering.
TechSpace LLC......... An incubator that provides facilities and Internet-based 49%
(www.techspace.com) support services to start-up Internet companies. TechSpace
is currently hosting 35 companies in approximately 40,000
square feet of space in New York and is developing
additional facilities in New York, San Francisco and
Boston. The company currently plans on developing
additional facilities internationally.
US Interactive, Inc... A provider of Internet professional services helping 13%
(www.usinteractive. companies take advantage of the business opportunities
com) presented by the Internet. The company provides integrated
(Nasdaq: USIT) Internet strategy consulting, marketing and technology
services that enable clients to align their people,
processes and systems to form an electronic enterprise
using its proprietary e-Roadmap(R) delivery platform,
IVL Methodology(SM), and CAPTURE(SM) -- an extranet
relationship management tool.
Zero to Five LLC...... A marketing and communications consulting firm focused on 33%(b)
(www.zeroto5ive.com) supporting early-stage technology companies to develop
their early brand and communications
strategy during the critical transition
from business plan to market launch.
</TABLE>
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(b) Assumes the conversion into equity securities of a convertible loan
currently outstanding to Zero to Five by Safeguard
Other Companies That Enhance Our Network
An important part of our strategy is to maintain long-term relationships
with partner companies that add value to our network. Several of our companies
engage in business-to-business electronic commerce, which complements our
Internet infrastructure business in many ways. Certain partner companies can
provide services, technologies, or distribution channels to our other companies,
act as test sites for our companies' new products and services, or are potential
customers for them. Some of our partner companies follow Safeguard's operating
model of acquiring interests in, incubating, and operating their own network of
Internet companies, which expands the reach of our network. Still other
companies in our network help us to validate our market assumptions or obtain
competitive intelligence. Many of our partner companies fulfill more than one of
the above roles.
Internet Capital Group. Part of our existing business is developing and
operating our business-to-business electronic commerce partner companies, of
which Internet Capital Group is the most significant. These companies are an
important resource for our Internet infrastructure partner companies. Internet
Capital Group was founded in 1996 by Safeguard executives who anticipated the
transformational effect of Internet business-to-business electronic commerce
markets. The company
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has creatively adapted our operating model to establish itself as a leading
network of business-to-business electronic commerce companies. Internet Capital
Group's network consists of over 50 companies, including VerticalNet, Inc.,
which owns and operates over 50 online trading communities. Internet Capital
Group is headquartered on our corporate campus, we remain its largest
shareholder and executives from each company serve on the other's Board of
Directors. We believe our affiliation with Internet Capital Group helps us
strengthen our own business model and provides us insight into the fast-evolving
business-to-business electronic commerce market. As a result, we are better able
to anticipate the industry's needs for new Internet infrastructure products and
services, and we can use that knowledge to guide our existing partner companies
and to select new Internet infrastructure companies to fill out our network.
Internet Capital Group's network of business-to-business market-maker companies
also constitutes a significant group of potential customers for our Internet
infrastructure partner companies. In addition, Safeguard and Internet Capital
Group have collaborated in the funding and development of companies such as
eMerge Interactive, Inc., US Interactive and PrivaSeek. We believe that the
relationship between Safeguard and Internet Capital Group strengthens our
respective partner companies and creates a powerful combined network of
companies to enable the growth of electronic commerce.
Other Business-to-Business Electronic Commerce Companies. In addition to
Internet Capital Group and its network of business-to-business electronic
commerce companies, we also have direct interests in two significant
business-to-business electronic commerce partner companies: eMerge Interactive,
which completed its initial public offering in February 2000, and AgWeb.com,
Inc. These companies have powerful business models designed to capture large
segments of the livestock and agricultural markets for electronic commerce, and
add significant value to our electronic commerce business.
CompuCom. CompuCom Systems, Inc., our majority-owned subsidiary, plays a key
role in the implementation of our strategy. CompuCom is a leading provider of
information technology products and services to over 5,000 businesses throughout
the United States, including many Fortune 1000 companies, with over $2.9 billion
in 1999 revenues. CompuCom provides a substantial distribution channel and often
serves as a test site for our other partner companies' products and services.
CompuCom is also continuing to develop its own suite of Internet infrastructure
services, including distribution and configuration of Internet access devices
and network design and support.
Internet Holding Companies and Incubators. In addition to Internet Capital
Group, we are involved in the management of and maintain holdings in a number of
Internet holding companies and incubators that complement our operating strategy
and enhance the value of our network. These include: XL Vision, Inc., our
incubation laboratory that identifies or invents paradigm-shifting technologies
and incubates businesses built around those technologies; TechSpace Ventures
LLC, organized to fund the incubation of selected TechSpace LLC resident
companies; and Redleaf Group, LLC, an Internet holding company that engages in
the development of electronic commerce through a network of partner companies
which it incubates and operates. As each of these companies applies its
resources and capital to grow its own network of Internet companies, the growth
of Safeguard's network will continue to accelerate.
Additional Partner Companies. Our additional partner companies are primarily
providers of information technology products and services and
business-to-consumer electronic commerce companies. Several of these companies
are actively seeking to develop or expand their Internet
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infrastructure offerings. They include: 4anything.com, Inc., ChromaVision
Medical Systems, Inc., DocuCorp International, Inc., The Basketball Network LLC,
d/b/a HoopsTV.com, Kanbay LLC, Nextron Communications, Inc., OAO Technology
Solutions, Inc., QuestOne Decision Sciences Corporation and Tangram Enterprise
Solutions, Inc. Tangram, a majority-owned subsidiary of Safeguard, is a provider
of enterprise-wide information technology solutions including asset tracking and
electronic software distribution for large computing environments.
Private Equity Funds. In addition to our operating partner companies, we
participate in managing nine private equity funds, and we are a limited partner
in two additional private equity funds. These funds currently invest primarily
in early-stage, rapidly growing Internet and other technology companies. These
funds, ten of which are located on Safeguard's corporate campus, augment our
network by providing us with an expanded base to conduct our operations.
Investors in these funds increase our network's capital base and facilitate
strategic partner development. The funds also increase the geographic
penetration of our network, maintaining offices in Palo Alto, New York, Los
Angeles, Boston and Austin. The personal relationships and expertise of the
professionals employed by these funds are important resources for developing and
evaluating acquisition opportunities. Safeguard frequently refers opportunities
that do not fit Safeguard's Internet infrastructure operating strategy to an
appropriate fund. The funds may pursue broader investment strategies and may
invest at earlier stages and at less significant ownership percentages than
Safeguard. The diversification within the funds allows Safeguard, through its
network, to stay abreast of a broader range of emerging technologies, to
maintain relationships with a greater number of promising entrepreneurs and to
evaluate perceived shifts in technologies.
The aggregate capital commitment of these funds is $2.0 billion. The funds
made over 50 new investments in 1999 and had over 120 companies in their
portfolios at December 31, 1999. The funds typically have a seven to ten-year
life. Following is a list of these funds:
TL Ventures (4 funds)
SCP Private Equity Partners
Cambridge Technology Capital Fund
Invemed Catalyst Fund
Pennsylvania Early Stage Partners
EnerTech Capital Partners (2 funds)
Safeguard International Fund
MECHANISMS TO REALIZE SHAREHOLDER VALUE
Our principal mission is to promote long-term shareholder value for our own
shareholders and for shareholders of our partner companies. To promote the
entrepreneurial spirit upon which each partner company was founded, we encourage
our partner companies to go public. By going public, a partner company enables
its management and employees to realize the value they have created and continue
to create in the company, obtains an independent source of financing for further
growth, and creates a valuable currency for making strategic acquisitions. Our
preferred mechanism to reconcile our entrepreneurs' interest in accessing public
markets with the interests of our own shareholders is the Safeguard Subscription
Program.
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Safeguard Subscription Program
We assist a number of our partner companies to complete their initial public
offerings. Generally, in connection with our initial acquisition of our equity
interest in a partner company, our partner companies agree to offer shares to
our shareholders through what we call our Safeguard Subscription Program as part
of the partner company's initial public offering. The program enables our
eligible shareholders to subscribe to purchase, at the offering price, one share
of the partner company's common stock for a variable number of shares of our
common stock that the shareholder owns. This ratio is dependent upon the size of
the offering. Each of our shareholders that owns at least 100 shares of our
common stock is eligible to participate in the program. We purchase any shares
in the program that are not purchased by our shareholders.
Four of our partner companies, Internet Capital Group, US Interactive,
Pac-West Telecomm and eMerge Interactive, completed their initial public
offerings which included the Safeguard Subscription Program. One of our partner
companies, OPUS360, has filed a registration statement relating to its initial
public offering, which includes the Safeguard Subscription Program.
Rights Offerings
Historically, we assisted our partner companies with their initial public
offerings by offering rights to purchase a partner company's stock solely to
Safeguard shareholders in a "Rights Offering." A Rights Offering is an initial
public offering in which the shares of a partner company are purchased by our
shareholders by the exercise of rights which are obtained based upon the number
of shares of Safeguard common stock held by the purchasing shareholder. One or
more standby underwriters purchase shares not purchased upon the exercise of
rights. We completed Rights Offerings for Novell, Inc. and CompuCom in 1985,
Tangram Enterprise Solutions, in 1987, Cambridge Technology Partners in 1993,
Coherent Communications Systems Corporation in 1994, USDATA in 1995, Sanchez
Computer Associates and Integrated Systems Consulting Group, Inc. in 1996,
Diamond Technology Partners, ChromaVision Medical Systems and OAO Technology
Solutions in 1997 and DocuCorp International in 1998.
Mergers and Acquisitions
We have also historically assisted our partner companies in considering and
evaluating merger and acquisition opportunities to promote shareholder value. We
help our partner companies identify acquisition partners or targets, evaluate
these companies, negotiate terms and document the transactions. We have assisted
our partner companies in completing various mergers and acquisitions. For
example, we assisted with the mergers of Coherent with and into Tellabs,
Integrated Systems Consulting Group, Inc. with and into First Consulting Group,
Inc., and Pacific Title/Mirage, Inc. with and into LifeF/X.
Open Market Transactions
We have sold or purchased shares of our public partner companies in
open-market transactions from time to time. We generally engage in these
transactions when we believe the prices of the shares are attractive.
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REVENUES OF CORE INTERNET INFRASTRUCTURE PARTNER COMPANIES
Because we account for most of our partner companies under the equity
method, our consolidated revenue figures reported in our consolidated financial
statements do not reflect the aggregate revenue of our partner companies. The
aggregate revenue (adjusted as described below) of our 3 core Internet
infrastructure partner companies described in the preceding tables has grown
from $490 million in 1997 to $736 million in 1998 and to $887 million for 1999.
This data excludes revenues of our 18 other partner companies that we do not
categorize as Internet infrastructure companies, such as CompuCom, which had
revenues of $2.9 billion in 1999.
Growth in aggregate Internet infrastructure partner company revenue is not
indicative of growth in any particular partner company's revenue. The foregoing
data includes revenue of all our core Internet infrastructure partner companies
for all periods presented but excludes revenues of partner companies for years
prior to the year we acquired an interest in them. Our partner companies'
revenue figures are based on the unaudited financial statements prepared by each
partner company and, in some cases, adjustments by us to exclude discontinued
operations. We do not believe these adjustments have a significant impact on the
aggregate partner company revenue data disclosed above. In addition, these
figures are preliminary in nature and are subject to change. They may differ
from figures previously reported by each partner company due to any necessary
corrections, changes resulting from differing interpretations of accounting
principles upon review by the Securities and Exchange Commission or changes in
accounting literature. For these reasons, we cannot assure you of the accuracy
of the revenue figures. Also, since we do not consolidate the majority of our
partner companies for financial reporting purposes and we do not include our
largest consolidated subsidiary in the above table, the aggregate partner
company revenue data disclosed above is not intended to represent the revenues
that we have reported or will report on a consolidated basis in accordance with
generally accepted accounting principles. In each case, these revenues are
subject to the numerous risks and uncertainties elsewhere described in this
report.
GOVERNMENT REGULATIONS AND LEGAL UNCERTAINTIES
As of February 15, 2000, there were few laws or regulations directed
specifically at electronic commerce. However, because of the Internet's
popularity and increasing use, new laws and regulations may be adopted. These
laws and regulations may cover issues such as the collection and use of data
from Web site visitors and related privacy issues, pricing, content, copyrights,
online gambling, distribution and the quality of goods and services. The
enactment of any additional laws or regulations may impede the growth of the
Internet and the Internet infrastructure market, which could decrease the
revenue of our partner companies and place additional financial burdens on them.
Laws and regulations directly applicable to electronic commerce or Internet
communications are becoming more prevalent. For example, Congress recently
enacted laws regarding online copyright infringement and the protection of
information collected online from children. Although these laws may not have a
direct adverse effect on our business or those of our partner companies, they
add to the legal and regulatory burden faced by Internet infrastructure
companies. Other specific areas of legislative activity are:
Taxes. Congress recently enacted a three-year moratorium, ending on October
21, 2001, on the application of "discriminatory" or "special" taxes by the
states on Internet access or on products and
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services delivered over the Internet. Congress further declared that there would
be no federal taxes on electronic commerce until the end of the moratorium.
However, this moratorium does not prevent states from taxing activities or goods
and services that the states would otherwise have the power to tax. Furthermore,
the moratorium does not apply to certain state taxes that were in place before
the moratorium was enacted.
Online Privacy. Both Congress and the Federal Trade Commission are
considering regulating the extent to which companies should be able to use and
disclose information they obtain online from consumers. If any regulations are
enacted, Internet infrastructure companies may find certain marketing activities
restricted. The Federal Trade Commission has issued regulations enforcing the
Children's Online Privacy Protection Act, which take effect on April 21, 2000.
These regulations make it illegal to collect information online from children
under the age of 13 without first obtaining parental consent. These regulations
also require Web site operators to allow parents to inspect and remove their
children's information from any database. Compliance with these regulations
could pose a significant administrative burden for Web site operators whose
products and services are targeted to children or may be attractive to children.
Also, the European Union has directed its member nations to enact much more
stringent privacy protection laws than are generally found in the United States,
and has threatened to prohibit the export of certain personal data to United
States companies if similar measures are not adopted. Such a prohibition could
limit the growth of foreign markets for United States Internet infrastructure
companies. The Department of Commerce is negotiating with the European Union to
provide exemptions from the European Union regulations, but the outcome of these
negotiations is uncertain.
Regulation of Communications Facilities. To some extent, the rapid growth of
the Internet in the United States has been due to the relative lack of
government intervention in the marketplace for Internet access. Lack of
intervention may not continue in the future. For example, several
telecommunications carriers are seeking to have telecommunications over the
Internet regulated by the Federal Communications Commission in the same manner
as other telecommunications services. Additionally, local telephone carriers
have petitioned the Federal Communications Commission to regulate Internet
service providers in a manner similar to long distance telephone carriers and to
impose access fees on these providers. Some Internet service providers are
seeking to have broadband Internet access over cable systems regulated in much
the same manner as telephone services, which could slow the deployment of
broadband Internet access services. Because of these proceedings or others, new
laws or regulations could be enacted which could burden the companies that
provide the infrastructure on which the Internet is based, thereby slowing the
rapid expansion of the medium and its availability to new users.
Other Regulations. The growth of the Internet and electronic commerce may
lead to the enactment of more stringent consumer protection laws. The Federal
Trade Commission may use its existing jurisdiction to police electronic commerce
activities, and it is possible that the Federal Trade Commission will seek
authority from Congress to regulate certain online activities.
Generally applicable laws may affect us and our partner companies. The exact
applicability of many of these laws to the Internet infrastructure market,
however, is uncertain.
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PROPRIETARY RIGHTS
Our partner companies assert various forms of intellectual property
protection with respect to software, Web sites and other materials. These
materials may constitute an important part of our partner companies' assets and
competitive strengths. Our partner companies rely on a combination of patent,
trademark, copyright and trade secret laws, as well as confidentiality
agreements and non-compete agreements to establish and protect their proprietary
rights in their intellectual property.
We cannot be certain that the steps our partner companies have taken to
protect their proprietary information will be adequate. Policing unauthorized
use of technology is difficult. Additionally, our partner companies'
intellectual property may become known to, or independently developed by, third
parties. The laws of other countries may afford our partner companies little or
no protection of their intellectual property. Any litigation to enforce
intellectual property rights could result in substantial cost to our partner
companies.
COMPETITION
Competition from Other Capital Providers
Although we believe our network structure bolsters our ability to attract
Internet infrastructure companies, competition for acquiring interests in
Internet infrastructure companies remains intense. As the market for Internet
infrastructure grows, we expect that competition will intensify. We face
competition from numerous other capital providers seeking to acquire interests
in Internet-related businesses, including publicly traded Internet companies,
investment partnerships, large corporations, and other capital providers who
also offer support services to companies.
Traditionally, venture capital and private equity firms have dominated
investment in emerging technology companies, and many of these types of
competitors may have greater experience and financial resources than us. In
addition to competition from venture capital and private equity firms, several
public companies, as well as private companies, devote significant resources to
providing capital together with other resources to Internet companies.
Additionally, corporate strategic investors, including Fortune 500 and other
significant companies, are developing Internet strategies and capabilities. Many
of these competitors have greater financial resources and brand name recognition
than we do, and the barriers to entry for companies wishing to provide capital
and other resources to entrepreneurs and their emerging technology companies are
minimal. We expect that competition from both private and public companies with
business models similar to our own will intensify. Furthermore, private venture
capital firms and other capital providers who also offer support services to
companies who do not plan to go public can avoid regulation under the Investment
Company Act either by having less than 100 beneficial owners of their
securities, other than short-term paper, or by limiting the owners of their
securities to certain qualified purchasers. This exemption from the Investment
Company Act will provide these competitors with more flexibility regarding their
investment strategies, allowing them to take advantage of more opportunities or,
in some cases, permitting them to invest in companies on more favorable terms to
the companies than we are able to offer. Any of these competitors could limit
our opportunities to acquire interests in new partner companies. If we cannot
acquire controlling interests in attractive companies, our strategy to build a
collaborative network of partner companies will not succeed.
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Competition Facing our Partner Companies
Competition for Internet products and services is intense. As the market for
business-to-business electronic commerce grows, we expect that competition will
intensify. Our partner companies will encounter competition from existing
companies that offer competitive solutions and additional companies that develop
competitive solutions in the future. Our partner companies' competitors may
develop Internet products or services that are superior to, or have greater
market acceptance than, the solutions offered by our partner companies. If our
partner companies are unable to compete successfully against their competitors,
our partner companies may fail. In addition, our partner companies may compete
with each other for Internet infrastructure opportunities. If this type of
competition develops, it may deter companies from partnering with us and limit
our business opportunities.
Many of our partner companies will have to compete against companies with
greater brand recognition and greater financial, marketing and other resources.
Our partner companies may be at a disadvantage in responding to their
competitors' pricing strategies, technological advances, advertising campaigns,
strategic partnerships and other initiatives.
COMPUCOM
CompuCom Systems, Inc. is a leading provider of technology management services
and information technology products 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
5,200 business customers nationwide.
To meet the needs of its customers, CompuCom provides a variety of technology
management 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. In
addition, CompuCom is an authorized dealer of major personal 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.
During late 1998 and 1999, CompuCom restructured its operations to reduce costs
by closing its physical branch offices and moving to a virtual office model, and
reducing its workforce by approximately 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 wireless communications facilities.
In May 1999 CompuCom purchased the Technology Acquisition Services Division
(TASD) of ENTEX Information Services, Inc. The acquisition included employees,
inventory, fixed assets, and a distribution center, and nearby doubled the size
of CompuCom's product business.
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In April 1999 CompuCom merged its ClientLink subsidiary into E-Certify
Corporation, an Internet security services company, in a stock-for-stock
transaction.
CompuCom's product sales accounted for 88% of Safeguard's total net sales in
1999, compared to 87% in 1998 and 86% in 1997. CompuCom's services sales
accounted for 10% of Safeguard's total net sales in 1999, compared to 12% in
1997 and 1998. 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 1999. However,
no one customer accounted for more than 10% sales in either products or
services. In each of the last three years, more than 60% of CompuCom's product
revenues derived from sales of Compaq, IBM and HP products. CompuCom has
agreements with these vendors which have been regularly renewed. These
agreements are generally terminable by the vendor without cause on 30 to 90 days
notice. However, CompuCom believes its relationships with these vendors are
satisfactory.
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 two corporate account
centers, located in Dallas, Texas and Mason, Ohio. Each ISR works closely with
CompuCom's direct sales representatives. The primary goal of the corporate
account centers 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, 1999, CompuCom employed 372 full-time direct sales
representatives who sell both services and products, and 685 corporate account
center personnel. CompuCom also offers its customers the ability to create
custom configurations and price quotes and to order products and track order
status on the Internet.
CompuCom configures and ships desktop products at its center in Paulsboro, NJ,
at a Raleigh, North Carolina facility located near IBM's manufacturing plant,
and at an Irvine, California facility located near Toshiba's plant. CompuCom
closed its Stockton, California center during 1999 and closed it Compaq
co-location facility in February 2000. CompuCom provides services to its
customers through over 2,900 service personnel based at its configuration
centers and in the field.
CompuCom's industry is characterized by intense competition, primarily in the
areas of price, product availability and breadth of service and product line.
CompuCom competes for potential clients, including national accounts, with
numerous service providers, resellers and distributors. Many established desktop
computer manufacturers (including some of CompuCom's vendors), direct marketers,
systems integrators and resellers of distributed desktop or networking products
compete with CompuCom 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, CompuCom implemented its cost
reduction restructuring and acquired TASD to increase its market share. The
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company expects consolidation in the industry will continue in 2000. 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."
CompuCom employed approximately 5,000 full-time employees as of December 31,
1999.
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, 1999 is contained in Note 20 to the Consolidated Financial
Statements on pages 69-71 of Safeguard's Annual Report to Stockholders for the
year ended December 31, 1999, which is filed as part of Exhibit 13 hereto and is
incorporated herein by reference.
OTHER INFORMATION
Export sales in each segment for the three-year period ended December 31, 1999
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.
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, 1999, Safeguard and its consolidated subsidiaries have
approximately 5,400 employees, of which approximately 93% are employed by
CompuCom. Safeguard believes relations with employees are good.
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."
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ITEM 2. PROPERTIES
We own the office park in which our corporate headquarters and administrative
offices are located in Wayne, Pennsylvania. The office park contains
approximately 112,000 square feet, most of which we lease to our affiliated
private equity funds, certain partner companies including Internet Capital
Group, and other tenants. Our headquarters building is subject to a $3.6 million
mortgage bearing interest at 9.75%, which amortizes over a 30 year term ending
2022 and is callable by the lender at any time beginning in 2002. We believe the
properties are in good condition and repair and are adequate for the particular
operations for which they are used. Additionally, we lease approximately 2,400
square feet of office space in Palo Alto, California. Our partner companies have
various facilities throughout the United States, and they believe they can
readily obtain additional facilities as needed to support their anticipated
needs.
CompuCom's executive and administrative facility in Dallas, Texas contains
250,000 square feet of office space in two buildings on 20 acres. In 1999,
CompuCom sold this facility and leased it back for a 20 year term with two
five-year renewal options. CompuCom also leases 42,500 square feet of office
space in Mason, Ohio, which lease expires July 2005 with a five year renewal
option. CompuCom leases configuration, warehouse and distribution centers in New
Jersey, North Carolina and California under leases which expire in 2001 to 2004
with various renewal options.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any material legal proceedings. The Company has informed
the staff of the Federal Trade Commission (the "FTC") of the Company's
inadvertent failure to file certain Premerger Notification Forms under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act")
in connection with acquisitions of stock of certain partner companies. The FTC
staff has not informed us as to whether they intend to seek a fine or other
penalty from the Company in connection with the failure to file timely Forms for
these transactions. Because of the early stage of our discussions of this issue
with the staff of the FTC, we are unable to estimate the amount, if any, of the
Company's ultimate liability in connection with this matter. However, we do not
believe any such ultimate liability would have a material adverse effect on the
Company.
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 1999.
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 74 of its Annual Report to Stockholders for the year
ended December 31, 1999 which page is filed as part of Exhibit 13 hereto.
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In March 2000, we closed the sale to Textron Inc. 2,181,819 shares of our common
stock for $100 million in a private placement under Section 4(2) of the
Securities Act of 1933. We did not pay any commissions or fees to any
underwriter in connection with this sale. On February 29, 2000, we filed a
registration statement for the proposed sale in an underwritten public offering
of up to 11,500,000 shares of our common stock. On March 15, 2000, we filed an
additional registration statement for the proposed sale directly to certain
strategic and institutional investors of up to $500 million of our common stock.
ITEM 6. SELECTED FINANCIAL DATA
Safeguard incorporates by reference the information contained under this caption
on page 35 of its Annual Report to Stockholders for the year ended December 31,
1999 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 36 through 46 of its Annual Report to Stockholders for the year ended
December 31, 1999 which pages are filed as part of Exhibit 13 hereto.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Safeguard incorporates by reference the information contained under this caption
on page 46 of its Annual Report to Stockholders for the year ended December 31,
1999 which pages are filed as part of Exhibit 13 hereto.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Safeguard incorporates by reference the information on pages 47 through 73 of
its Annual Report to Stockholders for the year ended December 31, 1999 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
Our executive officers and directors, their ages and their positions for the
last five years are as follows:
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<TABLE>
<CAPTION>
DIRECTOR,
EXECUTIVE
OFFICER OR
KEY EMPLOYEE
NAME AGE POSITION(S) SINCE
- ---- --- ----------- -----
<S> <C> <C> <C>
Warren V. Musser..................... 73 Chairman of the Board and Chief Executive 1953
Officer
Harry Wallaesa........................ 49 President, Chief Operating Officer and Director 1999
Jerry L. Johnson....................... 52 Executive Vice President 1995
Stephen J. Andriole, Ph.D............ 50 Senior Vice President and Chief Technology 1997
Officer
Gerald A. Blitstein.................... 40 Senior Vice President and Chief Financial 2000
Officer
Michael G. Bolton..................... 56 Senior Vice President 1999
John K. Halvey........................ 39 Senior Vice President 1999
James A. Ounsworth.................. 57 Senior Vice President, General Counsel and 1991
Secretary
Robert E. Keith........................ 58 Vice Chairman of the Board 1996
J. Edward Coleman................... 48 Chief Executive Officer of CompuCom 1999
Thomas C. Lynch..................... 57 President and Chief Operating Officer of 1998
CompuCom
Judith Areen........................... 55 Director 1997
Vincent G. Bell, Jr.................... 74 Director 1956
Walter W. Buckley III................ 39 Director 2000
Michael J. Emmi...................... 57 Director 1998
Robert A. Fox.......................... 70 Director 1981
Jack L. Messman...................... 59 Director 1994
Russell E. Palmer..................... 65 Director 1989
John W. Poduska, Sr., Ph.D......... 62 Director 1987
Heinz C. Schimmelbusch, Ph.D.... 55 Director 1989
Hubert J.P. Schoemaker, Ph.D...... 49 Director 1993
Carl J. Yankowski..................... 51 Director 1999
</TABLE>
Warren V. Musser has served as Chairman and Chief Executive Officer since
1953. Mr. Musser is Chairman of the Board of Cambridge Technology Partners
(Massachusetts), Inc. and CompuCom Systems, Inc. He is also a Director of
DocuCorp International, Inc. and Sanchez Computer Associates, Inc. and a trustee
of Brandywine Realty Trust. Mr. Musser serves on a variety of civic, educational
and charitable boards of directors, and serves as Vice President/Development,
Cradle of Liberty Council, Boy Scouts of America, Vice Chairman of The Eastern
Technology Council, and Chairman of the Pennsylvania Partnership on Economic
Education.
Harry Wallaesa became a Director of Safeguard in February 1999 and President
and Chief Operating Officer of Safeguard in March 1999. Mr. Wallaesa served as
President and Chief Executive Officer of aligne incorporated, which he
co-founded in 1996, until Safeguard acquired a majority of the company in March
1999. From 1985 to 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 branded food products. Mr. Wallaesa is the
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Chairman of the Board of CompuCom Systems, Inc. and a Director of Bowne, Inc.,
Redleaf Group LLC, aligne incorporated, iMedium, Inc., Allied Resource
Corporation, Pennsylvania Academy of Fine Arts, Atlas Commerce and University of
Pennsylvania Health Systems.
Jerry L. Johnson was promoted to Executive Vice President in March 1999 and
leads our Communications practice. He served as Senior Vice President from
September 1995 until March 1999. Prior to joining Safeguard, Mr. Johnson served
at US West, Inc., a regional Bell operating company, from 1985 through 1995,
most recently as Vice President of Network Technology Services, a division of US
West, Inc. Mr. Johnson is the Chairman of the Board of Pac-West Telecomm, Inc.,
and a Director of OAO Technology Solutions, Inc., Extant, Inc., SOTAS, Inc.,
QuestOne Decision Sciences Corporation and Vitts Networks, Inc.
Stephen J. Andriole, Ph.D. joined Safeguard in October 1997 from CIGNA
Corporation, where he was Senior Vice President for Technology Strategy and
Chief Technology Officer from 1995 to 1997. From 1990 to 1995, he was a
Professor of Information Systems and 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. Dr. Andriole is a
Director of iMedium, Inc., aligne incorporated, Integrated Visions, Inc., USDATA
Corporation, Broadreach Consulting and STORM Systems.
Gerald A. Blitstein was hired as Senior Vice President and Chief Financial
Officer on February 28, 2000. From 1994 until joining Safeguard, Mr. Blitstein
was a Managing Director of Painewebber Incorporated. While a Managing Director
at Painewebber, Mr. Blitstein served as Managing Director, Executive Assistant
to the Chairman from 1994-1996, Managing Director of Reengineering from
1997-1998, and Managing Director of Global Equities 1998-2000.
Michael G. Bolton was appointed to the position of Senior Vice President in
April 1999. Since January 1998, Mr. Bolton has served as the Managing Director
of Pennsylvania Early Stage Partners, one of Safeguard's affiliated private
equity funds. From February 1972 to July 1998, Mr. Bolton was the founding Chief
Executive of the Ben Franklin Technology Center located at Lehigh University,
Vice President of Lehigh University, co-founder of the NEPA Venture Funds, and
currently serves as a Director of several technology-oriented start-up
companies.
John K. Halvey was appointed a Senior Vice President in June 1999 and leads
our eServices practice. Prior to joining Safeguard, Mr. Halvey was a partner in
the law firm, Milbank, Tweed, Hadley and McCloy from 1994 to June 1999, where he
was the head of its Intellectual Property and Business Technology Group. Mr.
Halvey is a Director of OPUS360 Corporation, the Basketball Network LLC,
PrivaSeek, Inc., Zero to Five LLC and TechSpace LLC.
James A. Ounsworth has served as Vice President, Secretary and General
Counsel since December 1991 and was promoted to Senior Vice President in
November 1995. 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. Mr. Ounsworth is a Director of Tangram
Enterprise Solutions, Inc., TechSpace LLC and Owosso Corporation.
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Robert E. Keith, Jr. was appointed Vice Chairman of the Board in February
1999. Mr. Keith has been a Managing Director of TL Ventures and its predecessor
funds since 1988. He has served as President since 1991, and as Chief Executive
Officer since February 1996, of Technology Leaders Management, Inc., a private
equity capital management company that is a subsidiary of Safeguard. Mr. Keith
is Chairman of Internet Capital Group, Inc. and a Director of Cambridge
Technology Partners (Massachusetts), Inc., SunSource, Inc. and US Interactive,
Inc.
J. Edward Coleman has been Chief Executive Officer of CompuCom Systems, Inc.
since December 1999 and a director of CompuCom since February 2000. Prior to
that time, Mr. Coleman served as Business Development Executive and Director of
Marketing for Computer Services Corporation, an information technology services
company, since March 1995. From September 1993 until March 1995, Mr. Coleman was
Executive Vice President of McCallister's Technical Services, Inc., a provider
of systems integration services.
Thomas C. Lynch has been the President and Chief Operating Officer of
CompuCom Systems, Inc. since December 1999. From October 1998 until becoming
President, Mr. Lynch had served as an Executive Vice President and Chief
Operating Officer of CompuCom. Prior to that time, Mr. Lynch was Senior Vice
President of Safeguard since November 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 Director of the Navy Staff from 1994
through 1995. Mr. Lynch is a trustee of the U.S. Naval Academy Foundation, and
is a Director of CompuCom, eMerge Interactive, Inc. and Sanchez Computer
Associates, Inc.
Judith Areen has been Executive Vice President for Law Center Affairs and
Dean of the Law Center, Georgetown University, since 1989 and has been a
Professor of Law at Georgetown University since 1976. Ms. Areen is a Director of
MCI WorldCom, Inc.
Vincent G. Bell, Jr. is President of Verus Corporation, a management
investment firm he formed in 1987. Before 1987, Mr. Bell was Chairman of the
Board and Chief Executive Officer of Safeguard Business Systems, Inc., an
information systems company.
Walter W. Buckley, III, was appointed as a director on February 10, 2000.
Mr. Buckley is a co-founder, and has served as President, Chief Executive
Officer and a director of Internet Capital Group, Inc. since March 1996. Prior
to co-founding Internet Capital Group, Mr. Buckley worked for Safeguard as Vice
President of Acquisitions from 1991 to February 1996. Mr. Buckley is a Director
of Breakaway Solutions, Inc., e-Chemicals, Inc., PrivaSeek, Inc., Sky Alland
Marketing, Inc., Syncra Software, Inc., VerticalNet, Inc. and Who?Vision
Systems, Inc.
Michael J. Emmi has been Chairman of the Board, President and Chief
Executive Officer of Systems & Computer Technology Corporation, a provider of
computer software and services, since May 1985. Mr. Emmi is a Director of
CompuCom Systems, Inc. and CDI Corp.
Robert A. Fox has been Chairman and Chief Executive Officer of R.A.F.
Industries, Inc., a private investment company which acquires and manages a
diversified group of operating companies and venture capital investments, since
1980. Mr. Fox is a Director of Zany Brainy, Inc. He is a Trustee of the
University of Pennsylvania and the Wistar Institute.
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Jack L. Messman has been Chief Executive Officer of Cambridge Technology
Partners (Massachusetts), Inc. since 1999. From April 1991 until 1999, Mr.
Messman was Chairman and Chief Executive Officer of Union Pacific Resources
Group Inc., an energy company. From May 1988 to April 1991, Mr. Messman was
Chairman and Chief Executive Officer of USPCI, Inc., a provider of hazardous
waste services and a subsidiary of Union Pacific Corporation. Mr. Messman is a
Director of Cambridge Technology Partners (Massachusetts), Inc., Metallurg,
Inc., Novell, Inc., Tandy Corp. and USDATA Corporation.
Russell E. Palmer is Chairman and Chief Executive Officer of The Palmer
Group, a corporate investment firm he organized in 1990. From 1983 to June 1990,
Mr. Palmer was Dean of The Wharton School of the University of Pennsylvania.
From 1972 to 1983, he was Managing Partner and Chief Executive Officer of Touche
Ross & Co. (now Deloitte & Touche). Mr. Palmer is a Director of Federal Home
Loan Mortgage Corporation, GTE Corporation, Honeywell International Inc. and The
May Department Stores Company.
John W. Poduska, Sr., Ph.D. has served as Chairman of Advanced Visual
Systems, Inc., a provider of visualization software, since 1992. Before 1992,
Dr. Poduska was President and Chief Executive Officer of Stardent Computer,
Inc., a computer manufacturer, from December 1989 to December 1991. From
December 1985 to December 1989, Dr. Poduska was founder, Chairman and Chief
Executive Officer of Stellar Computer, Inc., a computer manufacturer and the
predecessor of Stardent Computer. Dr. Poduska is a Director of Cambridge
Technology Partners (Massachusetts), Inc., Union Pacific Resources Group, Inc.,
XL Vision, Inc. and eMerge Interactive, Inc.
Heinz C. Schimmelbusch, Ph.D. has served as President and Chief Executive
Officer of Safeguard International Group, Inc. since 1994. Dr. Schimmelbusch
also serves as managing director of Safeguard International Fund, L.P., a
Safeguard affiliated private equity fund and is Chairman of: Allied Resource
Corporation, a company pursuing technology-oriented, early-stage investment
opportunities in process industries; Metallurg, Inc., New York, a global
producer and supplier of high quality metal alloys and specialty metals;
Becancour Silicon Inc., Montreal, Quebec, a silicon metal producer; and ALD
Vacuum Technology AG, Frankfurt, Germany, a global supplier of industrial vacuum
technology. From 1973 to 1993, Dr. Schimmelbusch was associated with
Metallgesellschaft AG, a raw materials company of which he served as Chairman of
the Executive Board from March 1989 to December 1993.
Hubert J. P. Schoemaker, Ph.D. is Chairman, Chief Executive Officer and
founder of NeurOnyx Inc., a biotechnology company he founded in 1999. Prior to
that, Dr. Schoemaker served as Chairman of the Board and co-founder of Centocor,
Inc., a biotechnology company from 1987 to 1994.
Carl J. Yankowski has been Chief Executive Officer of Palm, Inc., a leading
global provider of handheld computing devices since December 1999. Prior to
joining Palm, he was President and Chief Executive Officer of the Reebok
Division and Executive Vice President of Reebok International Ltd., a leading
worldwide designer, marketer and distributor of sports, fitness and casual
footwear, apparel and equipment. Before joining Reebok in September 1998, from
December 1993 to January 1998 Mr. Yankowski was President and Chief Operating
Officer of Sony Electronics, Inc., a diversified company that markets electronic
products for consumer, broadcast and industrial use in the United States. From
December 1988 to November 1993, Mr. Yankowski held
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various senior management positions with Polaroid Corporation, his last position
being that of Chairman of the Asia-Pacific region. Mr. Yankowski is a Director
of Avidyne, Inc. and Vitts Networks Inc.
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 11, 2000 annual meeting of stockholders, to
be filed within 120 days after the end of the year covered by this Form 10-K
Report.
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 11,
2000 annual meeting of stockholders, to be filed within 120 days after the end
of the year covered by this Form 10-K Report.
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 11, 2000 annual meeting of stockholders, to be filed within
120 days after the end of the year covered by this Form 10-K Report.
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 11, 2000 annual meeting of
stockholders, to be filed within 120 days after the end of the year covered by
this Form 10-K Report.
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, 1999 and 1998
Operations - years ended December 31, 1999, 1998, and 1997
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<PAGE> 36
Shareholders' Equity - years ended December 31, 1999, 1998, and 1997
Comprehensive Income - years ended December 31, 1999, 1998, and 1997
Cash Flows - years ended December 31, 1999, 1998, and 1997
Notes to Consolidated Financial Statements
Independent Auditors' Report
Statement of Management's Financial Responsibility
Financial Statement Schedules
Independent Auditors' Report
Schedule I - Condensed Consolidated Financial Information of
Registrant
Schedule II - Valuation and Qualifying Accounts
The exhibits required to be filed as part of this Report are listed in the
exhibit index below.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the fourth quarter of 1999.
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<PAGE> 37
(d) FINANCIAL STATEMENT SCHEDULES
SEPARATE FINANCIAL STATEMENTS OF SUBSIDIARIES NOT CONSOLIDATED
The 1999 consolidated financial statements of Cambridge Technology Partners
(Massachusetts), Inc., required to be included in this report pursuant to Rule
3-09 of Regulation S-X, will be included in an amendment to this report to be
filed within 90 days of the date of this report. The 1998 consolidated financial
statements of Cambridge Technology Partners (Massachusetts), Inc., required to
be included in our 1998 annual report on Form 10-K were included in our 1998
Form 10-K/A, filed on March 17, 2000.
FINANCIAL STATEMENT SCHEDULES
Independent Auditors' Report
The Board of Directors and Shareholders
Safeguard Scientifics, Inc.:
Under date of February 28, 2000, we reported on the consolidated balance sheets
of Safeguard Scientifics, Inc. and subsidiaries as of December 31, 1999 and
1998, and the related consolidated statements of operations, shareholders'
equity, comprehensive income, and cash flows for each of the years in the
three-year period ended December 31, 1999, as contained in the 1999 annual
report to shareholders. These consolidated financial statements and our report
thereon are included in the annual report on Form 10-K for the year 1999. 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. We did not audit the 1998 financial statements of a nonsubsidiary
investee. The financial statements of this investee were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for this investee, is based solely on the report
of the other auditors.
In our opinion, based on our audits and the report of the 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 28, 2000
37
<PAGE> 38
SAFEGUARD SCIENTIFICS, INC.
SCHEDULE I
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS 1999 1998
- ------ ---- ----
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 33,536 $ 1,486
Trading securities -- 143,103
Notes and other receivables 32,275 27,783
Prepaid expenses and other current assets 6,929 1,497
---------- ----------
Total current assets 72,740 173,869
PROPERTY, PLANT AND EQUIPMENT, NET 24,865 24,455
OTHER ASSETS
Ownership interests in and advances to partner companies 687,925 348,237
Available-for-sale securities 302,940 84,977
Other 20,719 5,757
---------- ----------
Total other assets 1,011,584 438,971
---------- ----------
TOTAL ASSETS $1,109,189 $ 637,295
========== ==========
</TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
CURRENT LIABILITIES
Current maturities of long-term debt $ 6,758 $ 866
Accounts payable 174 383
Accrued expenses 28,689 31,200
Deferred taxes -- 48,375
---------- ----------
Total current liabilities 35,621 80,824
LONG-TERM DEBT 14,354 123,115
DEFERRED TAXES 109,716 17,902
OTHER LONG-TERM LIABILITIES 174,797 1,250
CONVERTIBLE SUBORDINATED NOTES 200,000 71,345
SHAREHOLDERS' EQUITY
Common stock 10,475 9,840
Additional paid-in capital 133,969 55,910
Retained earnings 385,120 261,594
Accumulated other comprehensive income 45,137 37,294
Treasury stock, at cost -- (21,779)
---------- ----------
Total shareholders' equity 574,701 342,859
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,109,189 $ 637,295
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
38
<PAGE> 39
SAFEGUARD SCIENTIFICS, INC.
SCHEDULE I
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenue $ 14,849 $ 12,769 $ 27,289
Operating Expenses 51,343 25,868 38,239
--------- --------- ---------
(36,494) (13,099) (10,950)
Gain on issuance of stock by partner
companies 175,662 3,782 5,772
Other income, net 107,290 189,883 18,253
Interest income 5,231 3,119 2,916
Interest expense (11,995) (10,706) (7,150)
--------- --------- ---------
INCOME BEFORE INCOME TAXES, MINORITY
INTEREST AND EQUITY INCOME (LOSS) 239,694 172,979 8,841
Income taxes (61,884) (61,010) (2,213)
Equity income (loss) (54,284) (1,846) 14,873
--------- --------- ---------
NET INCOME $ 123,526 $ 110,123 $ 21,501
========= ========= =========
Earnings Per Share
Basic
Diluted $ 1.22 $ 1.15 $ 0.23
$ 1.16 $ 1.07 $ 0.22
AVERAGE COMMON SHARES OUTSTANDING
Basic
Diluted 101,134 95,499 93,747
110,910 104,742 95,988
</TABLE>
See notes to condensed consolidated financial statements.
39
<PAGE> 40
SAFEGUARD SCIENTIFICS, INC.
SCHEDULE I
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 123,526 $ 110,123 $ 21,501
Adjustments to reconcile to net cash (used) by operating activities:
Depreciation and amortization 7,914 1,443 2,169
Deferred income taxes 39,217 41,447 (2,313)
Equity (income) loss 54,284 1,846 (14,873)
Gain on issuance of stock by partner companies (175,662) (3,782) (5,772)
Other income, net (107,290) (189,883) (18,253)
Cash provided (used) by changes in working capital items:
Accounts receivable, net 2,998 (17,408) 3,349
Accounts payable, accrued expenses, and other (10,846) 34,180 5,804
--------- --------- ---------
Net cash used in operating activities (65,859) (22,034) (8,388)
INVESTING ACTIVITIES
Proceeds from sales of available-for-sale securities 53,565 3,319 6,438
Proceeds from sales of partner company ownership interests 84,522 89,888 60,856
Advances to partner companies (56,417) (32,161) (25,769)
Repayment of advances to partner companies 8,150 7,689 2,082
Acquisitions of ownership interests in partner companies (212,294) (112,903) (56,831)
Capital expenditures (2,882) (3,142) (7,871)
Other, net (6,209) (120) 3,408
--------- --------- ---------
Net cash used in investing activities (131,565) (47,430) (17,687)
FINANCING ACTIVITIES
Borrowings on revolving credit facilities 182,000 185,007 122,200
Repayments on revolving credit facilities (290,107) (99,100) (100,000)
Borrowings on term debt -- 909 3,987
Repayments on term debt (765) (140) (616)
Issuance of convertible subordinated notes, net 200,000 -- --
Payment of financing costs on convertible subordinated notes (6,178) -- --
Proceeds from financial instruments 139,309 -- --
Repurchase of Company common stock (2,695) (18,672) (9,488)
Issuance of Company common stock 7,910 2,266 2,653
--------- --------- ---------
Net cash provided by financing activities 229,474 70,270 18,736
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 32,050 806 (7,339)
Cash and cash equivalents at beginning of period 1,486 680 8,019
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 33,536 $ 1,486 $ 680
========= ========= =========
</TABLE>
See notes to condensed consolidated financial statements
40
<PAGE> 41
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. Parent Company Financial Statements are provided
to present the financial position and results of operations of the Company as if
the consolidated companies were accounted for on the equity method of accounting
for all periods presented during which the Company owned its interest in these
companies. CompuCom Systems, Inc. and Tangram Enterprise Solutions, Inc. were
consolidated in 1999, 1998 and 1997. During 1999, the Company acquired
controlling majority voting interests in aligne, incorporated, SOTAS, Inc. and
Arista Knowledge Systems, Inc. Each one of these partner companies was
consolidated from the date the Company acquired directly or indirectly more than
50% of the outstanding voting securities interest. The Company also consolidated
Premier Solutions Ltd. (Premier) and Pioneer Metal Finishing (Pioneer) until
they were sold in 1997.
Subsequent to the sale of Premier and Pioneer, the Company's revenue consists of
administrative service fees charged to certain partner companies and private
equity funds.
On February 28, 2000, the Board of Directors approved a three-for-one stock
split to the Company's shareholders of record on March 13, 2000. All share and
per share data have been restated to reflect a three-for-one split of the
Company's common stock as if the stock split had occurred as of December 31,
1996.
Certain prior year amounts have been reclassified to conform to the current year
presentation.
NOTE 2 - LONG-TERM DEBT
<TABLE>
<CAPTION>
1999 1998
---------------- ---------------
(in thousands)
<S> <C> <C>
Revolving credit facilities $ - $108,107
Mortgage note, 9.75%, payable monthly through 2002 3,380 3,420
Mortgage notes, 6.1% to 7.8%, payable monthly through 2017 4,691 4,954
Mortgage note, 7.75%, payable monthly through 2021 6,130 6,239
Other 6,911 1,261
---------------- ---------------
Total debt 21,112 123,981
Current maturities of long-term debt (6,758) (866)
---------------- ---------------
Long-term debt $14,354 $123,115
================ ===============
</TABLE>
Aggregate maturities of long-term debt during future years are as follows (in
millions): $6.8 - 2000; $.7 - 2001; $.8 - 2002; $1.2 - 2003; $1.1 - 2004 and
$10.5 - thereafter.
Interest paid in 1999, 1998, and 1997 was $14.0 million, $11.5 million, and $6.9
million, respectively, of which $7.3 million, $4.9 million, and $5.8 million in
1999, 1998, and 1997, respectively, related to the Company's Convertible
Subordinated Notes.
41
<PAGE> 42
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
- ----------- ------- ---------- ---------- ----- -----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts (1)
Year ended December 31, 1997 $ 3,088 $ 2,183 $ 1,829 $ (570) (2) $ 2,872
Year ended December 31, 1998 $ 2,872 $ 3,049 $ 1,350 $ 198 (3) $ 4,769
Year ended December 31, 1999 $ 4,769 $ 2,719 $ 1,884 $ - $ 5,604
Inventory reserves
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
Year ended December 31, 1999 $ 7,802 $ 17,885 $ 15,319 $ - $ 10,368
Restructuring
Year ended December 31, 1998 $ - $ 16,437 $ - $ (2,349) (4) $ 14,088
Year ended December 31, 1999 $ 14,088 $ 387 $ - $(12,675) (4) $ 1,800
</TABLE>
(1) Net write-offs.
(2) Sale of Pioneer Metal Finishing and Premier Solutions Ltd.
(3) Acquisition of Dataflex.
(4) Represents payments against restructuring reserve, non-cash charges for
disposal of fixed assets and adjustments for changes in estimates.
42
<PAGE> 43
(a)(3) EXHIBITS
The following is a list of exhibits required by Item 601 of Regulation S-K filed
as part of this Report. Where so indicated by footnote, exhibits which were
previously filed are incorporated by reference. For exhibits incorporated by
reference, the location of the exhibit in the previous filing is indicated in
parentheses.
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
<S> <C>
2.1 Asset Purchase Agreement, dated as of May 10, 1999 by and between CompuCom Systems, Inc. and Entex
Information Services, Inc.(15) (Exhibit 2.1)
3.1 Amended and Restated Articles of Incorporation of Safeguard(7) (Exhibit 3.1)
3.2* By-laws of Safeguard, as amended(19) (Exhibit 3)
4.1** 1990 Stock Option Plan, as amended(7) (Exhibit 4.3)
4.2** Stock Option Plan for Non-Employee Directors(4) (Exhibit 4.8)
4.3** Safeguard Scientifics, Inc. Amended and Restated Stock Savings Plan(5) (Exhibit 4.9)
4.4** First Amendment to Safeguard Scientifics, Inc. Stock Savings Plan(7) (Exhibit 4.6)
4.5** Safeguard Scientifics, Inc. Stock Savings Plan Trust Agreement(2) (Exhibit 4.2)
4.6 Safeguard Scientifics, Inc. 1999 Equity Compensation Plan(16) (Exhibit 4.1)
</TABLE>
43
<PAGE> 44
<TABLE>
<S> <C>
4.7 Indenture, dated as of June 9, 1999, between Safeguard Scientifics, Inc. and Chase Manhattan Trust
Company, National Association, as trustee, including the form of 5.0% Convertible Subordinated Note due
2006(17) (Exhibit 4.2)
4.8 Purchase Agreement of Safeguard Scientifics, Inc. to issue and sell to Credit Suisse First Boston
Corporation Convertible Subordinated Notes due June 15, 2006. (Exhibits omitted)(16) (Exhibit 4.3)
4.9 Registration Rights Agreement between Safeguard Scientifics, Inc. and Credit Suisse First Boston Corporation(17)
(Exhibit 4.4)
4.10 Rights Agreement dated as of March 1, 2000 between Safeguard Scientifics, Inc. and ChaseMellon Shareholder
Services LLC, as Rights Agent(19) (Exhibit 4)
4.11 Designation of Series A Junior Participating Preferred Shares*
10.1** Safeguard Scientifics Money Purchase Pension Plan(3) (Exhibit 10.3)
10.2** First Amendment to Safeguard Scientifics Money Purchase Pension Plan(4) (Exhibit 10.2)
10.3** Second Amendment to Safeguard Scientifics Money Purchase Pension Plan(5) (Exhibit 10.3)
10.4** Third Amendment to Safeguard Scientifics Money Purchase Pension Plan(6) (Exhibit 10.4)
10.5** Safeguard Scientifics Money Purchase Pension Plan Trust Agreement(3) (Exhibit 10.4)
10.6** Safeguard Scientifics, Inc. Long Term Incentive Plan, as amended and restated effective June 15, 1994(5)
(Exhibit 10.6)
10.7** Safeguard Scientifics, Inc. Deferred Compensation Plan(1) (Exhibit 10.12)
10.8 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)(8) (Exhibit 10.1)
10.9 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)(13) (Exhibit
10.12)
10.10 Transaction Agreement dated February 28, 2000 between Safeguard Scientifics, Inc. and Textron Inc. (19)
(Exhibit 10)
10.11 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)(10) (Exhibit
10.1)
</TABLE>
44
<PAGE> 45
<TABLE>
<S> <C>
10.12 Amendment dated April 12, 1999 to Amended and Restated Credit Agreement among Safeguard Scientifics,
Inc., Safeguard Scientifics (Delaware), Inc., Safeguard Delaware, Inc. and PNC Bank, N.A. (Exhibits
omitted)(14) (Exhibit 10.1)
10.13 Amendment dated March 29, 1999 to Amended and Restated Credit Agreement***
10.14 Amendment dated July , 1999 to Amended and Restated Credit Agreement***
10.15 Amendment dated February 17, 2000 to Amended and Restated Credit Agreement*
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)(9)
(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)(11) (Exhibit 10.2)
10.18 Non-Competition, Referral and Non-Disclosure Agreement dated as of May 10, 1999, by and between CompuCom
Systems, Inc. and ENTEX Information Services, Inc.(15) (Exhibit 10.1)
10.19 CompuCom Receivables MasterTrust I Pooling and Servicing Agreement, dated as of May 7, 1999, between
Norwest Bank Minnesota National Association, CompuCom Systems, Inc., and CSI Funding, Inc.(16) (Exhibit
10.14)
10.20 CompuCom Receivables MasterTrust I Pooling and Servicing Agreement Series 1999-1 Supplement, dated as of
May 7, 1999, among PNC Bank, National Association, Market Street Capital Corporation, Norwest Bank
Minnesota, National Association, CompuCom Systems, Inc., and CSI Funding, Inc.(16) (Exhibit 10.5)
10.21 Inventory and Working Capital Financing Agreement, dated as of May 11, 1999, between IBM Credit
Corporation and CompuCom Systems, Inc.(16) (Exhibit 10.6)
10.22 Attachment A to Inventory and Working Capital Financing Agreement dated May 11, 1999.(16) (Exhibit 10.7)
10.23 Receivables Contribution and Sale Agreement dated May 7, 1999 between CompuCom Systems, Inc. and CSI Funding,
Inc. (16) (Exhibit 10.8)
10.24** Term Note dated October 22, 1998 from Edward Anderson to CompuCom Systems, Inc.(13) (Exhibit 10.25)
10.25** Pledge Agreement dated October 22, 1998 from Edward Anderson to CompuCom Systems, Inc.(13) (Exhibit 10.26)
</TABLE>
45
<PAGE> 46
<TABLE>
<S> <C>
10.26** First Amendment to Term Note dated February 19, 1999 from Edward Anderson to CompuCom Systems,
Inc.(13) (Exhibit 10.23)
10.27** Stock Option Grant Agreement between CompuCom Systems, Inc. and Thomas C. Lynch, dated as of October 22,
1998(12) (Exhibit 10.4)
10.28** Term Note dated December 23, 1998 from Thomas Lynch to CompuCom Systems, Inc.(13) (Exhibit 10.28)
10.29** Pledge Agreement dated December 23, 1998 from Thomas Lynch to CompuCom Systems, Inc.(13) (Exhibit 10.29)
10.30** Term Note dated December 23, 1998 from Thomas Lynch to Safeguard Scientifics, Inc.(13) (Exhibit 10.30)
10.31** Security Agreement dated December 23, 1998 between Thomas Lynch and Safeguard Scientifics,
Inc.(13) (Exhibit 10.31)
10.32** Form of Promissory Notes dated June 11, 1999 given by certain executives for advances by Safeguard of income tax
withholdings on restricted stock grants.(31) (Exhibit 10.2)
10.33** Form of Promissory Notes dated August 27, 1999 given by certain executives for advances by Safeguard of
income tax withholdings on restricted stock grants.(18) (Exhibit 10.9)
10.34** Term Note dated July 22, 1999, between Safeguard Delaware, Inc. and John Halvey(18) (Exhibit 10.10)
10.35** Form of Promissory Notes dated November 3, 1999 given by certain executives for advances by Safeguard of
income tax withholdings on restricted stock grants*
10.36** Form of Promissory Notes dated December 1, 1999 given by certain executives for advances by Safeguard of
income tax withholdings on restricted stock grants*
10.37** Form of Promissory Notes dated February 3, 2000 given by certain executives for advances by Safeguard of
income tax withholdings on restricted stock grants*
10.38** Stock option Grant by Safeguard Scientifics, Inc. to Harry Wallaesa dated March 1, 2000*
10.39** Executive Employment Agreement dated November 1, 1999 between J. Edward Coleman and CompuCom Systems,
Inc. *
</TABLE>
46
<PAGE> 47
<TABLE>
<S> <C>
11 Computation of Per Share Income * (included in Note 15 to the Consolidated Financial Statements on
page 66 of Safeguard's Annual Report to Stockholders for year ended December 31, 1999, which page is
filed as part of Exhibit 13 hereto)
13 Pages 35 to 74 of Annual Report to Stockholders for year ended December 31, 1999 *
21 List of Subsidiaries*
23.1 Consent of KPMG LLP, Independent auditors*
23.2 Consent of PricewaterhouseCoopers LLP, Independent accountants*
27 Financial Data Schedule for the year ended December 31, 1999*
99.1 Consolidated Financial Statements of Cambridge Technology Partners (Massachusetts), Inc. ***
</TABLE>
- --------------------------------
* Filed herewith.
** These exhibits relate to compensatory plans, contracts or arrangements in
which directors and/or executive officers of the registrant may
participate.
*** To be filed by amendment
(1) Filed on March 30, 1987 as an exhibit to Annual Report on Form 10-K
(No. 1-5620) and incorporated herein by reference.
(2) Filed on December 13, 1991 as an exhibit to Form 8-K (No. 1-5620) and
incorporated herein by reference.
(3) Filed on March 30, 1992 as an exhibit to Form 10-K (No. 1-5620) and
incorporated herein by reference.
(4) Filed on March 30, 1994 as an exhibit to Form 10-K (No. 1-5620) and
incorporated herein by reference.
(5) Filed on March 30, 1995 as an exhibit to Form 10-K (No. 1-5620) and
incorporated herein by reference.
(6) Filed on April 1, 1996 as an exhibit to Form 10-K (No. 1-5620) and
incorporated herein by reference.
(7) Filed on March 31, 1997 as an exhibit to Form 10-K (No. 1-5620) and
incorporated herein by reference.
(8) Filed May 15, 1997 as an exhibit to Form 10-Q (No. 1-5620) and
incorporated herein by reference.
(9) Filed March 31, 1998 as an exhibit to Form 10-K (No. 1-5620) and
incorporated herein by reference.
(10) Filed on May 15, 1998 as an exhibit to Form 10-Q (No. 1-5620) and
incorporated herein by reference.
(11) Filed August 14, 1998 as an exhibit to Form 10-Q (No. 1-5620) and
incorporated herein by reference.
47
<PAGE> 48
(12) Filed November 16, 1998 as an exhibit to Form 10-Q (No. 1-5620) and
incorporated herein by reference.
(13) Filed on March 31, 1999 as an exhibit to Form 10-K (No. 1-5620) and
incorporated herein by reference.
(14) Incorporated by reference from registrant's Form 10-Q for the quarter
ended March 31, 1999 dated May 17, 1999 and made a part hereof by such
reference.
(15) Incorporated by reference from registrant's 8-K dated May 10, 1999 and
made a part hereof by such reference.
(16) Incorporated by reference from registrant's Form 10-Q for the quarter
ended June 30, 1999 dated August 16, 1999 and made a part hereof by
such reference.
(17) Incorporated by reference from registrant's Form 10-Q/A for the quarter
ended June 30, 1999 dated September 2, 1999 and made a part hereof by
such reference.
(18) Incorporated by reference from registrant's Form 10-Q for the quarter
ended September 31, 1999 dated November 15, 1999 and made a part hereof
by such reference.
(19) Incorporated by reference from registrant's Current Report on Form 8-K
filed on February 29, 2000
48
<PAGE> 49
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 21, 2000 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.
<TABLE>
<S> <C>
Dated: March 21, 2000 /s/ Warren V. Musser
------------------------------------
Warren V. Musser,
Chairman and Chief Executive Officer
(Principal Executive Officer)
Dated: March 21, 2000 /s/ Gerald Blitstein
------------------------------------
Gerald Blitstein,
Senior Vice President and Chief
Financial Officer (Principal
Financial and Accounting Officer)
Dated: March 21, 2000 /s/ Judith Areen
------------------------------------
Judith Areen, Director
Dated: March 21, 2000 /s/ Vincent G. Bell, Jr.
------------------------------------
Vincent G. Bell, Jr., Director
Dated: March 21, 2000 /s/ Michael J. Emmi
------------------------------------
Michael J. Emmi, Director
Dated: March 21, 2000
------------------------------------
Walter W. Buckley, III, Director
Dated: March 21, 2000 /s/ Robert A. Fox
------------------------------------
Robert A. Fox, Director
Dated: March 21, 2000 /s/ Robert E. Keith, Jr.
------------------------------------
Robert E. Keith, Jr., Director
Dated: March 21, 2000 /s/ Jack L. Messman
------------------------------------
Jack L. Messman, Director
</TABLE>
<PAGE> 50
<TABLE>
<S> <C>
Dated: March 21, 2000 /s/ Russell E. Palmer
------------------------------------
Russell E. Palmer, Director
Dated: March ___, 2000
------------------------------------
John W. Poduska Sr., Director
Dated: March 21, 2000 /s/ Heinz Schimmelbusch
------------------------------------
Heinz Schimmelbusch, Director
Dated: March 16, 2000 /s/ Hubert J. P. Schoemaker
------------------------------------
Hubert J. P. Schoemaker, Director
Dated: March 21, 2000 /s/ Harry Wallaesa
------------------------------------
Harry Wallaesa, Director
Dated: March 21, 2000 /s/ Carl Yankowski
------------------------------------
Carl Yankowski, Director
</TABLE>
<PAGE> 1
Exhibit 4.11
RESOLUTION OF THE BOARD OF DIRECTORS OF
SAFEGUARD SCIENTIFICS, INC.
ESTABLISHING AND DESIGNATING
SERIES A JUNIOR PARTICIPATING PREFERRED SHARES
AS A SERIES OF THE PREFERRED STOCK
RESOLVED, that pursuant to the authority expressly vested in the Board
of Directors of Safeguard Scientifics, Inc. (the "Corporation") by Article FIFTH
of the Articles of Incorporation of the Corporation, the Board of Directors
hereby fixes and determines the voting rights, designations, preferences,
qualifications, privileges, limitations, restrictions, options, conversion
rights and other special or relative rights of the first series of the Series
Preferred Stock, par value $10.00 per share, which shall consist of 150,000
shares and shall be designated as Series A Junior Participating Preferred Shares
(the "Series A Preferred Shares").
Special Terms of the Series A Preferred Shares
Section 1. Dividends and Distributions.
(a) The rate of dividends payable per share of Series A Preferred
Shares on the first day of January, April, July and October in each year or such
other quarterly payment date as shall be specified by the Board of Directors
(each such date being referred to herein as a "Quarterly Dividend Payment
Date"), commencing on the first Quarterly Dividend Payment Date after the first
issuance of a share or fraction of a share of the Series A Preferred Shares,
shall be (rounded to the nearest cent) equal to the greater of (i) $10.00 or
(ii) subject to the provision for adjustment hereinafter set forth, 1,000 times
the aggregate per share amount of all cash dividends, and 1,000 times the
aggregate per share amount (payable in cash, based upon the fair market value at
the time the non-cash dividend or other distribution is declared or paid as
determined in good faith by the Board of Directors) of all non-cash dividends or
other distributions other than a dividend payable in shares of Common Stock or a
subdivision of the outstanding shares of Common Stock (by reclassification or
otherwise), declared on the Common Stock, $.10 par value per share, of the
Corporation since the immediately preceding Quarterly Dividend Payment Date, or,
with respect to the first Quarterly Dividend Payment Date, since the first
issuance of any share or fraction of a share of the Series A Preferred Shares.
Dividends on the Series A Preferred Shares shall be paid out of funds legally
available for such purpose. In the event the Corporation shall at any time after
March 24, 2000 (the "Rights Declaration Date") (i) declare and pay to a holder
of record as of a date after the Rights Declaration Date any dividend on Common
Stock payable in shares of Common Stock, (ii) subdivide the outstanding shares
of Common Stock, or (iii) combine the outstanding shares of Common Stock into a
smaller number of shares,
<PAGE> 2
then in each such case the amounts to which holders of Series A Preferred Shares
were entitled immediately prior to such event under clause (ii) of the preceding
sentence shall be adjusted by multiplying each such amount by a fraction the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
(b) Dividends shall begin to accrue and be cumulative on outstanding
Series A Preferred Shares from the Quarterly Dividend Payment Date next
preceding the date of issue of such Series A Preferred Shares, unless the date
of issue of such shares is prior to the record date for the first Quarterly
Dividend Payment Date, in which case dividends on such shares shall begin to
accrue from the date of issue of such shares, or unless the date of issue is a
Quarterly Dividend Payment Date or is a date after the record date for the
determination of holders of Series A Preferred Shares entitled to receive a
quarterly dividend and before such Quarterly Dividend Payment Date, in either of
which events such dividends shall begin to accrue and be cumulative from such
quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear
interest. Dividends paid on the Series A Preferred Shares in an amount less than
the total amount of such dividends at the time accrued and payable on such
shares shall be allocated pro rata on a share-by-share basis among all such
shares at the time outstanding.
Section 2. Voting Rights. In addition to any other voting rights
required by law, the holders of Series A Preferred Shares shall have the
following voting rights:
(a) Subject to the provision for adjustment hereinafter set forth, each
Series A Preferred Share shall entitle the holder thereof to 1,000 votes on all
matters submitted to a vote of the shareholders of the Corporation. In the event
the Corporation shall at any time after the Rights Declaration Date (i) declare
any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide
the outstanding shares of Common Stock, or (iii) combine the outstanding shares
of Common Stock into a smaller number of shares, then in each such case the
number of votes per share to which holders of Series A Preferred Shares were
entitled immediately prior to such event shall be adjusted by multiplying such
number by a fraction the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denominator of which is
the number of shares of Common Stock that were outstanding immediately prior to
such event.
(b) In the event that dividends upon the Series A Preferred Shares
shall be in arrears to an amount equal to six full quarterly dividends thereon,
the holders of such Series A Preferred Shares shall become entitled to the
extent hereinafter provided to vote noncumulatively at all elections of
directors
<PAGE> 3
of the Corporation, and to receive notice of all shareholders' meetings to be
held for such purpose. At such meetings, to the extent that directors are being
elected, the holders of such Series A Preferred Shares voting as a class shall
be entitled solely to elect two members of the Board of Directors of the
Corporation; and all other directors of the Corporation shall be elected by the
other shareholders of the Corporation entitled to vote in the election of
directors. Such voting rights of the holders of such Series A Preferred Shares
shall continue until all accumulated and unpaid dividends thereon shall have
been paid or funds sufficient therefor set aside, whereupon all such voting
rights of the holders of shares of such series shall cease, subject to being
again revived from time to time upon the reoccurrence of the conditions above
described as giving rise thereto.
At any time when such right to elect directors separately as a class
shall have so vested, the Corporation may, and upon the written request of the
holders of record of not less than 20% of the then outstanding total number of
shares of all the Series A Preferred Shares having the right to elect directors
in such circumstances shall, call a special meeting of holders of such Series A
Preferred Shares for the election of directors. In the case of such a written
request, such special meeting shall be held within 90 days after the delivery of
such request, and, in either case, at the place and upon the notice provided by
law and in the By-laws of the Corporation; provided, that the Corporation shall
not be required to call such a special meeting if such request is received less
than 120 days before the date fixed for the next ensuing annual or special
meeting of shareholders of the Corporation. Upon the mailing of the notice of
such special meeting to the holders of such Series A Preferred Shares, or, if no
such meeting be held, then upon the mailing of the notice of the next annual or
special meeting of shareholders for the election of directors, the number of
directors of the Corporation shall, ipso facto, be increased to the extent, but
only to the extent, necessary to provide sufficient vacancies to enable the
holders of such Series A Preferred Shares to elect the two directors hereinabove
provided for, and all such vacancies shall be filled only by vote of the holders
of such Series A Preferred Shares as hereinabove provided. Whenever the number
of directors of the Corporation shall have been increased, the number as so
increased may thereafter be further increased or decreased in such manner as may
be permitted by the By-laws and without the vote of the holders of Series A
Preferred Shares, provided that no such action shall impair the right of the
holders of Series A Preferred Shares to elect and to be represented by two
directors as herein provided.
So long as the holders of Series A Preferred Shares are entitled
hereunder to voting rights, any vacancy in the Board of Directors caused by the
death or resignation of any director elected by the holders of Series A
Preferred Shares, shall, until the next meeting of shareholders for the election
of directors, in each case be filled by the remaining director elected by the
holders
<PAGE> 4
of Series A Preferred Shares having the right to elect directors in such
circumstances.
Upon termination of the voting rights of the holders of any series of
Series A Preferred Shares the terms of office of all persons who shall have been
elected directors of the Corporation by vote of the holders of Series A
Preferred Shares or by a director elected by such holders shall forthwith
terminate.
(c) Except as otherwise provided herein, in the Articles of
Incorporation of the Corporation or by law, the holders of Series A Preferred
Shares and the holders of Common Stock (and the holders of shares of any other
series or class entitled to vote thereon) shall vote together as one class on
all matters submitted to a vote of shareholders of the Corporation.
Section 3. Reacquired Shares. Any Series A Preferred Shares purchased
or otherwise acquired by the Corporation in any manner whatsoever shall be
retired and canceled promptly after the acquisition thereof. All such shares
shall upon their cancellation become authorized but unissued Series Preferred
Stock and may be reissued as part of a new series of Series Preferred Stock to
be created by resolution or resolutions of the Board of Directors.
Section 4. Liquidation, Dissolution or Winding Up. In the event of any
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, the holders of Series A Preferred Shares shall be entitled to
receive the greater of (a) $1000.00 per share, plus accrued dividends to the
date of distribution, whether or not earned or declared, or (b) an amount per
share, subject to the provision for adjustment hereinafter set forth, equal to
1,000 times the aggregate amount to be distributed per share to holders of
Common Stock. In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding shares of Common Stock, or (iii)
combine the outstanding shares of Common Stock into a smaller number of shares,
then in each such case the amount to which holders of Series A Preferred Shares
were entitled immediately prior to such event pursuant to clause (b) of the
preceding sentence shall be adjusted by multiplying such amount by a fraction
the numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
Section 5. Consolidation, Merger, etc. In case the Corporation shall
enter into any consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case the Series A
Preferred Shares shall at the same time be similarly exchanged or changed in an
amount per share (subject to the provision for adjustment
<PAGE> 5
hereinafter set forth) equal to 1,000 times the aggregate amount of stock,
securities, cash and/or any other property (payable in kind), as the case may
be, into which or for which each share of Common Stock is changed or exchanged.
In the event the Corporation shall at any time after the Rights Declaration Date
(i) declare any dividend on Common Stock payable in shares of Common Stock, (ii)
subdivide the outstanding shares of Common Stock, or (iii) combine the
outstanding shares of Common Stock into a smaller number of shares, then in each
such case the amount set forth in the preceding sentence with respect to the
exchange or change of shares of Series A Preferred Shares shall be adjusted by
multiplying such amount by a fraction the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
Section 6. No Redemption. The Series A Preferred Shares shall not be
redeemable.
Section 7. Ranking. The Series A Preferred Shares shall rank junior to
all other series of the Corporation's Series Preferred Stock as to the payment
of dividends and the distribution of assets, unless the terms of any such series
shall provide otherwise.
Section 8. Fractional Shares. Series A Preferred Shares may be issued
in fractions of a share which shall entitle the holder, in proportion to such
holder's fractional shares, to exercise voting rights, receive dividends,
participate in distributions and to have the benefit of all other rights of
holders of Series A Preferred Shares.
<PAGE> 1
Exhibit 10.15
AMENDMENT TO AMENDED AND RESTATED
CREDIT AGREEMENT
THIS AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT (this
"Amendment"), dated as of February 17, 2000 by and among Safeguard Scientifics,
Inc., a Pennsylvania corporation ("SSI" or a "Borrower"), Safeguard Scientifics
(Delaware) Inc., a Delaware corporation ("SSD" or a "Borrower"), Safeguard
Delaware, Inc., a Delaware corporation ("SDI" or a "Borrower" and, collectively
with SSI and SSD, the "Borrowers") and PNC Bank, National Association, as agent
for the "Lenders" under the Loan Agreement (in such capacity, "Agent")).
BACKGROUND
A. The parties, together with the other Lenders identified therein,
entered into that certain Amended and Restated Credit Agreement dated April 17,
1998 (as amended to date, the "Loan Agreement").
B. Lenders, through the Agent, and the Borrowers desire to amend the
Loan Agreement in the manner hereinafter set forth.
C. Capitalized terms that are not defined herein shall have the
meanings ascribed to them in the Loan Agreement.
D. Subject to compliance with all conditions specified herein, all
amendments hereinafter set forth are effective as of the date hereof unless
otherwise expressly stated herein to the contrary.
NOW, THEREFORE, intending to be legally bound, the parties agree as
follows:
1. INVESTMENTS AND LOANS.
a. The term "Investments" set forth in Section 1.1 of the Loan
Agreement is hereby deleted and replaced by the term "Equity Interests", which
shall mean any loans, advances or extensions of credit (other than guaranties)
or any purchase of any debt or equity security, including without limitation,
capital stock, bonds, debentures, notes, general partnership interests, limited
partnership interests, warrants or other rights, all whether certificated or
uncertificated. All references in the Loan Agreement to "Investment" or
"Investments" shall hereafter be deemed references to Equity Interests.
b. Section 6.6 of the Loan Agreement, "Investments and Loans", is
hereby amended and restated in its entirety as follows:
<PAGE> 2
"6.6 EQUITY INTERESTS AND LOANS.
The Borrowers may make Equity Interests in other Persons, in
addition to Equity Interests existing on the date of Closing and
disclosed in Exhibit "6.6" hereto, subject to the following
limitations:
(a) (i) Borrowers may only invest in any fiscal year, whether as
further Equity Interests in a Person in which an Equity Interest
has previously been made or as a new Equity Interest in a new
Person, $75,000,000 per Equity Interest for up to two such Equity
Interests and $50,000,000 per Equity Interest for other Equity
Interests.
(ii) Notwithstanding subpart (a) (i) above, the term "Equity
Interest" as used therein shall not include a transaction which
would otherwise constitute an Equity Interest but for which the
consideration given by Borrowers in connection therewith consists
entirely of capital stock issued by SSI (herein, "Non Cash
Investments"), provided that should any such stock thereafter be
redeemed in whole or in part for cash, the cash so paid will be
deemed an "Equity Interest" in the fiscal year so paid.
(b) Borrowers shall notify Agent of any Equity Interest in any
Person in which no previous Equity Interest has been made by any
Borrower, within a reasonable period after making such Equity
Interest, and shall provide Agent with full information on the
Equity Interest, including without limitation, balance sheets,
statements of income, statements of stockholders equity and such
other information that Agent may request."
c. The parties acknowledge that, for purposes of measuring the
amount of Equity Interests, an Equity Interest shall be deemed made in the year
in which a Borrower becomes contractually obligated to make a payment
notwithstanding that the payment is made in a later year.
d. Any violation by the Borrowers of Section 6.6 of the Loan
Agreement (prior to the modification thereof as set forth in subpart a.) for the
fiscal periods ending September 30, 1999 and December 31, 1999 are hereby
waived.
2. COLLATERAL COVERAGE BASE.
a. The percentage and maximum dollar amount for the following
Collateral Coverage Securities shall be as follows notwithstanding anything to
the contrary set forth as to such securities in the definition of "Collateral
Coverage Base" set forth in the Loan Agreement:
-2-
<PAGE> 3
<TABLE>
<CAPTION>
Securities % Maximum Dollar
---------- - --------------
<S> <C> <C>
Sanchez 40% $75 Million
Cambridge 50% $125 Million
</TABLE>
b. The parties acknowledge that Pledged Securities of Internet
Capital Group ("ICG") shall constitute Collateral Coverage Securities, subject
to the following:
(i) the percentage and dollar maximum for inclusion of ICG
Collateral Coverage Securities in the Collateral Coverage Base will be,
respectively, 15 % and $150,000,000;
(ii) the parties acknowledge that securities subject to so-
called broker lock-up agreements constitute Restricted Securities for all
purposes of the Loan Agreement and that, subject to the following exception,
securities so subject are not eligible as Collateral Coverage Securities.
Notwithstanding the foregoing, securities of ICG which would otherwise
constitute Collateral Coverage Securities but for the fact that they are subject
to a broker lock-up agreement shall nevertheless constitute Collateral Coverage
Securities but shall be subject to a Maximum Dollar sublimit within the
Collateral Coverage Base of $50,000,000.
3. SECURITIES MONETIZATION; SUBORDINATED DEBT
a. As used herein, "Securities Monetization" means the transfer by
a Borrower of stock pursuant to a transaction substantially identical to that
provided for in the Sails Mandatorily Exchangeable Securities Contract dated as
of August 25, 1999 among SSI, Credit Suisse Financial Products and CSFP, Inc.,
and which is otherwise satisfactory to Bank in its reasonable business judgment.
In the event of any disagreement between the parties as to whether a transaction
proposed to be entered into by the Borrowers constitutes a "Securities
Monetization" for purposes hereof, the good faith determination by the Agent
shall be conclusive.
b. Securities Monetizations will not be subject to any of the
existing covenants set forth in Section 6 of the Loan Agreement, including
without limitation Section 6.3 (Indebtedness), 6.4 (Liens) and 6.11 thereof
(Sale of Assets), but instead will be subject to the following limitations:
(i) the entire net proceeds from such Securities Monetization
will concurrently with Borrowers' receipt thereof be paid against the principal
of the Loans;
(ii) No Event of Default or event which with the giving of
notice and/or the passage of time would constitute an Event of Default shall be
outstanding as of the date on which such transaction is to be closed or would
result therefrom, including an Event of Default by reason of non-compliance with
the Collateral Coverage Base as a result of such Securities Monetization; and
-3-
<PAGE> 4
(iii) the combined aggregate amount of all Securities
Monetizations (measured by the consideration received by the Borrowers in
exchange for the "transferred" stock) and all Subordinated Indebtedness incurred
after the date hereof (as defined and as otherwise permitted by subpart c. below
and measured by principal amount) will not exceed $400,000,000 per year (the
"Monetization/Sub Debt Annual Limit").
c. (i) As used herein, "Subordinated Indebtedness" means unsecured
Indebtedness of the Borrowers the holder of which has agreed with or for the
benefit of Agent pursuant to a written agreement satisfactory to Agent that the
principal of and interest on such Indebtedness will not be repaid in any
liquidation or dissolution of the Borrowers until all obligations and
indebtedness of Borrowers to Lenders have been repaid in full and Lenders'
lending commitment to Borrowers has terminated, and which is otherwise
satisfactory to Agent in its reasonable business judgment. In the event of any
disagreement between the parties as to whether a transaction proposed to be
entered into by the Borrowers constitutes Subordinated Indebtedness for purposes
hereof, the good faith determination by the Agent shall be conclusive;
(ii) Subordinated Indebtedness will not be subject to the
prohibition contained in Section 6.3 (Indebtedness) of the Loan Agreement but
instead will be subject to the limitations that (A) the combined aggregate
amount of principal of all Subordinated Indebtedness and all Securities
Monetizations incurred after the date hereof (as permitted and measured in
subpart b. above) shall not exceed the Monetization/Sub Debt Annual Limit and
(B) the aggregate amount of all Subordinated Indebtedness incurred after the
date hereof through the Commitment Termination Date will not exceed $500,000,000
(the "Sub Debt Aggregate Sub Limit").
(iii) In the event that any Subordinated Indebtedness is by its
terms convertible to stock of SSI, or in the event that Borrowers have the
option to redeem Subordinated Indebtedness prior to maturity, Borrowers may
issue stock of SSI in connection with any such conversion or redemption, subject
to the change of ownership limitation set forth in Section 7.10 of the Loan
Agreement, provided that Borrowers will exercise such optional redemption right
only when it reasonably and in good faith appears to Borrowers that the holder
will accept SSI stock in full payment thereof, such as by reason of the then
price per share being in excess of the then conversion price, although Borrowers
may, subject to the other terms of the Loan Agreement, make a cash payment for
such redemption if nevertheless required by the holder.
4. TANGIBLE NET WORTH.
a. The reference in the definition of Tangible Net Worth to
"Subordinated Debenture" is hereby changed to "Subordinated Indebtedness".
b. Section 6.8 of the Loan Agreement is hereby amended and
restated in its entirety as follows:
"The Borrowers shall have and maintain Tangible Net Worth of not less
than $519,084,000 as of September 30, 1999, increasing by the sum of (i) 75% of
after tax earnings
-4-
<PAGE> 5
plus (ii) 100% of additional equity (including Subordinated Indebtedness), for
all periods after September 30, 1999 (determined on a cumulative basis), tested
as set forth in Section 1.3 hereof."
5. MISCELLANEOUS.
A. Construction. The provisions of this Amendment shall be in addition
to those of the Loan Agreement, the Notes and the Security Documents, all of
which shall be construed as integrated and complementary to each other. In the
event of any express inconsistency between the terms hereof and those contained
in the Loan Agreement, the terms hereof shall control. Except as modified by the
terms hereof, all terms and provisions of the Loan Agreement remain unchanged
and in full force and effect.
B. Binding Effect; Assignment and Entire Agreement. This Amendment
shall inure to the benefit of, and shall be binding upon, the respective
successors and permitted assigns of the parties hereto. Borrowers have no right
to assign any of their rights or delegate any of their obligations hereunder
without the prior written consent of Lenders. This Amendment, together with the
Loan Agreement, the Notes and the Security Documents, constitute the entire
agreement among the parties relating to the subject matter thereof. All exhibits
referred to herein and attached hereto shall be deemed expressly incorporated
herein by reference and made a part hereof.
C. Waiver of Jury Trial. BORROWERS AND LENDERS IRREVOCABLY WAIVE TRIAL
BY JURY AND THE RIGHT THERETO IN ANY LITIGATION IN ANY COURT WITH RESPECT TO, IN
CONNECTION WITH, OR ARISING OUT OF, THIS AMENDMENT, THE NOTES, SECURITY
DOCUMENTS, OR ANY INSTRUMENT OR DOCUMENT DELIVERED PURSUANT TO THIS AMENDMENT,
OR THE VALIDITY, PROTECTION, INTERPRETATION, COLLECTION OR ENFORCEMENT THEREOF.
D. Expenses. In addition to all other expense reimbursement obligations
of the Borrowers contained in the Loan Agreement and the Security Documents,
Borrowers will reimburse Lenders for all costs and expenses, including
reasonable attorneys' fees, incurred by Lenders in the negotiation, preparation
and consummation of this Amendment and the documents to be delivered pursuant
hereto.
E. Reaffirmation and Release. Borrowers ratify and reaffirm all of
their Obligations to Lenders and agree that the same are owing without set-off,
counterclaim or other defense of any nature. Borrowers specifically ratify and
reaffirm all waiver of jury trial provisions set forth in the Loan Agreement,
the Notes and the Security Documents.
-5-
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed and delivered by their duly authorized officers as of the day and year
first above written.
LENDERS:
PNC BANK, NATIONAL ASSOCIATION, AS AGENT
By: /s/ Joseph Meterchick
------------------------------------
BORROWERS:
SAFEGUARD SCIENTIFICS, INC.
By: /s/ Michael Miles
------------------------------------
SAFEGUARD SCIENTIFICS (DELAWARE) INC.
By: /s/ Michael Miles
------------------------------------
SAFEGUARD DELAWARE, INC.
By: /s/ Michael Miles
------------------------------------
-6-
<PAGE> 1
Exhibit 10.35
TERM NOTE
$<<Loan>> November 3, 1999
In consideration of the loan (hereinafter referred to as a "Loan")
Safeguard Scientifics, Inc., a Pennsylvania corporation (the "Lender"), has made
to <<Name>>, (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 $<<Loan>>.
The unpaid principal balance of the Note shall be paid, in full, on the
earlier of December 3, 2000 or Borrower's termination of employment.
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 5.57% (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%).
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
and thereafter shall be applied to the installments of principal hereunder in
the inverse order of maturity.
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.
1
<PAGE> 2
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
(ii) an event of default under the Pledge Agreement; 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.
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:
2
<PAGE> 3
If to the Lender: Safeguard Scientifics, Inc.
800 The Safeguard Building
435 Devon Park Drive
Wayne, PA 19087-1945
If to the Borrower: <<Name>>
<<Address1>>
<<Address2>>
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 Commonwealth of Pennsylvania.
IN WITNESS WHEREOF, the Borrower has duly executed this Term Note as
of the date first written above.
--------------------------
<<Name>>
3
<PAGE> 4
<TABLE>
<CAPTION>
Date Party Amount
<S> <C> <C>
November 3, 1999 Harry Wallaesa $38,700
November 3, 1999 John K. Halvey $21,690
November 3, 1999 Michael Bolton $6,450 (1)
</TABLE>
(1) Loan paid off on December 17, 1999.
1
<PAGE> 1
Exhibit 10.36
TERM NOTE
<<Loan_Amount>> December 1, 1999
In consideration of the loan (hereinafter referred to as a "Loan")
Safeguard Scientifics, Inc., a Pennsylvania corporation (the "Lender"), has made
to <<Name>>, (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 <<Loan_Amount>>.
The unpaid principal balance of the Note shall be paid, in full, on the
earlier of December 31, 2000 or Borrower's termination of employment.
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 5.74% (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%).
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
and thereafter shall be applied to the installments of principal hereunder in
the inverse order of maturity.
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.
1
<PAGE> 2
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
(ii) an event of default under the Pledge Agreement; 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.
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:
2
<PAGE> 3
If to the Lender: Safeguard Scientifics, Inc.
800 The Safeguard Building
435 Devon Park Drive
Wayne, PA 19087-1945
If to the Borrower: <<Name>>
<<Address1>>
<<Address2>>
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 Commonwealth of Pennsylvania.
IN WITNESS WHEREOF, the Borrower has duly executed this Term Note as of
the date first written above.
----------------------------------------
<<Name>>
3
<PAGE> 4
<TABLE>
<CAPTION>
- ------------------------------ ----------------------------- --------------------------
Date Party Amount
- ------------------------------ ----------------------------- --------------------------
<S> <C> <C>
December 1, 1999 Harry Wallaesa $30,502.46
- ------------------------------ ----------------------------- --------------------------
December 1, 1999 John K. Halvey $16,591.56
- ------------------------------ ----------------------------- --------------------------
</TABLE>
1
<PAGE> 1
Exhibit 10.37
TERM NOTE
<<Loan_Amount>> February 3, 2000
In consideration of the loan (hereinafter referred to as a "Loan")
Safeguard Scientifics, Inc., a Pennsylvania corporation (the "Lender"), has made
to <<Name>>, (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 <<Loan_Amount>>.
The unpaid principal balance of the Note shall be paid, in full, on the
earlier of February 28, 2001 or Borrower's termination of employment.
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 6.20% (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%).
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
and thereafter shall be applied to the installments of principal hereunder in
the inverse order of maturity.
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.
1
<PAGE> 2
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
(ii) an event of default under the Pledge Agreement; 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.
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:
2
<PAGE> 3
If to the Lender: Safeguard Scientifics, Inc.
800 The Safeguard Building
435 Devon Park Drive
Wayne, PA 19087-1945
If to the Borrower: <<Name>>
<<Address1>>
<<Address2>>
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 Commonwealth of Pennsylvania.
IN WITNESS WHEREOF, the Borrower has duly executed this Term Note as of
the date first written above.
------------------------
<<Name>>
3
<PAGE> 4
<TABLE>
<CAPTION>
Name Amount of Loan
<S> <C>
Harry Wallaesa $98,544.18
John Halvey $76,365.00
</TABLE>
<PAGE> 1
Exhibit 10.38
[SAFEGUARD SCIENTIFICS, INC. LOGO]
STOCK OPTION GRANT CERTIFICATE
Safeguard Scientifics, Inc., a Pennsylvania corporation (the "Company"), hereby
grants to the grantee named below ("Grantee") an option (this "Option") to
purchase the total number of shares shown below of Common Stock of the Company
(the "Shares") at the exercise price per share set forth below, subject to all
of the terms and conditions on the reverse side of this Stock Option Grant
Certificate. The terms and conditions set forth on the reverse side hereof are
incorporated herein by reference.
<TABLE>
<CAPTION>
<S> <C>
Grant Date: March 1, 1999
Type of Option: Non-qualified Stock Option
Shares Subject to Option: 100,000
Exercise Price Per Share: $37.0625
Term of Option: 8 years
</TABLE>
Shares subject to issuance under this Option do not vest until the first
anniversary of the grant, and then shall be eligible for exercise according to
the Harry Wallaesa following vesting schedule:
March 1, 2000 to February 28, 2001 25%
March 1, 2001 to February 28, 2002 50%
March 1, 2002 to February 28, 2003 75%
On or after March 1, 2003 100%
In witness whereof, this Stock Option Grant Certificate has been executed by the
Company by a duly authorized officer as of the date specified hereon.
Safeguard Scientifics, Inc.
/s/ Michael Miles
- -------------------------------
Grantee acknowledges that the grant and exercise of this Option, and the sale of
Shares obtained through the exercise of this Option, may have tax implications
that could result in adverse tax consequences to the Grantee and that Grantee is
not relying on the Company for any tax, financial or legal advice and will
consult a tax adviser prior to such exercise or disposition.
/s/ Harry Wallaesa
- -------------------------------
Harry Wallaesa
<PAGE> 2
1. Option Expiration. The Option shall automatically terminate upon the
happening of the first of the following events:
(a) The expiration of the 90-day period after the Grantee ceases to be
employed by the Company, if the termination is for any reason other than
disability, death or cause;
(b) The expiration of the one-year period after the Grantee ceases to be
employed by the Company on account of the Grantee's disability;
(c) The expiration of the one-year period after the Grantee ceases to be
employed by the Company if the Grantee dies while employed by the Company or
within three months after the Grantee ceases to be so employed or provide such
services on account of a termination described in subparagraph (a) above; or
(d)The date on which the Grantee ceases to be employed by the Company for
cause.
Notwithstanding the foregoing, in no event may the Option be exercised
after the expiration of the Term of Option specified on the reverse side. Any
portion of the Option that is not vested at the time the Grantee ceases to be
employed by the Company shall immediately terminate.
In the event a Grantee ceases to be employed by the Company for cause, the
Grantee shall automatically forfeit all shares underlying any exercised portion
of an Option for which the Company has not yet delivered the share certificates
upon refund by the Company of the exercise price paid by the Grantee for such
shares.
For purposes of this Stock Option Grant Certificate, the terms "employed
by the Company," "disability," and "cause" shall have the same meanings as
defined in the Company's 1999 Equity Compensation Plan, and this grant shall be
administered by the same committee that administers the Company's other stock
option plans and grants.
2. Exercise Procedures.
(a)Subject to the provisions of this Stock Option Grant Certificate, the
Grantee may exercise part or all of the vested Option by giving the Company
written notice of intent to exercise in the manner provided in Paragraph 11
below, specifying the number of Shares as to which the Option is to be
exercised. On the delivery date, the Grantee shall pay the exercise price (i) in
cash, (ii) by delivering Shares of the Company (duly endorsed for transfer or
accompanied by stock powers signed in blank) which shall be valued at their fair
market value on the date of delivery, or (iii) by such other method as the
Committee may approve, including payment through a broker in accordance with
procedures permitted by Regulation T of the Federal Reserve Board. The Committee
may impose from time to time such limitations as it deems appropriate on the use
of Shares of the Company to exercise the Option.
(b)The obligation of the Company to deliver Shares upon exercise of the
Option shall be subject to all applicable laws, rules, and regulations and such
approvals by governmental agencies as may be deemed appropriate by the
Committee, including such actions as Company counsel shall deem necessary or
appropriate to comply with relevant securities laws and regulations. The Company
may require that the Grantee (or other person exercising the Option after the
Grantee's death) represent that the Grantee is purchasing Shares for the
Grantee's own account and not with a view to or for sale in connection with any
distribution of the Shares, or such other representation as the Board deems
appropriate. All obligations of the Company under this Stock Option Grant
Certificate shall be subject to the rights of the Company to withhold amounts
required to be withheld for any taxes, if applicable. Subject to Committee
approval, the Grantee may elect to satisfy any income tax withholding obligation
of the Company with respect to the Option by having Shares withheld up to an
amount that does not exceed the maximum marginal tax rate for federal (including
FICA), state and local tax liabilities.
3. Change of Control. In the event of a Change of Control, the Board may take
such actions as it deems appropriate.
4. Restrictions on Exercise. Only the Grantee may exercise the Option during
the Grantee's lifetime. After the Grantee's death, the Option shall be
exercisable (subject to the limitations specified in the Plan) solely by the
legal representatives of the Grantee, or by the person who acquires the right to
exercise the Option by will or by the laws of descent and distribution, to the
extent that the Option is exercisable pursuant to this Stock Option Grant
Certificate. Notwithstanding the foregoing, the Committee may provide, at or
after grant, that a Grantee may transfer non-qualified stock options pursuant to
a domestic relations order or to family members or other persons or entities on
such terms as the Committee may determine.
5. Grant Subject to Standard Provisions. This grant is not made pursuant to
any plan. However, it is intended that this option shall be governed by, and
interpreted in accordance with, the terms which govern other stock options which
may be granted by the Company under its 1999 Equity Compensation Plan. The grant
and exercise of the Option are subject to interpretations, regulations and
determinations established from time to time by the Committee, including, but
not limited to, provisions pertaining to (i) rights and obligations with respect
to withholding taxes, (ii) the registration, qualification or listing of the
Shares, (iii) capital or other changes of the Company, and (iv) other
requirements of applicable law. The Committee shall have the authority to
interpret and construe the Option, and its decisions shall be conclusive as to
any questions arising hereunder.
6. No Employment Rights. The grant of the Option shall not confer upon the
Grantee any right to be retained by or in the employ of the Company and shall
not interfere in any way with the right of the Company to terminate the
Grantee's employment or service at any time. The right of the Company to
terminate at will the Grantee's employment or service at any time for any reason
is specifically reserved. No policies, procedures or statements of any nature by
or on behalf of the Company (whether written or oral, and whether or not
contained in any formal employee manual or handbook) shall be construed to
modify this Grant Letter or to create express or implied obligations to the
Grantee of any nature.
7. No Stockholder Rights. Neither the Grantee, nor any person entitled to
exercise the Grantee's rights in the event of the Grantee's death, shall have
any of the rights and privileges of a stockholder with respect to the Shares
subject to the Option until certificates for Shares have been issued upon the
exercise of the Option.
8. No Disclosure. The Grantee acknowledges that the Company has no duty to
disclose to the Grantee any material information regarding the business of the
Company or affecting the value of the Shares before or at the time of a
termination of the Grantee's employment, including without limitation any plans
regarding a public offering or merger involving the Company.
9. Assignment and Transfers. The rights and interests of the Grantee under
this Stock Option Grant Certificate may not be sold, assigned, encumbered or
otherwise transferred except, in the event of the death of the Grantee, by will
or by the laws of descent and distribution, or as otherwise permitted by the
Committee in accordance with the terms of this Stock Option Grant Certificate.
In the event of any attempt by the Grantee to alienate, assign, pledge,
hypothecate, or otherwise dispose of the Option or any right hereunder, except
as provided for in this Stock Option Grant Certificate, or in the event of the
levy or any attachment, execution or similar process upon the rights or
interests hereby conferred, the Company may terminate the Option by notice to
the Grantee, and the Option and all rights hereunder shall thereupon become null
and void. The rights and protections of the Company hereunder shall extend to
any successors or assigns of the Company and to the Company's parents,
subsidiaries, and affiliates. This Stock Option Grant Certificate may be
assigned by the Company without the Grantee's consent.
10. Applicable Law. The validity, construction, interpretation and effect of
this instrument shall be governed by and determined in accordance with the laws
of the Commonwealth of Pennsylvania.
11. Notice. Any notice to the Company provided for in this instrument shall be
addressed to the Company in care of the Chief Financial Officer at the Company's
headquarters and any notice to the Grantee shall be addressed to such Grantee at
the current address shown on the payroll of the Company, or to such other
address as the Grantee may designate to the Company in writing. Any notice shall
be delivered by hand, sent by telecopy or enclosed in a properly sealed envelope
addressed as stated above, registered and deposited, postage prepaid, in a post
office regularly maintained by the United States Postal Service.
<PAGE> 1
Exhibit 10.39
EXECUTIVE EMPLOYMENT AGREEMENT
THIS AGREEMENT, dated November 1, 1999 is made and entered into by and
between CompuCom Systems, a Delaware corporation ("Employer" or "Company"), and
Edward Coleman ("Executive").
RECITALS
Employer desires to employ Executive in an executive capacity in order to
provide the necessary leadership and senior management skills that are important
to the success of Employer, and Executive desires to accept such employment
pursuant to the terms and conditions of this Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, the receipt and sufficiency of which is hereby acknowledged,
Employer and Executive intend by this Agreement to specify the terms and
conditions of Executive's employment relationship with Employer.
SECTION 1. Term; Employment Commencement Date.
1.1. The term of employment of Executive shall commence on December 1,
1999 ("Employment Commencement Date") and shall continue until the employment
relationship is terminated for reasons outlined in
this Agreement.
SECTION 2. General Duties of Employer and Executive.
2.1. Employer agrees to employ Executive and Executive agrees to accept
employment by Employer and to serve Employer in an executive capacity upon the
terms and conditions set forth herein. The duties and responsibilities of
Executive shall include those described for the particular position held by
Executive while employed hereunder in the Bylaws of Employer or other documents
of Employer, and shall also include such other or additional duties, for
Employer, as may from time-to-time be assigned to Executive by the Board of
Directors of Employer or any duly authorized committee thereof. The executive
capacity that Executive shall hold while this Agreement is in effect shall be
that position as determined by the Board of Directors, or any duly authorized
committee thereof, from time to time in its sole discretion. While employed
hereunder, the initial position that Executive shall hold (until such time as
such position may be changed as aforesaid) shall be the position of Chief
Executive Officer.
2.2. While employed hereunder, Executive shall obey the lawful directions
of the Board of Directors of Employer, or any duly authorized committee thereof,
and shall use his best efforts to promote the interests of Employer and to
maintain and to promote the reputation
<PAGE> 2
thereof. While employed hereunder, Executive shall devote his full time,
efforts, skills and attention to the affairs of Employer in order that he shall
faithfully perform his duties and obligations hereunder and such as may be
assigned to or vested in him/her by the Board of Directors of Employer, or any
duly authorized committee thereof.
2.3. While this Agreement is in effect, Executive may from time to time
engage in any businesses or activities that do not compete directly and
materially with Employer, provided that such businesses or activities do not
materially interfere with his performance of the duties assigned to him/her in
compliance with this Agreement by the Board of Directors of Employer or any duly
authorized committee thereof. In any event, Executive is permitted to (i) invest
his personal assets as a passive investor in such form or manner as Executive
may choose in his discretion, (ii) participate in various charitable efforts,
and (iii) serve as a director or officer of any other entity or organization
that does not compete with Employer.
SECTION 3. Compensation and Benefits.
3.1. As compensation for services to Employer, Employer shall pay to
Executive, while this Agreement is in effect, a salary at a monthly rate of
$44,583.33. Any increases to such rate shall be at the discretion of the
Compensation Committee duly elected by the Board of Directors. The salary shall
be payable in equal bi-weekly installments, subject only to such payroll and
withholding deductions as may be required by law and other deductions applied
generally to employees of Employer for insurance and other employee benefit
plans. In addition, beginning in 2000, Executive shall be entitled to
participate in the Company's Management Incentive Compensation Plan ("MICP) at a
rate of 120 % of base salary. This bonus will be subject to the parameters set
forth by the Compensation Committee each year and the amount of payment will be
determined by such Committee.
3.2. Upon Executive's furnishing to Employer customary and reasonable
documentary support (such as receipts or paid bills) evidencing costs and
expenses incurred by him/her in the performance of his services and duties
hereunder (including, without limitation, travel and entertainment expenses) and
containing sufficient information to establish the amount, date, place and
essential character of the expenditure, Executive shall be reimbursed for such
costs and expenses in accordance with Employer's normal expense reimbursement
policy.
3.3. As long as this Agreement is in effect, Employer will purchase and
maintain for Executive's benefit a guaranteed renewable term life insurance
policy having a death benefit of not less than $1 million. Unless prohibited by
any policy or plan under which such insurance is provided, Executive will have
the right to purchase at Executive's cost additional coverage under such policy
or plan. Employer will not permit, even in the event of termination of this
Agreement for any reason, any such policy to lapse without offering Executive
the opportunity to take up the premium payments and continue the policy in
force.
3.4. Executive shall have the right to participate in any additional
compensation, medical and dental insurance plan, 401(k) plan, other benefit,
life insurance or other plan or
<PAGE> 3
arrangement of Employer now or hereafter existing for the benefit of executive
officers of Employer.
3.5. Executive shall be entitled to such vacation (in no event less than
three (3) weeks per year), holidays and other paid or unpaid leaves of absence
as consistent with Employer's normal policies or as otherwise approved by the
Board of Directors.
3.6. Executive agrees to submit to and Company agrees to pay for one
complete physical examination on an annual basis at the Cooper Clinic (or
similar medical clinic) in Dallas, Texas.
3.7. As long as this Agreement is in effect, Employer will purchase and
maintain for Executive's benefit a comprehensive long-term disability insurance
policy. Employer will not permit, even in the event of termination of this
agreement for any reason, any such policy to lapse without offering Executive
the opportunity to take up the premium payments and continue the policy in
force.
3.8. On the Employment Commencement Date, Employer will pay Executive a
one-time signing bonus in the amount of $100,000, subject to payroll and
withholding deductions as may be required by law.
3.9. Employer will reimburse Executive for his reasonable costs incurred
in connection with his relocation from Annapolis, Maryland to the Dallas, Texas
area to commence employment as follows:
(i) his temporary, duplicative housing costs, including rent and
utilities, in the Dallas, Texas area until the earlier of six (6) months
after the Employment Commencement Date or Executive moves into a new home
there.
(ii) the normal closing costs of buying a new home in the Dallas,
Texas area and of selling Executive's home in Annapolis, Maryland;
(iii) the reasonable cost of moving the household belongings of
Executive and his immediate family from Annapolis Maryland to the Dallas,
Texas area; and
(iv) reasonable travel expenses of Executive between Annapolis,
Maryland and the Dallas, Texas area, as necessary, for the period of time
set forth in CLAUSE (i) above.
3.10. On the Employment Commencement Date, Employer will grant Executive a
non-qualified stock option, under the Company's current Option Plan, to purchase
800,000 shares of the Company's common stock, at the exercise price per shall
equal to the closing price of the Company's common stock on the Nasdaq National
Market system on the Employment Commencement Date. The option will become
exercisable for the purchase of the shares in equal increments on each of the
first four (4) anniversaries of the date of grant,
<PAGE> 4
and will expire on the earlier of the tenth anniversary of the date of grant or
(i) immediately upon Executive's voluntary termination of employment with
Employer; (ii) immediately upon termination by Employer for "due cause" pursuant
to SUBSECTION 5.2; (iii) 90 days after Executive's termination of employment
without due cause pursuant to SUBSECTION 5.3 or due to Executive's disability
and (iv) 180 days after Executive's death. The option will also contain other
customary terms and conditions which shall be reasonably satisfactory to
Employer and Executive. In the alternative, at the election of Executive, the
entire option will immediately become exercisable on the Employment Commencement
Date, and then only if Executive immediately exercises all such options. In such
event, the option shares obtained by such exercise will be subject to repurchase
at the cost thereof by the Company in the event Executive's employment with the
Company terminates for any reason as follows: 100% until one year after the
Employment Commencement Date; 75% until two years after the Employment
Commencement Date; 50% until three years after the Employment Commencement Date;
and, 25% until four years after the Employment Commencement Date. In connection
with this accelerated exercise of the entire option, Employer will lend
Executive the aggregate option exercise price, pursuant to the terms of a
promissory note with a term of 4 years and at an interest rate equal to the rate
of Employer for its present lending facility used to fund such note on the date
thereof (the "Loan"). The Loan will be secured by a pledge agreement from
Executive to Employer under which the option shares will be pledged as
collateral for the Loan. The promissory note and the pledge agreement will
contain other customary terms and conditions which shall be reasonably
satisfactory to Employer and Executive.
SECTION 4. Preservation of Business; Fiduciary Responsibility.
4.1. Executive shall use his best efforts to preserve the business and
organization of Employer, to keep available to Employer the services of present
employees and to preserve the business relations of Employer. Executive shall
not commit any act, or in any way assist others to commit any act, that would
injure Employer. So long as the Executive is employed by Employer, Executive
shall observe and fulfill proper standards of fiduciary responsibility attendant
upon his service and office.
SECTION 5. Termination. Employer or Executive may terminate Executive's
employment under this Agreement at any time, but only on the following terms:
5.1. Executive may terminate his employment under this Agreement at any
time upon at least thirty (30) days prior written notice to Employer.
5.2. Employer may terminate Executive's employment under this Agreement at
any time, without prior notice, for "due cause" upon the good faith
determination by the Board of Directors of Employer that "due cause" exists for
the termination of the employment relationship. As used herein, the term "due
cause" shall mean any of the following events:
(i) any intentional misapplication by Executive of Employer's funds,
or any other act of dishonesty injurious to Employer committed by
Executive; or
<PAGE> 5
(ii) Executive's conviction of a crime involving moral turpitude; or
(iii) Executive's illegal use or possession of any controlled
substance or chronic abuse of alcoholic beverages; or
(iv) Executive's breach, non-performance or non-observance of any of
the terms of this Agreement if such breach, non-performance or
non-observance shall continue beyond a period of ten (10) business days
immediately after notice thereof by Employer to Executive; or
(v) any other action by the Executive involving willful and
deliberate malfeasance or gross negligence in the performance of
Executive's duties.
5.3. In the event Executive is incapacitated by accident, sickness or
otherwise so as to render Executive mentally or physically incapable of
performing the services required under SECTION 2 of this Agreement for a period
of one hundred eighty (180) consecutive business days, and such incapacity is
confirmed by the written opinion of two (2) practicing medical doctors licensed
by and in good standing in the state in which they maintain offices for the
practice of medicine, upon the expiration of such period or at any time
reasonably thereafter, or in the event of Executive's death, Employer may
terminate Executive's employment under this Agreement upon giving Executive or
his legal representative written notice at least thirty (30) days' prior to the
termination date. Executive agrees, after written notice by the Board of
Directors of Employer or a duly authorized committee or officer of Employer, to
submit to examinations by such practicing medical doctors selected by the Board
of Directors of Employer or a duly authorized committee or officer of Employer.
5.4. Employer may terminate Executive's employment under this Agreement at
any time for any reason whatsoever, even without "due cause," by giving a
written notice of termination to Executive, in which case the employment
relationship shall terminate immediately upon the giving of such notice.
SECTION 6. Effect of Termination.
6.1. In the event the employment relationship is terminated (a) by
Executive upon thirty (30) days' written notice pursuant to SUBSECTION 5.1
hereof, (b) by Employer for "due cause" pursuant to SUBSECTION 5.2 hereof, or
(c) by Executive breaching this Agreement by refusing to continue his employment
and failing to give the requisite thirty (30) days' written notice, all
compensation and benefits shall cease as of the date of termination, other than:
(i) those benefits that are provided by retirement and benefit plans and
programs specifically adopted and approved by Employer for Executive that are
earned and vested by the date of termination, (ii) Executive's pro rata annual
salary through the date of termination, and (iii) those benefits required by law
to be made available to terminating employees.
<PAGE> 6
6.2. If Executive's employment relationship is terminated pursuant to
SUBSECTION 5.3 hereof due to Executive's incapacity or death, Executive (or, in
the event of Executive's death, Executive's legal representative) will be
entitled to those benefits that are provided by retirement and benefits plans
and programs specifically adopted and approved by Employer for Executive that
are earned and vested at the date of termination and, even though no longer
employed by Employer, shall continue to receive salary compensation (payable in
the manner as prescribed in the second sentence of SUBSECTION 3.1) for a two
year period beginning on the date of termination.
6.3. If Employer (i) terminates the employment of Executive other
than pursuant to SUBSECTION 5.2 hereof for "due cause" or other than for a
disability or death pursuant to SUBSECTION 5.3 hereof, (ii) demotes the
Executive to a position below the level of the position described in SUBSECTION
2.1 or (iii) decreases Executive's salary below the level or reduces the
employee benefits and perquisites below the level provided for by the terms of
SECTION 3 hereof, other than as a result of any amendment or termination of any
employee and/or executive benefit plan or arrangement, which amendment or
termination is applicable to all qualifying executives of Employer, then such
action by Employer, unless consented to in writing by Executive, shall be deemed
to be a constructive termination by Employer of Executive's employment (a
"Constructive Termination"). In the event of a Constructive Termination, the
Executive shall be entitled to receive, in a lump sum within ten (10) days after
the date of the Constructive Termination, an amount equal to two years salary.
The Company will also provide outplacement assistance to Executive in an amount
not to exceed $25,000, if so desired by the Executive.
6.4. For purposes of this SECTION 6, the term "salary" shall mean the sum
of (i) the annual rate of compensation provided to Executive by Employer under
SUBSECTION 3.1 immediately prior to the Constructive Termination plus (ii) the
targeted cash annual bonuses or other cash incentive compensation paid to
Executive (based upon most recent position) by Employer.
6.5. In the event of a Constructive Termination, all other rights and
benefits Executive may have under the employee and/or executive benefit plans
and arrangements of Employer generally shall be determined in accordance with
the terms and conditions of such plans and arrangements.
SECTION 7. Covenants of Noncompetition.
7.1. Executive acknowledges that he has received and/or will receive
specialized knowledge and training from Employer during the term of this
Agreement, and that such knowledge and training would provide an unfair
advantage if used to compete with Employer. In order to avoid such unfair
advantage, Executive agrees that while he is employed with Employer and for a
period equal to two (2) years after the date of voluntary or involuntary
termination of employment, by either party and for any reason described herein
(the "Restricted Period"), he shall not, directly or indirectly, individually or
as an owner, lender, consultant, adviser, independent contractor, employee,
partner, officer, director or in any other capacity, alone or in association
with other persons or entities, own, assist, finance, participate in or be
<PAGE> 7
employed by any business or other endeavor that is in competition with Employer
in any business at the time the termination occurs, including, but not limited
to, computer resellers, service companies providing the same services as
CompuCom, and computer retail companies. Executive also agrees that, for the
Restricted Period, he will not, either directly or indirectly, solicit any
employee or other independent contractor of the Employer to terminate his
employment or contract with the Employer.
7.2. Executive represents and acknowledges to Employer that his education,
experience and/or abilities are such that he can obtain employment in a
non-competing business and that enforcement of the terms of this Agreement
through temporary and/or permanent injunctive relief will not prevent him/her
from earning a livelihood and will not cause an undue hardship upon him/her.
Executive hereby acknowledges that $20,000 of his monthly salary described in
SUBSECTION 3.1 is paid by Employer in consideration for Executive's agreement to
be bound by the non-competition provisions of this Agreement.
SECTION 8. Change in Control.
8.1. Notwithstanding anything to the contrary in this Agreement, if a
"Change in Control" (as defined below) of the Employer occurs and, within six
months from the date of the Change in Control, the Executive voluntarily
terminates his employment under SUBSECTION 5.1, then the Executive, even though
no longer employed by the Employer, shall be entitled to all payments provided
in SUBSECTION 6.3, payable in a lump sum within thirty (30) days after the date
of termination.
8.2. If a Change of Control occurs during the course of this Agreement,
the Board of Directors will cause to vest, within ten (10) days of the effective
date of the Change of Control, all remaining unvested stock options granted to
Executive.
8.3. For the purposes of this Agreement, the term "Change in Control" of
the Employer shall be deemed to have occurred if (i) any "person" (as such term
is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934,
as amended) other than any Employer employee stock ownership plan or the
Employer, becomes the beneficial owner (as such term is used in Section 13(d) of
the Securities Exchange Act of 1934, as amended), directly or indirectly, of
securities of the Employer representing 25% or more of the combined voting power
of the Employer's then outstanding securities, (ii) the Board ceases to consist
of a majority of Continuing Directors (as defined below) or (iii) a person (as
defined in CLAUSE (i) above) acquires (or, during the 12-month period ending on
the date for the most recent acquisition by such person or group of persons, has
acquired) gross assets of Employer that have an aggregate market value greater
than or equal to over 50% of the fair market value of all of the gross assets of
Employer immediately prior to such acquisition or acquisitions. It is clearly
understood, however, that no change of control will be considered as having
occurred as long as Safeguard Scientifics, Inc. continues to maintain effective
control of the Company, evidenced by their ownership of more than 35% of the
outstanding common shares of the Company and/or the effective control of the
Board of Directors. It is also understood that the
<PAGE> 8
change of control provisions will not become effective if Executive is offered
and willingly accepts a position in a newly formed Company in the event a merger
occurs.
8.4. For purposes of this Agreement, a "Continuing Director" shall mean a
member of the Board of Directors who either (i) is a member of the Board of
Directors at the date of this Agreement or (ii) is nominated or appointed to
serve as a director by a majority of the then Continuing Directors.
8.5. Notwithstanding any other provision of this Agreement, if (a) there
is a change in the ownership or effective control of the Employer or (b) in the
ownership of a substantial portion of the assets of the Employer within the
meaning of Section 280G of the Internal Revenue Code ("Section 280G"), the
payments to be paid to the Executive in the nature of compensation to be
received by or for the benefit of the Executive and contingent upon such event
(the "Termination Payments") would create an "excess parachute payment" within
the meaning of Section 280G, then the Employer shall make the Termination
Payments in substantially equal installments, the first installment being due
within thirty (30) days after the date of termination and each subsequent
installment being due on January 31 of each year, such that the aggregate
present value of all Termination Payments, whether pursuant to this Agreement or
otherwise, will be as close as possible to two times the Executive's base salary
and targeted cash bonuses, within the meaning of Section 280G. It is the
intention of this SUBSECTION 8.5 to avoid excise taxes on the Executive under
Section 4999 of the Code and the disallowance of a deduction to the Employer
pursuant to Section 280G. However, if the Company makes an error which triggers
the excise tax, Executive will be entitled to receive a gross up to cover
incremental taxes owed due to such error.
SECTION 9. Inventions.
9.1. Any and all inventions, product, discoveries, improvements,
processes, formulae, manufacturing methods or techniques, designs or styles
(collectively, "Inventions") made, developed or created by Executive, alone or
in conjunction with others, during regular hours of work or otherwise, during
the term of Executive's employment with the Employer and for a period of two (2)
years thereafter that may be directly or indirectly related to the business of,
or tests being carried out by, the Employer, or any of its subsidiaries, shall
be promptly disclosed by Executive to Employer and shall be the Employer's
exclusive property.
9.2. Executive will, upon the Employer's request and without additional
compensation, execute any documents necessary or advisable in the opinion of the
Employer's counsel to direct the issuance of patents to the Employer with
respect to Inventions that are to be the Employer's exclusive property under
this SECTION 9 or to vest in the Employer title to such Inventions; the expense
of securing any patent, however, shall be borne by the Employer.
9.3. Executive will hold for the Employer's sole benefit any Invention
that is to be the Employer's exclusive property under this SECTION 9 for which
no patent is issued.
<PAGE> 9
9.4. Executive grants to Employer a royalty-free, nonexclusive irrevocable
license for any Inventions developed prior to the employment with the Company
that he has not reserved that are used by Executive in the performance of his
duties for the Employer. Employee represents and warrants that any work produced
by Executive will not, to the best knowledge of Executive, infringe on any other
person's or entity's copyright or other proprietary rights, and Employee will
hold the Employer harmless from any claims and losses based on such
infringements.
SECTION 10. No Violation. Executive represents that he is not
bound by any agreement with any former employer or other party that
would be violated by Executive's work for Employer.
SECTION 11. Confidential and Proprietary Information.
11.1. Executive acknowledges and agrees that he will not, without the
prior written consent of the Employer, at any time during the term of this
Agreement or any time thereafter, except as may be required by competent legal
authority or as required by the Employer to be disclosed in the course of
performing Executive's duties under this Agreement for the Employer, use or
disclose to any person, firm or other legal entity, any confidential records,
secrets or information related to the Employer or any parent, subsidiary or
affiliated person or entity (collectively, "Confidential Information").
Confidential Information shall include, without limitation, information about
the Employer's Inventions, customer lists, customer contracts, vendor contracts,
and non-public financial information. Executive acknowledges and agrees that all
Confidential Information of Employer and/or its affiliates that he has acquired,
or may acquire, were received, or will be received in confidence and as a
fiduciary of the Employer. Executive will exercise utmost diligence to protect
and guard such Confidential Information.
11.2. Executive agrees that he will not take with him/her upon the
termination of this Agreement, any document or paper, or any photocopy or
reproduction or duplication thereof, relating to any Confidential Information.
SECTION 12. Return of Employer's Property. Upon the termination of this
Agreement or whenever requested by Employer, Executive shall immediately deliver
to Employer all property in his possession or under his control belonging to
Employer, in good condition, ordinary wear and tear excepted.
SECTION 13. Injunctive Relief. Executive acknowledges that the breach, or
threatened breach, by the Executive of the provisions of this Agreement shall
cause irreparable harm to the Employer, which harm cannot be fully redressed by
the payment of damages to the Employer. Accordingly, the Employer shall be
entitled, in addition to any other right or remedy it may have at law or in
equity, to an injunction enjoining or restraining Executive from any violation
or threatened violation of this Agreement.
<PAGE> 10
SECTION 14. Arbitration.
14.1. As concluded by the parties and as evidenced by the signatures of
the parties, any dispute between the parties arising out of any section of this
Agreement except SECTIONS 7, 9 and 11, will, on the written notice of one party
served on the other, be submitted to arbitration complying with and governed by
the provisions of the Texas General Arbitration Act, Articles 224 through 238-20
of the Texas Revised Civil Statutes.
14.2. Each of the parties will appoint one person as an arbitrator to hear
and determine the dispute and if they are unable to agree, then the two
arbitrators so chosen will select a third impartial arbitrator whose decision
will be final and conclusive upon the parties.
14.3. The expenses of such arbitration will be borne by the losing party
or in such proportion as the arbitrators decide.
14.4 A material or anticipatory breach of any section of this Agreement
shall not release either party from the obligations of this SECTION 14.
SECTION 15. Miscellaneous.
15.1. If any provision contained in this Agreement is for any reason held
to be totally invalid or unenforceable, such provision will be fully severable,
and in lieu of such invalid or unenforceable provision there will be added
automatically as part of this Agreement a provision as similar in terms as may
be valid and enforceable.
15.2 All notices and other communications required or permitted hereunder
or necessary or convenient in connection herewith shall be in writing and shall
be deemed to have been given when mailed by registered mail or certified mail,
return receipt requested, as follows (provided that notice of change of address
shall be deemed given only when received):
if to Employer:
7171 Forest Lane
Dallas, Texas 75230
Attn: Chief Financial Officer
if to Executive:
J. Edward Coleman
1829 Hidden Point Road
Annapolis, MD 21401
or to such other names or addresses as Employer or Executive, as the case may
be, shall designate by notice to the other party hereto in the manner specified
in this SUBSECTION 15.2.
<PAGE> 11
15.3. This Agreement shall be binding upon and inure to the benefit of
Employer, its successors, legal representatives and assigns, and upon Executive,
his heirs, executors, administrators, representatives, legatees and assigns.
Executive agrees that his rights and obligations hereunder are personal to
him/her and may not be assigned without the express written consent of Employer.
15.4. This Agreement replaces and merges all previous agreements and
discussions relating to the same or similar subject matters between Executive
and Employer with respect to the subject matter of this Agreement. This
Agreement may not be modified in any respect by any verbal statement,
representation or agreement made by any employee, officer, or representative of
Employer or by any written agreement unless signed by an officer of Employer who
is expressly authorized by Employer to execute such document.
15.5. The laws of the State of Texas will govern the interpretation,
validity and effect of this Agreement without regard to the place of execution
or the place for performance thereof, and Employer and Executive agree that the
state and federal courts situated in Dallas County, Texas shall have personal
jurisdiction over Employer and Executive to hear all disputes arising under this
Agreement. This agreement is to be at least partially performed in Dallas
County, Texas, and, as such, Employer and Executive agree that venue shall be
proper with the state or federal courts in Dallas County, Texas to hear such
disputes. In the event either Employer or Executive is not able to effect
service of process upon the other with respect to such disputes, Employer and
Executive expressly agree that the Secretary of State for the State of Texas
shall be an agent of Employer and/or the Executive to receive service of process
on behalf of Employer and/or the Executive with respect to such disputes.
15.6. Executive and Employer shall execute and deliver any and all
additional instruments and agreements that may be necessary or proper to carry
out the purposes of this Agreement.
15.7. The descriptive headings of the several sections of this Agreement
are inserted for convenience only and do not constitute a part of this
Agreement.
15.8. If either party should file a lawsuit against the other to enforce
any right such party has hereunder, the prevailing party shall also be entitled
to recover reasonable attorneys' fees and costs of suit in addition to any other
relief awarded such prevailing party.
15.9. This Agreement may be executed in one or more counterparts, all of
which shall be considered one and the same agreement.
15.10 Executive acknowledges that Executive has had the opportunity to
read this Agreement and discuss it with advisors and legal counsel, if Executive
has so chosen.
Executive also acknowledges the importance of this Agreement and that Employer
is relying on this Agreement in establishing and maintaining an employment
relationship with Executive.
<PAGE> 12
The undersigned, intending to be legally bound, have executed this
Agreement on the date first written above. .
: EMPLOYER:
CompuCom Systems, Inc.
By: /s/ Harry Wallaesa
------------------
Its: Chairman
EXECUTIVE:
/s/ J. Edward Coleman
---------------------
Edward Coleman
<PAGE> 1
Exhibit 13
SELECTED CONSOLIDATED FINANCIAL DATA
Selected consolidated financial data for the Company are presented in the table
below and should be read in conjunction with Management's Discussion and
Analysis and the Company's consolidated financial statements included herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
TOTAL REVENUE ....................... $ 2,953,270 $ 2,287,092 $ 1,995,683 $ 2,068,807 $ 1,523,422
OPERATING EXPENSES
Cost of revenue ..................... 2,605,821 1,972,931 1,699,192 1,792,958 1,311,332
Selling, service, and general and
administrative ................... 311,564 268,996 224,184 212,702 156,491
Depreciation and amortization ....... 36,778 21,738 18,132 20,645 16,927
Restructuring ....................... 387 16,437 -- -- --
----------- ----------- ----------- ----------- -----------
Total operating expenses ......... 2,954,550 2,280,102 1,941,508 2,026,305 1,484,750
----------- ----------- ----------- ----------- -----------
(1,280) 6,990 54,175 42,502 38,672
Gains on issuance of stock by partner
companies ........................ 175,662 3,782 5,772 5,582 701
Other income, net ................... 107,290 189,883 21,085 25,546 21,250
Interest, net ....................... (30,718) (26,978) (19,885) (22,023) (19,114)
----------- ----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES, MINORITY
INTEREST AND EQUITY INCOME (LOSS) 250,954 173,677 61,147 51,607 41,509
Income taxes ........................ (66,514) (61,424) (14,336) (13,285) (12,124)
Minority interest ................... (8,936) (47) (25,727) (19,934) (13,853)
Equity income (loss) ................ (51,978) (2,083) 417 1,539 2,731
----------- ----------- ----------- ----------- -----------
NET INCOME .......................... $ 123,526 $ 110,123 $ 21,501 $ 19,927 $ 18,263
=========== =========== =========== =========== ===========
Net income per share(a)
Basic............................. $ 1.22 $ 1.15 $ 0.23 $ 0.22 $ 0.21
Diluted........................... $ 1.16 $ 1.07 $ 0.22 $ 0.20 $ 0.18
Weighted average shares
outstanding(a)
Basic............................. 101,134 95,499 93,747 89,700 87,156
Diluted........................... 110,910 104,742 95,988 94,044 92,202
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............ $ 49,813 $ 6,257 $ 5,382 $ 12,881 $ 7,267
Working capital...................... 133,839 251,991 228,001 345,530 226,659
Total assets......................... 1,499,879 1,068,690 714,541 936,070 742,874
Long-term debt....................... 14,532 205,044 127,089 252,725 204,431
Other long-term liabilities.......... 175,611 1,317 1,246 759 1,057
Convertible subordinated notes....... 200,000 71,345 90,881 102,131 --
Total shareholders' equity........... 574,701 342,859 207,070 169,011 154,309
</TABLE>
(a) Adjusted to reflect the 3-for-1 split of our common stock effective as
of March 13, 2000.
No cash dividends have been declared in any of the years presented, and
the Company has no present intention to declare cash dividends.
35
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
We are a leading Internet company actively engaged in the Internet
infrastructure business through our extensive network of partner companies. We
acquire interests in developing Internet infrastructure companies and incubate
and integrate these companies into our network. We focus on what we believe to
be the most significant market sectors of the Internet infrastructure industry:
software, communications and eServices. We believe that our experience
developing technology companies, our expertise in and focus on Internet
infrastructure and the reach of our network, which includes Internet Capital
Group's business- to-business electronic commerce companies, enable us to
identify and attract companies with significant potential for success in the
Internet infrastructure market. We intend to be the premier network of Internet
infrastructure companies offering solutions, seamless connectivity and eServices
to businesses engaged in electronic commerce.
Our principal mission is to promote long-term shareholder value. We
believe shareholder value is maximized by retaining and promoting the
entrepreneurial culture of our partner companies. The entrepreneurs of our
partner companies generally retain significant equity interests in their
businesses, and their interests as shareholders remain aligned with ours. We
provide a full range of operational and management services to each of our
partner companies through dedicated teams of Safeguard professionals. Each team
has expertise in the areas of business and technology strategy, sales and
marketing, operations, finance, legal and transactional support, and human
resources, and provides hands-on assistance to the management of the partner
company in support of its growth. The level of involvement varies and in some
circumstances includes the provision of full-time interim personnel. Since we
are a long-term partner, we pursue various alternatives to maximize the
long-term value of our partner companies. These alternatives include preparing
our partner companies for initial public offerings, assisting with mergers and
acquisitions, and providing additional capital. We typically retain a
significant ownership position in our partner companies after they complete
their initial public offerings.
We developed the Safeguard Subscription Program to give our
shareholders the opportunity to participate in the initial public offerings of
our partner companies. The offering ratio varies, but is based on the number of
shares being offered under the program by the partner company in relation to the
number of Safeguard shares outstanding at the time of an offering. We completed
Safeguard Subscription Programs in conjunction with the initial public offerings
of Internet Capital Group, Inc., US Interactive, Inc. and Pac-West Telecomm,
Inc. in 1999, and with the initial public offering of eMerge Interactive, Inc.
in February 2000. In addition, another partner company, OPUS360 Corporation, is
in registration for its initial public offering that will include a Safeguard
Subscription Program.
Our net income could fluctuate significantly from quarter to quarter.
There can be no guarantee that we will report net income in each period.
EFFECT OF VARIOUS ACCOUNTING METHODS ON THE CONSOLIDATED FINANCIAL STATEMENTS
The various interests that we acquire in our partner companies are
accounted for under three broad methods: consolidation, equity and cost. The
applicable accounting method is generally determined based on our voting
interest in a partner company.
Consolidation. Partner companies in which we directly or indirectly own
more than 50% of the outstanding voting securities are generally accounted for
under the consolidation method of accounting. Under this method, a partner
company's results of operations are included within our consolidated statements
of operations. Participation of other partner company shareholders in the income
or losses of a consolidated partner company is reflected in the caption
"minority interest" in our consolidated statements of operations. Minority
interest adjusts our consolidated net income to reflect only our share of the
income or losses of the consolidated partner company. CompuCom Systems, Inc. and
Tangram Enterprise Solutions, Inc. were consolidated in 1999, 1998 and 1997.
During 1999, we acquired controlling majority voting interests in aligne,
incorporated, SOTAS, Inc., and Arista Knowledge Systems Inc. Each one of these
partner companies was consolidated from the date we acquired directly or
indirectly more than 50% of the outstanding voting securities interest. We also
consolidated Premier Solutions Ltd. and Pioneer Metal Finishing until they were
sold in 1997.
36
<PAGE> 3
Equity Method. Partner companies whose results we do not consolidate,
but over whom we exercise significant influence, are generally accounted for
under the equity method of accounting. Whether or not we exercise significant
influence with respect to a partner company depends on an evaluation of several
factors including, among others, representation on the partner company's board
of directors and ownership level, which is generally a 20% to 50% interest in
the voting securities of the partner company, including voting rights associated
with our holdings in common, preferred and other convertible instruments in the
partner company. Under the equity method of accounting, a partner company's
results of operations are not reflected within our consolidated statement of
operations; however, our share of the income or losses of the partner company is
reflected in the caption "equity income (loss)" in our consolidated statements
of operations. The share of income or losses is generally based upon our voting
ownership of the partner company's securities, which may be different from the
percentage of the economic ownership of the partner company held by us. During
1999, we accounted for 29 of our partner companies under the equity method of
accounting.
Our partner companies accounted for under the equity method of
accounting at December 31, 1999 included:
<TABLE>
<CAPTION>
PARTNER
COMPANY VOTING
SINCE OWNERSHIP
----- ---------
<S> <C> <C>
PUBLICLY TRADED
Cambridge Technology Partners (Massachusetts), Inc................. 1991 16%
ChromaVision Medical Systems, Inc.................................. 1996 27%
DocuCorp International, Inc........................................ 1995 17%
eMerge Interactive, Inc............................................ 1997 19%
Internet Capital Group, Inc........................................ 1996 14%
LifeF/X, Inc....................................................... 1996 23%
OAO Technology Solutions, Inc...................................... 1996 31%
Pac-West Telecomm, Inc............................................. 1998 7%
Sanchez Computer Associates, Inc................................... 1986 26%
USDATA Corporation................................................. 1994 38%
US Interactive, Inc................................................ 1998 13%
PRIVATELY HELD
4anything.com, Inc................................................. 1999 28%
Extant, Inc........................................................ 1999 21%
The Basketball Network LLC, d/b/a HoopsTV.com...................... 1999 24%
iMedium, Inc....................................................... 1999 23%
Integrated Visions, Inc............................................ 1998 49%(a)
Kanbay LLC......................................................... 1998 28%
PrivaSeek, Inc..................................................... 1999 33%
QuestOne Decision Sciences Corporation............................. 1997 35%
RealTIME Media, Inc................................................ 1999 43%
Vitts Networks, Inc................................................ 1999 48%
Who? Vision Systems, Inc........................................... 1998 29%(a)
XL Vision, Inc..................................................... 1995 18%
</TABLE>
(a) We owned non-voting convertible securities in these companies. However,
we believe we have the ability to exercise significant influence based
on our representation on the board of directors and other factors. This
percentage represents the voting ownership assuming the conversion of
all non-voting convertible securities.
At December 31, 1999, we owned voting securities in all the privately
held companies listed except Integrated Visions and Who? Vision Systems. We have
representation on the board of directors of all of the above partner companies.
Although we own less than 20% of the voting stock of some of the above
companies, we believe we have the ability to exercise significant influence
based on our representation on the board of directors and other factors. We also
account for our interests in some private equity funds under the equity method
of accounting, based on our general and limited partner interest. In addition to
our
37
<PAGE> 4
holdings in voting and non-voting equity and debt securities, we also
periodically make advances to our partner companies in the form of promissory
notes. We had advances to equity method partner companies totaling $36 million
at December 31, 1999.
Many of our privately held, equity method partner companies are
Internet-related companies with limited operating histories that have not
generated significant revenues and incurred substantial losses in 1999. We
expect these losses to continue in 2000. Our equity losses may also increase as
a result of our acquisition of interests in, and operation of, additional
Internet-related companies.
Cost Method. Partner companies and private equity funds that we do not
account for under either the consolidation or the equity method of accounting
are accounted for under the cost method of accounting. Under this method, our
share of the earnings or losses of these companies is not included in our
consolidated statements of operations. However, the effect of the change in
market value of cost method holdings classified as trading securities is
reflected in our results of operations during each reporting period.
EFFECT OF VARIOUS ACCOUNTING METHODS ON THE PRESENTATION OF OUR
FINANCIAL STATEMENTS
The presentation of our financial statements may differ from period to
period primarily due to the applicable accounting method used for recognizing
our equity interests in the operating results of a partner company. For example,
the presentation of our financial statements are significantly influenced by the
consolidated results of operations of CompuCom which we consolidated based on
our 60% voting interest. CompuCom accounted for over 98% of our consolidated
revenues, but represented less than 5% of our consolidated net income in 1999.
To understand our net results of operations and financial position
without the effect of consolidating our consolidated partner companies, please
refer to note 18 to our consolidated financial statements, which summarizes our
parent company statements of operations and balance sheets and presents our
consolidated partner companies as if they were accounted for under the equity
method of accounting for all periods presented. Our share of the income or
losses of the consolidated partner companies is included in "equity income
(loss)" in the parent company statements of operations. The carrying value of
these companies is included in "ownership interest in and advances to partner
companies" in the parent company balance sheets.
Although the parent company statements of operations and balance sheets
presented in note 18 reflect our historical results, they are not necessarily
indicative of future parent company balance sheets and statements of operations.
NET RESULTS OF OPERATIONS
Our reportable segments include General Safeguard Operations, Partner
Company Operations and CompuCom Operations. General Safeguard Operations
represents the expenses of providing strategic and operational support to our
partner companies, and the related administrative costs. General Safeguard
Operations includes the effect of transactions and other events incidental to
our ownership interests in our partner companies and our operations in general.
Partner Company Operations reflect operations of all partner companies other
than CompuCom. The partner companies included under Partner Company Operations
have been accounted for under the consolidated, equity or cost method depending
on their particular circumstances. CompuCom Operations reflect the consolidated
results of CompuCom. All significant intersegment activity has been eliminated.
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<PAGE> 5
The following table reflects consolidated operating data by reported
segments (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
SUMMARY OF CONSOLIDATED NET INCOME
General Safeguard Operations .......................... $ 158,553 $ 109,689 $ 3,599
Partner Company Operations ............................ (42,739) 358 (210)
CompuCom Operations ................................... 7,712 76 18,112
----------- ----------- -----------
$ 123,526 $ 110,123 $ 21,501
=========== =========== ===========
GENERAL SAFEGUARD OPERATIONS
Revenue ............................................... $ 13,912 $ 11,949 $ 10,458
Operating expenses
General and administrative ......................... 43,429 24,413 22,308
Depreciation and amortization ...................... 7,914 1,443 1,309
----------- ----------- -----------
Total operating expenses ........................... 51,343 25,856 23,617
----------- ----------- -----------
(37,431) (13,907) (13,159)
Gains on issuance of stock by partner companies .... 175,662 3,782 5,772
Other income, net .................................. 107,290 189,883 18,253
Interest, net ...................................... (7,193) (7,964) (4,656)
----------- ----------- -----------
Income before income taxes ......................... 238,328 171,794 6,210
Income taxes ....................................... (79,775) (62,105) (2,611)
----------- ----------- -----------
Net Income from General Safeguard Operations .......... $ 158,553 $ 109,689 $ 3,599
=========== =========== ===========
PARTNER COMPANY OPERATIONS
Revenue ............................................... $ 27,469 $ 20,678 $ 35,423
Operating expenses
Cost of sales ...................................... 8,082 2,426 16,935
Selling and service ................................ 8,875 8,087 7,895
General and administrative ......................... 13,572 5,309 6,476
Depreciation and amortization ...................... 5,497 2,872 4,316
----------- ----------- -----------
Total operating expenses ........................... 36,026 18,694 35,622
----------- ----------- -----------
(8,557) 1,984 (199)
Interest, net ...................................... (330) (272) (282)
----------- ----------- -----------
Income (loss) before income taxes, minority interest
and equity income (loss) ........................ (8,887) 1,712 (481)
Income taxes ....................................... 18,192 729 (146)
Minority interest .................................. (66) -- --
Equity income (loss) ............................... (51,978) (2,083) 417
----------- ----------- -----------
Net Income (Loss) from Partner Company Operations ..... $ (42,739) $ 358 $ (210)
=========== =========== ===========
COMPUCOM OPERATIONS
Revenue ............................................... $ 2,911,889 $ 2,254,465 $ 1,949,802
Operating expenses
Cost of sales ...................................... 2,597,739 1,970,505 1,682,257
Selling and service ................................ 159,006 164,262 128,751
General and administrative ......................... 86,682 66,925 58,754
Depreciation and amortization ...................... 23,367 17,423 12,507
Restructuring ...................................... 387 16,437 --
----------- ----------- -----------
Total operating expenses ........................... 2,867,181 2,235,552 1,882,269
----------- ----------- -----------
44,708 18,913 67,533
Other income, net .................................. -- -- 2,832
Interest, net ...................................... (23,195) (18,742) (14,947)
----------- ----------- -----------
Income before income taxes and minority interest ... 21,513 171 55,418
Income taxes ....................................... (4,931) (48) (11,579)
Minority interest .................................. (8,870) (47) (25,727)
----------- ----------- -----------
Net Income from CompuCom Operations ................... $ 7,712 $ 76 $ 18,112
=========== =========== ===========
</TABLE>
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<PAGE> 6
NET RESULTS OF OPERATIONS--GENERAL SAFEGUARD OPERATIONS
Revenue. Revenue consists of administrative service fees charged to
certain partner companies and private equity funds for operational and
management services provided through a team of our professionals. Revenue was
$13.9 million for the year ended December 31, 1999, $11.9 million for the year
ended December 31, 1998 and $10.5 million for the year ended December 31, 1997.
The increase in each year in the three-year period ended December 31, 1999 was
the result of an increase in the number of partner companies.
General and Administrative. Our general and administrative costs
consist primarily of employee compensation, outside services such as legal,
accounting, marketing and consulting, and travel-related costs. General and
administrative expenses were $43.4 million for the year ended December 31, 1999,
$24.4 million for the year ended December 31, 1998 and $22.3 million for the
year ended December 31, 1997. General and administrative expenses increased
$19.0 million or 78% in 1999 from 1998 reflecting the growth in the number of
partner companies to 37 in 1999 from 26 in 1998. The increase represents
expenses incurred to support the growing number and related activities of our
partner companies, primarily payroll-related and marketing costs. We expect
these costs to continue to be higher compared to historical periods due to the
increased resources needed to support the increasing number of partner
companies.
Depreciation and Amortization. Increase in depreciation and
amortization is due to accretion of the obligation related to the two forward
sale contracts entered into in 1999 and an increase in depreciation related to
campus office buildings acquired in 1998.
Gains on Issuance of Stock by Partner Companies. Gains on issuance of
stock by partner companies represents gains or losses on the issuance of stock
by our partner companies to reflect the change in our share of the net equity of
these companies. Gains on issuance of stock by partner companies consisted of
the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Internet Capital Group ......... $172,934 $ -- $ --
Cambridge Technology Partners... 326 3,598 3,579
Other .......................... 2,402 184 2,193
-------- ------ ------
$175,662 $3,782 $5,772
======== ====== ======
</TABLE>
Gains on issuance of stock by partner companies consisted primarily of
the issuance by Internet Capital Group of 31 million shares of its common stock
in its initial public offering in August 1999, seven million shares of its
common stock in a follow-on public offering in December 1999, and approximately
three million shares in private placements and acquisitions completed in the
fourth quarter of 1999. The pretax gain represents the increase in our share of
Internet Capital Group's net equity as a result of its stock issuances.
We recorded gains on stock issued by Cambridge Technology Partners as a
result of employee stock option exercises.
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<PAGE> 7
Other Income, net. Other income, net, consisted of the following (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Gain on the Coherent Communications Systems
Corporation/Tellabs, Inc. merger ...................... $ -- $ 245,261 $ --
Unrealized gain (loss) on Tellabs stock, net ............. 78,163 (48,549) --
Gain on sale of Diamond Technology Partners, Inc. stock... 41,108 -- 4,954
Gain on sale of Internet Capital Group stock ............. 9,332 -- --
Gain on sale of Pac-West Telecomm stock .................. 7,113 -- --
Gain on sale of Cambridge Technology Partners stock ...... -- 15,016 15,209
Gain on sale of other public holdings .................... 7,383 2,677 2,720
Gain on distributions from private equity funds .......... 4,590 9,945 2,261
Gain on First Consulting Group, Inc./Integrated
Systems Consulting Group, Inc. merger ................. -- 6,586 --
Other, primarily impairment charges ...................... (40,399) (41,053) (6,891)
--------- --------- --------
$ 107,290 $ 189,883 $ 18,253
========= ========= ========
</TABLE>
In August 1998, Tellabs, Inc. acquired Coherent, and we received
approximately seven million shares (adjusted for a 2-for-1 stock split in May
1999) of Tellabs in exchange for all of our Coherent shares. The market value of
the Tellabs shares received on the date of exchange was used to determine the
gain. Subsequent to the merger, our holdings in Tellabs were classified as
trading securities and the effect of the change in market value of Tellabs was
reflected in our results of operations as an unrealized gain (loss). In August
1999, we completed the pledge of all our remaining holdings in Tellabs under
forward sale contracts that expire in 2002. As a result of the restrictions on
the sale of these shares under these contracts, we changed the classification of
these holdings to available-for-sale. Therefore, changes in the fair value of
our remaining Tellabs holdings are now recorded as an adjustment to other
comprehensive income in shareholders' equity.
For the years ended December 31, 1999, 1998 and 1997, we recorded
impairment charges of $37.5 million, $35.8 million and $12.3 million for the
other than temporary decline in the carrying value of some partner companies.
Interest, net. Interest expense, net, was $7.2 million for the year
ended December 31, 1999, $8.0 million for the year ended December 31, 1998 and
$4.7 million for the year ended December 31, 1997. The decrease in 1999 was a
result of higher interest income and the elimination of interest due to the
conversion of $71.3 million of our 1996 convertible subordinated notes, which
was partially offset by interest associated with the $200 million 5% convertible
subordinated notes issued in 1999. The increase in interest expense in 1998 was
due to our increased borrowings primarily to fund acquisitions in new and
existing partner companies.
Income Taxes. Our consolidated effective tax rate decreased to 35% in
1999 compared to 36% for 1998 due to the realization of previously unrecorded
tax benefits attributable to the difference between the book basis and tax basis
of some of our holdings as well as the application of lower tax rates against
realized securities gains.
NET RESULTS OF OPERATIONS--PARTNER COMPANY OPERATIONS
Revenue. Revenue was $27.5 million for the year ended December 31,
1999, $20.7 million for the year ended December 31, 1998 and $35.4 million for
the year ended December 31, 1997. The increase in revenue in 1999 was the result
of the acquisitions of aligne and SOTAS during 1999. The decrease in revenue in
1998 was primarily due to the elimination of revenue as a result of the sale of
Premier Solutions Ltd. and Pioneer Metal Finishing, Inc. in 1997.
Operating Expenses. Operating expenses were $36.0 million for the year
ended December 31, 1999, $18.7 million for the year ended December 31, 1998 and
$35.6 million for the year ended December 31, 1997. The increase in operating
expenses in 1999 was the result of consolidating aligne, Arista and SOTAS. The
decrease in operating expenses in 1998 was primarily due to the sale of Premier
Solutions and Pioneer Metal Finishing in 1997.
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<PAGE> 8
Equity Income (Loss). A significant portion of our net results of
operations is derived from companies in which we hold a significant minority
ownership interest. Equity income (loss) fluctuates with the number of companies
accounted for under the equity method, our voting ownership percentage in these
companies, the amortization of goodwill related to newly acquired equity method
companies, and the net results of operations of these companies. During the year
ended December 31, 1999, we accounted for 29 companies under the equity method
of accounting compared to 14 companies during the comparable 1998 period.
The significant increase in equity losses in 1999 from 1998 reflects
increased operating losses at some of our existing partner companies and an
increase in the number of companies accounted for under the equity method in
1999, a majority of which have operating losses. Many of our partner companies
accounted for under the equity method are Internet-related companies with
substantial losses. We expect to continue to acquire interests in more
Internet-related companies that may have operating losses and that we may
account for under the equity method. Additionally, we expect certain of our
existing partner companies to continue to invest in their products and services
and to recognize operating losses. As a result, equity losses could continue to
increase significantly.
The decrease in equity income in 1998 from 1997 is a result of
discontinuing the accounting for our holdings in Coherent under the equity
method of accounting, and recording our share of merger-related and other
charges at certain partner companies. The decrease was also a result of
increased operating losses at certain partner companies, partially offset by
strong overall performance at Cambridge Technology Partners and Sanchez.
NET RESULTS OF OPERATIONS--COMPUCOM OPERATIONS
CompuCom provides people, process, and technology to deliver
infrastructure solutions that optimize electronic business and enterprise
applications. CompuCom's revenues are primarily derived from sales of
distributed desktop computer products and configuration, network integration and
technology support.
Revenue. Revenue was $2.9 billion for the year ended December 31, 1999,
$2.3 billion for the year ended December 31, 1998 and $1.9 billion for the year
ended December 31, 1997. The increase in revenue was primarily due to increased
volume of product sales resulting from the acquisitions of the Technology
Acquisition Services Division of Entex Information Services, Inc. during the
second quarter of 1999 and Computer Integration Corporation and DataFlex
Corporation during the second quarter of 1998.
Gross Margin. Gross margin was 10.8% for the year ended December 31,
1999, 12.6% for the year ended December 31, 1998 and 13.7% for the year ended
December 31, 1997. The decrease in 1999 and 1998 was attributable to reduced
gross margins on product sales due to heightened competition from direct
marketers and other corporate resellers and a reduction in manufacturer
sponsored incentives which was not fully offset by improved services gross
margins.
Selling and Service Expenses. Selling and service expenses were 5.5% of
revenue for the year ended December 31, 1999, 7.3% of revenue for the year ended
December 31, 1998 and 6.6% of revenue for the year ended December 31, 1997. In
1999, the decrease in selling and service expense was primarily due to
CompuCom's cost reduction efforts, partially offset by an increase in sales
force as a result of the Entex acquisition. In 1998, the increase in selling and
services expense was primarily due to an increase in sales force as a result of
the Computer Integration Corporation and Dataflex acquisitions, the hiring of
additional sales representatives, higher commission expense, and growth in the
service business.
General and Administrative Expense. General and administrative expenses
were 3.0% of revenue in 1999, 1998 and 1997. The dollar increase in 1999 was
primarily due to expenditures to broaden CompuCom's eCommerce capabilities and
costs associated with the integration of Computer Integration Corporation,
Dataflex and Entex.
Depreciation and Amortization Expense. Depreciation and amortization
expense was $23.4 million in 1999, $17.4 million in 1998 and $12.5 million in
1997. The increases in depreciation and amortization expense was a result of the
Entex acquisition in 1999 and the Computer Integration Corporation and Dataflex
acquisitions in 1998.
Restructuring Expense. In October 1998, CompuCom's Board of Directors
approved a restructuring plan designed to reduce CompuCom's cost structure by
closing branch facilities and reducing CompuCom's workforce by approximately
10%. As a result, CompuCom recorded a restructuring charge in 1998 of $16.4
million (pretax), which reduced our income by
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<PAGE> 9
approximately $8.1 million (pretax), after recording minority interest. The
charge primarily consisted 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.
Interest, Net. The increase in interest expense, net was a result of
increased borrowings at CompuCom to fund the acquisitions of Entex in 1999 and
Computer Integration Corporation and Dataflex in 1998.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations in recent years with our bank credit
facility, proceeds from issuance of convertible notes, proceeds from forward
sale contracts, borrowings under partner company revolving credit facilities,
and proceeds from sales of partner companies.
In June 1999, we issued $200 million of 5% convertible subordinated
notes due June 2006. At December 31, 1999, the notes are convertible into our
common stock at approximately $25 per share, as adjusted to reflect a 3-for-1
stock split. We used approximately $111 million of the net proceeds to repay all
of our outstanding indebtedness under our bank credit facility and borrowings
from partner companies.
During 1999, we entered into two contracts relating to the forward sale
of 3.4 million shares of our holdings in Tellabs. We pledged these shares for
three years and in return received approximately $139 million of cash. At the
end of the term, we have the option to deliver cash or Tellabs shares with a
value determined by the stock price of Tellabs at maturity. The number of
Tellabs shares to be delivered at maturity ranges from 2.7 million to 3.4
million shares (or the cash value thereof). The proceeds from this financing
transaction were used to pay down a portion of our bank credit facility and to
acquire interests in or make advances to new and existing partner companies and
private equity funds.
Sales of equity securities generated proceeds of approximately $138
million in 1999, $95 million in 1998 and $71 million in 1997.
As of December 31, 1999, we have availability under our bank credit
facilities of $200 million. Of the $200 million, $150 million matures in May
2002 and is secured by certain equity securities we hold in publicly traded
companies. The value of these pledged securities exceeds the total availability
under the bank credit facility. The remaining $50 million is unsecured, with
availability limited to the lesser of $50 million or 10% of the value of the
pledged securities. The $50 million facility matures in April 2000. There were
no borrowings outstanding under the facilities at December 31, 1999. In 2000, we
intend to increase the availability under our bank credit facilities to $300
million and extend the maturity on both facilities.
In 1999, we repaid $20 million of borrowings from certain partner
companies. At December 31, 1999, there were no borrowings under agreements with
these companies.
Cash and cash equivalents at December 31, 1999, availability under our
bank credit facilities, proceeds from the potential sales of all or a portion of
our minority interests, and other internal sources of cash flow are expected to
be sufficient to fund our cash requirements through 2000, including commitments
to our existing partner companies and private equity funds, and our general
corporate requirements. At December 31, 1999, we were contingently obligated for
approximately $29 million of guarantee commitments, and had committed capital of
approximately $218 million to various partner companies and private equity
funds, to be funded over the next several years.
Our current operating plan for the acquisition of new partner companies
may change in the next 12 months which may make it necessary for us to raise
additional funds. On February 29, 2000, we filed a Registration Statement on
Form S-3 with the Securities and Exchange Commission to sell up to 11.5 million
shares of our common stock to the public through which Merrill Lynch, Pierce,
Fenner & Smith Incorporated, Deutsche Bank Securities, Inc., Lehman Brothers,
Inc. and Prudential Securities Incorporated are acting as representatives. This
Registration Statement has not yet been declared effective. Currently, we
anticipate we will receive $478 million from the offering after deduction of all
discounts, fees and expenses of the offering. On March 15, 2000, we filed a
Registration Statement on Form S-3 with the Securities and Exchange Commission
to sell up to 7.9 million shares of our common stock to certain strategic
investors and institutional investors. This Registration Statement has not yet
been declared effective. Currently, we anticipate we will receive $500 million
from the offering after deduction of all discounts, fees and expenses of the
offering. No assurance can be given that these underwritten offerings will be
consummated at
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<PAGE> 10
all or on terms describe in the Registration Statements. The size of these
offerings may be increased or decreased and the net proceeds therefrom
would change accordingly.
Should this offering not be consummated, we will likely have to raise
additional funds through the issuance of equity securities or obtain additional
bank financing. If additional funds are raised through the issuance of equity
securities, our existing shareholders may experience significant dilution.
Availability under our bank credit facility is determined by the market
value of the publicly traded partner 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
our ability to borrow under the facilities. In addition, our ability to raise
proceeds from sales of publicly traded partner companies could also be adversely
affected. As a result, our ability to acquire interests in new partner companies
and support our existing partner companies with additional funding could be
limited.
CompuCom maintains separate, independent financing arrangements, which
are non-recourse to us and are secured by certain assets of CompuCom. During
recent years, CompuCom has utilized bank financing arrangements and internally
generated funds to fund its cash requirements. During 1999 CompuCom sold its
corporate headquarters building in a sale/leaseback transaction. The proceeds
from the sale were approximately $40 million, of which $37 million was used to
pay down long-term debt. As part of the transaction, CompuCom entered into a
20-year operating lease on the building.
CompuCom has a $250 million receivables securitization facility and a
$200 million working capital facility. The securitization facility pricing is
based on a designated short-term interest rate plus an agreed-upon spread. The
receivables securitization facility, which matures in May 2002, was fully
utilized as of December 31, 1999. The working capital facility will be reduced
by $25 million in May 2000 and matures in May 2002. As of December 31, 1999
there were no outstanding borrowings on the working capital facility.
CompuCom's liquidity continues to be negatively affected 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 purchase price for the product is often higher than
the sales price CompuCom obtains from its customers. As of December 1999, these
programs are a major factor in CompuCom's financing needs. As of December 31,
1999, CompuCom was owed approximately $66 million under these programs.
Consolidated working capital decreased to $134 million at December 31,
1999 compared to $252 million at December 31, 1998. The decrease relates to the
change in classification of the Tellabs holdings.
Cash provided by operating activities increased in 1999 compared to
1998 due to a decrease in accounts receivable. This decrease was due to
CompuCom's accounting for its $75 million increase in its receivables
securitization facility as "off-balance sheet" financing, which resulted in a
reduction of accounts receivable and long-term debt.
Cash used in investing activities primarily reflects the acquisition of
ownership interests in and advances to new and existing partner companies. Cash
used in investing activities also reflects acquisitions by our subsidiaries,
which in 1999 primarily represented CompuCom's acquisition of Entex for
approximately $137 million. Partially offsetting these activities in the three
year period ended December 31, 1999 were proceeds from the sales of equity
securities.
During 1999, we committed approximately $123 million and funded $103
million to acquire interests in and make advances to 12 new partner companies,
including the following Internet infrastructure partner companies: Extant,
iMedium, OPUS360, SOTAS and Vitts Networks. We also funded approximately $125
million to acquire interests in and make advances to our existing private
partner companies and private equity funds. In addition, we acquired an 80%
interest in aligne in exchange for approximately 1.3 million shares of our
common stock with a market value of approximately $17 million, and purchased
approximately $41 million of shares of our publicly traded partner companies in
the open market and in private transactions.
From January 1, 2000 through February 15, 2000, we funded $46 million
of commitments made prior to December 31, 1999. Additionally, from January 1,
2000 through February 15, 2000, we committed $163 million and funded $46 million
to
44
<PAGE> 11
acquire ownership interests in or make advances to new and existing partner
companies. Some of these new partner companies include the following Internet
infrastructure companies: TechSpace LLC, NexTone Communications, Inc. and
fob.com, Inc.
During 1999, we received approximately $8 million in proceeds from the
issuance of our stock primarily as a result of stock options exercised. In 1999,
we purchased 150,000 shares of our common stock in the open market for
approximately $3 million. At December 31, 1999, we are authorized to purchase an
additional $16 million of our common stock.
In January 2000, we announced the sale of approximately 2.2 million
shares of our common stock to Textron Inc. for $100 million in a private
transaction. The sale price was based on the closing price of our common stock
on December 17, 1999 of approximately $46 per share. We completed the sale and
received the proceeds from the sale in March 2000.
Capital expenditures in any year normally would not be significant in
relation to our overall financial position. 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, 1999.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," requires an entity to recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The accounting for changes
in the fair value of a derivative will depend on the intended use of the
derivative and the resulting designation. SFAS 133 will be effective for us in
2001. We are currently evaluating the impact of SFAS 133.
We do not expect the adoption of other recently issued accounting
pronouncements to have a significant impact on our results of operations,
financial position or cash flow.
YEAR 2000 DISCLOSURE
We assessed our computer systems for year 2000 readiness, and replaced
all systems and software we found to be not compliant. These replacements were
generally part of our regular upgrade program. We then tested all of our systems
and software. We also obtained verifications from our vendors that our systems
that they supplied are year 2000 ready. We installed a back-up generator in our
data center and have a contingency plan to provide for disaster recovery and
continuation of critical computer and communications in case of a power loss. We
have not incurred any material extraordinary expense in connection with our year
2000 program. We believe that any year 2000 problem is unlikely to arise in the
future, and that if any problem does arise, we will be able to fix the problem
quickly and without material expenses.
To date, neither we nor our partner companies have experienced any
disruptions of operations due to year 2000 problems.
We have regularly surveyed our partner companies regarding their year
2000 issues. CompuCom spent approximately $1.4 million to assess, remediate, and
test its systems for year 2000 compliance. CompuCom is a reseller of computer
products. It makes no warranties regarding the year 2000 readiness of any
products it sells, but only passes through to its customers the applicable
vendor's warranties. If one of CompuCom's major vendors' products turn out to be
not year 2000 compliant, CompuCom could experience a material adverse effect on
its results of operations.
Some of our other partner companies are in the business of providing
software products and services. Those companies all believe the current version
of their products are year 2000 compliant. Older versions of some of our
companies' products may not have been year 2000 compliant. These partner
companies generally have attempted to limit their liability to their customers
in their software license agreements and service agreements. Many of their
customers have maintenance agreements under which the companies upgraded or
offered to upgrade older software versions to year 2000 compliant versions. The
companies generally encouraged their other customers to upgrade to compliant
versions as well. We are not aware that any of our partner companies have
received notice from any of their customers about problems resulting from non
year 2000 compliant software or systems purchases from our companies.
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<PAGE> 12
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to equity price risks on the marketable portion of our
securities. These securities include equity positions in companies in the
Internet industry, many of which have experienced significant historical
volatility in their stock prices. We typically do not attempt to reduce or
eliminate our market exposure on securities. Based on closing market prices at
December 31, 1999, the fair market value of our holdings in public securities
was approximately $7.7 billion (excluding warrants that are unexercisable).
Approximately $6.2 billion of these equity securities at December 31, 1999
consisted of our holdings in Internet Capital Group. A 20% decrease in equity
prices would result in an approximate $1.5 billion decrease in the fair value of
our publicly traded securities.
In 1999, we entered into two forward sale contracts related to our
remaining holdings in Tellabs. We pledged 3.4 million shares of Tellabs for
three years and in return received approximately $139 million in cash. At the
end of the term, we have the option to deliver cash or Tellabs shares with a
value determined by the stock price of Tellabs at maturity. The number of
Tellabs shares to be delivered at maturity ranges from 2.7 million to 3.4
million shares (or the cash value thereof).
Availability under our bank credit facilities is determined by the
market value of our publicly traded securities pledged as collateral. The market
value of our publicly traded securities would have to decrease by more than 50%
from their value on December 31, 1999 before the amount of our collateral would
be insufficient to enable us to fully use this facility. Additionally, we are
exposed to interest rate risk primarily through our bank credit facility. At
December 31, 1999, there were no borrowings outstanding.
CompuCom is exposed to interest rate risk primarily through its
receivables securitization and working capital facilities. CompuCom utilizes
borrowings on these facilities to meet its working capital needs and other
borrowing needs. At December 31, 1999, the securitization facility had
borrowings of approximately $250 million, and there were no borrowings on the
working capital facility. If CompuCom's effective interest rate were to increase
75 basis points, or 0.75%, CompuCom's interest expense would increase by
approximately $2 million based on CompuCom's average borrowings during 1999. Our
share of this increase would be approximately $1 million after deduction for
minority interest but before income taxes.
SAFE HARBOR STATEMENT
Certain statements in this annual report describing the plans, goals,
strategies, intentions, forecasts, and expectations of us or our partner
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.
Our business depends on the performance of our partner companies, which
is uncertain. In general, our partner companies depend on the continuing growth
of the Internet as a medium for commercial transactions, and on the growth of
the Internet infrastructure market in particular. The Internet infrastructure
industry is intensely competitive, characterized by rapid changes in technology
and customer demands, frequent new product introductions, and shifting
distribution channels. Many of our partner companies are early-stage companies
with limited operating history and no historical profits, and compete against
companies with greater resources and name recognition.
Fluctuations in the price of the common stock of our publicly traded
partner companies, especially Internet Capital Group, may affect the price of
our common stock. On February 15, 2000, our equity interest in Internet Capital
Group had a market value of approximately $4.3 billion, which was significant
compared to our market value of $5.4 billion. The price of Internet Capital
Group's common stock has been, and may continue to be, highly volatile. Our
continuing growth is also dependent on the continuing strength of the market for
securities of Internet infrastructure companies in general and initial public
offerings of those companies in particular. Competition to acquire interests in
Internet infrastructure companies is intense, which could reduce the returns we
can achieve on our acquisitions.
46
<PAGE> 13
SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
---- ----
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents ................................ $ 49,813 $ 6,257
Trading securities ....................................... -- 143,103
Accounts receivable, less allowances
($5,604-1999; $4,769-1998) ............................ 259,383 296,093
Inventories .............................................. 129,826 138,551
Prepaid expenses and other current assets ................ 16,488 5,006
---------- -----------
Total current assets ........................................ 455,510 589,010
Property and equipment, net ................................. 56,234 96,840
Ownership interests in and advances to partner companies .... 529,381 218,999
Available-for-sale securities ............................... 302,940 84,977
Excess of cost over net assets of businesses acquired, net... 119,288 65,137
Other ....................................................... 36,526 13,727
---------- -----------
TOTAL ASSETS ................................................ $1,499,879 $ 1,068,690
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt ..................... $ 11,019 $ 2,366
Accounts payable ......................................... 183,781 161,700
Accrued expenses ......................................... 126,871 124,578
Deferred taxes ........................................... -- 48,375
---------- -----------
Total current liabilities ................................... 321,671 337,019
Long-term debt .............................................. 14,532 205,044
Deferred taxes .............................................. 110,556 12,562
Minority interest ........................................... 102,808 98,544
Other long-term liabilities ................................. 175,611 1,317
Convertible subordinated notes .............................. 200,000 71,345
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred stock, $10.00 par value; 1,000,000 and
55,423 shares authorized in 1999 and 1998, respectively... -- --
Common stock, $0.10 par value--authorized 500,000,000
and 100,000,000 shares in 1999 and 1998,
respectively; 104,749,317 and 98,398,026 shares
issued and outstanding in 1999 and 1998, respectively .... 10,475 9,840
Additional paid-in capital .................................. 133,969 55,910
Retained earnings ........................................... 385,120 261,594
Accumulated other comprehensive income ...................... 45,137 37,294
Treasury stock, at cost (3,758,985 shares-1998) ............. -- (21,779)
---------- -----------
Total shareholders' equity .................................. 574,701 342,859
---------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .................. $1,499,879 $ 1,068,690
========== ===========
</TABLE>
See notes to consolidated financial statements.
47
<PAGE> 14
SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
---- ---- ----
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
REVENUE
Product sales ................................... $ 2,621,124 $ 1,994,965 $ 1,724,220
Service sales ................................... 318,234 280,178 261,005
Other ........................................... 13,912 11,949 10,458
----------- ----------- -----------
Total revenue ...................................... 2,953,270 2,287,092 1,995,683
OPERATING EXPENSES
Cost of sales--product .......................... 2,398,613 1,787,370 1,534,310
Cost of sales--service .......................... 207,208 185,561 164,882
Selling and service ............................. 167,881 172,349 136,646
General and administrative ...................... 143,683 96,647 87,538
Depreciation and amortization ................... 36,778 21,738 18,132
Restructuring ................................... 387 16,437 --
----------- ----------- -----------
Total operating expenses ........................... 2,954,550 2,280,102 1,941,508
----------- ----------- -----------
(1,280) 6,990 54,175
Gains on issuance of stock by partner companies..... 175,662 3,782 5,772
Other income, net .................................. 107,290 189,883 21,085
Interest income .................................... 4,839 2,742 2,474
Interest expense ................................... (35,557) (29,720) (22,359)
----------- ----------- -----------
INCOME BEFORE INCOME TAXES, MINORITY
INTEREST AND EQUITY INCOME (LOSS) ............... 250,954 173,677 61,147
Income taxes ....................................... (66,514) (61,424) (14,336)
Minority interest .................................. (8,936) (47) (25,727)
Equity income (loss) ............................... (51,978) (2,083) 417
----------- ----------- -----------
NET INCOME ......................................... $ 123,526 $ 110,123 $ 21,501
=========== =========== ===========
NET INCOME PER SHARE
Basic ........................................... $ 1.22 $ 1.15 $ 0.23
Diluted ......................................... $ 1.16 $ 1.07 $ 0.22
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic ........................................... 101,134 95,499 93,747
Diluted ......................................... 110,910 104,742 95,988
</TABLE>
See notes to consolidated financial statements.
48
<PAGE> 15
SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TREASURY STOCK
----------------- PAID-IN RETAINED COMPREHENSIVE ------------------
SHARES AMOUNT CAPITAL EARNINGS INCOME SHARES AMOUNT TOTAL
------ ------ ------- -------- ------ ------ ------ -----
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE--DECEMBER 31, 1996.... 98,398,026 $ 9,840 $ 29,006 $ 129,970 $ 7,360 6,695,487 $ (7,165) $ 169,011
Net income.................... 21,501 21,501
Stock options exercised, net.. 618 (2,011,947) 2,035 2,653
Tax benefit of stock option
exercises .................. 3,166 3,166
Repurchase of common stock.... 1,171,731 (9,488) (9,488)
Conversion of convertible
subordinated notes.......... 9,731 (1,164,393) 1,279 11,010
Subsidiaries' equity
transactions................ 871 871
Other comprehensive income.... 8,346 8,346
----------- ------- -------- --------- -------- ---------- -------- ----------
BALANCE--DECEMBER 31, 1997.... 98,398,026 9,840 43,392 151,471 15,706 4,690,878 (13,339) 207,070
Net income.................... 110,123 110,123
Stock options exercised, net.. (1,935) (1,204,893) 4,201 2,266
Tax benefit of stock
option exercises............ 1,869 1,869
Repurchase of common stock.... 2,295,000 (18,672) (18,672)
Conversion of convertible
subordinated notes.......... 13,189 (2,022,000) 6,031 19,220
Subsidiaries' equity
transactions................ (605) (605)
Other comprehensive income.... 21,588 21,588
----------- ------- -------- --------- -------- ---------- -------- ----------
BALANCE--DECEMBER 31, 1998.... 98,398,026 9,840 55,910 261,594 37,294 3,758,985 (21,779) 342,859
Net income.................... 123,526 123,526
Stock options exercised, net.. 735,597 74 1,700 (815,808) 6,136 7,910
Tax benefit of stock
option exercises............ 7,051 7,051
Issuance of common stock for
acquisition................. 8,781 (1,324,554) 7,721 16,502
Repurchase of common stock.... 150,000 (2,695) (2,695)
Conversion of convertible
subordinated notes.......... 5,615,694 561 60,384 (1,768,623) 10,617 71,562
Subsidiaries' equity
transactions................ 143 143
Other comprehensive income.... 7,843 7,843
----------- ------- -------- --------- -------- ---------- -------- ----------
BALANCE--DECEMBER 31, 1999.... 104,749,317 $10,475 $133,969 $ 385,120 $ 45,137 -- $ -- $ 574,701
=========== ======= ======== ========= ======== ========== ======== ==========
</TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
NET INCOME ..................................... $ 123,526 $ 110,123 $ 21,501
--------- --------- --------
OTHER COMPREHENSIVE INCOME (LOSS), BEFORE TAXES:
Unrealized holding gains .................... 59,631 43,676 10,706
Reclassification adjustments ................ (47,565) (10,103) 1,940
RELATED TAX (EXPENSE) BENEFIT:
Unrealized holding gains .................... (20,871) (15,591) (3,640)
Reclassification adjustments ................ 16,648 3,606 (660)
--------- --------- --------
OTHER COMPREHENSIVE INCOME ..................... 7,843 21,588 8,346
--------- --------- --------
COMPREHENSIVE INCOME ........................... $ 131,369 $ 131,711 $ 29,847
========= ========= ========
</TABLE>
See notes to consolidated financial statements.
49
<PAGE> 16
SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income ...................................................... $ 123,526 $ 110,123 $ 21,501
Adjustments to reconcile to net cash provided by operating
activities:
Depreciation and amortization ................................ 36,778 21,738 18,132
Deferred income taxes ........................................ 45,397 28,909 (2,566)
Equity (income) loss ......................................... 51,978 2,083 (417)
Gain on issuance of stock by partner companies ............... (175,662) (3,782) (5,772)
Other income, net ............................................ (107,290) (189,883) (21,085)
Minority interest ............................................ 5,151 28 15,436
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable, net ..................................... 41,595 (32,301) 210,578
Inventories .................................................. 102,922 68,840 35,498
Accounts payable, accrued expenses, and other ................ 3,952 71,182 (120,593)
----------- --------- ---------
Net cash provided by operating activities ................. 128,347 76,937 150,712
INVESTING ACTIVITIES
Proceeds from sales of available-for-sale securities ............ 53,565 3,319 6,438
Proceeds from sales of partner company ownership interests ...... 84,522 91,519 64,880
Advances to partner companies ................................... (56,417) (32,161) (23,163)
Repayment of advances to partner companies ...................... 8,150 7,689 1,582
Acquisitions of ownership interests in partner companies and
subsidiaries, net of cash acquired ........................... (212,294) (112,903) (56,831)
Acquisitions by subsidiaries, net of cash acquired .............. (141,253) (49,679) --
Proceeds from sale of building .................................. 45,466 -- --
Capital expenditures ............................................ (10,191) (17,582) (31,314)
Other, net ...................................................... (7,931) (1,988) 449
----------- --------- ---------
Net cash used in investing activities ..................... (236,383) (111,786) (37,959)
FINANCING ACTIVITIES
Borrowings on revolving credit facilities ....................... 1,181,552 796,257 858,450
Repayments on revolving credit facilities ....................... (1,342,272) (743,503) (976,216)
Borrowings on long-term debt .................................... -- 909 3,987
Repayments on long-term debt .................................... (28,295) (3,178) (4,155)
Proceeds from issuance of convertible subordinated notes ........ 200,000 -- --
Payment of financing costs on convertible subordinated notes .... (6,178) -- --
Proceeds from financial instruments ............................. 139,309 -- --
Repurchase of Company common stock .............................. (2,695) (18,672) (9,488)
Issuance of Company common stock ................................ 7,910 2,266 2,653
Issuance of subsidiary common stock ............................. 2,261 1,645 4,517
----------- --------- ---------
Net cash provided by (used in) financing activities ....... 151,592 35,724 (120,252)
----------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............ 43,556 875 (7,499)
Cash and cash equivalents at beginning of period ................ 6,257 5,382 12,881
----------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ...................... $ 49,813 $ 6,257 $ 5,382
=========== ========= =========
</TABLE>
See notes to consolidated financial statements.
50
<PAGE> 17
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE COMPANY
Safeguard Scientifics, Inc. (the Company) is a leader in incubating and
operating what it believes are the premier developing technology companies in
the Internet infrastructure market with a focus on three sectors; software,
communications and eServices. The Company believes that its experience
developing technology companies, its expertise in and focus on the Internet
infrastructure business, and the reach of its network enables it to identify and
attract companies with the greatest potential for success in the Internet
infrastructure market and to assist these companies in becoming market leaders.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its majority-owned subsidiaries, including CompuCom Systems, Inc.
(CompuCom), Tangram Enterprise Solutions, Inc. (Tangram), aligne, incorporated
(aligne), Arista Knowledge Systems, Inc. (Arista) and SOTAS, Inc. (SOTAS). The
various interests that the Company acquires in its partner companies are
accounted for under three broad methods: consolidation, equity and cost. The
applicable accounting method is generally determined based on the Company's
voting interest in a partner company. In 1997, the Company established limited
partnerships to hold its ownership interests in partner companies. The Company
allocates 10.0% to 12.5% interest in these partnerships for purchase by Company
employees. The Company is the sole general partner and retains the remaining
interest. Distributions to limited partners are subject to the achievement of
certain thresholds.
Consolidation. Partner companies in which the Company directly or
indirectly owns more than 50% of the outstanding voting securities are generally
accounted for under the consolidation method of accounting. Under this method, a
partner company's results of operations are included within the Company's
consolidated statements of operations. All significant intercompany accounts and
transactions have been eliminated. Participation of other partner company
shareholders in the income or losses of a consolidated partner company is
reflected in the caption "minority interest" in the Company's consolidated
statements of operations.
Equity Method. Partner companies whose results are not consolidated,
but over whom the Company exercises significant influence, are generally
accounted for under the equity method of accounting. Whether or not the Company
exercises significant influence with respect to a partner company depends on an
evaluation of several factors including, among others, representation on the
partner company's Board of Directors and ownership level, which is generally a
20% to 50% interest in the voting securities of the partner company, including
voting rights associated with the Company's holdings in common, preferred and
other convertible instruments in the partner company. Under the equity method of
accounting, a partner company's results of operations are not reflected within
the Company's consolidated statements of operations; however, the Company's
share of the income or losses of the partner company is reflected in the caption
"equity income (loss)" in the consolidated statements of operations. The
Company's carrying value for a partner company accounted for under the equity
method includes the unamortized excess of the cost of the Company's interest in
the partner company over its equity in the underlying net assets determined at
the date of acquisition. This excess is amortized on a straight-line basis
generally over ten years and is included in "equity income (loss)" in the
consolidated statements of operations.
Cost Method. Partner companies not consolidated or accounted for under
the equity method are accounted for under the cost method of accounting. Under
the cost method, the Company's share of the income or losses of such companies
is not included in the Company's consolidated statements of operations.
The Company periodically evaluates the carrying value of its ownership
interests in each of its partner companies for possible impairment based on
achievement of business plan objectives and milestones, the value of each
ownership interest in the partner company relative to its carrying value, the
financial condition and prospects of the partner company, and other relevant
factors. The business plan objectives and milestones the Company considers
include, among others; achievement of planned financial results; completion of
capital raising activities; hiring of key employees; and the value at which
independent third parties have or have committed to invest in its partner
companies. Management then determines whether there has been an
51
<PAGE> 18
other than temporary impairment in the carrying value of its ownership interest
in the partner companies. Impairment charges are recognized in the consolidated
statement of operations. The new cost basis of a partner company is not
written-up if circumstances suggest the value of the partner company has
subsequently recovered.
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. At
December 31, 1999, cash and cash equivalents consist of commercial paper and
other deposits that are readily convertible into cash.
MARKETABLE SECURITIES
Marketable securities consist of common stock held in publicly traded
companies. Marketable securities are stated at market value as determined by the
most recently traded price of each security at the balance sheet date. All
marketable securities are defined as trading securities or available-for-sale
securities under the provisions of Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities."
Management determines the appropriate classification of its holdings in
marketable securities at the time of purchase and reevaluates such determination
at each balance sheet date. Available-for-sale securities are carried at fair
value, based on quoted market prices, with the unrealized gains and losses, net
of tax, reported as a separate component of shareholders' equity. Trading
securities are carried at fair value, based on quoted market prices, with the
unrealized net gain or loss included in "other income, net" in the consolidated
statements of operations.
RECEIVABLES SECURITIZATION
CompuCom has an agreement with a financial institution that allows
CompuCom to sell, without recourse, and on a revolving basis, an interest in a
portion of its accounts receivable. In accordance with Statement of Financial
Accounting Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" (SFAS 125), these
transactions are accounted for as a sale of receivables. Sales of receivables
are reflected as a reduction in "accounts receivable 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.
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. The fair value
of the Company's forward sales contracts on its Tellabs holdings is $179
million, based on the amount the Company would have to pay to terminate these
contracts. At December 31, 1999, the market value of the Company's convertible
subordinated notes was approximately $452 million based on quoted market prices.
The Company may selectively enter into agreements to reduce the impact
of stock market volatility on its ownership in publicly traded companies. These
may include agreements to protect against a possible decline in the market value
of the particular company. The Company does not enter into agreements for
trading or speculative purposes. The counterparties to these agreements are
major financial institutions.
INVENTORIES
Inventory consisted primarily of product inventory held by CompuCom.
Inventory is 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.
52
<PAGE> 19
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation
and amortization. Provision for depreciation and amortization is based on the
estimated useful lives of the assets (buildings and leasehold improvements, 3 to
40 years; machinery and equipment, 3 to 12 years) and is computed using the
straight-line method.
EXCESS OF COST OVER NET ASSETS OF BUSINESSES ACQUIRED
Goodwill is amortized on a straight-line basis generally over 3 to 20
years. Accumulated amortization at December 31, 1999 and 1998, was $40.8 million
and $29.1 million, respectively. The Company periodically 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).
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company reviews long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to forecasted undiscounted cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets.
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. Administrative service fees (presented
as other revenue) represent charges to partner companies for operational and
management services provided through a team of Safeguard professionals.
Administrative service fees are recognized ratably over the term of each
administrative service fee contract.
The Company adopted Statement of Position (SOP) 97-2 Software Revenue
Recognition for software transactions entered into beginning January 1, 1998.
The adoption of this SOP did not have a material impact on the Company's revenue
recognition policies. CompuCom derives software revenues in connection with the
sale of personal computers with standard installed software packages. These
revenues are recognized as a component of product revenues as computers are
shipped. Tangram recognizes revenue from software licenses, postcontract
customer support (PCS) and related consulting services. Revenue from software
license agreements and product sales are recognized upon delivery, provided that
all of the following conditions are met: a non-cancelable license agreement has
been signed; the software has been delivered; no significant production,
modification or customization of the software is required; the vendor's fee is
fixed or determinable; and collection of the resulting receivable is deemed
probable. In software arrangements that include rights to software products,
specified upgrades or gateways, PCS, and/or other services, the Company
allocates the total arrangement fee among each deliverable based on
vendor-specific objective evidence. Revenue from maintenance agreements are
recognized ratably over the term of the maintenance period, generally one year.
Consulting and training services, which are not considered essential to the
functionality of the software products, are recognized as the respective
services are performed.
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 income and net income 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).
53
<PAGE> 20
GAINS OR LOSSES ON ISSUANCE OF STOCK BY PARTNER COMPANIES
At the time a partner company accounted for under the consolidation or
equity method of accounting sells its common stock at a price different from the
Company's book value per share, the Company's share of the partner company's net
equity changes. If at that time, the partner company is not a newly-formed,
non-operating entity, nor a research and development, start-up or development
stage company, nor is there question as to the partner company's ability to
continue in existence, the Company records the change in its share of the
partner company's net equity as a gain or loss in its consolidated statements of
operations (note 12). Otherwise, the increase is reflected in "subsidiaries'
equity transactions" in the Company's consolidated statements of shareholders'
equity.
If gains have been recognized on issuances of a subsidiary's stock and
shares of the subsidiary are subsequently repurchased by the subsidiary or by
the Company, gain recognition does not occur on issuances subsequent to the date
of a repurchase until such time as shares have been issued in an amount
equivalent to the number of repurchased shares. Such transactions are reflected
as equity transactions, and the net effect of these transactions is reflected in
the consolidated statements of shareholders' equity.
DEFINED CONTRIBUTION PLANS
Defined contribution plans are contributory and cover eligible
employees of the Company and certain subsidiaries. The Company and certain
subsidiaries generally match from 50% to 75% of the first 4% to 6% of employee
contributions to these plans. Additionally, the Company makes annual
contributions to a non-contributory defined contribution pension plan based on
4.5% of a participant's eligible compensation. Amounts expensed relating to
these plans were $3.1 million, $2.7 million and $1.9 million in 1999, 1998 and
1997, respectively.
INCOME TAXES
Income taxes are accounted for under the asset and liability method
whereby deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates in effect for the year in which the temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
NET INCOME PER SHARE
Net income per share (EPS) is computed on net income using the weighted
average number of common shares outstanding during each year. Diluted 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 income of such transactions.
Diluted EPS calculations adjust net income for the dilutive effect of common
stock equivalents and convertible securities issued by the Company's public
subsidiaries or equity affiliates.
COMMON STOCK
On February 28, 2000, the Board of Directors approved a three-for-one
stock split to the Company's shareholders of record on March 13, 2000. All share
and per share data have been restated to reflect a three-for-one split of the
Company's common stock as if the stock split had occurred as of December 31,
1996.
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.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
current year presentation.
54
<PAGE> 21
COMPREHENSIVE INCOME
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 income, the Company's source of other
comprehensive income is from net unrealized appreciation on cost method holdings
classified as available-for-sale. Reclassification adjustments result from the
recognition in net income of unrealized 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.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133) will require that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
accounting for changes in the fair value of a derivative will depend on the
intended use of the derivative and the resulting designation. SFAS 133 will be
effective for the Company in 2001. The Company is currently evaluating the
impact of SFAS 133.
The Company does not expect the adoption of other recently issued
accounting pronouncements to have a significant impact on the Company's results
of operations, financial position or cash flows.
2. BUSINESS COMBINATIONS
ACQUISITIONS BY THE COMPANY
In February 1999, the Company acquired an 80% voting ownership in
aligne in exchange for 1.3 million shares of the Company's common stock with a
market value of $16.5 million. aligne is an information technology
management-consulting firm that assists its clients in optimizing investments in
technology.
In June 1999, the Company acquired a 75% voting ownership in SOTAS for
$9.4 million and assumed certain liabilities. SOTAS develops, markets and sells
telecommunications technology and related products and services.
ACQUISITIONS BY SUBSIDIARIES
In May 1999, CompuCom purchased from ENTEX Information Services, Inc.
certain assets of its Technology Acquisition Services Division (Entex) in a cash
transaction. This acquisition was structured as an asset purchase. Under the
terms of the agreement, CompuCom paid approximately $137 million and assumed
certain liabilities for the acquired assets, which consisted primarily of
inventory, certain fixed assets and the Erlanger, Kentucky distribution center.
The initial purchase price allocation for this acquisition is preliminary and
may be adjusted upon completion of the final valuation work.
During 1998, CompuCom completed the acquisitions of DataFlex, Inc.,
Computer Integration Corporation, and ECC II Corporation, entities engaged in
the sale of microcomputers and related services and solutions. The purchase
consideration given for these acquisitions was cash of approximately $27
million, $17 million and $5 million, respectively. In addition, CompuCom assumed
liabilities in connection with these acquisitions of approximately $22 million,
$71 million and $3 million, respectively.
These transactions were accounted for as purchases and, accordingly,
the consolidated financial statements reflect the operations of these companies
since the date of acquisition. The Company and its subsidiaries allocated the
purchase price to the assets and liabilities acquired based on estimated fair
value as of the date of acquisition. The acquisitions resulted in goodwill of
approximately $110 million which is being amortized over periods ranging from
ten to twenty years.
The following unaudited pro forma financial information (in thousands
except per share amounts) presents the combined results of operations of the
Company as if the acquisitions had occurred as of January 1, 1998, after giving
effect to
55
<PAGE> 22
certain adjustments, including amortization of goodwill, increased interest
expense on debt related to the acquisitions, and related income tax effects. The
pro forma results of operations are not indicative of the actual results that
would have occurred had the acquisitions been consummated at the beginning of
the period presented and is not intended to be a projection of future results.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998
---- ----
<S> <C> <C>
Revenues .................... $3,577,199 $4,404,852
Net income .................. $ 117,705 $ 95,064
Net income per share--diluted $ 1.10 $ 0.93
</TABLE>
3. FINANCIAL INSTRUMENTS
In 1999, the Company entered into two forward sale contracts related to
3.4 million shares of its holdings in Tellabs. The Company pledged these shares
of Tellabs for three years and in return received approximately $139 million of
cash. At the end of the term, the Company has the option to deliver cash or
Tellabs shares with a value determined by the stock price of Tellabs at
maturity. The number of Tellabs shares to be delivered at maturity ranges from
2.7 million to 3.4 million shares (or the cash value thereof). The liability of
$149.4 million related to these transactions is included in "other long-term
liabilities" on the consolidated balance sheets.
In August 1999, the Company completed the pledge of all of its
remaining holdings in Tellabs under forward sale contracts that expire in 2002.
As a result of the restrictions on the sale of these shares under these
contracts, the Company changed the classification of these holdings to
available-for-sale at that time. Therefore, the Company's holdings in Tellabs
are included in non-current assets under the caption "available-for-sale
securities" as of December 31, 1999.
56
<PAGE> 23
4. OWNERSHIP INTERESTS IN AND ADVANCES TO PARTNER COMPANIES
The following summarizes the Company's ownership interests in and
advances to partner companies accounted for under the equity method or cost
method of accounting (in thousands). The ownership interests are classified
according to applicable accounting methods at December 31, 1999 and 1998. Market
value reflects the price of publicly traded holdings at the close of business at
the respective date, and exclude warrants that are not currently exercisable.
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
---------------------------------------- ------------------------
CARRYING MARKET VOTING CARRYING MARKET
VALUE VALUE INTEREST VALUE VALUE
<S> <C> <C> <C> <C> <C>
EQUITY METHOD
Cambridge Technology Partners....... $ 49,181 $ 254,556 16% $ 35,248 $ 190,217
ChromaVision Medical Systems........ 13,626 81,201 27% 11,304 22,419
DocuCorp International.............. 9,995 22,249 17% --(b) --(b)
Internet Capital Group.............. 189,068 6,169,208 14% 19,183 --(a)
LifeF/X............................. -- 86,823(c) 23% -- --(a)
OAO Technology Solutions............ 16,448 42,853 31% 16,472 16,551
Sanchez Computer Associates......... 11,686 258,995 26% 10,620 91,965
Pac West Telecomm................... 7,613 62,943 7% 8,913 --(a)
USDATA Corporation.................. 15,920 82,406 38% 7,053 5,545
US Interactive...................... 9,769 107,795 13% 10,832 --(a)
Non-public companies................ 169,331 80,867
---------- ----------
492,637 200,492
COST METHOD
Non-public companies................ 16,266 2,867
ADVANCES TO PARTNER COMPANIES....... 20,478 15,640
---------- ----------
$ 529,381 $ 218,999
========== ==========
</TABLE>
(a) These companies were not publicly traded until 1999.
(b) DocuCorp was included in available-for-sale securities at December 31,
1998. The Company increased its voting interest in DocuCorp during 1999.
(c) LifeF/X acquired all of the equity interests of Pacific Title/Mirage
through a reverse triangular merger in 1999.
Internet-related stocks have experienced significant volatility in
recent years. For example, at December 31, 1999, the market value of the
Company's holdings in Internet Capital Group was $6.2 billion. Based on the high
and low stock prices in 2000, through February 15, 2000, the market value of the
Company's holdings in Internet Capital Group has ranged from $4.1 billion to
$7.3 billion.
At December 31, 1999 and 1998, the Company's carrying value in its
partner companies accounted for under the equity method exceeded its share of
the underlying equity in the net assets of such companies by $99.1 million and
$25.4 million, respectively. This excess is being amortized generally over a
ten-year period. Amortization expense of $9.5 million, $3.3 million and $3.9
million, is included in "equity income (loss)" in the accompanying consolidated
statements of operations for the years ended December 31, 1999, 1998 and 1997,
respectively.
As of December 31, 1999 and 1998, the Company had advances to partner
companies which mature on various dates through May 2004 and bear interest at
fixed rates between 5.3% and 8% and variable rates consisting of the prime rate
(8.5% at December 31, 1999) plus 1%. The Company also has short-term advances to
partner companies of $15.0 million and $7.2 million at December 31, 1999 and
1998, respectively, which is included in "accounts receivable, less allowances"
on the consolidated balance sheets.
57
<PAGE> 24
The following summarized financial information for partner companies
accounted for under the equity method at December 31, 1999, 1998 and 1997 has
been compiled from the unaudited financial statements of the respective partner
companies and reflects certain historical adjustments (in thousands). Revenue
and net income of a partner company are excluded for years prior to the year of
acquisition.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1999 1998
---- ----
<S> <C> <C>
BALANCE SHEETS
Current assets................................................................. $ 2,148,361 $ 453,829
Non-current assets............................................................. 1,006,726 187,797
------------- ----------
Total assets................................................................ $ 3,155,087 $ 641,626
============= ==========
Current liabilities............................................................ $ 348,995 $ 198,683
Non-current liabilities........................................................ 740,983 26,106
Shareholders' equity........................................................... 2,065,109 416,837
------------- ----------
Total liabilities and shareholders' equity.................................. $ 3,155,087 $ 641,626
============= ==========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
RESULTS OF OPERATIONS
Revenue:
Public companies...................................................... $ 1,074,315 $ 792,320 $ 574,267
Non-public companies.................................................. 135,262 49,734 41,797
----------- ----------- ----------
$ 1,209,577 $ 842,054 $ 616,064
=========== =========== ==========
Net income (loss)..................................................... $ (185,748) $ 7,503 $ 11,857
=========== =========== ==========
</TABLE>
5. AVAILABLE-FOR-SALE SECURITIES
Available-for-sale securities consisted of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
------------------------------ ----------------------------
CARRYING MARKET CARRYING MARKET
VALUE VALUE VALUE VALUE
----- ------ ----- -----
<S> <C> <C> <C> <C>
Tellabs.............................. $ 212,731 $ 216,595 $ --(a) $ --(a)
Diamond Technology Partners.......... 710 57,436 3,120 21,337
First Consulting Group............... 9,115 9,023 8,490 11,308
e4L.................................. 1,457 1,532 2,035 32,299
Brandywine Realty Trust.............. 8,561 8,177 8,561 8,926
DocuCorp International............... --(b) --(b) 3,226 8,035
Other public companies............... 6,480 10,177 2,177 3,072
Unrealized appreciation.............. 63,886 57,368
---------- ---------
$ 302,940 $ 84,977
========== =========
</TABLE>
(a) At December 31, 1998, Tellabs is included in "trading securities" on the
consolidated balance sheets. (See note 3)
(b) In 1999, the Company acquired an additional ownership interest in DocuCorp.
As a result, DocuCorp is accounted for under the equity method at December
31, 1999.
58
<PAGE> 25
6. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
---- ----
<S> <C> <C>
Land, building and improvements...................................... $ 36,642 $ 75,204
Machinery and equipment.............................................. 67,904 65,128
---------- ----------
104,546 140,332
Accumulated depreciation and amortization............................ (48,312) (43,492)
---------- ----------
$ 56,234 $ 96,840
========== ==========
</TABLE>
In 1999, CompuCom sold its corporate headquarters building in a
sale/leaseback transaction for approximately $40 million. The proceeds from the
sale were used to pay down CompuCom's long-term debt. As part of the
transaction, CompuCom entered into a 20-year operating lease on the building.
7. LONG-TERM DEBT
The following is a summary of long-term debt (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
---- ----
<S> <C> <C>
Parent Company and Other Recourse Debt
Revolving credit facilities....................................... $ -- $ 108,107
Other............................................................. 25,325 15,874
---------- ----------
25,325 123,981
Subsidiary Debt (Non-Recourse to Parent)
CompuCom.......................................................... -- 83,429
Other............................................................. 226 --
---------- ----------
226 83,429
Total debt........................................................ 25,551 207,410
Current maturities of long-term debt.............................. (11,019) (2,366)
---------- ----------
Long-term debt.................................................... $ 14,532 $ 205,044
========== ==========
</TABLE>
The Company has available $200 million under its bank revolving credit
facilities. Of the $200 million, $150 million matures in May 2002. Borrowing
availability under the facility is based on the fair market value of the
Company's holdings of certain publicly traded companies (the "Pledged
Securities"). The remaining $50 million is unsecured, with availability limited
to the lesser of $50 million or 10% of the value of the Pledged Securities. The
$50 million facility matures in April 2000. The Company intends to renew the $50
million bank revolving credit facility in 2000. The bank revolving credit
facility bears interest at the prime rate and/or, at the Company's option, at
LIBOR (approximately 5.82% at December 31, 1999) plus 1.25% and is subject to a
commitment fee ranging from 0.2% to 0.3% on the unused portion. There were no
borrowings outstanding under the facilities at December 31, 1999. The Company
borrowed a maximum of $146.6 million and $123.2 million during 1999 and 1998,
respectively. The credit facilities generally require some or all of the
following: the maintenance of specified levels of tangible net worth, debt to
tangible net worth and net income, specified interest coverage ratios, and
limitations on the amount available for acquisitions, dividends and capital
expenditures.
During 1999, the Company had revolving credit facilities with certain
partner companies whereby the Company borrowed up to $20 million from these
partner companies on a revolving basis at a rate that varies with the Company's
effective borrowing rate. As of December 31, 1999, there were no borrowings
under these facilities.
Other long-term debt includes mortgage obligations and bank credit
facilities of consolidated partner companies. These obligations bear interest at
rates ranging from 7.75% to 9.75%.
At December 31, 1999, CompuCom has a $200 million working capital
facility and a $250 million receivables securitization facility. The $200
million working capital facility bears interest at a rate of LIBOR plus an
agreed upon spread and
59
<PAGE> 26
is secured by certain assets of CompuCom. This facility is fully available
subject to a borrowing base and compliance with certain financial covenants and
ratios. As of December 31, 1999, CompuCom had sufficient collateral to enable it
to fully utilize the working capital facility, and there were no amounts
outstanding as of December 31, 1999. The working capital facility will be
reduced by $25 million in May 2000, and matures in May 2002. The securitization
facility allows CompuCom to sell, without recourse, an interest in its accounts
receivable on a revolving basis and is accounted for as a sale of accounts
receivable in accordance with SFAS 125. The effective rate on the $250 million
receivables securitization is based on a designated short-term interest rate
(6.26% at December 31, 1999) plus an agreed upon spread. This securitization
matures in May 2002, and is subject to certain covenant compliance. The
securitization facility was fully utilized at December 31, 1999.
Aggregate maturities of long-term debt during future years are (in
millions): $11.0--2000; $0.8--2001; $1.0--2002; $1.2--2003; $1.0--2004; and
$10.6--thereafter.
8. CONVERTIBLE SUBORDINATED NOTES
In June 1999, the Company issued $200 million of 5% convertible
subordinated notes (1999 notes) due June 15, 2006. Interest is payable
semi-annually. The 1999 notes are redeemable in whole or in part at the option
of the Company on or after June 18, 2002, for a maximum of 102.5% of face value
depending on the date of redemption and subject to certain restrictions. The
1999 notes are convertible into the Company's common stock subject to adjustment
under certain conditions including rights offerings and Safeguard Subscription
Programs to the Company's shareholders. Pursuant to the terms of the 1999 Notes,
the conversion rate of the Notes at December 31, 1999 was $25.0147 per share.
In April 1999, the Company notified the holders of its previously
issued convertible subordinated notes (1996 notes) of its intent to redeem all
of the outstanding 1996 notes on June 2, 1999. All holders converted the 1996
notes into common stock. In 1999, 1998 and 1997, $71.3 million, $19.5 million
and $11.3 million of notes, respectively, were converted into 7.4 million, 2.0
million and 1.2 million shares, respectively, of the Company's common stock. The
Company recorded in shareholder's equity the principal amount of the converted
notes, as well as forfeited interest and a proportionate share of the related
unamortized deferred financing charges.
9. ACCRUED EXPENSES
Accrued expenses consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
---- ----
<S> <C> <C>
Accrued payroll and payroll taxes.................................... $ 35,351 $ 23,569
Accrued cost of software and licenses................................ 24,083 18,903
Accrued restructuring charge......................................... 1,800 14,088
Accrued taxes........................................................ -- 13,643
Other................................................................ 65,637 54,375
---------- ----------
Total................................................................ $ 126,871 $ 124,578
========== ==========
</TABLE>
10. SHAREHOLDERS' EQUITY
COMMON STOCK
The Company repurchased approximately $3 million and $19 million of its
common stock in the open market in 1999 and 1998, respectively, at an average
price of $17.97 in 1999 and $8.11 in 1998. The Company is authorized to purchase
up to an additional $16 million at December 31, 1999.
60
<PAGE> 27
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. During 1999, the Company approved an increase in the number of
authorized blank check preferred stock. At December 31, 1999, there were one
million shares authorized and none outstanding.
SHAREHOLDERS' RIGHTS PLAN
In February 2000, the Company adopted a shareholders' rights plan.
Under the plan, each shareholder of record on March 24, 2000 will receive the
right to purchase 1/1000 of a share of the Company's Series A Junior
Participating Preferred Stock at the rate of one right for each share of the
Company's common stock then held of record. Each 1/1000 of a share of the
Company's Series A Junior Participating Preferred Stock is designed to be
equivalent in voting and dividend rights to one share of the Company's common
stock. The rights will be exercisable only if a person or group acquires
beneficial ownership of 15% or more of the Company's common stock or commences a
tender or exchange offer that would result in such a person or group owning 15%
or more of the Company's common stock. If the rights do become exercisable, the
Company's shareholders, other than the shareholders that caused the rights to
become exercisable, will be able to exercise each right at an exercise price of
$300 and receive shares of the Company's common stock having a market value
equal to approximately twice the exercise price. As an alternative to paying the
exercise price in cash, if the directors of the Company so determine,
shareholders may elect to exercise their rights and, without the payment of any
exercise price, receive half the number of shares of common stock that would
have been received had the exercise price been paid in cash.
STOCK BASED COMPENSATION
In 1999, the Company's shareholders approved the 1999 Equity
Compensation Plan, which provides for the grant of stock options, restricted
stock awards, stock appreciation rights and performance units to employees,
directors, and consultants. Initially, 9,000,000 shares were reserved for
issuance. Prior to this approval, stock options were granted under the 1990
Stock Option Plan. Additionally, in 1999, the Company granted 300,000 options
outside of existing option plans. Generally, outstanding options vest over 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, 1999, the Company
reserved 13.9 million shares of common stock for possible future issuance under
its stock option plans. Several subsidiaries and most partner companies also
maintain stock option plans for their employees and directors.
At December 31, 1999, 1998 and 1997, outstanding options to purchase
approximately 214,000, 240,000 and 1,506,000 shares of common stock at an
average price of $34.01, $11.79 and $10.85 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.
Option activity is summarized below (in thousands except per share
amounts):
<TABLE>
<CAPTION>
1999 1998 1997
---------------------- --------------------- -------------------
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............ 4,791 $ 7.36 5,211 $ 5.86 6,234 $ 3.61
Options granted............................. 4,056 27.59 936 9.12 1,050 10.53
Options exercised........................... (1,615) 5.58 (1,323) 2.04 (2,019) 1.52
Options canceled............................ (135) 10.12 (33) 11.99 (54) 7.63
------- ------- ------ -------- ------- --------
Outstanding at end of year.................. 7,097 $ 19.28 4,791 $ 7.36 5,211 $ 5.86
------- ------- ------ -------- ------- --------
Options exercisable at year-end............. 1,865 2,589 2,601
Shares available for future grant........... 6,759 1,518 2,421
</TABLE>
61
<PAGE> 28
The following summarizes information about the Company's stock options
outstanding at December 31, 1999:
<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>
$0.90-$ 1.92 474 1.80 $ 1.35 474 $ 1.35
7.00- 9.75 1,406 5.51 8.27 806 7.83
10.33- 11.27 1,103 5.52 10.80 551 10.84
11.96- 14.21 1,648 7.08 12.37 34 13.25
20.09- 30.98 919 7.49 23.88 - -
45.47 1,547 7.96 45.47 - -
------------ ------ ----- ------- ------ ------
$0.90-$45.47 7,097 6.42 $ 19.28 1,865 $ 7.17
============ ====== ===== ======= ====== ======
</TABLE>
The Company, its subsidiaries, and its partner companies accounted for
under 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 income and income 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,
------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Consolidated net income............ As reported.......... $ 123,526 $ 110,123 $ 21,501
Pro forma............ $ 110,057 $ 99,411 $ 17,314
Income per share
Basic ....................... As reported.......... $ 1.22 $ 1.15 $ 0.23
Pro forma............ $ 1.09 $ 1.04 $ 0.18
Diluted ..................... As reported.......... $ 1.16 $ 1.07 $ 0.22
Pro forma............ $ 1.04 $ 0.97 $ 0.18
Per share weighted average fair value of
stock options issued on date of grant.................. $ 15.95 $ 4.38 $ 4.99
</TABLE>
The following range of assumptions were used by the Company, and its
subsidiaries, and its companies accounted for under the equity method to
determine the fair value of stock options granted in 1999, 1998 and 1997 using
the Black-Scholes option-pricing model:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
COMPANY
Dividend yield....................................... 0% 0% 0%
Expected volatility.................................. 60% to 75% 48% 45%
Average expected option life......................... 5 years 5 years 5 years
Risk-free interest rate.............................. 5.3% to 6.6% 4.4% to 5.8% 5.9% to 6.0%
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
SUBSIDIARIES AND EQUITY METHOD COMPANIES
Dividend yield....................................... 0% 0% 0%
Expected volatility.................................. 0% to 100% 0% to 100% 0% to 100%
Average expected option life......................... 4 to 5 years 4 to 6 years 4 to 6 years
Risk-free interest rate.............................. 5.0% to 6.6% 4.2% to 5.9% 5.9% to 6.8%
</TABLE>
62
<PAGE> 29
11. 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 CompuCom's workforce. As a result, CompuCom recorded a
restructuring charge in the amount of $16.4 million. The following table
provides a detail of the charges by category as a roll forward of the
restructuring accrual through December 31, 1999 (in thousands):
<TABLE>
<CAPTION>
RESTRUCTURING ACCRUAL AT CASH ACCRUAL AT
CHARGE 12/31/98 OUTLAYS OTHER 12/31/99
------ -------- ------- ----- --------
<S> <C> <C> <C> <C> <C>
Lease termination costs................................... $ 7,259 $ 6,415 $ 5,175 $ -- $ 1,240
Employee severance and related benefits................... 3,804 2,986 2,293 133 560
Disposal of assets, net of proceeds....................... 3,044 2,907 -- 2,907 --
Other..................................................... 2,330 1,780 1,780 -- --
-------- -------- -------- -------- -------
Total..................................................... $ 16,437 $ 14,088 $ 9,248 $ 3,040 $ 1,800
======== ======== ======== ======== =======
</TABLE>
The $1.8 million and $14.1 million accrued at December 31, 1999 and
1998 are reflected in "accrued expenses" on the Company's consolidated balance
sheet. CompuCom recorded approximately $0.4 million of additional costs relating
to the restructuring primarily due to additional expenses for disposal of assets
and other charges.
The lease termination costs represents the estimated costs for 65
facilities throughout the country to either fulfill CompuCom's obligation under
a signed lease contract, the net expense expected to be incurred to sublet
certain facilities, or the estimated amount to be paid to terminate the lease
contract before the end of the term. Employee severance and related benefits
represents the estimated costs for a reduction in workforce that included 457
associates in sales, service and administration, and 2 executive officers. Other
restructuring charges primarily consists of costs incurred to ship fixed assets
to CompuCom's headquarters. The remaining accrual relates to 16 leases that have
not been sublet or terminated and the remaining severance payments to be made to
an executive officer in 2000.
The remaining restructuring accrual at December 31, 1999 is not
expected to differ significantly from actual amounts to be paid.
12. GAINS ON ISSUANCE OF STOCK BY PARTNER COMPANIES
Gains on issuance of stock by partner companies consisted of the
following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Internet Capital Group......................................................... $ 172,934 $ -- $ --
Cambridge Technology Partners................................................... 326 3,598 3,579
Other........................................................................... 2,402 184 2,193
---------- ----------- ----------
$ 175,662 $ 3,782 $ 5,772
========== =========== ==========
</TABLE>
Gains on issuance of stock by partner companies consisted primarily of
issuance by Internet Capital Group of 31 million shares of its common stock in
its IPO in August 1999, seven million shares of its common stock in a secondary
public offering in December 1999, and approximately three million in private
placements and acquisitions completed in the fourth quarter of 1999. The pretax
gain represents the increase in the Company's share of Internet Capital Group's
net equity as a result of its stock issuances. The Company provided for deferred
income taxes resulting from the gain on issuance of stock by Internet Capital
Group.
63
<PAGE> 30
The Company recorded gains on stock issued by Cambridge Technology
Partners as a result of employee stock option exercises. The Company provided
for deferred income taxes resulting from the gain on issuance of stock by
Cambridge.
13. OTHER INCOME, NET
Other income, net, consists of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Gain on the Coherent/Tellabs merger............................................. $ -- $ 245,261 $ --
Unrealized gain (loss) on Tellabs stock......................................... 78,163 (48,549) --
Gain on sale of Diamond stock................................................... 41,108 -- 4,954
Gain on sale of Internet Capital Group stock.................................... 9,332 -- --
Gain on sale of Pac-West stock.................................................. 7,113 -- --
Gain on sale of Cambridge Technology Partners stock............................. -- 15,016 15,209
Gain on sale of other public holdings........................................... 7,383 2,677 2,720
Gain on distributions from private equity funds................................. 4,590 9,945 2,261
Gain on First Consulting Group/Integrated Systems
Consulting Group Merger..................................................... -- 6,586 --
Other, primarily impairment charges............................................. (40,399) (41,053) (4,059)
--------- ---------- --------
$ 107,290 $ 189,883 $ 21,085
========= ========== ========
</TABLE>
In August 1998, Tellabs acquired Coherent, and the Company received
approximately 7 million shares (adjusted for May 1999 two-for-one stock split)
of Tellabs in exchange for all of its Coherent shares. The market value of the
Tellabs shares received on the date of exchange was used to determine the gain.
Subsequent to the merger, the Company's holdings in Tellabs were reflected in
the Company's results of operations as an unrealized gain (loss). In August
1999, the Company completed the pledge of all its holdings in Tellabs under
forward sale contracts that expire in 2002. As a result of the restrictions on
the sale of these shares under these contracts, the Company changed the
classification of these holdings to available-for-sale. Therefore, changes in
the fair value of the Company's remaining Tellabs holdings are now recorded as
an adjustment to other comprehensive income in shareholders' equity.
For the years ended December 31, 1999, 1998 and 1997, the Company
recorded impairment charges of $37.5 million, $35.8 million and $12.3 million,
respectively, for the other than temporary decline in the carrying value of
certain partner companies.
14. INCOME TAXES
The provision (benefit) for income taxes is comprised of the following
(in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Current................................................... $ 21,117 $ 32,515 $ 16,902
Deferred.................................................. 45,397 28,909 (2,566)
---------- ----------- ----------
$ 66,514 $ 61,424 $ 14,336
========== =========== =========
State taxes on income included above...................... $ 565 $ 776 $ 2,235
========== =========== =========
</TABLE>
64
<PAGE> 31
Total income tax expense differed from the amounts computed by applying
the U.S. Federal income tax rate of 35% to income before income taxes as a
result of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Statutory tax provision......................................................... 35.0% 35.0% 35.0%
Increase (decrease) in taxes resulting from:
Non-deductible goodwill amortization......................................... 1.0 0.9 3.4
Book/tax basis difference on securities sold................................. (1.7) (0.4) --
State taxes, net of federal tax benefit...................................... 0.2 0.4 4.1
Income taxed at rates other than statutory rate.............................. 0.5 (0.1) (2.5)
----- ------ -----
35.0% 35.8% 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,
------------------
1999 1998
---- ----
<S> <C> <C>
Deferred tax assets:
Subsidiary/investee carrying values...................................................... $ 22,010 $ 3,656
Accounts receivable and inventories, reserves and tax capitalized costs.................. 14,152 17,132
Other.................................................................................... 3,400 15,865
---------- ----------
Gross deferred tax assets................................................................ 39,562 36,653
Less valuation allowance................................................................. -- (850)
---------- ----------
Deferred tax assets...................................................................... 39,562 35,803
---------- ----------
Deferred tax liabilities:
Subsidiary/investee carrying values...................................................... (123,709) (16,472)
Accelerated depreciation................................................................. (626) (3,252)
Unrealized appreciation on holdings...................................................... (24,943) (20,075)
Other.................................................................................... (840) (8,566)
---------- ----------
Deferred tax liabilities................................................................. (150,118) (48,365)
---------- ----------
Net deferred tax liabilities............................................................. $ (110,556) $ (12,562)
========== ==========
</TABLE>
At December 31, 1998, the above table excluded $48.4 million of current
deferred tax liabilities attributable to the difference between the book basis
and tax basis of the Company's holdings in Tellabs.
The valuation allowance at December 31, 1998, related 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
partner holdings. 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.
The Company has not recognized a deferred tax liability for the
difference between the book basis and tax basis of its holdings in the common
stock of its subsidiaries (such difference relates primarily to unremitted
income 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 basis in these subsidiaries
tax-free.
65
<PAGE> 32
15. NET INCOME PER SHARE
The calculations of EPS were (in thousands except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Basic EPS:
Net income............................................................... $ 123,526 $ 110,123 $ 21,501
========== =========== ==========
Average common shares outstanding........................................ 101,134 95,499 93,747
========== =========== ===========
Basic EPS................................................................ $ 1.22 $ 1.15 $ 0.23
========== =========== ===========
Diluted EPS:
Net income............................................................... $ 123,526 $ 110,123 $ 21,501
Effect of: Public holdings(a)............................................ (595) (606) (328)
Dilutive securities(b)........................................ 5,178 2,967 --
---------- ----------- -----------
Adjusted net income...................................................... $ 128,109 $ 112,484 $ 21,173
========== =========== ===========
Average common shares outstanding........................................ 101,134 95,499 93,747
Effect of: Dilutive options.............................................. 2,605 1,662 2,241
Dilutive securities(b)........................................ 7,171 7,581 --
---------- ----------- -----------
Average number of common shares assuming dilution........................ 110,910 104,742 95,988
========== =========== ===========
Diluted EPS.............................................................. $ 1.16 $ 1.07 $ 0.22
========== =========== ===========
</TABLE>
(a) Represents the dilutive effect of public company common stock equivalents
and convertible securities.
(b) For the year ended December 31, 1997, the 1996 convertible subordinated
notes were anti-dilutive; therefore, they do not impact the calculation of
diluted EPS in 1997.
16. RELATED PARTY TRANSACTIONS
The Company charges administrative service fees to certain partner
companies for strategic and operational support that it provides in the normal
course of its business. These services are generally provided by the Company's
employees and outside consultants. In 1999, 1998 and 1997, the Company received
$1.9 million, $2.1 million and $2.2 million, respectively, for these services.
The costs related to these services are included in general and administrative
expenses.
The Company's partner companies have transactions in the normal course
of business with other partner companies. For example, CompuCom incurred
consulting related expenses of $3.5 million for services provided by other
Safeguard partner companies. Additionally, in 1999, the Company leased space to
certain partner companies.
During 1999, the Company repaid aggregate indebtedness of $20 million
under revolving credit facilities to certain partner companies. There were no
borrowings under these revolving credit facilities at December 31, 1999.
In 1999, the Company purchased 367,866 shares of Tangram for
approximately $800,000 from an officer and director of Tangram.
66
<PAGE> 33
In 1999, the Company loaned an officer of the Company $500,000
evidenced by a term note receivable. Interest on the note accrues at the prime
rate (8.5% at December 31, 1999), and principal and interest on the notes is due
in July 2002. In 1999, the Company loaned an officer and a director 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.
Also in 1999, CompuCom loaned one of its officers $625,950 to exercise CompuCom
stock options. Interest on the note accrues at a rate of 5.7% per annum, and the
loan is due November 2000.
In 1998, the Company loaned an officer and director of the Company
$500,000 evidenced by a term note receivable. The note was fully repaid in March
1999. Also 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, 2001, respectively. The loan proceeds were
used to exercise stock options.
17. 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.
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 2019. Total rental expense under operating leases was $12.4
million, $11.7 million and $10.2 million in 1999, 1998 and 1997, respectively.
Future minimum lease payments under non-cancelable operating leases with initial
or remaining terms of one year or more at December 31, 1999, are (in millions):
$12.0--2000; $10.3--2001; $8.8--2002; $7.9--2003 and $6.1--2004.
At December 31, 1999, the Company was contingently obligated for
approximately $29 million of guarantee commitments. In addition, the Company has
committed capital of approximately $218 million to various partner companies and
private equity funds, to be funded over the next several years.
The Company has informed the staff of the Federal Trade Commission
(FTC) of the Company's inadvertent failure to file Premerger Notification Forms
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 in connection
with acquisitions of stock of certain partner companies. The FTC has not
informed the Company as to whether they intend to seek a fine from the Company
in connection with the failure to file timely Forms for these transactions.
Because of the early stage of our discussions of this issue with the staff of
the FTC, we are unable to estimate the amount, if any, of the Company's ultimate
liability in connection with this matter. The Company does not believe any such
ultimate liability would have a material adverse effect on the Company.
Because many of its partner companies are not majority-owned
subsidiaries, changes in the value of the Company's interests in partner
companies and the income or loss attributable to them could require the Company
to register under the Investment Company Act unless it takes action to avoid
being required to register. However, the Company believes it can take steps to
avoid being required to register under the Investment Company Act which would
not adversely affect its operations or shareholder value.
18. PARENT COMPANY FINANCIAL INFORMATION
The Company's consolidated financial statements for the years ended
December 31, 1999, 1998 and 1997 reflect certain entities accounted for under
the consolidated method of accounting as discussed in Note 1.
Parent company financial information is provided to present the
financial position and results of operations of the Company as if the
consolidated companies were accounted for under the equity method of accounting
for all periods presented during which the Company owned its interest in these
companies.
67
<PAGE> 34
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
---- ----
<S> <C> <C>
Assets
Cash and cash equivalents.............................................. $ 33,536 $ 1,486
Trading securities..................................................... -- 143,103
Other current assets................................................... 39,204 29,280
Ownership interests in and advances to partner companies............... 687,925 348,237
Available-for-sale securities.......................................... 302,940 84,977
Other.................................................................. 45,584 30,212
----------- ---------
Total assets.............................................................. $ 1,109,189 $ 637,295
=========== =========
Liabilities and Shareholders' Equity
Current liabilities.................................................... $ 35,621 $ 80,824
Long-term debt......................................................... 14,354 123,115
Other long-term liabilities............................................ 284,513 19,152
Convertible subordinated notes......................................... 200,000 71,345
Shareholders' equity................................................... 574,701 342,859
----------- ---------
Total liabilities and shareholders' equity................................ $ 1,109,189 $ 637,295
=========== =========
</TABLE>
The carrying value of its less than wholly owned subsidiaries,
primarily CompuCom, Tangram, aligne, SOTAS and Arista at December 31, 1999, and
CompuCom and Tangram at December 31, 1998 are included in "ownership interests
in and advances to partner companies."
The carrying value and market value of CompuCom at December 31, 1999
was $128 million and $116 million, respectively. The carrying value and market
value of Tangram at December 31, 1999 was $4 million and $85 million,
respectively.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenue.................................................................. $ 14,849 $ 12,769 $ 27,289
Operating expenses....................................................... 51,343 25,868 38,239
---------- ---------- ---------
(36,494) (13,099) (10,950)
Gain on issuance of stock by partner companies........................... 175,662 3,782 5,772
Other income, net........................................................ 107,290 189,883 18,253
Interest, net............................................................ (6,764) (7,587) (4,234)
---------- ---------- ---------
Income before income taxes and equity income (loss)...................... 239,694 172,979 8,841
Income taxes............................................................. (61,884) (61,010) (2,213)
Equity income (loss)..................................................... (54,284) (1,846) 14,873
---------- ---------- ---------
Net income............................................................... $ 123,526 $ 110,123 $ 21,501
========== ========== =========
</TABLE>
The Company's share of the income or losses of CompuCom and Tangram for
1999, 1998 and 1997 and aligne, SOTAS and Arista for 1999 are reflected in the
caption "equity income (loss)".
68
<PAGE> 35
19. SUPPLEMENTAL NON-CASH FINANCING AND INVESTING ACTIVITIES
During the years ended December 31, 1999, 1998 and 1997, the Company
converted $12.9 million, $10.8 million and $3.5 million, respectively, of
advances to partner companies into ownership interests in partner companies.
Additionally, in 1999, in connection with the reverse merger of Pacific
Title/Mirage into LifeF/X, the Company received warrants convertible into
approximately 10 million shares of LifeF/X in exchange for conversion of all of
the outstanding debt of Pacific Title/Mirage.
Interest paid in 1999, 1998 and 1997 was $39.3 million, $31.5 million
and $21.9 million, respectively, of which $7.3 million, $4.9 million and $5.8
million in 1999, 1998 and 1997, respectively, related to the Company's
convertible subordinated notes.
Cash paid for taxes in the years ended December 31, 1999, 1998 and 1997
was $36.6 million, $9.8 million and $13.5 million, respectively.
As discussed in Note 2, the Company acquired an ownership interest in
aligne in exchange for approximately 1.3 million shares of the Company's common
stock.
In 1999, $71.3 million of convertible subordinated notes (1996 notes)
were converted into 7.4 million shares of the Company's common stock.
During the years ended December 31, 1999, 1998 and 1997, the Company
received stock distributions from its interests in venture funds with a fair
value of $4.3 million, $1.8 million and $1.9 million, respectively.
During the year ended December 31, 1998, the Company exchanged all of
its holdings in Coherent and Integrated Systems Consulting Group for shares of
Tellabs and First Consulting Group, respectively.
20. OPERATING SEGMENTS
The Company's reportable segments determined in accordance with SFAS
131 are General Safeguard Operations, Partner Company Operations, and CompuCom
Operations. General Safeguard Operations represents the expenses of providing
strategic and operational support to the Company's partner companies, and the
related administrative costs. General Safeguard Operations also includes the
effect of transactions and other events incidental to the Company's ownership
interests in our partner companies and the Company's operations in general.
Partner Company Operations reflect operations of all partner companies other
than CompuCom. CompuCom Operations reflect the results of operations of
CompuCom.
69
<PAGE> 36
The following summarizes information related to the Company's segments.
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,
---------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
SUMMARY OF CONSOLIDATED NET INCOME
General Safeguard Operations ........................ $ 158,553 $ 109,689 $ 3,599
Partner Company Operations .......................... (42,739) 358 (210)
CompuCom Operations ................................. 7,712 76 18,112
----------- ----------- -----------
$ 123,526 $ 110,123 $ 21,501
=========== =========== ===========
GENERAL SAFEGUARD OPERATIONS
Revenue ............................................. $ 13,912 $ 11,949 $ 10,458
Operating expenses
General and administrative ....................... 43,429 24,413 22,308
Depreciation and amortization .................... 7,914 1,443 1,309
----------- ----------- -----------
Total operating expenses ......................... 51,343 25,856 23,617
----------- ----------- -----------
(37,431) (13,907) (13,159)
Gain on issuance of stock by partner companies ... 175,662 3,782 5,772
Other income, net ................................ 107,290 189,883 18,253
Interest, net .................................... (7,193) (7,964) (4,656)
----------- ----------- -----------
Income before income taxes ....................... 238,328 171,794 6,210
Income taxes ..................................... (79,775) (62,105) (2,611)
----------- ----------- -----------
Net Income from General Safeguard Operations ........ $ 158,553 $ 109,689 $ 3,599
=========== =========== ===========
PARTNER COMPANY OPERATIONS
Revenue ............................................. $ 27,469 $ 20,678 $ 35,423
Operating expenses
Cost of Sales .................................... 8,082 2,426 16,935
Selling and service .............................. 8,875 8,087 7,895
General and administrative ....................... 13,572 5,309 6,476
Depreciation and amortization .................... 5,497 2,872 4,316
----------- ----------- -----------
Total operating expenses ......................... 36,026 18,694 35,622
----------- ----------- -----------
(8,557) 1,984 (199)
Interest, net .................................... (330) (272) (282)
----------- ----------- -----------
Income (loss) before income taxes,
minority interest and equity income (loss) .... (8,887) 1,712 (481)
Income taxes ..................................... 18,192 729 (146)
Minority interest ................................ (66) -- --
Equity income (loss) ............................. (51,978) (2,083) 417
----------- ----------- -----------
Net Income (Loss) from Partner Company Operations ... $ (42,739) $ 358 $ (210)
=========== =========== ===========
COMPUCOM OPERATIONS
Revenue ............................................. $ 2,911,889 $ 2,254,465 $ 1,949,802
Operating expenses
Cost of Sales .................................... 2,597,739 1,970,505 1,682,257
Selling and service .............................. 159,006 164,262 128,751
General and administrative ....................... 86,682 66,925 58,754
Depreciation and amortization .................... 23,367 17,423 12,507
Restructuring .................................... 387 16,437 --
----------- ----------- -----------
Total operating expenses ......................... 2,867,181 2,235,552 1,882,269
----------- ----------- -----------
44,708 18,913 67,533
Other income, net ................................ -- -- 2,832
Interest, net .................................... (23,195) (18,742) (14,947)
----------- ----------- -----------
Income before income taxes and minority interest . 21,513 171 55,418
Income taxes ..................................... (4,931) (48) (11,579)
Minority interest ................................ (8,870) (47) (25,727)
----------- ----------- -----------
Net Income from CompuCom Operations ................. $ 7,712 $ 76 $ 18,112
=========== =========== ===========
</TABLE>
70
<PAGE> 37
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
---- ----
<S> <C> <C>
ASSETS
GENERAL SAFEGUARD OPERATIONS
Cash and cash equivalents .............................. $ 33,536 $ 1,486
Other .................................................. 84,788 59,492
---------- ----------
118,324 60,978
---------- ----------
PARTNER COMPANY OPERATIONS
Trading securities ..................................... -- 143,103
Ownership interests in and advances to partner companies 529,381 218,999
Available-for-sale securities .......................... 302,940 84,977
Other .................................................. 45,927 15,170
---------- ----------
878,248 462,249
---------- ----------
COMPUCOM OPERATIONS .................................... 503,307 545,463
---------- ----------
$1,499,879 $1,068,690
========== ==========
</TABLE>
21. SUBSEQUENT EVENTS
In February 2000, the Company announced the sale of approximately 2.2
million shares of its common stock for $100 million to Textron Inc. in a private
transaction.
From January 1, 2000 through February 15, 2000, we funded $46 million
of commitments made prior to December 31, 1999. Additionally, from January 1,
2000 through February 15, 2000, we committed $163 million and funded $46 million
to acquire ownership interests in or make advances to new and existing partner
companies.
22. QUARTERLY FINANCIAL DATA
The following table presents unaudited supplementary quarterly
financial data for the years ended December 31, 1999 and 1998 (in thousands,
except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED,
-------------------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
-------- ------- -------- -------
<S> <C> <C> <C> <C>
1999
Revenue............................ $ 502,892 $ 812,582 $ 900,658 $ 737,138
Net Income Before Income
Taxes, Minority Interest
and Equity Income (Loss)........ 41,670 26,472 30,027 152,785
Net Income......................... 24,148 11,513 9,317 78,548
Net Income Per Share
Basic........................... $ 0.25 $ 0.11 $ 0.09 $ 0.75
Diluted......................... $ 0.24 $ 0.11 $ 0.09 $ 0.70
1998
Revenue............................ $ 444,666 $ 605,646 $ 611,829 $ 624,951
Net Income Before Income
Taxes, Minority Interest
and Equity Income (Loss)........ 10,037 10,781 97,096 55,763
Net Income......................... 5,060 6,026 59,242 39,795
Net Income Per Share
Basic........................... $ 0.05 $ 0.06 $ 0.62 $ 0.42
Diluted......................... $ 0.05 $ 0.06 $ 0.57 $ 0.39
</TABLE>
Net income per share calculations for each of the quarters is based on
the weighted average number of shares outstanding in each period. Diluted income
per share calculations adjust net income for the dilutive effect of public
investee common stock equivalents and convertible securities. The Company's 1996
convertible subordinated notes are anti-dilutive for the three months ended
March 31, 1998 and June 30, 1998. The Company's 1999 convertible subordinated
notes (issued in June 1999) are anti-dilutive for the three months ended June
30, 1999 and September 30, 1999. Therefore, the sum of the quarters may not
necessarily equal the year to date net income per share.
71
<PAGE> 38
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Safeguard Scientifics, Inc.:
We have audited the accompanying consolidated balance sheets of
Safeguard Scientifics, Inc. (the "Company") and subsidiaries as of December 31,
1999 and 1998, and the related consolidated statements of operations,
shareholders' equity, comprehensive income and cash flows for each of the years
in the three-year period ended December 31, 1999. 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 a
nonsubsidiary investee. The Company's ownership interest in the investee at
December 31, 1998 was $35.2 million and its equity in earnings of this investee
was $7.9 million for the year ended December 31, 1998. The financial statements
of this investee were audited by other auditors whose report has been furnished
to us, and our opinion, insofar as it relates to the amounts included for this
investee, is based solely on the report 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 report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report 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, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
February 28, 2000
72
<PAGE> 39
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
of Cambridge Technology Partners (Massachusetts), Inc.:
In our opinion, the 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 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 29, 1999
<PAGE> 40
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/ Gerald A. Blitstein
Senior Vice President and Chief Financial Officer
73
<PAGE> 41
COMMON STOCK DATA
The Company's common stock is currently traded on the New York Stock
Exchange under the symbol "SFE." The following table sets forth the high and low
sale prices of the Company's common stock as reported on the New York Stock
Exchange for the periods indicated as adjusted, to reflect a 3-for-1 split of
the Company's common stock effective as of March 13, 2000.
<TABLE>
<CAPTION>
1999 1998
-------------------- ------------------
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter.......................... $24.63 $9.17 $12.81 $10.04
Second Quarter......................... 40.00 19.13 15.13 11.54
Third Quarter.......................... 25.50 15.85 13.81 7.83
Fourth Quarter......................... 61.81 22.63 10.58 5.71
</TABLE>
The high and low sale prices reported in 2000 through February 15 were
$63.67 and $43.71, respectively. On February 28, 2000, the closing price of the
Company's common stock on the New York Stock Exchange Composite Tape was $48.17
per share. As of February 15, 2000, there were 104,943,726 shares of the
Company's common stock outstanding. At February 15, 2000, the Company had
approximately 58,000 beneficial holders of its common stock. No cash dividends
have been declared in any of the years presented, and the Company has no present
intention to declare cash dividends.
74
<PAGE> 1
Exhibit 21
SUBSIDIARIES OF SAFEGUARD SCIENTIFICS, INC.
Exclusive of immaterial subsidiaries and companies in which Registrant
holds a minority interest, Registrant as of March 15, 2000 had the following
subsidiaries:
<TABLE>
<CAPTION>
PLACE OF
NAME INCORPORATION
- ---- -------------
<S> <C>
Alermon, Inc. Delaware
aligne Incorporated Pennsylvania
Arista Knowledge Systems, Inc. Delaware
Bebob Associates Pennsylvania
CompuCom Systems, Inc. Delaware
CompuCom Properties, 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
GPMC Holdings, LLC Delaware
Penn-Sylvan Management, Inc. Pennsylvania
Pennsylvania Early Stage Partners GP, LLC Pennsylvania
Radnor Venture Management Company Pennsylvania
Safeguard Delaware, Inc. Delaware
Safeguard Scientifics (Delaware), Inc. Delaware
Safeguard 97 Capital, L.P. Delaware
Safeguard 98 Capital, L.P. Delaware
Safeguard 99 Capital, L.P. Delaware
Safeguard 2000 Capital, L.P. Delaware
Safeguard Capital Management, Inc. Delaware
Safeguard International Group, Inc. Delaware
Safeguard Partners Capital, L.P. Delaware
Safeguard Partners Capital II, L.P. Delaware
Safeguard Partnership Holdings, Inc. Delaware
Safeguard Partnership Holdings
(Pennsylvania), Inc. Pennsylvania
Safeguard Pioneer, Inc. Delaware
Safeguard Technologies, Inc. Delaware
Safeguard XL Capital, L.P. Delaware
SFGS, Inc. Delaware
SFINT, Inc. Delaware
Sotas, Inc. Delaware
SSI B, Inc. Delaware
SSI Buttonwood, Inc. Delaware
SSI Management Company, Inc, Delaware
SSIP (Delaware), Inc. Delaware
SSI Real, Inc. Delaware
Tangram Enterprise Solutions, Inc. Pennsylvania
Technology Leaders Management, Inc. Delaware
XL Realty Corp. Florida
</TABLE>
<PAGE> 1
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, 33-48579, 33-48462, 2-72362, 33-72559,33-72560, 333-75499, 33-75501
and 333-86777) on Form S-8 and in the Registration Statements (No. 333-86675,
333-31296, 333-32512) on Form S-3 of Safeguard Scientifics, Inc. of our report
dated February 28, 2000, relating to the consolidated balance sheets of
Safeguard Scientifics, Inc. and subsidiaries as of December 31, 1999 and 1998,
the related consolidated statements of operations, shareholders' equity,
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 1999 and related financial statement schedules, which
reports are included or incorporated by reference in the December 1999 annual
report on Form 10-K of Safeguard Scientifics, Inc. Our report makes reference to
the other auditors who audited the 1998 financial statements of an investee and
our opinion, insofar as it relates to the investee, is based solely on the
report of the other auditors.
/S/ KPMG LLP
Philadelphia, Pennsylvania
March 21, 2000
<PAGE> 1
Exhibit 23.2
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, 33-72560, 333-75499, 333-75501, and 333-86777) and
on Form S-3 (File Nos. 333-86675, 333-31296 and 333-32512) of our report dated
February 2, 1999, except for Note R, as to which the date is March 29, 1999, on
our audits of the consolidated financial statements of Cambridge Technology
Partners (Massachusetts), Inc. as of December 31, 1998 and 1997, and for each
of the three years in the period ended December 31, 1998, which report is
included in the December 31, 1999 annual report of Safeguard Scientifics, Inc.
on Form 10-K.
/s/ PricewaterhouseCoopers LLP
-----------------------------
Boston, Massachusetts
March 21, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 49,813
<SECURITIES> 0
<RECEIVABLES> 264,987
<ALLOWANCES> 5,604
<INVENTORY> 129,826
<CURRENT-ASSETS> 455,510
<PP&E> 104,546
<DEPRECIATION> 48,312
<TOTAL-ASSETS> 1,499,879
<CURRENT-LIABILITIES> 321,671
<BONDS> 214,532
0
0
<COMMON> 10,475
<OTHER-SE> 564,226
<TOTAL-LIABILITY-AND-EQUITY> 1,499,879
<SALES> 2,621,124
<TOTAL-REVENUES> 2,953,270
<CGS> 2,398,613
<TOTAL-COSTS> 2,605,821
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 35,557
<INCOME-PRETAX> 250,954
<INCOME-TAX> 66,514
<INCOME-CONTINUING> 123,526
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 123,526
<EPS-BASIC> 1.22
<EPS-DILUTED> 1.16
</TABLE>
