<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 23, 2000
REGISTRATION NO. 333-31296
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
SAFEGUARD SCIENTIFICS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
PENNSYLVANIA 7389 23-1609753
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
435 DEVON PARK DRIVE
BUILDING 800
WAYNE, PENNSYLVANIA 19087
(610) 293-0600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
JAMES A. OUNSWORTH, ESQ.
SAFEGUARD SCIENTIFICS, INC.
435 DEVON PARK DRIVE
BUILDING 800
WAYNE, PENNSYLVANIA 19087
(610) 293-0600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
WITH COPIES TO:
<TABLE>
<S> <C>
N. JEFFREY KLAUDER, ESQ. ALAN DEAN, ESQ.
MORGAN, LEWIS & BOCKIUS LLP DAVIS POLK & WARDWELL
1701 MARKET STREET 450 LEXINGTON AVENUE
PHILADELPHIA, PENNSYLVANIA 19103 NEW YORK, NEW YORK 10017
(215) 963-5000 (212) 450-4000
</TABLE>
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after the effective date of this Registration Statement.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement number for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SEC, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE> 2
THIS INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS
IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED MARCH 23, 2000
PROSPECTUS
10,000,000 SHARES
[SAFEGUARD SCIENTIFICS, INC. LOGO]
COMMON STOCK
----------------------
Safeguard Scientifics, Inc. is selling 10,000,000 shares.
The shares trade on the New York Stock Exchange under the symbol "SFE." On
March 21, 2000, the last sale of the shares as reported on the New York Stock
Exchange was $90.50 per share.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS WHICH ARE DESCRIBED IN THE
"RISK FACTORS" SECTION BEGINNING ON PAGE 6 OF THIS PROSPECTUS.
----------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Public offering price....................................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to Safeguard Scientifics......... $ $
</TABLE>
The underwriters may also purchase up to an additional 1,500,000 shares at
the public offering price, less the underwriting discount, within 30 days from
the date of this prospectus to cover over-allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The shares will be ready for delivery on or about , 2000.
----------------------
MERRILL LYNCH & CO.
DEUTSCHE BANC ALEX. BROWN
LEHMAN BROTHERS
PRUDENTIAL VOLPE TECHNOLOGY
A UNIT OF PRUDENTIAL SECURITIES
J.P. MORGAN & CO.
ADAMS, HARKNESS & HILL, INC.
----------------------
The date of this prospectus is , 2000.
<PAGE> 3
INSIDE FRONT COVER
[Artwork Appears Here]
INSIDE GATE FOLD
[Artwork Appears Here]
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 2
Risk Factors................................................ 6
Forward-Looking Statements.................................. 14
Use of Proceeds............................................. 15
Dividend Policy............................................. 15
Price Range of Our Common Stock............................. 15
Capitalization.............................................. 16
Selected Consolidated Financial Data........................ 17
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 18
Business.................................................... 30
Management.................................................. 51
Certain Shareholders........................................ 59
Description of Capital Stock................................ 60
Underwriting................................................ 64
Legal Matters............................................... 66
Experts..................................................... 66
Where You Can Find Additional Information................... 66
Index To Consolidated Financial Statements.................. F-1
</TABLE>
----------------------
ABOUT THIS PROSPECTUS
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate as of the date on the
front cover of this prospectus only. Our business, financial condition, results
of operations and prospects and those of our partner companies may have changed
since that date.
The information in this prospectus may not contain all the information that
may be important to you. You should read the entire prospectus, as well as the
documents incorporated by reference in the prospectus, before making an
investment decision. The terms "Safeguard Scientifics," "Safeguard," "our" and
"we," as used in this prospectus, refer to Safeguard Scientifics, Inc.
Although we refer to the companies in which we have acquired an equity
interest as our "partner companies" and state that we have a "partnership" with
these companies, we do not act as an agent or legal representative for any of
our partner companies, we do not have the power or authority to legally bind any
of our partner companies and we do not have the types of liabilities for our
partner companies that a general partner of a partnership would have.
<PAGE> 5
PROSPECTUS SUMMARY
This summary is not complete and may not contain all of the information
that may be important to you. You should read the entire prospectus carefully,
including the financial data and related notes, before making an investment
decision. Unless otherwise specifically stated, the information in this
prospectus has been adjusted to reflect a 3-for-1 split of our common stock
effective as of March 13, 2000. This prospectus does not take into account the
possible sale of additional shares of common stock to the underwriters under the
underwriters' right to purchase additional shares to cover over-allotments.
SAFEGUARD SCIENTIFICS, INC.
Safeguard Scientifics, Inc. is a leader in incubating and operating what we
believe are the premier developing technology companies in the Internet
infrastructure market with a focus on three sectors: software, communications,
and eServices. We believe that our experience developing technology companies,
our expertise in and focus on the Internet infrastructure business, and the
reach of our network enable us to identify and attract companies with
significant potential for success in the Internet infrastructure market and to
assist these companies in becoming market leaders. We intend to continue to
develop and operate the premier network of Internet infrastructure companies to
offer solutions, seamless connectivity and eServices to businesses engaged in
electronic commerce. As of March 17, 2000, we owned interests in 45 partner
companies, and our network was comprised of over 200 companies, including the
partner companies of Internet Capital Group and our other Internet holding
companies, incubators, and private equity funds.
Our strategy is to utilize our extensive network to meet the strategic and
operational needs of our developing Internet infrastructure companies. Our
network is broad and deep and supports our partner company development process
from beginning to end. We not only provide our partner companies with capital,
but we also draw on our broad 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 have a long-term ownership strategy. Even after a partner company achieves
market success, we continue to provide the company with ongoing access to our
network resources and industry relationships.
For the past twenty years, we have been acquiring, developing, operating
and integrating into our network leading-edge technology companies. We have
successfully capitalized on the major trends in successive waves of innovations
in information technology. For instance, we founded and built Novell in the
1980s to lead the computer networking industry, Cambridge Technology Partners 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 developing our next generation of
partner companies to lead the Internet infrastructure industry.
We believe that the rapid growth in business-to-consumer and
business-to-business electronic commerce is being driven by advances in Internet
infrastructure technology. Electronic commerce depends upon a highly functional,
fast, reliable and secure Internet infrastructure. As Internet infrastructure
develops, companies will increasingly be able to use the Internet to connect
themselves with their customers and business partners to reduce sales, marketing
and related expenses, and to integrate their systems more efficiently. Forrester
Research estimates that the total electronic commerce market worldwide will
reach $3.2 trillion by 2003. Moreover, IDC estimates that worldwide Internet
infrastructure spending will grow from $366 billion in 1999 to $1.5 trillion in
2003. We believe there are significant opportunities for companies that create
the infrastructure that enables electronic commerce. We believe
2
<PAGE> 6
the most significant sectors in the Internet infrastructure market are software,
communications and eServices. The following chart depicts our interests in these
three areas:
<TABLE>
<CAPTION>
SOFTWARE COMMUNICATIONS ESERVICES
-------- -------------- ---------
<S> <C> <C>
Arista Extant aligne
e-Profile Integrated Visions Cambridge Technology Partners
eMake NexTone Communications iMedium
fob.com Pac-West Telecomm Mi8
LifeF/X PrivaSeek OPUS360
RealTIME Media SOTAS TechSpace LLC
Sanchez Vitts Networks US Interactive
USDATA Web Telecom Zero to Five
Who? Vision
Wireless Online
</TABLE>
RECENT DEVELOPMENTS
We continually seek ways to extend the reach of our network. We highlight
the following recent events:
In February 2000, eMerge Interactive, a partner company of both Safeguard
and Internet Capital Group, completed its initial public offering, raising over
$100 million. The offering included an offering to our shareholders under the
Safeguard Subscription Program, and was the fourth offering to include a
Safeguard Subscription Program. The previous three offerings, all completed in
the second half of 1999, were by Internet Capital Group, US Interactive, and
Pac-West Telecomm.
In March 2000, we closed the sale to Textron Inc. of 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. 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.
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.
These transactions have all added to the depth and reach of our network.
On March 15, 2000, we filed a registration statement to register the
offering of up to $500 million of our common stock directly to a limited number
of strategic and institutional investors. We anticipate that the shares would be
issued at a price based upon the trading price of Safeguard shares during a
period prior to completing the sale. The size and terms of the offering are
subject to change and no assurance can be given that the offering will be
completed. The underwritten offering of common stock covered by this prospectus
is not conditioned upon the sale of any shares in the simultaneous offering to
strategic and institutional investors.
------------------------
The address of our principal executive offices is 435 Devon Park Drive,
Wayne, PA 19087, (610) 293-0600. We maintain a website at www.safeguard.com.
Please note that our website and the websites of our partner companies are not
part of this prospectus.
3
<PAGE> 7
THE OFFERING
Common stock offered by
Safeguard........................ 10,000,000 shares
Shares outstanding after
the offering................... 117,329,728 shares
Over-allotment option............ 1,500,000 shares
Use of proceeds.................. We expect to use the net proceeds to
continue to acquire equity interests in
Internet infrastructure companies, to
acquire additional interests in current
partner companies, to pay down any of our
future outstanding balances on our
revolving credit facilities, and for
working capital and other general corporate
purposes.
Risk factors..................... See "Risk Factors" and the other
information included in this prospectus for
a discussion of factors you should
carefully consider before deciding to
invest in shares of our common stock.
NYSE symbol...................... "SFE"
4
<PAGE> 8
SUMMARY CONSOLIDATED FINANCIAL DATA
The following summary consolidated financial data set forth below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our audited consolidated financial
statements and related notes thereto included elsewhere in this prospectus. The
pro forma consolidated balance sheet data as of December 31, 1999 reflects the
sale of 10,000,000 shares of our common stock in this offering, after deduction
of estimated underwriting discounts and commissions and estimated offering
expenses, and the sale and issuance of 2,181,819 shares of our common stock to
Textron Inc. for $100 million. The pro forma data does not reflect our intended
use of proceeds from the sales of our common stock. See "Use of Proceeds." Our
historical results are not necessarily indicative of future results.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND NUMBER OF PARTNER COMPANIES)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
REVENUE............................. $2,953,270 $2,287,092 $1,995,683 $2,068,807 $1,523,422
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
------------------------
ACTUAL PRO FORMA
---------- ----------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 49,813 $ 627,913
Working capital............................................. 133,839 711,939
Total assets................................................ 1,499,879 2,077,979
Long-term debt.............................................. 14,532 14,532
Other long-term liabilities................................. 175,611 175,611
Convertible subordinated notes.............................. 200,000 200,000
Total shareholders' equity.................................. 574,701 1,152,801
NUMBER OF PARTNER COMPANIES................................. 37
</TABLE>
- ---------------
(a) Adjusted to reflect the 3-for-1 split of our common stock effective as of
March 13, 2000.
5
<PAGE> 9
RISK FACTORS
Investing in our common stock will provide you with an equity ownership
interest in Safeguard. As one of our shareholders, your investment will be
subject to risks inherent in our business. The price of our common stock may
decline. You should carefully consider the following factors as well as other
information contained in this prospectus before deciding to invest in shares of
our common stock. Additional risks that are not currently known to us or that we
deem immaterial may also harm us and the value of your investment.
RISKS RELATED TO US
OUR BUSINESS DEPENDS UPON THE PERFORMANCE OF OUR PARTNER COMPANIES, WHICH IS
UNCERTAIN
Economic, governmental, industry and internal company factors outside our
control affect each of our partner companies. If our partner companies do not
succeed, the value of our assets, our results of operations and the price of our
common stock could decline. The material risks relating to our partner companies
include:
- demand for the products and services of our partner companies depends on
widespread commercial use of the Internet;
- intensifying competition for the products and services our partner
companies offer, which could lead to the failure of some of our partner
companies;
- inability to adapt to the rapidly changing Internet marketplace;
- many of our partner companies are in the early stages of their
development with limited operating history, little revenue and
substantial losses;
- inability to manage growth;
- weakness in the public and private capital markets for Internet-related
companies may affect our ability to realize value for our partner
companies through initial public offerings; and
- the operating results of our partner companies.
Other material risks relating to our partner companies are more fully
described below under "Risks Related to Our Partner Companies and Internet
Infrastructure Companies."
FLUCTUATIONS IN THE PRICE OF THE COMMON STOCK OF OUR PUBLICLY TRADED PARTNER
COMPANIES, IN PARTICULAR THAT OF INTERNET CAPITAL GROUP, INC., MAY AFFECT THE
PRICE OF OUR COMMON STOCK
The aggregate market value of our equity interests in our publicly traded
partner companies is $6.0 billion as of March 17, 2000, excluding warrants that
are not exercisable at that date. We own approximately 14% of Internet Capital
Group, Inc., an Internet company actively engaged in business-to-business
electronic commerce through a network of partner companies. On March 17, 2000,
our equity interest in Internet Capital Group had a market value of
approximately $4.3 billion, which is significant with respect to our market
value of $10.6 billion. Fluctuations in the price of Internet Capital Group and
our other publicly traded partner companies, which include Cambridge Technology
Partners, CompuCom, eMerge Interactive, LifeF/X, Sanchez Computer Associates and
US Interactive, are likely to affect the price of our common stock. The common
stock price of Internet Capital Group's common stock has been highly volatile
and subject to fluctuations unrelated or disproportionate to its operating
performance. On August 5, 1999, Internet Capital Group completed its initial
public offering at a price of $6.00 per share and its common stock has since
traded as high as $212 per share, adjusted for a 2-for-1 stock split effected on
December 10, 1999.
Internet Capital Group's results of operations, and accordingly the price
of its common stock, may be adversely affected by a number of factors including
the following:
- lack of acceptance of the Internet as a medium for business-to-business
commercial transactions;
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<PAGE> 10
- failure of the operating results of its partner companies to meet
expectations;
- changes in equity losses or income and amortization of goodwill related
to the acquisition or divestiture of interests in its partner companies;
- changes in the market value of its partner company interests, and in
particular, VerticalNet, Breakaway Solutions, and eMerge Interactive,
three of its publicly traded partner companies;
- intense competition from other potential acquirors of, and capital
providers to, business-to-business electronic commerce companies, which
could increase its cost of acquiring interests in additional companies,
and competition for the goods and services offered by its partner
companies; and
- its inability to effectively manage its growth and the growth of its
partner companies during the anticipated rapid growth of the global
business-to-business electronic commerce market.
OUR SUCCESS IS DEPENDENT ON THE RETENTION OF OUR EXECUTIVE MANAGEMENT
Our success is dependent on our ability to retain executive management. If
one or more of the members of our executive management were unable or unwilling
to continue in their present position, our business could be disrupted.
OUR RESOURCES AND OUR ABILITY TO MANAGE NEWLY ACQUIRED PARTNER COMPANIES MAY BE
STRAINED AS WE ACQUIRE MORE AND LARGER INTERESTS IN INTERNET INFRASTRUCTURE
COMPANIES
We have acquired, and plan to continue to acquire, significant interests in
Internet infrastructure companies that complement our business strategy. In the
future, we may acquire larger percentages or larger interests in companies than
we have in the past, or we may acquire 100% ownership of companies. We may also
spend more on individual acquisitions than we have in the past. An increased
number of acquisitions and potentially larger acquisitions may place
significantly greater strain on our resources, ability to manage such companies
and ability to integrate them into our collaborative network. Future
acquisitions could subject us to the following risks:
- our acquisitions may cause a disruption in our ongoing support of our
partner companies, distract our management and other resources and make
it difficult to maintain our standards, controls and procedures;
- we may not be able to facilitate collaboration between our partner
companies and new companies that we acquire; and
- we may be required to issue equity securities to fund future
acquisitions, which may dilute existing shareholders, or to incur debt.
OUR ABILITY TO BORROW FUNDS MAY BE LIMITED IF THE VALUE OF OUR EQUITY INTERESTS
IN OUR PUBLIC PARTNER COMPANIES SIGNIFICANTLY DECREASES
Our ability to draw down on our credit facilities is dependent in part upon
the market value of our equity interests in our publicly traded partner
companies. If there is a significant decline in the market value of these equity
interests, our ability to access our credit facilities may be limited or we may
need to repay some of the amounts outstanding. Based on our current operating
plans, we depend on our credit facility to provide a portion of the funds we
will need for acquiring new partner companies, funding existing partner
companies and satisfying our working capital requirements. Any limitation on our
access to our credit facilities may significantly reduce our ability to execute
our business plan.
INTENSE COMPETITION FROM OTHER ACQUIRORS OF INTERESTS IN INTERNET INFRASTRUCTURE
COMPANIES COULD RESULT IN LOWER RETURNS OR LOSSES ON ACQUISITIONS
We face intense competition from companies with business strategies similar
to our own and capital providers to develop and acquire interests in Internet
infrastructure companies. Some of these competitors
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<PAGE> 11
may have more experience identifying and acquiring equity interests in Internet
infrastructure companies and have greater financial and management resources,
brand name recognition or industry contacts than we do. Although most of our
acquisitions will be made at a stage when our partner companies are not publicly
traded, we may pay higher prices for those equity interests because of higher
trading prices for securities of similar public Internet infrastructure
companies and competition from other acquirers and capital providers which would
result in lower returns or losses on equity investments. In addition, our
strategy of actively operating and integrating our partner companies generally
requires us to acquire majority or controlling interests in partner companies.
This may place us at a competitive disadvantage to some of our competitors
because they have more flexibility than we do in structuring acquisitions.
WE MAY BE UNABLE TO OBTAIN MAXIMUM VALUE FOR OUR PARTNER COMPANY INTERESTS
We have significant positions in our partner companies. If we were to
divest all or part of an interest in a partner company, we may not receive
maximum value for this position. The realizable value of our interests in our
partner companies may ultimately prove to be lower than the carrying value
currently reflected in our consolidated financial statements. For partner
companies with publicly traded stock, we may be unable to sell our interest at
then-quoted market prices. For example, we own or have the right to acquire, by
exercising warrants, approximately 32 million, or approximately 55%, of the
common shares of LifeF/X, Inc., one of our publicly traded partner companies.
The trading volume and public float in LifeF/X common stock are extremely small
relative to our holdings of LifeF/X common shares. As a result, any significant
divestiture by us of our LifeF/X holdings would likely have a material adverse
effect on the market price of LifeF/X common stock and on our proceeds from such
a divestiture. For other partner companies, like Internet Capital Group, the
absolute size of our holdings may affect our ability to realize their market
value. In addition, registration and other requirements of applicable securities
laws may adversely affect our ability to dispose of our interest in partner
companies on a timely basis.
OUR BUSINESS STRATEGY MAY NOT BE SUCCESSFUL IF VALUATIONS OF INTERNET-RELATED
COMPANIES DECLINE
Our strategy involves creating value for our shareholders and the owners of
our partner companies by helping our partner companies grow and access the
public and private capital markets. Therefore, our success is dependent on
acceptance by the public and private capital markets of Internet-related
companies in general and of initial public offerings of those companies in
particular. If the capital markets for Internet-related companies or the market
for initial public offerings of those companies weaken for an extended period of
time, we may not be able to take our partner companies public as a means of
creating shareholder value. In addition, reduced market interest in Internet
infrastructure companies may cause the market value of our publicly traded
partner companies to decline.
WE MAY HAVE TO BUY, SELL OR RETAIN ASSETS WHEN WE WOULD OTHERWISE NOT WISH TO IN
ORDER TO AVOID REGISTRATION UNDER THE INVESTMENT COMPANY ACT
We believe that we are actively engaged in the business of providing
Internet infrastructure products and services through our network of
majority-owned subsidiaries and companies that we are considered to "control."
Under the Investment Company Act, a company is considered to control another
company if it owns more than 25% of that company's voting securities and is the
largest voting shareholder. A company may be required to register as an
investment company if more than 45% of its total assets consists of, or more
than 45% of its income/loss attributable to it over the last four quarters is
derived from, securities of companies it does not control. Because many of our
partner companies are not majority-owned subsidiaries, and because we own 25% or
less of the voting securities of a number of our partner companies, changes in
the value of our interests in our partner companies and the income/loss and
revenue attributable to our partner companies could subject us to regulation
under the Investment Company Act unless we took precautionary steps. For
example, in order to avoid having excessive income from "non-controlled"
interests, we may choose not to sell minority interests we would otherwise want
to sell or we may have to generate non-investment income by selling interests in
partner companies that we are considered to control. We may also need to ensure
that we retain more than 25% ownership interests
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<PAGE> 12
in our partner companies after any equity offerings. In addition, we may have to
acquire additional income or loss generating majority-owned or controlled
interests that we might not otherwise have acquired or may not be able to
acquire "non-controlling" interests in companies that we would otherwise want to
acquire. In the alternative, we may have to file an application with the
Securities and Exchange Commission seeking to rebut the presumption that we do
not control a company in situations where we own less than 25% of the voting
securities. Issuing orders granting relief under these applications involves the
discretion of the Commission and orders may be revoked or modified if the
Commission finds an order to be no longer consistent with the facts. It is not
feasible for us to be regulated as an investment company because the Investment
Company Act rules are inconsistent with our strategy of actively managing,
operating and promoting collaboration by and among our network of partner
companies.
ACCOUNTING CONVENTIONS MAY REQUIRE US TO CHANGE THE PRESENTATION OF OUR
FINANCIAL STATEMENTS
Because we generally obtain less than a 50% voting interest in our partner
companies, we generally do not consolidate the results of operations of our
partner companies with our results of operations. However, we own more than 50%
of the voting interests of five partner companies, CompuCom, Tangram Enterprise
Solutions, aligne, Arista Knowledge Systems, and SOTAS, and therefore
consolidate the results of operations of these five companies.
For example, in 1999, the revenues of CompuCom represented more than 98% of
our total revenues although it represented less than 5% of net income. At
December 31, 1999, we owned approximately 60% of the aggregate voting interests
of CompuCom. If our voting ownership of CompuCom were to decrease below 50% as a
result of the issuance of stock in an acquisition or other transaction, we may
no longer be able to consolidate the results of operations of CompuCom with our
results of operations.
OUR PARTNER COMPANIES COULD MAKE BUSINESS DECISIONS THAT ARE NOT IN OUR BEST
INTERESTS OR THAT WE DO NOT AGREE WITH, WHICH COULD IMPAIR THE VALUE OF OUR
PARTNER COMPANY INTERESTS
Although we generally seek a significant equity interest and participation
in the management of our partner companies, we may not be able to control
significant business decisions of our partner companies. We may have shared
control or no control over some of our partner companies. In addition, although
we currently own a controlling interest in many of our partner companies, we may
not maintain this controlling interest. Acquisitions of interests in partner
companies in which we share control or have no control or the dilution of our
interests in, and control over, partner companies will involve additional risks
that could cause the performance of our interests and our operating results to
suffer, including:
- the management of a partner company having economic or business interests
or objectives that are different than ours; and
- partner companies not taking our advice with respect to the financial or
operating difficulties that they may encounter.
Our inability to adequately control our partner companies could prevent us
from assisting them, financially or otherwise, or could prevent us from
liquidating our interests in them at a time or at a price that is favorable to
us. Additionally, our partner companies may not collaborate with each other or
act in ways that are consistent with our business strategy. These factors could
hamper our ability to maximize returns on our interests, and cause us to
recognize losses on our interests in partner companies.
RISKS RELATED TO OUR PARTNER COMPANIES AND INTERNET INFRASTRUCTURE COMPANIES
THE SUCCESS OF OUR PARTNER COMPANIES DEPENDS ON THE DEVELOPMENT OF THE INTERNET
INFRASTRUCTURE MARKET, WHICH IS UNCERTAIN
In general, our partner companies rely on the Internet as a medium for
commercial transactions for the success of their businesses. The development of
the electronic commerce market is in its early stages. If widespread commercial
use of the Internet does not continue to develop, or if the Internet does not
9
<PAGE> 13
develop as an effective medium for providing products and services, our partner
companies may not succeed.
Our long-term success depends on widespread market acceptance of the
Internet as a medium for electronic commerce. A number of factors could prevent
such continued acceptance, including the following:
- the unwillingness of businesses to shift from traditional processes to
Internet-based processes;
- the failure to continue the development of the necessary network
infrastructure for substantial growth in usage of the Internet;
- increased government regulation or taxation may adversely affect the
viability of the Internet infrastructure market; and
- the growth in bandwidth may not keep pace with the growth in Internet
traffic, which could result in slower response times for the users of
Internet-based commercial transactions.
OUR PARTNER COMPANIES FACE INTENSE COMPETITION, WHICH COULD ADVERSELY AFFECT
THEIR BUSINESS, FINANCIAL CONDITION, RESULTS OF OPERATIONS AND PROSPECTS OF
GROWTH
There is intense competition in the Internet marketplace, and we expect
competition to intensify in the future. Our partner companies compete against
companies outside our family of companies. Additionally, the intense competition
within the Internet marketplace may cause our partner companies to compete among
themselves. Our business, financial condition, results of operations and
prospects for growth will be materially adversely affected if our partner
companies are not able to compete successfully with companies outside our family
of companies or compete among themselves. We expect that additional competitors
will enter the Internet infrastructure market with competing products as the
size and visibility of the Internet infrastructure market opportunity increases.
Many of the present and potential competitors may have greater financial,
technical, marketing and other resources than those of our partner companies.
This may place our partner companies at a disadvantage in responding to the
offerings of their competitors, technological changes or changes in client
requirements. Also, our partner companies may be at a competitive disadvantage
because many of their competitors have greater name recognition, more extensive
client bases and a broader range of product offerings.
OUR PARTNER COMPANIES MAY FAIL IF THEY DO NOT ADAPT TO THE RAPIDLY CHANGING
INTERNET MARKETPLACE
Competition for Internet products and services is intense. As the Internet
marketplace in general and the Internet infrastructure market in particular
grow, we expect that competition will intensify. If our partner companies fail
to adapt to rapid changes in technology and customer and supplier demands, they
may not become or remain profitable. We cannot assure you that the products and
services of our partner companies will achieve market acceptance or commercial
success, nor can we assure you that the businesses of our partner companies will
be successful.
The Internet marketplace in general and Internet infrastructure market in
particular are characterized by:
- rapidly changing technology;
- evolving industry standards;
- frequent new products and services;
- shifting distribution channels; and
- changing customer demands.
Our future success will depend on our partner companies' ability to adapt
to this rapidly evolving marketplace. They may not be able to adequately or
economically adapt their products and services, develop new products and
services or establish and maintain effective distribution channels for their
10
<PAGE> 14
products and services. If our partner companies are unable to offer competitive
products and services or maintain effective distribution channels, they will
sell fewer products and services and forego potential revenue, possibly causing
them to lose money. In addition, we and our partner companies may not be able to
respond to the rapid technology changes occurring in Internet products and
services in an economically efficient manner, and our partner companies may
become or remain unprofitable.
MANY OF OUR PARTNER COMPANIES HAVE A LIMITED OPERATING HISTORY AND MAY NEVER BE
PROFITABLE
Many of our partner companies are early-stage companies with limited
operating history, have significant historical losses and may never be
profitable. Many of these companies have incurred substantial costs to develop
and market their products, have incurred net losses and cannot fund their cash
needs from operations. We expect that the operating expenses of these companies
will increase substantially in the foreseeable future as they continue to
develop products, increase sales and marketing efforts and expand operations.
MANY OF OUR PARTNER COMPANIES MAY GROW RAPIDLY AND MAY BE UNABLE TO MANAGE THEIR
GROWTH
We expect many of our partner companies to grow rapidly. Rapid growth often
places considerable operational, managerial and financial strain on a business.
To successfully manage rapid growth, our partner companies must, among other
things:
- rapidly improve, upgrade and expand their business infrastructures;
- attract and maintain qualified personnel; and
- maintain adequate levels of liquidity.
In addition, many of our partner companies have only recently begun
developing their financial reporting systems and controls.
SOME OF OUR PARTNER COMPANIES MAY BE UNABLE TO PROTECT THEIR PROPRIETARY RIGHTS
AND MAY INFRINGE ON THE PROPRIETARY RIGHTS OF OTHERS
Our partner companies assert various forms of intellectual property
protection. This intellectual property may constitute an important part of our
partner companies' assets and competitive strengths. Federal law -- most
typically, copyright, patent, trademark and trade secret -- generally protects
intellectual property rights. Although reasonable efforts will be taken to
protect the rights to this intellectual property, the complexity of
international trade secret, copyright, trademark and patent law, coupled with
the limited resources of these young companies and the demands of quick delivery
of products and services to market, create a risk that their efforts will prove
inadequate. Some of our partner companies also license intellectual property
from third parties and it is possible that they could become subject to
infringement actions based upon the intellectual property licensed from those
third parties. Our partner companies generally obtain representations as to the
origin and ownership of such licensed intellectual property; however, this may
not adequately protect them. Any claims against our partner companies'
proprietary rights, with or without merit, could subject our partner companies
to costly litigation and the diversion of their technical and management
personnel. If our partner companies incur costly litigation and their personnel
are not effectively deployed, the expenses and losses incurred by our partner
companies will increase and their profits, if any, will decrease.
OUR PARTNER COMPANIES' OPERATIONS MAY BE DISRUPTED BY TECHNOLOGICAL PROBLEMS
Some of our partner companies' businesses will depend on the efficient and
uninterrupted operation of their computer and communications hardware systems.
It may be difficult to project the capacity limits on the technology,
transaction processing systems and network hardware and software of our partner
companies or of third parties they rely on. Our partner companies and the third
parties they rely on may not be able to expand and upgrade their systems to meet
increased use. As Internet usage increases the strain on the infrastructure of
the Internet, our partner companies will need to expand the capacity of their
11
<PAGE> 15
technology, transaction processing systems and network hardware and software or
find third parties to provide these services. In addition, our partner companies
may not be able to expand and upgrade their systems and network hardware and
software capabilities to accommodate increased use of their web sites or find
third parties to provide these services. If our partner companies are unable to
appropriately upgrade their systems and network hardware and software or find
third parties to provide these services, their operations and processes may be
disrupted.
OUR PARTNER COMPANIES' SUCCESS DEPENDS ON THEIR ABILITY TO RETAIN KEY PERSONNEL
Our partner companies are dependent upon their ability to attract and
retain senior management and key personnel, including trained technical and
marketing personnel. Our partner companies will also need to continue to hire
additional personnel as they expand. A shortage in the availability of required
personnel would limit the ability of our partner companies to grow, to increase
sales of their existing products and services and to launch new products and
services.
CONCERNS REGARDING SECURITY OF TRANSACTIONS AND TRANSMITTING CONFIDENTIAL
INFORMATION OVER THE INTERNET MAY HAVE AN ADVERSE IMPACT ON OUR PARTNER
COMPANIES
We believe that concern regarding the security of confidential information
transmitted over the Internet prevents many from using the Internet as a medium
for communicating or engaging in electronic commerce. If our partner companies
that depend on the growing use of the Internet do not add sufficient security
features to their future product releases, our partner companies may not gain
market acceptance or may have additional legal exposure.
Despite the measures some of our partner companies have taken, the
infrastructure of each of them is potentially vulnerable to physical or
electronic break-ins, viruses or similar problems. If a person circumvents the
security measures imposed by any one of our partner companies, he or she could
misappropriate proprietary information or cause interruption in operations of
the partner company. Security breaches that result in access to confidential
information could damage the reputation of any one of our partner companies and
expose the partner company affected to a risk of loss or liability. Recently,
several highly publicized technology disruptions at large electronic commerce
companies have highlighted the importance of deploying a reliable Internet
infrastructure. Some of our partner companies may be required to make
significant investments and efforts to protect against or remedy security
breaches.
GOVERNMENT REGULATIONS AND LEGAL UNCERTAINTIES MAY PLACE FINANCIAL BURDENS ON
OUR BUSINESS AND THE BUSINESSES OF OUR PARTNER COMPANIES
Currently, there are 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,
distribution and 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 our business and the businesses of our
partner companies.
Laws and regulations directly applicable to Internet communications are
becoming more prevalent. For example, the United States 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.
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 services delivered over the Internet.
Congress further declared that there will be no federal taxes on electronic
commerce until the end of the moratorium. However, this moratorium does not
prevent states from taxing activities
12
<PAGE> 16
or goods and services that the states would otherwise have the power to tax.
Furthermore, the moratorium does not apply to certain state taxes where taxes
were in place before the moratorium was enacted.
OUR PARTNER COMPANIES MAY HAVE SOLD SOFTWARE WHICH IS NOT YEAR 2000 COMPLIANT
WHICH COULD SUBJECT THEM TO LITIGATION
Although we are currently unaware of any Year 2000 problems in our partner
companies' installed software, some of our partner companies are software
companies that may have sold software that is not Year 2000 compliant. The
failure by our companies to remedy any non-compliant software sold by them could
expose these companies to litigation.
RISKS RELATING TO THE OFFERING
WE MAY ISSUE SECURITIES WHICH MAY DILUTE YOUR OWNERSHIP INTEREST
In the future, we may issue securities to raise cash for acquisitions, and
we may also pay for interests in additional partner companies by using a
combination of cash and our common stock, or just our common stock. Any of these
events may dilute your ownership interest in us and have an adverse impact on
the price of our common stock. In addition, if we issue securities convertible
into our common stock the conversion of these securities may dilute your
ownership interest and have an adverse impact on the price of our common stock.
ANTI-TAKEOVER PROVISIONS AND OUR RIGHT TO ISSUE PREFERRED STOCK COULD MAKE A
THIRD-PARTY ACQUISITION OF US DIFFICULT
Our articles of incorporation provides that our board of directors may
issue preferred stock without shareholder approval and also provides for
supermajority voting requirements. We are also subject to the anti-takeover
statutes of the Pennsylvania Business Corporation Law. In addition, we have a
shareholder rights plan which has the effect of discouraging any person or group
from beneficially owning more than 15% of our outstanding common stock unless
our board has amended the plan or redeemed the rights. The issuance of preferred
stock, the existence of the shareholder rights plan and the supermajority voting
requirements and the operation of the anti-takeover statutes of the Pennsylvania
Business Corporation Law could make it more difficult for a third party to
acquire us without the approval of our board. The supermajority voting
requirements, the shareholder rights plan and the anti-takeover provisions of
the Pennsylvania Business Corporation Law are described in detail under the
caption "Description of Capital Stock" beginning on page 60 of this prospectus.
OUR COMMON STOCK PRICE IS HIGHLY VOLATILE
The market price for our common stock has been highly volatile and is
likely to continue to be highly volatile. The trading prices of many technology
and Internet-related company stocks, including ours, have experienced
significant price and volume fluctuations in recent months. These fluctuations
often have been unrelated or disproportionate to the operating performance of
these companies. Any negative change in the public's perception of the prospects
of the Internet or Internet companies could depress our stock price regardless
of our results.
The following factors will add to our common stock price's volatility:
- actual or anticipated variations in our quarterly results and those of
our partner companies;
- changes in the market valuations of our partner companies and other
Internet companies;
- conditions or trends in the Internet industry in general and the Internet
infrastructure industry in particular;
- negative changes in the public's perception of the prospects of Internet
infrastructure companies;
- changes in the size, form or rate of our acquisitions;
13
<PAGE> 17
- changes in our financial estimates and those of our partner companies by
securities analysts;
- new products or services offered by us, our partner companies and their
competitors;
- announcements by our partner companies and their competitors of
technological innovations;
- announcements by us or our partner companies or our competitors of
significant acquisitions, strategic partnerships or joint ventures;
- our capital commitments;
- additional sales of our securities;
- additions to or departures of our key personnel and key personnel of our
partner companies; and
- general economic conditions such as a recession, or interest rate or
currency rate fluctuations.
Many of these factors are beyond our control. These factors may decrease the
market price of our common stock, regardless of our operating performance. In
the past, securities class action litigation has often been brought against a
company following periods of volatility in the market price of its securities.
We may in the future be the target of similar litigation. Securities litigation
could result in substantial costs and divert management's attention and
resources, which could have a material adverse effect on our business, operating
results and financial condition.
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements within the meaning of
Section 27A of the Securities Act, and Section 21E of the Securities Exchange
Act. We have based these forward-looking statements on our current expectations
and projections about future events. These forward-looking statements are
subject to known and unknown risks, uncertainties and assumptions about us and
our partner companies, that may cause our actual results, levels of activity,
performance, or achievements to be materially different from any future results,
levels of activity, performance, or achievements expressed or implied by such
forward-looking statements. These factors are discussed in the "Risk Factors"
section beginning on page 6 of this prospectus, and include, among other things:
- development of the Internet and the infrastructure that supports it;
- our ability to identify trends in our markets and the infrastructure
markets of our partner companies and to offer new solutions that address
the changing needs of these markets;
- our ability to successfully execute our business model;
- our partner companies' ability to compete successfully against direct and
indirect competitors;
- our ability to acquire interests in additional companies;
- growth in demand for Internet infrastructure products and services; and
- changes in the market for securities of Internet companies in general and
for initial public offerings of Internet companies in particular.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "could," "would," "expect," "plan,"
"anticipate," "believe," "estimate," "continue" or the negative of such terms or
other similar expressions. All forward-looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirety by the
cautionary statements included in this prospectus. We undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise. In light of these risks,
uncertainties and assumptions, the forward-looking events discussed in this
prospectus might not occur.
14
<PAGE> 18
USE OF PROCEEDS
We estimate the net proceeds to us from the offering will be approximately
$478 million (approximately $550 million if the underwriters over-allotment
option is exercised in full), after deducting the underwriters' discount and the
other expenses of the offering payable by us. We expect to use the net proceeds
to continue to acquire equity interests in Internet infrastructure companies, to
acquire additional interests in current partner companies, to pay down any of
our future outstanding indebtedness under our revolving credit facilities, for
working capital, and other general corporate purposes. Pending our use of the
net proceeds, we plan to invest the net proceeds in interest-bearing investment
grade securities. We had no outstanding borrowings under our revolving credit
facilities as of March 17, 2000. Other than to repay any future borrowings under
our revolving credit facilities due to the funding of previous commitments or
otherwise, we currently have no specific plans as to the use of the net
proceeds, and we will have broad discretion in the use of the net proceeds.
DIVIDEND POLICY
We have never declared or paid cash dividends and currently do not
anticipate paying cash dividends in the future.
PRICE RANGE OF OUR COMMON STOCK
Our 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
for our common stock as reported on The New York Stock Exchange for the periods
indicated as adjusted, to reflect a 3-for-1 split of our common stock effective
as of March 13, 2000.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1998:
First Quarter............................................... $12.81 $10.04
Second Quarter.............................................. 15.13 11.54
Third Quarter............................................... 13.81 7.83
Fourth Quarter.............................................. 10.58 5.71
YEAR ENDED DECEMBER 31, 1999:
First Quarter............................................... 24.63 9.17
Second Quarter.............................................. 40.00 19.13
Third Quarter............................................... 25.50 15.85
Fourth Quarter.............................................. 61.81 22.63
YEAR ENDED DECEMBER 31, 2000:
First Quarter (through March 17, 2000)...................... 99.00 43.71
</TABLE>
On March 21, 2000, the closing price of our common stock on The New York
Stock Exchange Composite Tape was $90.50 per share. As of March 17, 2000, there
were 107,329,089 shares of our common stock outstanding. At March 17, 2000, we
had approximately 68,000 beneficial holders of our common stock.
15
<PAGE> 19
CAPITALIZATION
The following table sets forth our actual total capitalization as of
December 31, 1999 and our pro forma capitalization to adjust for (1) the sale of
2,181,819 shares of our common stock to Textron Inc., and (2) the sale of our
common stock pursuant to this offering and the application of the estimated net
proceeds of approximately $478 million from this offering.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------
ACTUAL PRO FORMA
-------- ----------
(IN THOUSANDS)
<S> <C> <C>
5% convertible subordinated notes due June 15, 2006......... $200,000 $ 200,000
Long-term debt.............................................. 14,532 14,532
Shareholders' equity:
Preferred Stock, $10.00 par value, 1,000,000 shares
authorized, none issued and outstanding -- actual and
pro forma.............................................. -- --
Common Stock, $0.10 par value; 500,000,000 shares
authorized; 104,749,317 shares issued and
outstanding -- actual, and 116,931,136 shares issued
and outstanding -- pro forma........................... 10,475 11,693
Additional paid-in capital................................ 133,969 710,851
Retained earnings......................................... 385,120 385,120
Accumulated other comprehensive income.................... 45,137 45,137
-------- ----------
Total shareholders' equity............................. 574,701 1,152,801
-------- ----------
Total capitalization................................. $789,233 1,367,333
======== ==========
</TABLE>
The table above excludes, as of March 17, 2000:
- 8,294,100 shares of common stock issuable upon the conversion of the
convertible subordinated notes issued in June 1999;
- 1,500,000 shares issuable upon the exercise of the underwriters
over-allotment options in connection with this offering;
- 7,464,201 shares issuable upon exercise of outstanding stock options with
a weighted average exercise price of $21.97 per share; and
- 6,198,750 shares underlying options reserved for future issuance under
our stock option plans; and
- 193,158 shares issued upon the exercise of stock options from January 1,
2000 to March 17, 2000; and
- 160,434 shares issued on February 15, 2000 upon the acquisition of the
remaining 20% interest in aligne.
- 45,000 shares issued on February 28, 2000 to a certain executive as a
restricted stock award.
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<PAGE> 20
SELECTED CONSOLIDATED FINANCIAL DATA
You should read the following selected consolidated financial data in
conjunction with our consolidated financial statements, including the notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this prospectus. The Consolidated
Statement of Operations Data for the years ended December 31, 1999, 1998 and
1997, and the Consolidated Balance Sheet Data at December 31, 1999 and 1998 have
been derived from Safeguard's consolidated financial statements which, together
with the notes thereto, have been audited by KPMG LLP, independent auditors, and
are included elsewhere in this prospectus. The Consolidated Statement of
Operations Data for the years ended December 31, 1996 and 1995, and the
Consolidated Balance Sheet Data at December 31, 1997, 1996 and 1995 have been
derived from Safeguard's consolidated financial statements, which, together with
the notes thereto, have been audited by KPMG LLP, independent auditors, and are
not included in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA AND
NUMBER OF PARTNER COMPANIES)
<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
NUMBER OF PARTNER COMPANIES.......... 37 26 24 25 22
</TABLE>
- ---------------
(a) Adjusted to reflect the 3-for-1 split of our common stock effective as of
March 13, 2000.
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<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of many factors,
including those set forth under "Risk Factors" and elsewhere in this prospectus.
The following discussion should be read in conjunction with our audited
Consolidated Financial Statements and related Notes thereto included elsewhere
in this prospectus.
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.
18
<PAGE> 22
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.
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 13%
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%
</TABLE>
19
<PAGE> 23
<TABLE>
<CAPTION>
PARTNER
COMPANY VOTING
SINCE OWNERSHIP
------- ---------
<S> <C> <C>
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 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.
20
<PAGE> 24
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.
21
<PAGE> 25
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>
22
<PAGE> 26
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.
23
<PAGE> 27
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
24
<PAGE> 28
SOTAS. The decrease in operating expenses in 1998 was primarily due to the sale
of Premier Solutions and Pioneer Metal Finishing in 1997.
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.
25
<PAGE> 29
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 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.
The proceeds of this offering, together with cash and cash equivalents at
December 31, 1999, availability under our bank credit facilities, 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, our current operating plan to acquire new partner companies 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 $142 million to various partner companies and
private equity funds, to be funded over the next several years.
26
<PAGE> 30
On March 15, 2000, we filed Registration Statement No. 333-32512 on Form
S-3 with the Securities and Exchange Commission to sell directly 7,915,150
shares of our common stock to certain strategic investors and institutional
investors. The Registration Statement has not yet been declared effective. The
proposed maximum aggregate offering price is $500,000,000. No assurance can be
given that the offering will be consummated at all or on the terms described in
such Registration Statement. The size of the offering may be increased or
decreased and the net proceeds therefrom would change accordingly.
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. 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.
27
<PAGE> 31
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 March 17, 2000, we funded $28 million of
commitments made prior to December 31, 1999. Additionally, from January 1, 2000
through March 17, 2000, we committed $250 million and funded $121 million to
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.
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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.
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.
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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.
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
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information and a broad range of 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 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.
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- 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 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.
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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 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.
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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 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;
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- identify the business metrics that will be applied by Safeguard and the
markets to measure their success; and
- 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
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.
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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.
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
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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.
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 the date of this prospectus, the following are our core
Internet infrastructure partner companies:
<TABLE>
<CAPTION>
SOFTWARE COMMUNICATIONS ESERVICES
-------- -------------- ---------
<S> <C> <C>
Arista Extant aligne
e-Profile Integrated Visions Cambridge Technology Partners
eMake NexTone Communications iMedium
fob.com Pac-West Telecomm Mi8
LifeF/X PrivaSeek OPUS360
RealTIME Media SOTAS TechSpace LLC
Sanchez Vitts Networks US Interactive
USDATA WebTelecom Zero to Five
Who? Vision
Wireless Online
</TABLE>
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<PAGE> 41
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 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>
<CAPTION>
% OWNED
COMPANY DESCRIPTION OF BUSINESS BY US
------- ----------------------- -------
<S> <C> <C>
Arista Knowledge Systems, A provider of web-based infrastructure technology 45%
Inc. ......................... which enables enterprises and web businesses to
(www.aristasys.com) manage, 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 25%(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.
</TABLE>
38
<PAGE> 42
<TABLE>
<CAPTION>
% OWNED
COMPANY DESCRIPTION OF BUSINESS BY US
------- ----------------------- -------
<S> <C> <C>
fob.com Inc. ................... A developer, builder and manager of business-to- 30%
(www.fob.com) business 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 13%
(www.pactitle.com) company is developing a "face" for the Internet
(OTC BB: LEFX.OB) through photo- realistic digital human images,
called "standins," that can be 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 43%
(www.realtimemedia.com) that uses 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 Associates, 25%
Inc. ......................... A global provider of comprehensive enterprise
(www.sanchez.com) banking software called PROFILE(R) for financial
(Nasdaq: SCAI) services organizations worldwide. The primary
module, called 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 38%
(www.usdata.com) software designed to help customers reduce
(Nasdaq: USDC) operating costs, shorten 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>
- ---------------
(a) This company is a wholly-owned subsidiary of an existing partner company.
Our ownership percentage reflects our ownership position in its parent.
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<PAGE> 43
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.
<TABLE>
<CAPTION>
% OWNED
COMPANY DESCRIPTION OF BUSINESS BY US
------- ----------------------- -------
<S> <C> <C>
Extant, Inc. ................... A global facilities-based provider of wholesale 15%
(www.extant.net) fiber 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, Inc. ....... An XL Vision company that provides network 49%
(www.integratedvisions.com) security solutions using biometric
authentication, initially to the 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 Communications Inc. .... A developer of an Internet-based system that 39%
(www.nextone.com) allows communications service providers to offer
voice-data integration services over broadband
connections in a simple 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 Telecomm, Inc. ........ An integrated communications provider committed 7%
(www.pacwest.com) to providing usage-intensive customers, including
(Nasdaq: PACW) Internet service providers, medium and small
businesses and enhanced 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.
</TABLE>
40
<PAGE> 44
<TABLE>
<CAPTION>
% OWNED
COMPANY DESCRIPTION OF BUSINESS BY US
------- ----------------------- -------
<S> <C> <C>
PrivaSeek, Inc. ................ A provider of permission marketing and privacy 31%
(www.privaseek.com) management 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 66%
(www.sotasinc.com) network monitoring and integrity testing
solutions that measure the 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.
Vitts Networks, Inc. ........... An integrated communications provider that offers 48%
(www.vitts.com) single 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 42%
(www.webtele.com) collaboration for Internet-based customer
contact. WebTelecom's Application Service
Provider (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.
</TABLE>
41
<PAGE> 45
<TABLE>
<CAPTION>
% OWNED
COMPANY DESCRIPTION OF BUSINESS BY US
------- ----------------------- -------
<S> <C> <C>
Who? Vision Systems, Inc. ...... An XL Vision company that is a provider of secure 29%
(www.whovision.com) identification technology that enables
individuals to 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, Inc. .......... A provider of smart antenna solutions for 45%
(www.wireless-online.com) wireless data networks worldwide. The company's
solutions combine advance digital signal
processing and radio frequency 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.
<TABLE>
<CAPTION>
% OWNED
COMPANY DESCRIPTION OF BUSINESS BY US
------- ----------------------- -------
<S> <C> <C>
aligne incorporated............. An information technology management consulting 100%
(www.aligne.com) firm that 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 Technology Partners 16%
(Massachusetts), Inc. ........ A global provider of Internet professional
(www.ctp.com) services, management consulting and system
(Nasdaq: CATP) integration services to transform its clients into
electronic businesses. Cambridge believes it
combines a deep understanding of electronic
commerce issues with integrated, end-to-end
services and a record of shared risk and rapid,
guaranteed delivery.
</TABLE>
42
<PAGE> 46
<TABLE>
<CAPTION>
% OWNED
COMPANY DESCRIPTION OF BUSINESS BY US
------- ----------------------- -------
<S> <C> <C>
iMedium, Inc. .................. A developer of an interactive visual platform for 31%
(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 38%
(www.mi8.com) leading 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, helpdesk services, training and lease
financing.
OPUS360 Corporation............. A provider of an integrated, web-based solution for 8%
(www.opus360.com) putting people and projects together across the
labor supply chain. 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 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 49%
(www.techspace.com) Internet-based 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 13%
(www.usinteractive.com) helping companies take advantage of the business
(Nasdaq: USIT) opportunities presented by the Internet. The
company provides integrated 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.
</TABLE>
43
<PAGE> 47
<TABLE>
<CAPTION>
% OWNED
COMPANY DESCRIPTION OF BUSINESS BY US
------- ----------------------- -------
<S> <C> <C>
Zero to Five LLC ............... A marketing and communications consulting firm 33%(b)
(www.zeroto5ive.com) focused on supporting early-stage technology
companies to develop their early brand and
communications strategy during the critical
transition from business plan to market launch.
</TABLE>
- ---------------
(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 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 at approximately 14% 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
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<PAGE> 48
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 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 investment
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
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entrepreneurs' interest in accessing public markets with the interests of our
own shareholders is the Safeguard Subscription Program.
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.
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 26 core Internet
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infrastructure partner companies described in the preceding tables has grown
from $490 million in 1997 to $736 million in 1998 and to $869 million for 1999.
This data excludes revenues of our 19 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
prospectus.
GOVERNMENT REGULATIONS AND LEGAL UNCERTAINTIES
As of March 17, 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 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
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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.
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.
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<PAGE> 52
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.
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.
FACILITIES
We own the office park in which our corporate headquarters and
administrative offices are located in Wayne, Pennsylvania. Our headquarters
building is subject to a $3.6 million mortgage bearing interest at 9.75% per
annum, 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.
EMPLOYEES
As of March 17, 2000, excluding our partner companies, we had approximately
80 employees. We consider our relationships with our employees to be good. None
of our employees are covered by collective bargaining agreements.
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<PAGE> 53
LEGAL MATTERS
We are not a party to any material legal proceedings. We have informed the
staff of the Federal Trade Commission (the"FTC") of our inadvertent failure to
file certain Premerger Notification Forms under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended in connection with acquisitions of stock of
certain partner companies. The FTC has the right to seek a material fine in
connection with the failure to file timely Forms for these transactions, but has
not informed us as to whether they intend to seek any fine or other penalty from
us. 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 our ultimate
liability in connection with this matter. However, we do not believe any such
ultimate liability would have a material adverse effect on us.
50
<PAGE> 54
MANAGEMENT
EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS
Our executive officers, key employees and directors, their ages and their
positions for the last five years are as follows:
<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 1953
Executive Officer
Harry Wallaesa.................... 49 President, Chief Operating Officer 1999
and Director
Jerry L. Johnson.................. 52 Executive Vice President 1995
Stephen J. Andriole, Ph.D......... 50 Senior Vice President and Chief 1997
Technology Officer
Gerald A. Blitstein............... 40 Senior Vice President and Chief 2000
Financial 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 1991
Counsel and Secretary
Robert E. Keith................... 58 Vice Chairman of the Board 1996
J. Edward Coleman................. 48 Chief Executive Officer of 1999
CompuCom
Thomas C. Lynch................... 57 President and Chief Operating 1998
Officer of 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
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<PAGE> 55
aligne incorporated, which he co-founded in 1996, until Safeguard acquired a
majority of the company in March 1996. 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 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.
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.
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<PAGE> 56
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 elected 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.
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
53
<PAGE> 57
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 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.
54
<PAGE> 58
EXECUTIVE COMPENSATION
The following table provides summary information concerning the
compensation earned by our chief executive officer and other executive officers
employed by us during the fiscal year ended December 31, 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-----------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------------ ----------------------- ---------
SECURITIES LONG
RESTRICTED UNDERLYING TERM
OTHER STOCK OPTIONS/ INCENTIVE ALL OTHER
SALARY BONUS COMPENSATION AWARD(S) SARS PAYOUTS COMPENSATION
YEAR ($)(1) ($)(2) ($)(3) ($)(4) (#) ($)(5) ($)(6)
---- -------- ---------- ------------ ---------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Warren V. Musser............ 1999 $413,731 $ 827,500 $53,920 0 0 0 $12,000
Chairman of the Board and 1998 305,000 305,000 60,193 0 0 0 12,000
Chief Executive Officer 1997 290,000 290,000 63,004 0 0 0 12,000
Harry Wallaesa.............. 1999 $330,770 $1,386,176 -- 0 1,590,000 0 $10,970
President, Chief Operating 1998 -- -- -- -- -- -- --
Officer and Director(7) 1997 -- -- -- -- -- -- --
Stephen J. Andriole,
Ph.D...................... 1999 $260,577 $ 730,151 $ -- 0 90,000 $321,179 $20,746
Senior Vice President and 1998 -- -- -- -- -- -- --
Chief Technology Officer(7) 1997 -- -- -- -- -- -- --
John K. Halvey.............. 1999 $150,000 $ 635,713 -- 0 210,000 -- $ 8,398
Senior Vice President(7) 1998 -- -- -- -- -- -- --
1997 -- -- -- -- -- -- --
Jerry L. Johnson............ 1999 $283,462 $ 416,469 -- 60,000 $905,722 $19,896
Executive Vice President 1998 240,000 182,000 -- 0 60,000 38,258 19,895
1997 210,000 169,760 -- 0 90,000 0 19,620
James A. Ounsworth.......... 1999 $267,115 $ 610,498 -- 0 60,000 $905,722 $22,562
Senior Vice President,
General 1998 221,000 154,700 -- 0 60,000 38,258 33,621
Counsel and Secretary 1997 210,000 147,000 -- 0 60,000 0 23,009
</TABLE>
- ---------------
(1) Includes compensation that has been deferred by the named officers under
voluntary savings plans.
(2) Includes discretionary payouts under our Long-Term Incentive Plan which were
made to each of the named executive officers with the exception of Mr.
Musser.
(3) For Mr. Musser, this amount includes personal use of our plane in all years.
Mr. Musser's use of the plane increased starting in 1997 following a
determination by the board of directors requiring him to travel on the
company plane instead of commercial aircraft whenever possible for safety
reasons.
(4) In May 1999, we released the shares of restricted stock of Internet Capital
Group, Inc. previously awarded to Mr. Johnson and Mr. Ounsworth upon the
satisfaction of the conditions of the grant.
(5) The 1999 payout represents the value of shares of Internet Capital Group,
Inc., U.S. Interactive, Inc., and Pac-West Telecomm, Inc. distributed to
Messrs. Andriole, Johnson and Ounsworth based on their limited partnership
interests in Safeguard 98 Capital L.P.
(6) For 1999, all other compensation includes the following amounts.
<TABLE>
<CAPTION>
DEFINED CONTRIBUTION COMPANY MATCH LIFE INSURANCE
NAME PENSION PLAN VOLUNTARY SAVINGS PLAN PREMIUMS PAID
---- -------------------- ---------------------- --------------
<S> <C> <C> <C>
Warren V. Musser........................ $7,200 $4,800 $ 0
Harry Wallaesa.......................... $7,200 $ -- $ 3,770
Stephen J. Andriole..................... $7,200 $4,800 $ 8,746
John K. Halvey.......................... $6,750 $ -- $ 1,648
Jerry L. Johnson........................ $7,200 $4,800 $ 7,896
James A. Ounsworth...................... $7,200 $4,800 $10,562
</TABLE>
(7) Messrs. Wallaesa, Andriole and Halvey became executive officers in March
1999, January 1999 and June 1999, respectively.
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<PAGE> 59
SAFEGUARD SCIENTIFICS, INC. 1999 EQUITY COMPENSATION PLAN
The Safeguard Scientifics, Inc. 1999 Equity Compensation Plan authorizes
the issuance of up to 9,000,000 shares of our common stock, subject to
adjustment as discussed below. The maximum number of shares that may be granted
to any individual during any calendar year is 1,500,000. If options or stock
appreciation rights granted under the plan terminate, expire or are canceled,
forfeited, exchanged or surrendered without being exercised, or if a restricted
stock award or performance unit is forfeited, those shares will again be
available for purposes of the 1999 Plan. The 1999 Plan is not qualified under
section 401(a) of the Internal Revenue Code and is not subject to the provisions
of the Employee Retirement Income Security Act.
OPTION GRANTS DURING THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF
STOCK PRICE APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM(1)
----------------------------------------------------- ------------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS EXERCISE
UNDERLYING GRANTED TO OR BASE
OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED(#)(2) FISCAL YEAR ($/SH)(3) DATE 5%($) 10%($)
- ---- ------------- ------------ --------- ---------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Warren V. Musser......... 0 0% -- -- -- --
Harry Wallaesa........... 1,500,000(4) 37.65% $12.3542 3/1/07 $8,847,870 $21,192,187
90,000 2.26% 45.4687 12/15/07 1,953,835 4,679,775
Stephen J. Andriole,
Ph.D................... 30,000 .75% $26.3437 4/15/07 $ 337,338 $ 903,791
60,000 1.51% 45.4687 12/15/07 1,302,557 3,119,850
John K. Halvey........... 150,000 3.76% $20.0938 6/15/07 $1,439,084 $ 3,446,857
60,000 1.51% 45.4687 12/15/07 1,302,557 3,119,850
Jerry L. Johnson......... 60,000 1.51% $45.4687 12/15/07 $1,302,557 $ 3,119,850
James A. Ounsworth....... 60,000 1.51% $45.4687 12/15/07 $1,302,557 $ 3,119,850
</TABLE>
- ---------------
(1) These values assume that the shares appreciate at the compounded annual rate
shown from the grant date until the end of the option term. These values are
not estimates of future stock price growth of Safeguard. Executives will not
benefit unless our common stock price increases above the stock option
exercise price.
(2) The options have an eight-year term and vest 25% each year commencing on the
first anniversary of the grant. If an executive retires on or after his 65th
birthday, the options will become fully vested on his retirement date.
Certain of the options reported in the above table may be exercised at any
time. If an executive exercises unvested options and his employment is
terminated, we may repurchase the unvested shares at the exercise price. The
option exercise price may be paid in cash, by delivery of previously
acquired shares, subject to certain conditions, same day sales (that is, a
cashless exercise through a broker) or such other method as the compensation
committee may approve. The compensation committee may modify the terms of
outstanding options, including acceleration of the exercise date.
(3) All options have an exercise price equal to the fair market value of the
shares subject to each option on the grant date.
(4) This includes 300,000 options granted outside of existing option plans to
Mr. Wallaesa in 1999 by the Company.
56
<PAGE> 60
The following table sets forth information about option exercises by each
of the officers named in the summary compensation table.
YEAR-END STOCK OPTION VALUES
DECEMBER 31, 1999
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT FISCAL OPTIONS/SARS AT FISCAL
SHARES YEAR-END(#) YEAR-END($)(1)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Warren V. Musser.......... 0 -- 0 0 -- --
Harry Wallaesa............ 0 -- 0 1,590,000 $ 0 $63,766,464
Stephen J. Andriole,
Ph.D.................... 37,500 $ 462,952 45,000 187,500 $ 1,981,404 $ 5,675,622
John K. Halvey............ 0 -- 0 210,000 $ 0 $ 5,667,801
Jerry L. Johnson.......... 88,152 $1,847,211 229,620 150,000 $10,651,936 $ 4,537,812
James A. Ounsworth........ 240,000 $4,518,012 465,000 135,000 $23,501,028 $ 3,885,000
</TABLE>
- ---------------
(1) Value is calculated using the difference between the option exercise price
and the year-end stock price, multiplied by the number of shares subject to
an option. The year-end stock price was $54.3333 per share.
SAFEGUARD SCIENTIFICS, INC. LONG-TERM INCENTIVE PLAN
Beginning in 1997, we established one or more limited partnerships to hold
all acquisitions approved and made by Safeguard during any given year. Under our
long-term incentive plan, participants may purchase interests in these limited
partnerships. We allocated up to a 10% interest for purchase by the participants
for 1997 and 1998 and up to a 12.5% interest for 1999. Safeguard Scientifics,
through a wholly-owned subsidiary acting as the general partner of each
partnership, retains approximately a 90% interest in each partnership for 1997
and 1998 and approximately an 87.5% interest for each partnership in 1999.
Partnership interests vest 25% each year, generally starting on July 1 in the
year following the acquisition. The compensation committee has the authority to
accelerate vesting. A partnership will generally distribute the securities it
holds to its partners after five to ten years, but may distribute securities
earlier if the company has completed an initial public offering or has been
sold. We must receive two times the cost of the equity securities of a company
and repayment of any loans to the company before the limited partners receive
any of the securities of the company. If that threshold is met, the limited
partners will receive distributions of approximately 10% to 12.5% of the equity
securities of the company. The percentages allocated during 1999 to each named
executive officer in each partnership are included in the following table.
LONG-TERM INCENTIVE PLAN
<TABLE>
<CAPTION>
PERFORMANCE OR
OTHER PERIOD
UNTIL
PERCENTAGE MATURATION
NAME/PARTNERSHIP INTEREST OR PAYOUT
- ---------------- ---------- ---------------
<S> <C> <C>
Warren V. Musser 0%(1) --
Harry Wallaesa
Safeguard 99 Capital LP 1.1250% 5 years
Safeguard Partners Capital II L.P. 1.1250% 10 years
Stephen J. Andriole, Ph.D.
Safeguard 99 Capital LP 0.8310% 5 years
Safeguard Partners Capital II L.P. 0.8310% 10 years
</TABLE>
57
<PAGE> 61
<TABLE>
<CAPTION>
PERFORMANCE OR
OTHER PERIOD
UNTIL
PERCENTAGE MATURATION
NAME/PARTNERSHIP INTEREST OR PAYOUT
- ---------------- ---------- ---------------
<S> <C> <C>
John K. Halvey
Safeguard 99 Capital LP(2)................................ 0.5000% 5 years
Safeguard Partners Capital II L.P.(2)..................... 0.5000% 10 years
Jerry L. Johnson
Safeguard 99 Capital LP................................... 0.8310% 5 years
Safeguard Partners Capital II L.P......................... 0.8310% 10 years
James A. Ounsworth
Safeguard 99 Capital LP................................... 0.8310% 5 years
Safeguard Partners Capital II L.P......................... 0.8310% 10 years
</TABLE>
- ---------------
(1) Mr. Musser did not participate in the plan prior to the year 2000, but will
participate in 2000 and thereafter.
(2) The percentage allocable to Mr. Halvey permits him to participate only in
those acquisitions approved and made by Safeguard on or after June 1, 1999.
58
<PAGE> 62
CERTAIN SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of our common stock as of March 17, 2000 by:
- each person (or group of affiliated persons) who is known by us to own
more than five percent of the outstanding shares of our common stock;
- each of our directors and our executive officers named in the summary
compensation table; and
- all of our executive officers and directors as a group.
Beneficial ownership is determined in accordance with the rules of the SEC
and generally includes voting or investment power with respect to securities.
Unless otherwise noted, we believe that all persons named in the table have sole
voting and sole investment power with respect to all shares beneficially owned
by them. All figures include shares of our common stock issuable upon exercise
of options or warrants exercisable within 60 days of March 17, 2000. These
options and warrants are deemed to be outstanding and to be beneficially owned
by the person holding them for the purpose of computing the percentage ownership
of that person but are not treated as outstanding for the purpose of computing
the percentage ownership of any other person.
<TABLE>
<CAPTION>
PERCENT
NUMBER OF BENEFICIALLY OWNED
SHARES ----------------------------
NAME AND ADDRESS OF 5% BENEFICIAL BENEFICIALLY BEFORE AFTER
OWNERS, DIRECTORS AND EXECUTIVE OFFICERS OWNED THE OFFERING THE OFFERING
- ---------------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Warren V. Musser........................................ 9,367,343(1) 8.5%
800 The Safeguard Building
435 Devon Park Drive
Wayne, PA 19087
Robert E. Keith, Jr. ................................... 220,077(2) *
Judith Areen............................................ 26,550 *
Vincent G. Bell, Jr. ................................... 1,455,579(3) 1.4%
Steven J. Andriole...................................... 88,791 *
Walter W. Buckley, III.................................. 18,000 *
Michael J. Emmi......................................... 10,875 *
Robert A. Fox........................................... 250,875(4) *
John K. Halvey.......................................... 600 *
Jerry L. Johnson........................................ 282,582 *
Jack L. Messman......................................... 160,875 *
James A. Ounsworth...................................... 803,115 *
Russell E. Palmer....................................... 89,610 *
John W. Poduska, Sr. ................................... 547,875 *
Heinz C. Schimmelbusch.................................. 12,513 *
Hubert J.P. Schoemaker.................................. 337,370 *
Harry Wallaesa.......................................... 926,898 *
Carl J. Yankowski....................................... -- --
All executive officers and directors as a group (23
persons).............................................. 14,460,549 13.3%
</TABLE>
- ---------------
* Less than 1%.
(1) Includes 233,100 shares held by a charitable foundation established by Mr.
Musser and 115,500 shares held by two trusts of which Mr. Musser is a
co-trustee.
(2) Includes 900 shares held by his spouse. Mr. Keith disclaims beneficial
ownership of the shares held by his spouse.
(3) Includes 337,704 shares held by a charitable foundation established by Mr.
Bell.
(4) Includes 15,000 shares held by a charitable foundation established by Mr.
Fox.
59
<PAGE> 63
DESCRIPTION OF CAPITAL STOCK
The following summarizes the terms of our capital stock.
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
- 500,000,000 shares of common stock, par value $.10, authorized and
107,329,089 shares outstanding as of March 17, 2000 (after adjustment for
a 3-for-1 split of our common stock effective as of March 13, 2000); and
- 1,000,000 shares of preferred stock, par value $10.00, authorized,
150,000 shares of which have been designated Series A Junior
Participating Preferred Stock and reserved for issuance in connection
with our shareholders' rights plan.
COMMON STOCK
Voting
In elections to the Board:
- Cumulative voting rights -- shareholders are entitled to cast that number
of votes equal to the number of shares that they own multiplied by the
number of directors to be elected.
On all other matters except as described under "Supermajority voting
requirements" below:
- One vote for each share held of record; and
- Action taken by the vote of majority of votes cast.
Dividends
- Subject to the rights of holders of preferred stock, entitled to receive
ratably declared dividends; and
- The board may only declare dividends out of legally available funds.
Additional Rights
- Subject to the rights of holders of preferred stock, entitled to receive
ratably net assets which are available after payment of our debts, upon
our liquidation, dissolution or winding;
- No redemption rights;
- No sinking fund rights; and
- No conversion rights.
The rights and preferences of our common shareholders are subject to the rights
of any series of preferred stock we may issue.
PREFERRED STOCK
By resolution of the board, we may, without any further vote by our
shareholders, authorize and issue an aggregate of 850,000 additional shares of
preferred stock. The preferred stock may be issued in one or more classes or
series. With respect to each class or series, the board may determine the
designation and the number of shares, voting rights, preferences, limitations
and special rights, including any dividend rights, conversion rights, redemption
rights and liquidation preferences. Because of the rights that may be granted,
the issuance of preferred stock may delay or prevent a change of control. In
connection with our shareholders' rights plan, we have designated a series of
preferred stock as Series A Junior Participating Preferred Stock. See
"Shareholders' Rights Plan" on page 62 of this Prospectus.
60
<PAGE> 64
SUPERMAJORITY VOTING REQUIREMENTS
The vote by the holders of 80% of the voting power of all shares of stock
entitled to vote in the election of directors is required for any of the
following actions:
- the merger or consolidation of Safeguard Scientifics or any subsidiary of
Safeguard Scientifics;
- the sale or other disposition of substantially all of our or any our
subsidiary's assets; or
- the sale or lease of our assets or any assets of any of our subsidiaries
if:
- the assets have a fair market value in excess of $2,000,000; and
- the other party owns at least 5% of any class of capital stock of
Safeguard Scientifics.
This 80% voting requirement, however, is not applicable in the following
circumstances:
- our board approved the agreement relating to the transaction prior to the
time the other party acquired its 5% interest; or
- our board, acting, prior to the time the other party acquired its 5%
interest, approved the transaction.
This 80% voting requirement can only be amended or repealed with the
approval by the vote of the holders of 80% of the voting power of all shares of
stock entitled to vote in the election of directors.
PENNSYLVANIA ANTI-TAKEOVER LAWS
The Pennsylvania corporate law contains provisions applicable to publicly
held Pennsylvania corporations that may be deemed to have an anti-takeover
effect. Some of these provisions which are applicable to Safeguard are described
below.
Under Section 1715 of the Pennsylvania corporate law, directors of the
corporation are not required to regard the interests of the shareholders as
being dominant or controlling in considering the best interests of the
corporation. The directors may consider, to the extent they deem appropriate,
such factors, including:
- the effects of any action upon any group affected by such actions
including shareholders, employees, suppliers, customers and creditors of
the corporation and upon communities in which offices or other
establishments of the corporation are located;
- the short term and long term interests of the corporation, including
benefits that may accrue to the corporation from its long term plans and
the possibility that these interests may be best served by the continued
independence of the corporation;
- the resources, intent and conduct of any person seeking to acquire
control of the corporation; and
- all other pertinent factors.
Section 1715 further provides that any act of the board of directors, a
committee of the board or an individual director relating to or affecting an
acquisition or potential or proposed acquisition of control to which a majority
of disinterested directors have assented will be presumed to satisfy the
standard of care set forth in the Pennsylvania corporate law, unless it is
proven by clear and convincing evidence that the disinterested directors did not
consent to such act in good faith after reasonable investigation. As a result of
this and the other provisions of the Pennsylvania corporate law, directors are
provided with broad discretion with respect to actions that may be taken in
response to acquisitions or proposed acquisitions of corporate control.
Chapter 25, Subchapter F of the Pennsylvania corporate law is designed to
regulate certain business combinations between most publicly traded Pennsylvania
corporations and interested shareholders. In
61
<PAGE> 65
general, Subchapter F prohibits the consummation of enumerated business
combination transactions during a five year moratorium period. The moratorium
period does not apply to:
- business combinations with persons who became interested shareholders
with the approval of the board of directors;
- business combinations that were approved prior to the date on which the
shareholder became an interested shareholder;
- business combinations approved by a majority of disinterested
shareholders at a meeting at least three months after the interested
shareholder acquires at least 80% of the outstanding voting stock if the
consideration paid to other holders of our outstanding securities
satisfies fair price requirements set forth in Subchapter F of the
Pennsylvania corporate law; and
- business combinations approved by all of the holders of the outstanding
shares.
The moratorium period runs from the date on which the interested
shareholder becomes an interested shareholder. Generally a shareholder becomes
an interested shareholder the date the shareholder first acquires beneficial
ownership of 20% or more of our voting shares. After the moratorium period, the
corporation can undertake a business combination with an interested shareholder
only upon approval of disinterested shareholders holding a majority of the
voting shares or in a transaction approved by shareholders that satisfies the
fair price provisions referred to above.
Section 1715 and Subchapter F may discourage open market purchases of our
common stock or a nonnegotiated tender or exchange offer for our common stock of
a corporation and, accordingly, may be considered disadvantageous by a
shareholder who would desire to participate in any such transactions. In
addition, Section 1715 and Subchapter F may have a depressive effect on the
price of our common stock.
SHAREHOLDERS' RIGHTS PLAN
We have a shareholders' rights plan. Under the plan each shareholder of
record on March 24, 2000 received the right to purchase 1/1000 of a share of our
Series A Junior Participating Preferred Stock at the rate of one right for each
share of our common stock held as of the close of business on March 24, 2000.
Each 1/1000 of a share of our Series A Junior Participating Preferred Stock is
designed to be equivalent in voting and dividend rights to one share of our
common stock. The rights will be exercisable only if a person or group acquires
beneficial ownership of 15% or more of our common stock or commences a tender or
exchange offer that would result in such a person or group owning 15% or more of
our common stock. If the rights do become exercisable, our 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 our
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 Safeguard 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.
Although our shareholders' rights plan is designated to protect shareholder
interest if we are confronted with coercive or unfair takeover tactics, it may
have a depressive effect on the price of our common stock or discourage or
prevent takeover proposals which a holder of common stock may consider
desirable.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar with respect to our common stock is
ChaseMellon Shareholder Services, L.L.C.
62
<PAGE> 66
NOTICE TO CANADIAN INVESTORS
RESALE RESTRICTIONS
The distribution of our common stock in Canada is being made on a private
placement basis. Accordingly, any resale of our common stock must be made in
accordance with an exemption from the registration and prospectus requirements
of applicable securities laws. Purchasers of our common stock are advised to
seek legal advice prior to any resale of our common stock.
REPRESENTATION BY PURCHASERS
Confirmations of the acceptance of offers to purchase our common stock will
be sent to purchasers in Canada who have not withdrawn their offers to purchase
prior to the issuance of such confirmations. Each purchaser who receives a
purchase confirmation will, by the purchaser's receipt thereof, be deemed to
represent to Safeguard Scientifics and the dealer from whom such purchase
confirmation is received that such purchaser is entitled under applicable
provincial securities laws to purchase our common stock without the benefit of a
prospectus qualified under such securities laws.
RIGHTS OF ACTION (ONTARIO PURCHASERS ONLY)
Ontario. Our common stock being offered are those of a foreign issuer and
Ontario purchasers will not receive the contractual right of action prescribed
by section 32 of the Regulation under the Securities Act (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available, including
common law rights of action for damages or rescission or rights of action under
the civil liability provisions of the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of Safeguard Scientifics' directors and officers and the experts named
herein may be located outside Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon
Safeguard Scientifics or such persons. All or a substantial portion of our
assets and such persons may be located outside of Canada and, as a result, it
may not be possible to satisfy a judgment against us or such persons in Canada
or to enforce a judgment obtained in Canadian courts against us or such persons
outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of our common stock to whom the Securities Act (British
Columbia) applies is advised that it is required to file with the British
Columbia Securities Commission a report within 10 days of the sale of any of our
common stock acquired by it in this offering. Such report must be filed in the
form attached to the British Columbia Securities Commission Blanket Order BOR
#95/17, a copy of which may be obtained from us. Only one such report must be
filed in respect of the same date and under the same prospectus exemption.
63
<PAGE> 67
UNDERWRITING
GENERAL
We intend to offer our common stock in the U.S. and Canada through a number
of underwriters. Merrill Lynch, Pierce, Fenner & Smith Incorporated, Deutsche
Bank Securities, Inc., Lehman Brothers Inc., Prudential Securities Incorporated,
J.P. Morgan Securities Inc., and Adams, Harkness & Hill, Inc. are acting as
representatives of each of the underwriters. Subject to the terms and conditions
set forth in the purchase agreement among us and the underwriters, we have
agreed to sell to each of the underwriters, and each of the underwriters,
severally and not jointly, has agreed to purchase from us the number of shares
of our common stock set forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- ------------------------------------------------------------ ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith Incorporated..........
Deutsche Bank Securities Inc. ..............................
Lehman Brothers Inc. .......................................
Prudential Securities Incorporated..........................
J.P. Morgan Securities Inc..................................
Adams, Harkness & Hill, Inc.................................
--------
Total..........................................
========
</TABLE>
In the purchase agreement, the several underwriters have agreed, subject to
the terms and conditions set forth therein, to purchase all of the shares of
common stock being sold under the terms of the purchase agreement if any of the
shares of common stock being sold under the purchase agreement are purchased. In
the event of a default by an underwriter, the purchase agreement provides that,
in certain circumstances, the purchase commitments of the nondefaulting
underwriters may be increased or the purchase agreement may be terminated.
We have agreed to indemnify the underwriters against some liabilities,
including liabilities under the Securities Act, or to contribute to payments
that the underwriters may be required to make in respect to those liabilities.
The shares of common stock are being offered by the several underwriters,
subject to prior sales, when, as and if issued to and accepted by them, subject
to approval of certain legal matters by counsel for the underwriters and certain
other conditions. The underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part.
COMMISSIONS AND DISCOUNTS
The representatives have advised us that they propose initially to offer
the shares of our common stock to the public at the public offering price set
forth on the cover page of this prospectus, and to certain dealers at such price
less a concession not in excess of $ per share of common stock. The
underwriters may allow, and such dealers may reallow, a discount not in excess
of $ per share of common stock on sales to certain other dealers.
The following table shows the per share and total public offering price,
underwriting discount to be paid by us to the underwriters and the proceeds
before expenses to us. This information is presented assuming either no exercise
or full exercise by the underwriters of their over-allotment options.
<TABLE>
<CAPTION>
PER SHARE WITHOUT OPTION WITH OPTION
--------- -------------- -----------
<S> <C> <C> <C>
Public offering price.......................... $ $ $
Underwriting discount.......................... $ $ $
Proceeds, before expenses, to Safeguard
Scientifics, Inc. ........................... $ $ $
</TABLE>
64
<PAGE> 68
OVER-ALLOTMENT OPTION
We have granted an option to the underwriters, exercisable for 30 days
after the date of this prospectus, to purchase up to an aggregate of 1,500,000
additional shares of common stock at the public offering price set forth on the
cover page of this prospectus, less the underwriting discount. The underwriters
may exercise this option solely to cover over-allotments, if any, made on the
sale of the common stock offered hereby. To the extent that the underwriters
exercise this option, each underwriter will be obligated, subject to certain
conditions, to purchase a number of additional shares of common stock
proportionate to such underwriter's initial amount reflected in the foregoing
table.
NO SALES OF SIMILAR SECURITIES
We, and our executive officers and directors have agreed, with some
exceptions, without the prior written consent of Merrill Lynch on behalf of the
underwriters, not to directly or indirectly:
- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant for the sale of, or otherwise dispose of or transfer any
shares of our common stock, or securities convertible into or
exchangeable or exercisable for our common stock, whether now owned or
later acquired by the person executing the agreement or with respect to
which the person executing the agreement has or later acquires the power
of disposition, or file a registration statement under the Securities Act
relating to any of the foregoing, except for any registration statement
on Forms S-4 or S-8 or any successor form or other registration statement
relating to shares of our common stock issued in connection with an
acquisition of an entity or business or other business combination, or
shares of our common stock issued in connection with stock option or
other employee benefit plans; or
- enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of our common stock, whether
any such swap or transaction is to be settled by delivery of our common
stock, or other securities, in cash or otherwise.
These restrictions may apply for 90 days.
PRICE STABILIZATION AND SHORT POSITIONS
Until the distribution of our common stock is completed, rules of the SEC
may limit the ability of the underwriters and certain selling group members to
bid for and purchase our common stock. As an exception to these rules, the
representatives are permitted to engage in certain transactions that stabilize
the price of our common stock. Such transactions consist of bids or purchases
for the purpose of pegging, fixing or maintaining the price of our common stock.
If the underwriters create a short position in our common stock in
connection with the offering, that is, if they sell more shares of common stock
than are set forth on the cover page of this prospectus, the representatives may
reduce that short position by purchasing common stock in the open market. The
representatives may also elect to reduce any short position by exercising all or
part of the over-allotment option described above. Purchases of our common stock
to stabilize its price or to reduce a short position may cause the price of our
common stock to be higher than it might be in the absence of such purchases.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of our common stock. In addition, neither
we nor any of the underwriters makes any representation that the representatives
or the lead managers will engage in such transactions or that such transactions,
once commenced, will not be discontinued without notice.
65
<PAGE> 69
LEGAL MATTERS
The validity of our common stock offered hereby will be passed upon for us
by Morgan, Lewis & Bockius LLP, Philadelphia, Pennsylvania. Certain legal and
regulatory matters in connection with the offering will be passed upon for the
underwriters by Davis Polk & Wardwell, New York, New York. Davis Polk & Wardwell
is also acting as special Investment Company Act counsel to us and the
underwriters. A lawyer at Davis Polk & Wardwell participating in these matters
beneficially owns 1,500 shares of our common stock.
EXPERTS
The consolidated financial statements and schedules of Safeguard
Scientifics, Inc. as of December 31, 1999 and 1998 and for each of the years in
the three year period ended December 31, 1999 have been included herein and
incorporated by reference herein in reliance upon the reports of KPMG LLP,
independent certified public accountants, appearing elsewhere herein, and
incorporated by reference herein, and upon the authority of said firm as experts
in accounting and auditing.
The audited 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, not separately presented in this
prospectus, have been audited by PricewaterhouseCoopers LLP, independent
accountants, whose report thereon appears herein. Such financial statements, to
the extent they have been included in the financial statements of Safeguard
Scientifics, Inc., have been so included in reliance on the report of such
independent accountants given on the authority of said firm as experts in
auditing and accounting.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We are subject to the informational requirements of the Securities Exchange
Act and we file reports, proxy and information statements and other information
with the Commission. You may read and copy all or any portion of the reports,
proxy and information statements or other information we file at the
Commission's principal office in Washington, D.C., and copies of all or any part
thereof may be obtained from the Public Reference Section of the Commission, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional
offices located at Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and at 7 World Trade Center, 13th Floor, New York, New
York 10048 after payment of fees prescribed by the Commission. Please call the
Commission at 1-800-SEC-0330 for further information on operation of the public
reference rooms. The Commission also maintains a World Wide Web site which
provides online access to reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission
at the address http://www.sec.gov.
We have filed with the Commission a Registration Statement on Form S-3
under the Securities Act with respect to the common stock to be sold in this
offering. This prospectus does not contain all of the information set forth in
the registration statement and the exhibits to the registration statement. For
further information with respect to Safeguard Scientifics and our common stock
offered hereby, reference is made to the registration statement and the exhibits
filed as a part of the registration statement. Statements contained in this
prospectus concerning the contents of any contract or any other document that
has been filed as an exhibit to the registration statement are not necessarily
complete; reference is made in each instance to the copy of such contract or any
other document filed as an exhibit to the registration statement. Each such
statement is qualified in all respects by such reference to such exhibit. The
registration statement, including exhibits thereto, may be inspected without
charge at the locations described above, or obtained upon payment of fees
prescribed by the Commission.
The SEC allows us to "incorporate by reference" information into this
prospectus, which means that we can disclose important information to you by
referring you to another document filed separately with the SEC. The information
incorporated by reference is deemed to be part of this prospectus, except for
any information superseded by information in this prospectus. This prospectus
incorporated by reference the documents set forth below that we have previously
filed with the SEC. These documents contain important information about us, our
business and our finances.
66
<PAGE> 70
The documents that we are incorporating by reference are:
- Our Annual Report on Form 10-K for the year ended December 31, 1999, as
amended;
- Our Current Reports on Form 8-K, dated February 29, 2000 and May 25,
1999, as amended.
Any documents which we file pursuant to Sections 13(a), 13(c), 14 or 15(d)
of the Exchange Act after the date of this prospectus but before the end of any
offering of securities made under this prospectus will also be considered to be
incorporated by reference.
If you request, either orally or in writing, we will provide you with a
copy of any or all documents which are incorporated by reference. We will
provide such documents to you free of charge, but will not include any exhibits,
unless those exhibits are incorporated by reference into the document. You
should address written requests for documents to: Safeguard Scientifics, Inc.,
435 Devon Park Drive, Building 800, Wayne, PA 19087, (888) 733-1200, Office of
Investor Relations.
67
<PAGE> 71
SAFEGUARD SCIENTIFICS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Reports............................... F-2
Consolidated Balance Sheets................................. F-4
Consolidated Statements of Operations....................... F-5
Consolidated Statements of Shareholders' Equity............. F-6
Consolidated Statements of Comprehensive Income............. F-6
Consolidated Statements of Cash Flows....................... F-7
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
F-1
<PAGE> 72
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.
KPMG LLP
Philadelphia, Pennsylvania
February 28, 2000
F-2
<PAGE> 73
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
of Cambridge Technology Partners (Massachusetts), Inc.:
In our opinion, the consolidated balance sheet 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.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 2, 1999, except for Note R,
as to which the date
is March 29, 1999
F-3
<PAGE> 74
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.
F-4
<PAGE> 75
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.
F-5
<PAGE> 76
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.
F-6
<PAGE> 77
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.
F-7
<PAGE> 78
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.
F-8
<PAGE> 79
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
F-9
<PAGE> 80
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
F-10
<PAGE> 81
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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).
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.
F-11
<PAGE> 82
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
F-12
<PAGE> 83
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
F-13
<PAGE> 84
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<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.
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.
F-14
<PAGE> 85
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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>
F-15
<PAGE> 86
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-16
<PAGE> 87
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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
F-17
<PAGE> 88
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-18
<PAGE> 89
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
F-19
<PAGE> 90
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 0 0.00
45.47 1,547 7.96 45.47 0 0.00
- --------------- ----- ---- ------ ----- ------
$ 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> <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>
F-20
<PAGE> 91
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
F-21
<PAGE> 92
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
F-22
<PAGE> 93
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
F-23
<PAGE> 94
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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%
F-24
<PAGE> 95
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $142 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 the right to
seek a material fine in connection with the failure to file timely Forms for
these transactions, but has not informed us to whether they intend to seek any
fine or other penalty from us. 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 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.
F-25
<PAGE> 96
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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)".
F-26
<PAGE> 97
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
F-27
<PAGE> 98
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
F-28
<PAGE> 99
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<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 $12 million of
commitments made prior to December 31, 1999. Additionally, from January 1, 2000
through February 15, 2000, we committed $224 million and funded $81 million to
acquire ownership interests in or make advances to new and existing partner
companies.
F-29
<PAGE> 100
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
F-30
<PAGE> 101
INSIDE BACK COVER
[Artwork Appears Here]
<PAGE> 102
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
10,000,000 SHARES
[SAFEGUARD SCIENTIFICS, INC. LOGO]
COMMON STOCK
----------------------
PROSPECTUS
----------------------
MERRILL LYNCH & CO.
DEUTSCHE BANC ALEX. BROWN
LEHMAN BROTHERS
PRUDENTIAL VOLPE TECHNOLOGY
A UNIT OF PRUDENTIAL SECURITIES
J.P. MORGAN & CO.
ADAMS, HARKNESS & HILL, INC.
, 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 103
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses to be paid by Safeguard in connection with the distribution of
the securities being registered, other than underwriting discounts and
commissions, are as follows:
<TABLE>
<CAPTION>
AMOUNT(1)
---------
<S> <C>
SEC Registration Fee........................................ $146,366
The New York Stock Exchange Filing Fee...................... 1,500
The New York Stock Exchange Listing Fee..................... 70,000
Accounting Fees and Expenses................................ 200,000
Blue Sky Fees and Expenses.................................. 10,000
Legal Fees and Expenses..................................... 300,000
Trustee, Transfer Agent and Registrar....................... 5,000
Fees and Expenses........................................... 30,000
Printing and Engraving Expenses............................. 150,000
Miscellaneous Fees and Expenses............................. 30,000
Total..................................................... $942,866
========
</TABLE>
- ---------------
(1) All amounts are estimates except the SEC filing fee, The New York Stock
Exchange filing fee and The New York Stock Exchange listing fee.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 1741 and 1742 of the Pennsylvania Business Corporation Law of
1988, as amended (the "PBCL"), provide that a business corporation may indemnify
directors and officers against liabilities they may incur as such provided that
the particular person acted in good faith and in a manner he or she reasonably
believed to be in, or not opposed to, the best interests of the corporation,
and, with respect to any criminal proceeding, had no reasonable cause to believe
his or her conduct was unlawful. In general, the power to indemnify under these
sections does not exist in the case of actions against a director or officer by
or in the right of the corporation if the person otherwise entitled to
indemnification shall have been adjudged to be liable to the corporation unless
it is judicially determined that, despite the adjudication of liability but in
view of all the circumstances of the case, the person is fairly and reasonably
entitled to indemnification for specified expenses. The corporation is required
to indemnify directors and officers against expenses they may incur in defending
actions against them in such capacities if they are successful on the merits or
otherwise in the defense of such actions.
Section 1713 of the PBCL permits the shareholders to adopt a bylaw
provision relieving a director (but not an officer) of personal liability for
monetary damages except where (i) the director has breached the applicable
standard of care and (ii) such conduct constitutes self-dealing, willful
misconduct or recklessness. The statute provides that a director may not be
relieved of liability for the payment of taxes pursuant to any federal, state or
local law or responsibility under a criminal statute.
Section 1746 of the PBCL grants a corporation broad authority to indemnify
its directors, officers and other agents for liabilities and expenses incurred
in such capacity, except in circumstances where the act or failure to act giving
rise to the claim for indemnification is determined by a court to have
constituted willful misconduct or recklessness.
Safeguard's Articles of Incorporation (filed as Exhibit 3.1 hereto) provide
that a director or officer of Safeguard shall not be personally liable for
monetary damages as such (including, without limitation, any judgment, amount
paid in settlement, penalty, punitive damages or expense of any nature
(including, without limitation, attorneys' fees and disbursements)) for any
action taken, or any failure to take any
II-1
<PAGE> 104
action, unless the director or officer has breached or failed to perform the
duties of his or her office under the Articles or the bylaws of Safeguard or
applicable provisions of law and the breach or failure to perform constitutes
self-dealing, willful misconduct or recklessness provided that such limitation
on monetary damages does not relieve a director or officer of liability for the
payment of any taxes pursuant to local, state or federal law, or liability or
responsibility pursuant to any criminal statute.
Section 6 of Article II of the bylaws of Safeguard (filed as Exhibit 3.2
hereto) also limits the monetary liability of directors for any action taken, or
any failure to take any action, unless the director has breached or failed to
perform the duties of his or her office. The limitation on monetary liability
does not extend to breaches of duty constituting self-dealing, willful
misconduct or recklessness and does not relieve a director of liability for the
payment of any taxes pursuant to local, state or federal law, or liability or
responsibility pursuant to any criminal statute.
Article VIII of the bylaws provides, except as expressly prohibited by law,
an unconditional right to indemnification for expenses and any liability paid or
incurred by any director or officer of Safeguard, or any other person designated
by the board of directors as an indemnified representative, in connection with
any proceeding in which the indemnified representative may be involved as a
party or otherwise, by reason of the fact that such person is or was serving in
an indemnified capacity, including without limitation liabilities resulting from
any actual or alleged breach or neglect of duty, error, misstatement or
misleading statement, negligence, gross negligence or act giving rise to
stricter products liability, except where such indemnification is expressly
prohibited by applicable law or where the conduct of the indemnified
representative has been determined to constitute willful misconduct,
recklessness or self-dealing sufficient in the circumstances to bar
indemnification against liabilities arising from the conduct.
Safeguard has a directors' and officers' liability insurance policy that
affords directors and officers with insurance coverage for losses arising from
claims based on breaches of duty, negligence, error and other wrongful acts.
The Purchase Agreement filed as Exhibit 1.1 to this Registration Statement
provide for indemnification by the underwriters of Safeguard and its officers
and directors for certain liabilities arising under the Securities Act of 1933,
as amended, (the "Securities Act") or otherwise.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT
- ------- --------
<C> <S>
1.1 Purchase Agreement**
3.1 Amended and Restated Articles of Incorporation of
Safeguard***
3.2 By-laws of Safeguard, as amended****
4.1 Form of Shareholder Rights Agreement, dated February 28,
2000, by and between Safeguard and ChaseMellon Shareholder
Services, LLC as rights agent.*****
5.1 Opinion of Morgan, Lewis & Bockius LLP**
23.1 Consent of KPMG LLP*
23.2 Consent of PricewaterhouseCoopers LLP*
23.9 Consent of Morgan, Lewis & Bockius LLP (contained in Exhibit
5.1)
23.10 Consent of Davis, Polk & Wardwell**
24.1 Power of Attorney+
27.1 Financial Data Schedule*
</TABLE>
- ---------------
+ Previously filed.
* Filed herewith.
** To be filed by amendment.
II-2
<PAGE> 105
*** Incorporated by reference to Safeguard's Annual Report on Form 10-K (No.
1-5620) for the year ended December 31, 1996 filed on March 31, 1997.
***** Incorporated by reference to Safeguard's Current Report on Form 8-K filed
on February 29, 2000.
(b) Financial Statement Schedules
None.
Schedules have been omitted since they are not required or are not
applicable or the required information is shown in the financial statements or
related notes.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned Registrant hereby undertakes:
(1) That, for purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) That, for purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) That, for purposes of determining any liability under the Securities
Act, each filing of the registrant's annual report pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended, (the "Exchange Act")
(and, where applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Exchange Act) that is incorporated by reference
in this Registration Statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
II-3
<PAGE> 106
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all the
requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the Town of Wayne, County of Chester, Commonwealth of
Pennsylvania on the 22nd day of March, 2000.
Safeguard Scientifics, Inc.
By: /s/ WARREN V. MUSSER
------------------------------------
Warren V. Musser
Chairman and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ WARREN V. MUSSER Chairman of the Board and Chief March 22, 2000
- --------------------------------------------------- Executive Officer
Warren V. Musser
/s/ HARRY WALLAESA President, Chief Operating March 22, 2000
- --------------------------------------------------- Officer and Director
Harry Wallaesa
/s/ GERALD A. BLITSTEIN Senior Vice President and Chief March 22, 2000
- --------------------------------------------------- Financial Officer
Gerald A. Blitstein
* Vice Chairman of the Board
- ---------------------------------------------------
Robert E. Keith
* Director
- ---------------------------------------------------
Judith A. Areen
* Director
- ---------------------------------------------------
Vincent G. Bell, Jr.
* Director
- ---------------------------------------------------
Walter W. Buckley, III
* Director
- ---------------------------------------------------
Michael J. Emmi
* Director
- ---------------------------------------------------
Robert A. Fox
* Director
- ---------------------------------------------------
Jack L. Messman
* Director
- ---------------------------------------------------
Russell E. Palmer
</TABLE>
II-4
<PAGE> 107
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Director
- ---------------------------------------------------
John W. Poduska, Sr., Ph.D.
* Director
- ---------------------------------------------------
Heinz C. Schimmelbusch, Ph.D.
* Director
- ---------------------------------------------------
Hubert J.P. Schoemaker, Ph.D.
* Director
- ---------------------------------------------------
Carl J. Yankowski
</TABLE>
II-5
<PAGE> 108
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT
- ------- --------
<C> <S>
1.1 Underwriting Agreement**
3.1 Amended and Restated Articles of Incorporation of
Safeguard***
3.2 By-laws of Safeguard, as amended****
4.1 Form of Shareholder Rights Agreement, dated February 28,
2000, by and between Safeguard and ChaseMellon Shareholder
Services, LLC as rights agent.****
5.1 Opinion of Morgan, Lewis & Bockius LLP**
23.1 Consent of KPMG LLP*
23.2 Consent of PricewaterhouseCoopers LLP*
23.9 Consent of Morgan, Lewis & Bockius LLP (contained in Exhibit
5.1)
23.10 Consent of Davis, Polk & Wardwell**
24.1 Power of Attorney+
27.1 Financial Data Schedule*
</TABLE>
- ---------------
+ Previously filed.
* Filed herewith.
** To be filed by amendment.
*** Incorporated by reference to Safeguard Scientifics' Annual Report on Form
10-K (No. 1-5620) for the year ended December 31, 1996 filed on March 31,
1997.
**** Incorporated by reference to Safeguard Scientifics' Current Report on Form
8-K filed on February 29, 2000.
<PAGE> 1
Exhibit 23.1
Consent of Independent Auditors
The Board of Directors and Shareholders
Safeguard Scientifics, Inc.:
We consent to the use of our reports included herein and incorporated by
reference herein and to the reference to our firm under the headings "Selected
Financial Data" and "Experts" in the prospectus. Our reports make reference to
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 22, 2000
<PAGE> 1
Exhibit 23.2
Consent of Independent Accountants
We hereby consent to the incorporation by reference in this Registration
Statement of Safeguard Scientifics, Inc. on Form S-3 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
three years in the period ended December 31, 1998 which appears in Safeguard
Scientifics, Inc.'s Annual Report on Form 10-K for the year ended December 31,
1999. We also consent to the reference to us under the heading "Experts" in such
Registration Statement.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
March 22, 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>
