<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended March 31, 2000 Commission File Number 1-5620
-------------- ------
SAFEGUARD SCIENTIFICS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1609753
- --------------------------------------------------------------------------------
(state or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
800 The Safeguard Building, 435 Devon Park Drive Wayne, PA 19087
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (610) 293-0600
--------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities and Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports) and (2) has been subject
to such filing requirements for the past 90 days.
Yes X No
------- -------
Number of shares outstanding as of May 12, 2000
Common Stock 118,123,676
<PAGE>
SAFEGUARD SCIENTIFICS, INC.
QUARTERLY REPORT FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION Page
------------------------------ ----
Item 1 - Financial Statements:
Consolidated Balance Sheets -
March 31, 2000 (unaudited) and December 31, 1999.................... 3
Consolidated Statements of Operations (unaudited) -
Three Months Ended March 31, 2000 and 1999.......................... 4
Consolidated Statements of Cash Flows (unaudited) -
Three Months Ended March 31, 2000 and 1999.......................... 5
Notes to Consolidated Financial Statements.......................... 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations................... 18
Item 3 - Quantitative and Qualitative Disclosures About Market Risk...... 29
PART II - OTHER INFORMATION
---------------------------
Item 2 - Changes in Securities and Use of Proceeds....................... 30
Item 4 - Submission of Matters to a vote of Security Holders............. 31
Item 6 - Exhibits and Reports on Form 8-K................................ 31
Signatures............................................................... 33
2
<PAGE>
SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---------- ------------
(unaudited)
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents.................................. $ 4,658 $ 49,813
Accounts receivable, less allowances....................... 222,629 259,383
Inventories................................................ 101,175 129,826
Prepaid expenses and other current assets.................. 16,678 16,488
---------- ----------
Total current assets........................................ 345,140 455,510
Property and equipment, net................................. 54,092 56,234
Ownership interests in and advances to partner companies.... 759,195 529,381
Available-for-sale securities............................... 234,161 302,940
Excess of cost over net assets of businesses acquired, net.. 126,007 119,288
Other....................................................... 33,214 36,526
---------- ----------
Total Assets................................................ $1,551,809 $1,499,879
========== ==========
Liabilities and Shareholders' Equity
Current Liabilities
Current maturities of long-term debt....................... $ 3,751 $ 11,019
Accounts payable........................................... 138,449 183,781
Accrued expenses........................................... 116,091 126,871
---------- ----------
Total current liabilities................................... 258,291 321,671
Long-term debt.............................................. 65,024 14,532
Deferred taxes.............................................. 82,616 110,556
Minority interest........................................... 98,900 102,808
Other long-term liabilities................................. 180,679 175,611
Convertible subordinated notes.............................. 200,000 200,000
Commitments and contingencies
Shareholders' Equity
Preferred stock............................................. -- --
Common stock................................................ 10,740 10,475
Additional paid-in capital.................................. 247,480 133,969
Retained earnings........................................... 414,718 385,120
Accumulated other comprehensive (loss) income............... (5,193) 45,137
Treasury stock, at cost..................................... (1,446) --
---------- ----------
Total shareholders' equity.................................. 666,299 574,701
---------- ----------
Total Liabilities and Shareholders' Equity.................. $1,551,809 $1,499,879
========== ==========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share data)
Three Months Ended March 31,
----------------------------
2000 1999
-------- --------
(unaudited)
Revenue
Product sales................................... $507,308 $425,467
Service sales................................... 68,143 74,418
Other........................................... 3,745 3,007
-------- --------
Total revenue.................................... 579,196 502,892
Operating Expenses
Cost of sales--product.......................... 468,905 388,312
Cost of sales--service.......................... 47,014 47,991
Selling and service............................. 36,633 36,497
General and administrative...................... 48,227 27,368
Depreciation and amortization................... 8,330 5,725
Restructuring................................... 5,169 --
-------- --------
Total operating expenses......................... 614,278 505,893
-------- --------
(35,082) (3,001)
Gains on issuance of stock by partner companies.. -- 326
Other income, net................................ 50,021 51,333
Interest income.................................. 1,194 744
Interest expense................................. (10,698) (7,732)
-------- --------
Income Before Income Taxes, Minority
Interest and Equity Income (Loss)............... 5,435 41,670
Income taxes..................................... (15,937) (13,003)
Minority interest................................ 8,599 1,951
Equity income (loss)............................. 31,501 (6,470)
-------- --------
Net Income....................................... $ 29,598 $ 24,148
======== ========
Net Income Per Share
Basic........................................... $ 0.28 $ 0.25
Diluted......................................... $ 0.26 $ 0.24
Weighted Average Shares Outstanding
Basic........................................... 105,523 95,252
Diluted......................................... 117,310 104,557
See notes to consolidated financial statements.
4
<PAGE>
SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
2000 1999
--------- ---------
(unaudited)
<S> <C> <C>
Operating Activities
Net income......................................................... $ 29,598 $ 24,148
Adjustments to reconcile to net cash provided by operating
activities:
Depreciation and amortization..................................... 8,330 5,725
Deferred income taxes............................................. (840) (2,109)
Equity (income) loss.............................................. (31,501) 6,470
Gain on issuance of stock by partner companies.................... -- (326)
Other income, net................................................. (50,021) (51,333)
Minority interest, net of taxes................................... (5,159) (1,171)
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable, net.......................................... 21,959 59,564
Inventories....................................................... 28,651 6,153
Accounts payable, accrued expenses, and other..................... (49,896) (41,828)
--------- ---------
Net cash (used in) provided by operating activities.............. (48,879) 5,293
Investing Activities
Proceeds from sales of available-for-sale securities............... 57,756 9,080
Proceeds from sales of partner company ownership interests......... 21,173 49,927
Advances to partner companies...................................... (14,025) (14,483)
Repayment of advances to partner companies......................... 10,050 2,300
Acquisitions of ownership interests in partner companies and
subsidiaries, net of cash acquired................................ (211,394) (52,745)
Acquisitions by subsidiaries, net of cash acquired................. (750) --
Proceeds from sale of building..................................... -- 39,791
Capital expenditures............................................... (2,536) (1,801)
Other, net......................................................... (858) (2,242)
--------- ---------
Net cash (used in) provided by investing activities.............. (140,584) 29,827
Financing Activities
Borrowings on revolving credit facilities.......................... 345,570 195,300
Repayments on revolving credit facilities.......................... (298,238) (270,543)
Borrowings on long-term debt....................................... 1,000 -
Repayments on long-term debt....................................... (5,802) (25,190)
Proceeds from financial instruments................................ -- 71,205
Repurchase of Company common stock................................. -- (253)
Issuance of Company common stock................................... 100,557 1,329
Issuance of subsidiary common stock................................ 1,221 583
--------- ---------
Net cash provided by (used in) financing activities.............. 144,308 (27,569)
--------- ---------
Net (Decrease) Increase in Cash and Cash Equivalents............... (45,155) 7,551
Cash and cash equivalents at beginning of period................... 49,813 6,257
--------- ---------
Cash and Cash Equivalents at End of Period......................... $ 4,658 $ 13,808
========= =========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
SAFEGUARD SCIENTIFICS, INC.
Notes to Consolidated Financial Statements
March 31, 2000
1. General
-------
The accompanying unaudited interim consolidated financial statements were
prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. The 1999 Form 10-K, as
amended, should be read in conjunction with the accompanying statements.
These statements include all adjustments (consisting only of normal
recurring adjustments) which the Company believes are necessary for a fair
presentation of the statements. The interim operating results are not
necessarily indicative of the results for a full year.
2. Comprehensive Income
--------------------
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
comprehensive income is from net unrealized appreciation on its 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. The following summarizes
the components of comprehensive income (loss), net of income taxes, (in
thousands):
Three Months Ended
March 31,
2000 1999
-------- -------
(Unaudited)
Net Income............................... $ 29,598 $24,148
-------- -------
Other Comprehensive Loss, Before Taxes:
Unrealized holding losses........... (31,600) (6,167)
Reclassification adjustments........ (45,831) (5,872)
Related Tax Benefit:
Unrealized holding losses........... 11,060 2,158
Reclassification adjustments........ 16,041 2,055
-------- -------
Other Comprehensive Loss................. (50,330) (7,826)
-------- -------
Comprehensive (Loss) Income.............. ($20,732) $16,322
======== =======
3. Reclassifications
-----------------
Certain prior year amounts have been reclassified to conform to the current
year presentation.
4. Stock Split
-----------
On February 28, 2000, the Board of Directors approved a three-for-one 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 occurred as of January 1,
1999.
6
<PAGE>
5. Financial Investments
---------------------
In 1999, in order to mitigate the Company's market exposure and generate
cash from holdings in Tellabs, 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 under contracts that expire in 2002
and in return received approximately $139 million of cash. At maturity the
Company is required to deliver cash or Tellabs stock with a value
determined by the stock price of Tellabs at maturity. The number of Tellabs
shares to be delivered at maturity will range between 2.7 million to 3.4
million depending on the price of Tellabs stock at that date.
The Company's liability of $179 million in connection with these
transactions is included in other long-term liabilities as of March 31,
2000. These liabilities 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. The initial cost of the
transaction ($2.4 million) is being amortized as an adjustment of yield
over the life of the agreement through the statement of operations.
The Company's holdings in Tellabs are included in non-current assets under
the caption "available-for-sale securities." These securities are carried
at fair value, based on quoted market prices, with the unrealized gains and
losses, net of tax, is reported as a separate component of shareholders'
equity.
The Company has only limited involvement with derivative financial
instruments and does not use them for trading purposes. The risk of loss to
the Company in the event of nonperformance by the counterparty under the
forward sales contract is not considered to be significant. Although the
forward sales contracts expose the Company to market risk, fluctuations in
the fair value of these contracts are mitigated by expected offsetting
fluctuations in the pledged securities.
7
<PAGE>
6. 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 March 31, 2000 and December
31, 1999. Market value reflects the price of publicly traded holdings at
the close of business at the respective date, and excludes warrants that
are not currently exercisable.
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
-------------------------------- ---------------------
Carrying Market Voting Carrying Market
Value Value Interest Value Value
-------- ----------- --------- -------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Equity Method
Cambridge Technology Partners.. $ 55,577 $ 136,946 16% $ 49,181 $ 254,556
ChromaVision Medical Systems... 12,517 81,201 27% 13,626 81,201
DocuCorp International......... 9,914 17,848 17% 9,995 22,249
eMerge Interactive............. 4,539 158,965 13% 7,201 --(a)
Internet Capital Group......... 251,434 3,286,095 14% 189,068 6,169,208
LifeF/X........................ -- 75,464 12% -- 86,823
OAO Technology Solutions....... 16,496 42,507 30% 16,448 42,853
Sanchez Computer Associates.... 10,821 220,872 25% 11,686 258,995
Pac-West Telecomm.............. 7,770 74,226 7% 7,613 62,943
USDATA Corporation............. 12,598 88,116 38% 15,920 82,406
US Interactive................. 10,919 91,506 13% 9,769 107,795
Non-public companies........... 292,979 162,130
-------- --------
685,564 492,637
Cost Method
Non-public companies........... 42,489 16,266
Advances to Partner Companies.. 31,142 20,478
-------- --------
$759,195 $529,381
======== ========
</TABLE>
(a) eMerge Interactive was not publicly traded until 2000.
Internet-related stocks have experienced significant volatility. For example,
at March 31, 2000, the market value of the Company's holdings in Internet
Capital Group was $3.3 billion. Based on the high and low stock prices from
January 1, 2000 through May 12, 2000, the market value of the Company's
holdings in Internet Capital Group has ranged from $7.3 billion to $1.1
billion.
At March 31, 2000, 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 $190 million. This excess
relates to ownership interests acquired through March 31, 2000, and is being
amortized generally over a ten-year period. Amortization expense of $3.0
million and $0.9 million, is included in "equity income (loss)" in the
accompanying consolidated statements of operations for the three months ended
March 31, 2000 and 1999, respectively.
As of March 31, 2000, the Company had advances to partner companies that
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 (9% at
March 31, 2000) plus 1%. The Company also has short-term advances to partner
companies of $6 million at March 31, 2000, which is included in "accounts
receivable, less allowances" on the consolidated balance sheets.
8
<PAGE>
7. Available-for-Sale Securities
-----------------------------
Available-for-sale securities consisted of the following (in thousands):
March 31, 2000 December 31, 1999
------------------ ------------------
Carrying Market Carrying Market
Value Value Value Value
-------- -------- -------- --------
(Unaudited)
Tellabs...................... $212,731 $212,535 $212,731 $216,595
Diamond Technology Partners.. 373 6,433 710 57,436
First Consulting Group....... 2,049 2,126 9,115 9,023
e4L.......................... 1,457 979 1,457 1,532
Brandywine Realty Trust...... 8,561 8,552 8,561 8,177
Other public companies....... 3,080 3,536 6,480 10,177
Unrealized appreciation...... 5,910 63,886
-------- --------
$234,161 $302,940
======== ========
During the three months ended March 31, 2000, the Company sold a portion of
its interest in Diamond Technology Partners.
8. Debt
----
The following is a summary of long-term debt (in thousands):
March 31, December 31,
2000 1999
--------- ------------
(Unaudited)
Parent Company and Other Recourse Debt
Revolving credit facilities............... $32,115 $ --
Other..................................... 18,153 25,325
------- --------
50,268 25,325
Subsidiary Debt (Non-Recourse to Parent)
CompuCom.................................. 18,400 --
Other..................................... 107 226
------- --------
18,507 226
------- --------
Total debt................................ 68,775 25,551
Current maturities of long-term debt...... (3,751) (11,019)
------- --------
Long-term debt............................ $65,024 $ 14,532
======= ========
In April 2000, the Company increased the availability under the bank
revolving credit facility to $300 million from $200 million. Of the $300
million, $250 million matures in April 2005 and is secured by certain
equity securities the Company holds of its publicly traded partner
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 2001.
There was $32.1 million outstanding under the total facility at March 31,
2000.
9
<PAGE>
CompuCom has financing arrangements consisting of a $250 million receivable
securitization facility and a $200 million working capital facility. Both
facilities mature in May 2002. The securitization facility allows CompuCom
to sell an interest in its accounts receivable on a revolving basis and is
accounted for as a sale of accounts receivable in accordance with Statement
of Financial Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities". As of
March 31, 2000, $160 million of the securitization facility was utilized.
Availability under the working capital facility is subject to a borrowing
base calculation. As of March 31, 2000, availability under the working
capital facility was $68.8 million, of which $18.4 million was outstanding.
In accordance with the terms of the agreement, the working capital facility
is scheduled to be reduced from $200 million to $175 million in May 2000.
9. Shareholders' Equity
--------------------
Common Stock
In February 2000, the Company acquired the remaining 20% voting ownership
in aligne incorporated in exchange for 160,434 shares of the Company's
common stock with a market value of $8.2 million.
In March 2000, the Company closed the sale of 2.2 million shares of its
common stock for $100 million to Textron in a private placement. Textron
and the Company 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 April 2000, the Company completed a follow-on public offering, selling
8.6 million shares of its common stock, including exercise in full of the
underwriters' overallotment option, at $50 per share. Net proceeds to the
Company were approximately $414 million (net of underwriters' commission
and offering expenses).
In April 2000, the Company completed the sale of shares of its common stock
to IBM and Compaq, and formed strategic relationships with both companies.
Net proceeds to the Company from these transactions aggregated $100
million.
Stock Based Compensation
In February 2000, the Company granted 75,000 shares of restricted stock to
an executive. The fair value on the date of grant was $48.21 per share.
These shares vested immediately. The Company uses APB Opinion No. 25 to
account for stock-based compensation. The Company recorded compensation
expense related to this restricted stock award of $3.6 million during the
three months ended March 31, 2000.
During the three months ended March 31, 2000, the Company recorded $6
million of expense related to the termination of two of its former
executives.
10
<PAGE>
10. Restructuring
-------------
During the first quarter of 2000, CompuCom effected a restructuring plan
designed to reduce its cost structure by closing its distribution facility
in Houston, Texas, closing and consolidating three office facilities, and
reducing its workforce. As a result, CompuCom recorded a restructuring
charge of $5.2 million in the first quarter of 2000, the effect of which
was approximately $2.6 million to the Company's pretax earnings, after
recording minority interest. The charge consists primarily of costs
associated with the closing and consolidation of certain facilities and
disposing of related fixed assets, as well as employee severance and
benefits related to the reduction in workforce. The following unaudited
table provides a detail of the charges and cash payments made by category
as well as the amounts accrued as of March 31, 2000 (in thousands):
<TABLE>
<CAPTION>
Restructuring Cash Accrual at
Charge Payments Other(1) March 31, 2000
------ -------- -------- --------------
<S> <C> <C> <C> <C>
Lease termination costs.................. $2,904 $ (8) $ -- $2,896
Employee severance and related benefits.. 1,800 (999) -- 801
Other.................................... 465 (87) (310) 68
------ ------- ----- ------
Total.................................... $5,169 $(1,094) $(310) $3,765
====== ======= ===== ======
</TABLE>
(1) Consists of non-cash charges for the write-off of leasehold
improvements at the closed facilities.
The $3.8 million accrued at March 31, 2000 is reflected in accrued
liabilities in the Company's Consolidated Balance Sheets.
Lease termination costs include the estimated cost to close the three
office facilities and represents the amount to either fulfill CompuCom's
obligation under signed lease contracts, the net expense expected to be
incurred to sublet the facilities, or the estimated amount to be paid to
terminate the lease contracts before the end of their term. In developing
the estimated costs, CompuCom has consulted with a professional real estate
firm with knowledge of market rent rates in all applicable markets where
CompuCom has space. Assumptions have been used for market rent rates and
the estimated amount of time to sublet the facilities. Payments, net of
proceeds derived from subleases, are charged against the accrual as
incurred. The remaining accrual at March 31, 2000 relates to three leases
for the office facilities that have not been sublet or terminated.
Severance is paid based on associates' years of service as well as their
level within the organization. The reduction included 308 associates, of
which 1 was an executive officer. The reduction in workforce included
associates from the following areas: sales, services and general and
administrative, who were located at certain branch locations, corporate
offices and the Houston distribution center. The remaining accrual at March
31, 2000 relates to severance payments which are being paid to many of the
former associates and are expected to be substantially complete by the end
of 2000.
Other restructuring charges primarily include the write-off of leasehold
improvements at the Houston distribution center.
11
<PAGE>
During the fourth quarter of 1998, CompuCom recorded a $16.4 million
restructuring charge, primarily consisting of costs associated with the
closing of facilities and disposing of related fixed assets as well as
employee severance and benefits related to a reduction in workforce. The
following unaudited table provides a summary by category of the
restructuring accrual for the three months ended March 31, 2000 (in
thousands):
<TABLE>
<CAPTION>
Accrued at Cash Accrual at
December 31, 1999 Payments March 31, 2000
----------------- --------- --------------
<S> <C> <C> <C>
Employee severance and related benefits.. $ 560 $ (94) $466
Lease termination costs.................. 1,240 (741) 499
------ ----- ----
Total.................................... $1,800 $(835) $965
====== ===== ====
CompuCom expects all restructuring activities to be substantially complete
by the end of 2000 and believes the restructuring accruals are adequate.
</TABLE>
11. Other Income, Net
-----------------
Other income, net, consists of the following (in thousands):
Three Months Ended
March 31,
2000 1999
------- -------
(Unaudited)
Unrealized gain (loss) on Tellabs stock.......... $ -- $49,639
Gain on sale of Diamond stock.................... 44,613 --
Gain on sale of other public holdings............ 7,643 5,872
Gain on distributions from private equity funds.. -- 2,701
Other, primarily impairment charges.............. (2,235) (6,879)
------- -------
$50,021 $51,333
======= =======
For the three months ended March 31, 2000 and 1999, the Company recorded
impairment charges of $2.4 million and $6.6 million, respectively, for the
other than temporary decline in the carrying value of certain partner
companies.
12
<PAGE>
12. Net Income Per Share
--------------------
The calculations of EPS were (in thousands except per share amounts):
Three Months Ended
March 31,
2000 1999
-------- --------
(Unaudited)
Basic EPS
---------
Net Income......................................... $ 29,598 $ 24,148
======== ========
Average common shares outstanding.................. 105,523 95,252
======== ========
Basic EPS.......................................... $ 0.28 $ 0.25
======== ========
Diluted EPS
-----------
Net Income......................................... $ 29,598 $ 24,148
Effect of: Public holdings (a).................... (1,133) (54)
Dilutive securities (b)................ 1,776 725
-------- --------
Adjusted Net Income................................ $ 30,241 $ 24,819
======== ========
Average common shares outstanding.................. 105,523 95,252
Effect of: Dilutive options....................... 3,624 1,921
Dilutive securities (b)................ 8,163 7,384
-------- --------
Average number of common shares assuming dilution.. 117,310 104,557
======== ========
Diluted EPS........................................ $ 0.26 $ 0.24
======== ========
(a) Represents the dilutive effect of public company common stock
equivalents and convertible securities.
(b) Represents the dilutive effect of the Company's 5% 1999 convertible
subordinated notes for the three months ended March 31, 2000, and the
Company's 6% 1996 convertible subordinated notes for the three months
ended March 31, 1999.
13
<PAGE>
13. Parent Company Financial Information
------------------------------------
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.
<TABLE>
<CAPTION>
Balance Sheets March 31, December 31,
2000 1999
---- ----
(Unaudited)
<S> <C> <C>
Assets
Cash and cash equivalents................................. $ 1,749 $ 33,536
Other current assets...................................... 19,268 39,204
Ownership interests in and advances to partner companies.. 893,751 687,925
Available-for-sale securities............................. 234,161 302,940
Other..................................................... 64,404 45,584
---------- ----------
Total assets.............................................. $1,213,333 $1,109,189
========== ==========
Liabilities and Shareholders' Equity
Current liabilities....................................... $ 37,950 $ 35,621
Long-term debt............................................ 46,558 14,354
Other long-term liabilities............................... 262,526 284,513
Convertible subordinated notes............................ 200,000 200,000
Shareholders' equity...................................... 666,299 574,701
---------- ----------
Total liabilities and shareholders' equity................ $1,213,333 $1,109,189
========== ==========
</TABLE>
The carrying value of the Company's less than wholly owned subsidiaries,
primarily CompuCom, Tangram, SOTAS and Arista at March 31, 2000, and
including aligne at December 31, 1999, are included in "ownership interests
in and advances to partner companies."
<TABLE>
<CAPTION>
Statements of Operations
------------------------
Three Months Ended
March 31,
2000 1999
---- ----
(Unaudited)
<S> <C> <C>
Revenue.............................................. $ 6,521 $ 3,207
Operating expenses................................... 25,720 7,037
-------- --------
(19,199) (3,830)
Gain on issuance of stock by partner companies....... -- 326
Other income, net.................................... 50,021 51,333
Interest, net........................................ (4,916) (2,541)
-------- --------
Income before income taxes and equity income (loss).. 25,906 45,288
Income taxes......................................... (19,337) (13,699)
Equity income (loss)................................. 23,029 (7,441)
-------- --------
Net income........................................... $ 29,598 $ 24,148
======== ========
</TABLE>
The Company's shares of the income or losses of its less than wholly owned
subsidiaries, primarily CompuCom, Tangram, SOTAS and Arista for the three
months ended March 31, 2000 and CompuCom, Tangram and aligne for the three
months ended March 31, 1999, are reflected in the caption "equity income
(loss)".
14
<PAGE>
14. 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 represent 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 its partner companies
and the Company's operations in general. Partner Company Operations
reflects operations of all partner companies other than CompuCom. CompuCom
Operations reflects the results of operations of CompuCom.
15
<PAGE>
The following summarizes information related to the Company's segments (in
thousands). All significant intersegment activity has been eliminated.
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
2000 1999
-------- --------
(Unaudited)
<S> <C> <C>
Summary of Consolidated Net Income
General Safeguard Operations....................... $ 16,833 $ 28,993
Partner Company Operations......................... 17,654 (3,664)
CompuCom Operations................................ (4,889) (1,181)
-------- --------
$ 29,598 $ 24,148
======== ========
General Safeguard Operations
Revenue............................................ $ 5,727 $ 3,007
Operating expenses
General and administrative........................ 24,643 6,578
Depreciation and amortization..................... 1,077 459
-------- --------
Total operating expenses.......................... 25,720 7,037
-------- --------
(19,993) (4,030)
Gain on issuance of stock by partner companies.... -- 326
Other income, net................................. 50,021 51,333
Interest, net..................................... (5,024) (2,613)
-------- --------
Income before income taxes........................ 25,004 45,016
Income taxes...................................... (8,171) (16,023)
-------- --------
Net Income from General Safeguard Operations....... $ 16,833 $ 28,993
======== ========
Partner Company Operations
Revenue............................................ $ 6,048 $ 6,565
Operating expenses
Cost of Sales..................................... 1,309 1,454
Selling and service............................... 2,499 1,927
General and administrative........................ 3,605 1,723
Depreciation and amortization..................... 1,242 834
-------- --------
Total operating expenses.......................... 8,655 5,938
-------- --------
(2,607) 627
Interest, net..................................... (215) (45)
-------- --------
Income (loss) before income taxes,
minority interest and equity income (loss)....... (2,822) 582
Income taxes (expense) benefit.................... (11,025) 2,265
Minority interest................................. -- (41)
Equity income (loss).............................. 31,501 (6,470)
-------- --------
Net Income (Loss) from Partner Company Operations.. $ 17,654 $ (3,664)
======== ========
CompuCom Operations
Revenue............................................ $567,421 $493,320
Operating expenses
Cost of Sales..................................... 513,479 434,849
Selling and service............................... 34,134 34,570
General and administrative........................ 21,110 19,067
Depreciation and amortization..................... 6,011 4,432
Restructuring..................................... 5,169 --
-------- --------
Total operating expenses.......................... 579,903 492,918
-------- --------
(12,482) 402
Interest, net..................................... (4,265) (4,330)
-------- --------
Income before income taxes and minority interest.. (16,747) (3,928)
Income taxes...................................... 3,259 755
Minority interest................................. 8,599 1,992
-------- --------
Net Loss from CompuCom Operations.................. $ (4,889) $ (1,181)
======== ========
</TABLE>
16
<PAGE>
15. Business Combinations
---------------------
Acquisitions by the Company
In February 2000, the Company acquired the remaining 20% voting ownership
in aligne in exchange for 160,434 shares of the Company's common stock with
a market value of $8.2 million.
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. In June 1999, the Company acquired a 75% voting
ownership in SOTAS for $9.4 million and assumed certain liabilities.
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.
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, 1999,
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.
Three Months Ended
March 31, 1999
------------------
Total Revenues.............. $937,235
Net Earnings................ $ 21,838
Diluted earnings per share.. $ 0.21
16. Subsequent Events
-----------------
As discussed in Note 9, in April 2000, the Company completed a public
offering of 8.6 million shares of its common stock at $50 per share.
As discussed in Note 9, in April 2000, the Company completed a sale of its
common stock for $100 million to certain strategic investors, bringing the
total raised from strategic investors to $200 million in 2000.
As discussed in Note 8, in April 2000, the Company increased its
availability under its bank revolving credit facilities to $300 million
from $200 million.
17
<PAGE>
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
certain factors, including those set forth elsewhere in this report and the
risks discussed in our other SEC filings. The following discussion should
be read in conjunction with our Financial Statements and related Notes
thereto included elsewhere in this report.
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 and OPUS360
Corporation in April 2000.
Our net income could fluctuate significantly from quarter to quarter. There
can be no assurance that we will report net income in each period.
18
<PAGE>
Effect of Various Accounting Methods on the Consolidated Financial
Statements
The various interests that we acquire in our partner companies are
accounted for under three broad methods: consolidation, equity and cost.
The applicable accounting method is generally determined based on our
voting interest in a partner company.
Consolidation. Partner companies in which we directly or indirectly own
more than 50% of the outstanding voting securities are generally accounted
for under the consolidation method of accounting. Under this method, a
partner company's results of operations are included within our
consolidated statements of operations. Participation of other partner
company shareholders in the income or losses of a consolidated partner
company is reflected in the caption "minority interest" in our consolidated
statements of operations. Minority interest adjusts our consolidated net
income to reflect only our share of the income or losses of the
consolidated partner company. CompuCom Systems, Inc., Tangram Enterprise
Solutions, Inc., and aligne, incorporated were consolidated in 2000 and
1999. During the three months ended June 30, 1999, we acquired controlling
majority voting interests in SOTAS, Inc., and Arista Knowledge Systems Inc.
Each of these partner companies was consolidated from the date we acquired
directly or indirectly more than 50% of the outstanding voting securities
interest.
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.
Our partner companies accounted for under the equity method of accounting
at March 31, 2000 and December 31, 1999 included:
<TABLE>
<CAPTION>
Partner Voting Voting
Company Ownership Ownership
Since 3/31/00 12/31/99
----- ------- --------
<S> <C> <C> <C>
Publicly Traded
Cambridge Technology Partners (Massachusetts), Inc... 1991 16% 16%
ChromaVision Medical Systems, Inc.................... 1996 27% 27%
DocuCorp International, Inc.......................... 1995 17% 17%
eMerge Interactive, Inc.............................. 1997 13% 19%
Internet Capital Group, Inc.......................... 1996 14% 14%
LifeF/X, Inc......................................... 1996 12% 13%
OAO Technology Solutions, Inc........................ 1996 30% 31%
Pac-West Telecomm, Inc............................... 1998 7% 7%
Sanchez Computer Associates, Inc..................... 1986 25% 26%
USDATA Corporation................................... 1994 38% 38%
US Interactive, Inc.................................. 1998 13% 13%
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
Partner Voting Voting
Company Ownership Ownership
Since 3/31/00 12/31/99
------- ------- --------
<S> <C> <C> <C>
Privately Held
4anything.com, Inc............................. 1999 28% 28%
AgWeb.com, Inc................................. 2000 41% N/A
The Basketball Network LLC, d/b/a HoopsTV.com.. 1999 24% 24%
Buystream.com.................................. 2000 34% N/A
Extant, Inc.................................... 1999 15% 21%
fob.com, Inc................................... 2000 30% N/A
iMedium, Inc................................... 1999 31% 23%
Integrated Visions, Inc........................ 1998 49% (a) 49%(a)
Kanbay LLC..................................... 1998 27% 28%
Mi8 Corporation................................ 2000 38% N/A
Nextone Communications, Inc.................... 2000 38% N/A
PrivaSeek, Inc................................. 1999 30% 33%
QuestOne Decision Sciences Corporation......... 1997 35% 35%
RealTIME Media, Inc............................ 1999 43% 43%
RedLeaf Group LLC.............................. 2000 30% N/A
Techspace LLC.................................. 2000 49% N/A
Techspace Ventures LLC......................... 2000 78% N/A
Vitts Networks, Inc............................ 1999 42% 48%
WebTelecomm, Inc............................... 2000 42% N/A
Who? Vision Systems, Inc....................... 1998 29% (a) 29%(a)
Wireless OnLine, Inc........................... 2000 43% N/A
XL Vision, Inc................................. 1995 18% 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 March 31, 2000, 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 March 31, 2000.
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 2000. 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.
20
<PAGE>
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 is
significantly influenced by the consolidated results of operations of
CompuCom, which we consolidated based on our 60% voting interest.
To understand our net results of operations and financial position without
the effect of consolidating our consolidated partner companies, please
refer to note 13 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 interests in
and advances to partner companies" in the parent company balance sheets.
Although the parent company statements of operations and balance sheets
presented in note 13 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 include the effect of transactions and other events
incidental to our ownership interests in our partner companies and our
operations in general. Partner Company Operations reflects 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 reflects the consolidated results of
CompuCom. All significant intersegment activity has been eliminated.
21
<PAGE>
The following summarizes information related to the Company's segments (in
thousands). All significant intersegment activity has been eliminated.
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
2000 1999
-------- --------
(Unaudited)
<S> <C> <C>
Summary of Consolidated Net Income
General Safeguard Operations....................... $ 16,833 $ 28,993
Partner Company Operations......................... 17,654 (3,664)
CompuCom Operations................................ (4,889) (1,181)
-------- --------
$ 29,598 $ 24,148
======== ========
General Safeguard Operations
Revenue............................................ $ 5,727 $ 3,007
Operating expenses
General and administrative........................ 24,643 6,578
Depreciation and amortization..................... 1,077 459
-------- --------
Total operating expenses.......................... 25,720 7,037
-------- --------
(19,993) (4,030)
Gain on issuance of stock by partner companies.... -- 326
Other income, net................................. 50,021 51,333
Interest, net..................................... (5,024) (2,613)
-------- --------
Income before income taxes........................ 25,004 45,016
Income taxes...................................... (8,171) (16,023)
-------- --------
Net Income from General Safeguard Operations....... $ 16,833 $ 28,993
======== ========
Partner Company Operations
Revenue............................................ $ 6,048 $ 6,565
Operating expenses
Cost of Sales..................................... 1,309 1,454
Selling and service............................... 2,499 1,927
General and administrative........................ 3,605 1,723
Depreciation and amortization..................... 1,242 834
-------- --------
Total operating expenses.......................... 8,655 5,938
-------- --------
(2,607) 627
Interest, net..................................... (215) (45)
-------- --------
Income (loss) before income taxes,
minority interest and equity income (loss)....... (2,822) 582
Income taxes (expense) benefit.................... (11,025) 2,265
Minority interest................................. -- (41)
Equity income (loss).............................. 31,501 (6,470)
-------- --------
Net Income (Loss) from Partner Company Operations.. $ 17,654 $ (3,664)
======== ========
CompuCom Operations
Revenue............................................ $567,421 $493,320
Operating expenses
Cost of Sales..................................... 513,479 434,849
Selling and service............................... 34,134 34,570
General and administrative........................ 21,110 19,067
Depreciation and amortization..................... 6,011 4,432
Restructuring..................................... 5,169 --
-------- --------
Total operating expenses.......................... 579,903 492,918
-------- --------
(12,482) 402
Interest, net..................................... (4,265) (4,330)
-------- --------
Income before income taxes and minority interest.. (16,747) (3,928)
Income taxes...................................... 3,259 755
Minority interest................................. 8,599 1,992
-------- --------
Net Loss from CompuCom Operations.................. $ (4,889) $ (1,181)
======== ========
</TABLE>
22
<PAGE>
Net Results of Operations--General Safeguard Operations
During the three months ended March 31, 1999, aligne's operating results
were included in the Partner Company Operations segment. During the first
quarter of 2000, we acquired the remaining 20% of aligne. As a result,
effective January 1, 2000, aligne's results of operations are included in
the General Safeguard Operations segment.
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, and, effective
January 1, 2000, charges for consulting services by our wholly owned
subsidiary, aligne. Revenue was $5.7 million for the three months ended
March 31, 2000, and $3.0 million for the three months ended March 31, 1999.
The increase was the result of an increase in the number of partner
companies, and the inclusion of aligne's revenues. Effective April 1,
2000, the Company will no longer charge administrative services fees to its
partner companies. These fees accounted for $0.7 million of revenue for the
three months ended March 31, 2000.
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 $24.6 million for the three months ended March
31, 2000 and $6.6 million for the three months ended March 31, 1999. The
increase was primarily a result of approximately $10 million of non-cash
compensation charges related primarily to severance packages for two former
executives and a restricted stock grant. Excluding these non-cash charges,
general and administrative expenses increased $8.0 million, reflecting the
growth in the number of partner companies to 45 at March 31, 2000 compared
to 27 at March 31, 1999. The increase represents expenses incurred to
support the growing number and related activities of the Company and our
partner companies, including payroll-related, professional fees 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. The increase in depreciation and
amortization relates to amortization of goodwill associated with our
holdings in aligne.
Other Income, net. Other income, net, consisted of the following (in
thousands):
Three Months Ended
March 31,
2000 1999
---- ----
Unrealized gain (loss) on Tellabs stock.......... $ -- $49,639
Gain on sale of Diamond stock.................... 44,613 --
Gain on sale of other public holdings............ 7,643 5,872
Gain on distributions from private equity funds.. -- 2,701
Other, primarily impairment charges.............. (2,235) (6,879)
------- -------
$50,021 $51,333
======= =======
For the three months ended March 31, 2000, and 1999 we recorded impairment
charges of $2.4 million, and $6.6 million, respectively, for the other than
temporary decline in the carrying value of some partner companies.
23
<PAGE>
Interest, net. Interest expense, net, was $5.0 million for the three months
ended March 31, 2000 and $2.6 million for the three months ended March 31,
1999. The increase was primarily due to the accretion of the obligation and
the amortization of the cost of the two forward sale contracts entered into
during March 1999 and August 1999.
Income Taxes. Our consolidated effective tax rate remained consistent at
35% for the three months ended March 31, 2000 and 1999.
Net Results of Operations--Partner Company Operations
Revenue. Revenue was $6.0 million for the three months ended March 31, 2000
and $6.6 million for the three months ended March 31, 1999. The decrease is
a result of aligne no longer being included in the Partner Company
Operations segment, partially offset by the inclusion of revenue related to
SOTAS and Arista subsequent to our acquiring a majority voting interest in
the second quarter of 1999.
Operating Expenses. Operating expenses were $8.7 million for the three
months ended March 31, 2000 and $5.9 million for the three months ended
March 31, 1999. The increase in operating expenses in 2000 was primarily
the result of the inclusion of operating expenses related to SOTAS and
Arista subsequent to our acquiring a majority voting interest in the second
quarter of 1999, partially offset by the exclusion of aligne's expenses in
2000.
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. The significant increase in equity income in
2000 from 1999 reflects increased net income at Internet Capital Group.
Internet Capital Group reported net income of $352.0 million for the three
months ended March 31, 2000 compared to $20.1 million for the same period
in 1999. The increase in Internet Capital Group's results related primarily
to a pre-tax gain of $449 million for the shares of Ariba, Inc. it received
in exchange for its ownership in Tradex Technologies, Inc., and pre-tax
gains of approximately $177 million relating primarily to VerticalNet's
issuance of shares for its acquisition of Tradeum, Inc. Our share of
Internet Capital Group's income for the three months ended March 31, 2000,
was approximately $50 million. Excluding our share of Internet Capital
Group, our equity losses increased as a result of operating losses at some
of our existing partner companies and an increase in the number of
companies accounted for under the equity method in 2000, a majority of
which have operating losses. During the three months ended March 31, 2000,
we accounted for 33 companies under the equity method of accounting
compared to 12 companies during the comparable 1999 period. 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.
24
<PAGE>
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 $567.4 million for the three months ended March 31,
2000 and $493.3 million for the three months ended March 31, 1999. The
increase in revenue is primarily due to the May 1999 acquisition of the
Technology Acquisition Services Division of Entex Information Services.
Negatively impacting first quarter revenue was lower demand resulting from
CompuCom's clients Year 2000 concerns and spending on Year 2000 remediation
projects that occurred in 1999 and not in 2000, as well as manufacturer
direct selling and fulfillment strategies.
Gross Margin. Gross margin was 9.5% for the three months ended March 31,
2000 and 11.9% for the three months ended March 31, 1999. The decrease is
due to reductions in the amount of manufacturer volume incentives and
increased competition from direct marketers and other corporate resellers
of personal computer products, as well as lower utilization in consulting
services. CompuCom anticipates a continued reduction in the amount of
manufacturer sponsored volume incentives, which could lower product margins
even further. CompuCom expects to experience continued pressure on both
product revenue and product gross margin, when compared to the comparable
prior period.
Selling and Service Expenses. Selling and service expenses were 6.0% of
revenue for the three months ended March 31, 2000 and 7.0% of revenue for
the three months ended March 31, 1999. CompuCom attributes this decline to
increased leverage of its infrastructure resulting from the Entex
acquisition and its own cost reduction efforts.
General and Administrative Expense. General and administrative expenses
increased $2.0 million to $21.0 million for the three months ended March
31, 2000 from $19.1 million for the three months ended March 31, 1999. The
increase was due to increases in distribution and administrative personnel
to support CompuCom's growth as a result of the Entex acquisition. As a
percentage of revenue, general and administrative expenses were 3.7% for
the three months ended March 31, 2000 and 3.9% for the three months ended
March 31, 1999. This decrease is due to increased leverage of CompuCom's
infrastructure resulting from the Entex acquisition and its own cost
reduction efforts relative to its revenue base.
Depreciation and Amortization Expense. Depreciation and amortization
expense was $6.0 million for the three months ended March 31, 2000 and $4.4
million for the three months ended March 31, 1999. The increase is due
primarily to goodwill amortization related to the May 1999 Entex
acquisition and software license amortization.
Restructuring Expense. During the first quarter of 2000, CompuCom
implemented a restructuring plan designed to reduce CompuCom's cost
structure by closing certain facilities, consolidating one facility, and
reducing its workforce. As a result, CompuCom recorded a restructuring
charge of $5.2 million in the first quarter of 2000, primarily consisting
of costs associated with the closing and consolidation of certain
facilities and disposing of related fixed assets as well as employee
severance and benefits related to the reduction in workforce. Of the $5.2
million charged to operations, approximately $1.4 million was paid through
March 31, 2000.
Interest, Net. Interest expense, net slightly decreased for the three
months ended March 31, 2000, as compared to the same period in 1999.
25
<PAGE>
Liquidity and Capital Resources
We have funded our operations with our bank credit facility, proceeds from
issuance of convertible notes, proceeds from the issuance of equity
securities, proceeds from forward sale contracts, and proceeds from sales
of partner companies.
In April 2000, we completed a follow-on public offering, selling 8.6
million shares of our common stock, including exercise in full of the
underwriters' overallotment option, at $50 per share. The net proceeds to
us were approximately $414 million, net of underwriters' commission and
offering expenses.
On March 15, 2000, we filed a Registration Statement on Form S-3 with the
Securities and Exchange Commission to sell from time to time up to $500
million of our common stock to certain strategic investors and
institutional investors. In April 2000, we completed the first tranche of
this offering with a sale to certain strategic investors. Net proceeds from
these stock sales totaled $100 million.
Sales of equity securities generated proceeds of approximately $79 million
in 2000 and $59 million in 1999.
The Company has availability under its bank revolving credit facility of
$300 million. Of the $300 million, $250 million matures in April 2005 and
is secured by certain equity securities the Company holds of its publicly
traded partner companies (the Pledged Securities), including CompuCom. The
value ascribed to these Pledged Securities for purposes of permitting
borrowings under the bank revolving credit facility exceeds the total
availability under the bank revolving 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 2001. There was $32.1 million outstanding under
the total facility at March 31, 2000.
The proceeds of our public offering and our offering to certain strategic
and institutional investors, 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, our general corporate requirements, and the repurchase
of up to $100 million of the our common stock from time to time in the open
market as authorized by the Company's Board of Directors in May 2000. At
March 31, 2000, we were contingently obligated for approximately $33
million of guarantee commitments. Additionally, we had committed capital of
approximately $232 million, including commitments made in prior years, to
various partner companies and private equity funds, to be funded over the
next several years.
Availability under our bank credit facility is determined by the market
value of the publicly traded partnership companies pledged as collateral.
If the stock markets experience a significant decline, availability under
the credit facilities could be reduced significantly and could have an
adverse effect on 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 partnership companies and support our existing
partnership 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.
26
<PAGE>
CompuCom has financing arrangements consisting of a $250 million receivable
securitization facility and a $200 million working capital facility. Both
facilities mature in May 2002. The securitization facility allows CompuCom
to sell an interest in its accounts receivable on a revolving basis and is
accounted for as a sale of accounts receivable in accordance with Statement
of Financial Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities". As of
March 31, 2000, $160 million of the securitization facility was utilized.
Availability under the working capital facility is subject to a borrowing
base calculation. As of March 31, 2000, availability under the working
capital facility was $68.8 million, of which $18.4 million was outstanding.
In accordance with the terms of the agreement, the working capital facility
is scheduled to be reduced from $200 million to $175 million in May 2000.
Both the securitization facility and the working capital facility are
subject to CompuCom's compliance with selected financial covenants and
ratios.
CompuCom's liquidity continues to be negatively impacted by the dollar
volume of vendor rebate programs. 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 these programs, CompuCom's initial price for the product is often
higher than the sales price CompuCom obtains from its customers. As of
March 2000, these programs are a material factor in CompuCom's financing
needs. As of March 31, 2000, CompuCom was owed approximately $65 million
under these programs.
Consolidated working capital decreased to $86.8 million at March 31, 2000
from $133.8 million at December 31, 1999. The decrease is a result of a
reduction in cash, which was used primarily for the cost of ownership
interests we acquired and other net outflows during in the first quarter of
2000.
Cash provided by operating activities decreased in 2000 compared to 1999
due to reduced operating results at CompuCom.
Cash used in investing activities reflects the acquisition of ownership
interests in and advances to new and existing partner companies. Partially
offsetting these activities during the three months ended March 31, 2000
and 1999, were proceeds from the sales of equity securities.
During the first quarter of 2000, we committed approximately $200 million
and funded $143 million to acquire interests in and make advances to 11 new
partner companies, including the following Internet infrastructure partner
companies: Buytream.com, fob.com, Mi8 Corporation, Nextone Communications,
TechSpace LLC, Wireless-Online and Web Telecom. We also funded
approximately $77 million to acquire interests in and make advances to our
existing private partner companies and private equity funds. In addition,
we acquired the remaining 20% interest in aligne in exchange for
approximately 160,434 shares of our common stock with a market value of
approximately $8.2 million, and purchased approximately $7 million of
shares of our publicly traded partner companies in the open market.
From April 1, 2000 through May 12, 2000, we funded $47 million of
commitments made prior to March 31, 2000. Additionally, from April 1, 2000
through May 12, 2000, we committed $93 million and funded $53 million to
acquire ownership interests in or make advances to new and existing partner
companies and private equity funds.
The Company's operations are not capital intensive, and capital
expenditures in any year normally would not be significant in relation to
the overall financial position of the Company. Capital asset requirements
are generally funded through bank credit facilities, internally generated
funds or other financing sources. There were no material capital asset
purchase commitments at March 31, 2000.
27
<PAGE>
Recent Accounting Pronouncements
We do not expect the adoption of recently issued accounting pronouncements
to have a significant impact on our net results of operations, financial
position or cash flows.
Safe Harbor Statement
Certain statements in this report describing the plans, goals, strategies,
intentions, forecasts, and expectations of our partner companies or us
constitute what are sometimes termed "forward-looking statements." The
following important factors could cause actual results to differ materially
from those in such forward-looking statements.
Our business depends on the performance of our partner companies, which is
uncertain. In general, our partner companies depend on the continuing
growth of the Internet as a medium for commercial transactions, and on the
growth of the Internet infrastructure market in particular. The Internet
infrastructure industry is intensely competitive, characterized by rapid
changes in technology and customer demands, frequent new product
introductions, and shifting distribution channels. Many of our partner
companies are early-stage companies with limited operating history and no
historical profits, and compete against companies with greater resources
and name recognition.
Fluctuations in the price of the common stock of our publicly traded
partner companies, especially Internet Capital Group, may affect the price
of our common stock. On May 9, 2000, our equity interest in Internet
Capital Group had a market value of approximately $1.3 billion, which was
significant compared to our market value of $4.3 billion. The price of
Internet Capital Group's common stock has been, and may continue to be,
highly volatile. Our continuing growth is also dependent on the continuing
strength of the market for securities of Internet infrastructure companies
in general and initial public offerings of those companies in particular.
Competition to acquire interests in Internet infrastructure companies is
intense, which could reduce the returns we can achieve on our acquisitions.
28
<PAGE>
Item 3. 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
March 31, 2000, the fair value of our holdings in public securities was
approximately $4.8 billion (excluding warrants that are unexercisable).
Approximately $3.3 billion of these equity securities at March 31, 2000
consisted of holdings in Internet Capital Group. A 20% decrease in equity prices
would result in an approximate $1.0 billion decrease in the fair values 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 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 the 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 May 12, 2000 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 March 31,
2000, there were $32.1 million of borrowings outstanding under these facilities.
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
March 31, 2000, the securitization facility had borrowings of approximately $160
million and the working capital facility had borrowings of $18 million. If
CompuCom's effective interest rate were to increase 75 basis points, or 0.75%,
CompuCom's annual interest expense would increase by approximately $1.8 million
based on CompuCom's average borrowings during the three months ended March 31,
2000. Our share of this increase would be approximately $0.9 million after
deduction for minority interest before taxes.
29
<PAGE>
PART II
OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
(a) On February 15, 2000, the Company acquired from the two minority
shareholders of aligne incorporated the remaining 20% of the outstanding common
stock of aligne not already owned by the Company. In exchange, the Company
issued 160,434 shares of the Company's common stock with a market value of
approximately $8 million. The registrant believes that the sale was exempt from
registration under Section 4(2) of the Securities Act of 1933, as amended,
because the sale was made to a limited group of persons, each of whom was
believed to have been a sophisticated investor and was purchasing for investment
without a view to further distribution. Restrictive legends were placed on stock
certificates evidencing the shares.
(b) On February 28, 2000, the Company adopted a Shareholder Rights Plan which is
described in the Company's Current Report on Form 8-K, filed with the Securities
and Exchange Commission on February 29, 2000, which is hereby incorporated by
reference herein.
30
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Company held its Annual Meeting of Shareholders on May 11, 2000. At the
meeting the shareholders voted in favor of the following items listed in the
Proxy Statement dated April 10, 2000:
I. ELECTION OF DIRECTORS
FOR WITHHELD
--- --------
Warren V. Musser 95,752,257 785,836
Robert E. Keith, Jr. 95,795,772 742,321
Harry Wallaesa 95,621,988 916,105
Vincent G. Bell, Jr. 95,747,111 790,982
Walter W. Buckley, III 95,747,031 791,062
Michael J. Emmi 95,775,835 762,258
Robert A. Fox 95,554,679 983,414
Jack L. Messman 95,550,252 987,841
Russell E. Palmer 95,769,186 768,907
John W. Poduska, Sr., Ph.D. 95,785,833 752,260
Heinz C. Schimmelbusch, Ph.D. 95,533,317 1,004,776
Hubert J.P. Schoemaker, Ph.D. 95,796,150 741,943
Carl J. Yankowski 95,754,202 783,891
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
Number Description
------ -----------
10.1* Restricted Stock Grant Letter dated February 28, 2000
from Safeguard Scientifics, Inc. to a certain executive.
(Exhibits Omitted)
10.2* Term note dated April 13, 2000 from a certain executive
to Safeguard Scientifics, Inc.
10.3* Form of Promissory Notes dated April 6, 2000 given by
certain executives for advances by Safeguard of income
tax withholdings on restricted stock grants.
10.4* Amended and Restated Credit Agreement among Safeguard
Scientifics, Inc., Safeguard Scientifics (Delaware),
Inc., Safeguard Delaware, Inc., and PNC Bank , N.A.
(Exhibits Omitted)
10.5* Executive Employment Agreement dated March 13, 2000,
between Anthony F. Pellegrini and CompuCom Systems, Inc.
27* Financial Data Schedule (electronic filing only)
* filed herewith
31
<PAGE>
(b) On February 29, 2000, the Company filed a Current Report on Form 8-K
to report under Item 5 the following:
. the Company's Board of Directors approval of a three-for-one
split of the outstanding shares of Common Stock of the
Company, in the form of a dividend of two shares of Common
Stock of the Company outstanding at the close of business on
March 13, 2000;
. the adoption of the shareholder rights plan;
. that the Company and Textron Inc. entered into a Transaction
Agreement, dated February 28, 2000, providing for the
purchase by Textron Inc. of 727,273 Common Shares (or
2,181,819 Common Shares after giving effect to the Stock
Split) for an aggregate purchase price of $100 million.
. On February 10, 2000, the Board of Directors of the Company
amended and restated the Bylaws of the Company. The amended
and restated Bylaws are filed as Exhibit 3 hereto.
. the financial results for the fourth quarter of 1999.
On March 1, 2000, the Company filed a Current Report on Form 8-K to
report under Item 5 a three-for-one stock split on the Company's
Common Stock effected in the form of a stock dividend to holders of
record on March 13, 2000, the filing of a registration statement for
an underwritten public offering of Common Stock of the Company, and
the appointment of Gerald Blitstein to senior vice president and chief
financial officer of the Company.
32
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SAFEGUARD SCIENTIFICS, INC.
(Registrant)
Date: May 15, 2000 /s/ HARRY WALLAESA
----------------------------------------
Harry Wallaesa
President and Chief Operating Officer
Date: May 15, 2000 /s/ GERALD A. BLITSTEIN
----------------------------------------
Gerald A. Blitstein
Senior Vice President and Chief
Financial Officer
(Principal Financial and Principal
Accounting Officer)
33
<PAGE>
EXHIBIT 10.1
SAFEGUARD SCIENTIFICS, INC.
RESTRICTED STOCK GRANT LETTER
DATE OF GRANT: February 28, 2000
This Restricted Stock Grant is granted by Safeguard Scientifics, Inc., a
Pennsylvania corporation (the "Company") to Gerald A. Blitstein (the "Grantee")
this 28th day of February, 2000, as an inducement to Grantee's joining the
Company in the position of Senior Vice President and Chief Financial Officer.
1. Stock Grant
-----------
The Company hereby offers to the Grantee the opportunity to acquire from
the Company 25,000 shares of common stock of the Company, $.10 par value (the
"Shares"), for no consideration.
Subject to the Grantee's acceptance of this offer the Company will prepare
and issue a certificate representing the Shares, which shall be registered in
the name of the Grantee and which shall bear the following restrictive legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 OR APPLICABLE STATE
SECURITIES LAWS. THESE SECURITIES HAVE BEEN ACQUIRED FOR
INVESTMENT AND NOT WITH A VIEW TO DISTRIBUTION OR RESALE. THESE
SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, DELIVERED AFTER
SALE, TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT COVERING SUCH SHARES UNDER THE
ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR THE
AVAILABILITY, IN THE OPINION OF COUNSEL, OF AN EXEMPTION FROM
REGISTRATION THEREUNDER.
2. Acceptance by the Grantee; Deposit of Certificates into Escrow
--------------------------------------------------------------
The Grantee shall signify acceptance of the offer to acquire the Shares by
delivering to the Company an executed copy of the Acceptance of Grant attached
as Exhibit A hereto.
Upon receipt from the Grantee of the executed copy of the Acceptance of
Grant and approval by the New York Stock Exchange of the Supplemental Listing
Application relating to the Shares, the Company shall cause a certificate
representing the Shares to be issued in Grantee's name.
3. Withholding of Taxes
--------------------
The Company's income tax withholding obligation with respect to the Shares
will be satisfied, in whole or in part, as the case may be, by having Shares
withheld equal to the lesser of 10,000 shares or the amount of the Grantee's
maximum marginal tax rate for federal (including FICA), state and local tax
liabilities.
1
<PAGE>
4. No Contract for Employment
--------------------------
Nothing contained in this Grant Letter shall be deemed to require the
Company to continue the Grantee's employment.
5. Administration
--------------
All questions of interpretation of this Grant shall be determined by the
Compensation Committee of the Company's Board of Directors, in its discretion,
and any such determination shall be final and binding upon all persons. The
validity, construction and effect of this Grant shall be determined in
accordance with the laws of the Commonwealth of Pennsylvania, without giving
effect to the principles of conflicts of law thereof.
SAFEGUARD SCIENTIFICS, INC.
By: /s/ Harry Wallaesa
--------------------------------
Harry Wallaesa, President and
Chief Operating Officer
2
<PAGE>
EXHIBIT A
ACCEPTANCE OF GRANT
The Grantee acknowledges and agrees with the terms and conditions of the
attached Grant Letter pursuant to which Safeguard Scientifics, Inc. (the
"Company") has offered the Grantee the opportunity to acquire 25,000 shares of
common stock of the Company, $.10 par value (the "Shares").
As a condition to the issuance of the Shares, the Grantee hereby represents
and warrants to the Company and agrees with the Company as follows:
1. Investment Intent. The Grantee is acquiring the Shares for the
-----------------
Grantee's own account for investment and not with a view to, or for sale in
connection with, any distribution of the Shares or any portion thereof and not
with any present intention of selling, offering to sell or otherwise disposing
of or distributing the Shares or any portion thereof in any transaction other
than a transaction exempt from registration under the 1933 Act. The Grantee
represents that the entire legal and beneficial interest in the Shares is being
acquired, and will be held, for the Grantee's account only, and neither in whole
or in part for any other person.
2. Information Concerning the Company. The Grantee has heretofore had the
----------------------------------
opportunity to discuss with officers and directors of the Company the plans,
operations and financial condition of the Company and has heretofore received
all such information as the Grantee has requested.
3. Economic Risk. The Grantee understands that the Shares are highly
-------------
speculative securities involving a high degree of risk. The Grantee is able,
without impairing his financial condition, to hold the Shares for an indefinite
period of time and to suffer a complete loss of value of the Shares.
4. Restricted Securities. The Grantee understands that the Shares will
---------------------
not be registered under the Securities Act of 1933, that the Company has no
obligation to register the Shares, and that the Shares may not be resold except
in accordance with Rule 144. Grantee acknowledges that he is familiar with Rule
144, which provides for the resale of restricted securities. In its present
form, Rule 144 generally provides that routine sales of restricted securities
may be made in reliance thereon if (i) such securities have been beneficially
owned for a period of at least one year by the person for whose account they are
sold, (ii) the amount sold does not exceed in any three-month period the greater
of one percent of the class outstanding or the average weekly volume reported on
all exchanges or quotation systems during the four weeks preceding the filing of
the required notice of sale, (iii) adequate information is available to the
public in regard to the issuer of the securities, and (iv) a notice of the sale
on Form 144 is timely filed.
5. Legends. The Grantee understands that the certificates representing
-------
the Shares will bear any legends required by the securities or "blue sky" laws
of any state in addition to the legends set forth in the Grant Letter.
1
<PAGE>
The Grantee, intending to be legally bound hereby, has executed this
Acceptance of Grant as of the date set forth below.
Dated: February 28, 2000
GRANTEE:
/s/ Gerald A. Blitstein
------------------------------
Gerald A. Blitstein
2
<PAGE>
EXHIBIT 10.2
TERM NOTE
$31,800.00 April 13, 2000
In consideration of the loan (hereinafter referred to as a "Loan")
Safeguard Scientifics, Inc., a Pennsylvania corporation (the "Lender"), has made
to Gerald A. Blitstein (the "Borrower"), and for value received, the Borrower
hereby promises to pay to the order of the Lender, at the Lender's office
located at 800 The Safeguard Building, 435 Devon Park Drive, Wayne, PA 19087-
1945, or at such other place in the continental United States as the Lender may
designate in writing, in lawful money of the United States, and in immediately
available funds, the principal sum of $31,800.00.
The unpaid principal balance of the Note shall be paid, in full, on the
earlier of May 13, 2001 or Borrower's termination of employment.
The Borrower hereby further promises to pay to the order of the Lender
interest on the outstanding principal amount from the date hereof, at a per
annum rate equal to 6.46% (the "Loan Rate"). The Borrower shall pay, on demand,
interest on any overdue payment of principal and interest (to the extent legally
enforceable) at the Loan Rate plus three percent (3%).
Interest shall be payable upon maturity or early repayment of the entire
outstanding principal balance of the Note.
All payments made on this Note (including, without limitation, prepayments)
shall be applied, at the option of the Lender, first to late charges and
collection costs, if any, then to accrued interest and then to principal.
Interest payable hereunder shall be calculated for actual days elapsed on the
basis of a 360-day year. All accrued and unpaid interest shall be due and
payable upon maturity of this Note. After maturity or in the event of default,
interest shall continue to accrue on the Note at the rate set forth above and
shall be payable on demand of the Lender.
The outstanding principal amount of this Note may be prepaid in whole or in
part without any prepayment penalty or premium at any time or from time to time
by Borrower upon notice to the Lender; provided, that any prepayment shall be
applied first to any interest due to the date of such prepayment on this Note
and thereafter shall be applied to the installments of principal hereunder in
the inverse order of maturity.
Notwithstanding anything in this Note, the interest rate charged hereon
shall not exceed the maximum rate allowable by applicable law. If any stated
interest rate herein exceeds the maximum allowable rate, then the interest rate
shall be reduced to the maximum allowable rate, and any excess payment of
interest made by Borrower at any time shall be applied to the unpaid balance of
any outstanding principal of this Note.
An event of default hereunder shall consist of:
<PAGE>
(i) a default in the payment by the Borrower to the Lender of principal
or interest under this Note as and when the same shall become due and payable;
or
(ii) an event of default under the Pledge Agreement; or
(iii) institution of any proceeding by or against the Borrower under any
present or future bankruptcy or insolvency statute or similar law and, if
involuntary, if the same are not stayed or dismissed within sixty (60) days,
or the Borrower's assignment for the benefit of creditors or the appointment
of a receiver, trustee, conservator or other judicial representative for the
Borrower or the Borrower's property or the Borrower's being adjudicated a
bankrupt or insolvent.
Upon the occurrence of an event of default hereunder, this Note shall
automatically without any action or notice by Lender, be accelerated and become
immediately due and payable, and Lender shall have all of the rights and
remedies provided for herein or otherwise available at law or in equity, all of
which remedies shall be cumulative.
Neither the reference to nor the provisions of any agreement or document
referred to herein shall affect or impair the absolute and unconditional
obligation of the Borrower to pay the principal of and interest on this Note as
herein provided.
The Borrower hereby waives presentment, demand, protest and notice of
dishonor and protest, and also waives all other exemptions, and agrees that
extension or extensions of the time of payment of this Note or any installment
or part thereof may be made before, at or after maturity by agreement by the
Lender. Upon default hereunder the Lender shall have the right to offset the
amount owed by the Borrower against any amounts owed by the Lender in any
capacity to the Borrower, whether or not due, and the Lender shall be deemed to
have exercised such right of offset and to have made a charge against any such
account or amounts immediately upon the occurrence of an event of default
hereunder even though such charge is made or entered on the books of the Lender
subsequent thereto. The Borrower shall pay to the Lender, upon demand, all costs
and expenses, including, without limitation, attorneys' fees and legal expenses,
that may be incurred by the Lender in connection with the enforcement of this
Note.
Notices required to be given hereunder shall be deemed validly given (i)
three business days after sent, postage prepaid, by certified mail, return
receipt requested, (ii) one business day after sent, charges paid by the sender,
by Federal Express Next Day Delivery or other guaranteed delivery service, (iii)
when sent by facsimile transmission, or (iv) when delivered by hand:
If to the Lender: Safeguard Scientifics, Inc.
800 The Safeguard Building
435 Devon Park Drive
Wayne, PA 19087-1945
If to the Borrower: Gerald A. Blitstein
11 Kingston Road
<PAGE>
Scarsdale, NY 10583
or to such other address, or in care of such other person, as the holder or the
Borrower shall hereafter specify to the other from time to time by due notice.
Any failure by the Lender to exercise any right hereunder shall not be
construed as a waiver of the right to exercise the same or any other right at
any time. No amendment to or modification of this Note shall be binding upon
the Lender unless in writing and signed by it. Any provision hereof found to be
illegal, invalid or unenforceable for any reason whatsoever shall not affect the
validity, legality or enforceability of the remainder hereof. This Note shall
apply to and bind the successors of the Borrower and shall inure to the benefit
of the Lender, its successors and assigns.
This Note shall be governed by and interpreted in accordance with the laws
of the Commonwealth of Pennsylvania.
IN WITNESS WHEREOF, the Borrower has duly executed this Term Note as of the
date first written above.
/s/ Gerald A. Blitstein
-------------------------------
Gerald A. Blitstein
<PAGE>
EXHIBIT 10.3
TERM NOTE
$ April 6, 2000
----------
In consideration of the loan (hereinafter referred to as a "Loan")
Safeguard Scientifics, Inc., a Pennsylvania corporation (the "Lender"), has made
to _______, (the "Borrower"), and for value received, the Borrower hereby
promises to pay to the order of the Lender, at the Lender's office located at
800 The Safeguard Building, 435 Devon Park Drive, Wayne, PA 19087-1945, or at
such other place in the continental United States as the Lender may designate in
writing, in lawful money of the United States, and in immediately available
funds, the principal sum of $___________.
The unpaid principal balance of the Note shall be paid, in full, on the
earlier of May 6, 2001 or Borrower's termination of employment.
The Borrower hereby further promises to pay to the order of the Lender
interest on the outstanding principal amount from the date hereof, at a per
annum rate equal to 6.46% (the "Loan Rate"). The Borrower shall pay, on demand,
interest on any overdue payment of principal and interest (to the extent legally
enforceable) at the Loan Rate plus three percent (3%).
Interest shall be payable upon maturity or early repayment of the entire
outstanding principal balance of the Note.
All payments made on this Note (including, without limitation, prepayments)
shall be applied, at the option of the Lender, first to late charges and
collection costs, if any, then to accrued interest and then to principal.
Interest payable hereunder shall be calculated for actual days elapsed on the
basis of a 360-day year. All accrued and unpaid interest shall be due and
payable upon maturity of this Note. After maturity or in the event of default,
interest shall continue to accrue on the Note at the rate set forth above and
shall be payable on demand of the Lender.
The outstanding principal amount of this Note may be prepaid in whole or in
part without any prepayment penalty or premium at any time or from time to time
by Borrower upon notice to the Lender; provided, that any prepayment shall be
applied first to any interest due to the date of such prepayment on this Note
and thereafter shall be applied to the installments of principal hereunder in
the inverse order of maturity.
Notwithstanding anything in this Note, the interest rate charged hereon
shall not exceed the maximum rate allowable by applicable law. If any stated
interest rate herein exceeds the maximum allowable rate, then the interest rate
shall be reduced to the maximum allowable rate, and any excess payment of
interest made by Borrower at any time shall be applied to the unpaid balance of
any outstanding principal of this Note.
1
<PAGE>
An event of default hereunder shall consist of:
(i) a default in the payment by the Borrower to the Lender of principal
or interest under this Note as and when the same shall become due and payable;
or
(ii) an event of default under the Pledge Agreement; or
(iii) institution of any proceeding by or against the Borrower under any
present or future bankruptcy or insolvency statute or similar law and, if
involuntary, if the same are not stayed or dismissed within sixty (60) days,
or the Borrower's assignment for the benefit of creditors or the appointment
of a receiver, trustee, conservator or other judicial representative for the
Borrower or the Borrower's property or the Borrower's being adjudicated a
bankrupt or insolvent.
Upon the occurrence of an event of default hereunder, this Note shall
automatically without any action or notice by Lender, be accelerated and become
immediately due and payable, and Lender shall have all of the rights and
remedies provided for herein or otherwise available at law or in equity, all of
which remedies shall be cumulative.
Neither the reference to nor the provisions of any agreement or document
referred to herein shall affect or impair the absolute and unconditional
obligation of the Borrower to pay the principal of and interest on this Note as
herein provided.
The Borrower hereby waives presentment, demand, protest and notice of
dishonor and protest, and also waives all other exemptions, and agrees that
extension or extensions of the time of payment of this Note or any installment
or part thereof may be made before, at or after maturity by agreement by the
Lender. Upon default hereunder the Lender shall have the right to offset the
amount owed by the Borrower against any amounts owed by the Lender in any
capacity to the Borrower, whether or not due, and the Lender shall be deemed to
have exercised such right of offset and to have made a charge against any such
account or amounts immediately upon the occurrence of an event of default
hereunder even though such charge is made or entered on the books of the Lender
subsequent thereto. The Borrower shall pay to the Lender, upon demand, all costs
and expenses, including, without limitation, attorneys' fees and legal expenses,
that may be incurred by the Lender in connection with the enforcement of this
Note.
Notices required to be given hereunder shall be deemed validly given (i)
three business days after sent, postage prepaid, by certified mail, return
receipt requested, (ii) one business day after sent, charges paid by the sender,
by Federal Express Next Day Delivery or other guaranteed delivery service, (iii)
when sent by facsimile transmission, or (iv) when delivered by hand:
2
<PAGE>
If to the Lender: Safeguard Scientifics, Inc.
800 The Safeguard Building
435 Devon Park Drive
Wayne, PA 19087-1945
If to the Borrower:
or to such other address, or in care of such other person, as the holder or the
Borrower shall hereafter specify to the other from time to time by due notice.
Any failure by the Lender to exercise any right hereunder shall not be
construed as a waiver of the right to exercise the same or any other right at
any time. No amendment to or modification of this Note shall be binding upon
the Lender unless in writing and signed by it. Any provision hereof found to be
illegal, invalid or unenforceable for any reason whatsoever shall not affect the
validity, legality or enforceability of the remainder hereof. This Note shall
apply to and bind the successors of the Borrower and shall inure to the benefit
of the Lender, its successors and assigns.
This Note shall be governed by and interpreted in accordance with the laws
of the Commonwealth of Pennsylvania.
IN WITNESS WHEREOF, the Borrower has duly executed this Term Note as of the
date first written above.
-------------------------------
3
<PAGE>
Name Loan Amount
- -----------------------------------------------------------------------
Gerald A. Blitstein $16,125.00
- -----------------------------------------------------------------------
John K. Halvey $39,076.65
- -----------------------------------------------------------------------
4
<PAGE>
EXHIBIT 10.4
============================================================
AMENDED AND RESTATED
CREDIT AGREEMENT
AMONG
SAFEGUARD SCIENTIFICS, INC.
SAFEGUARD SCIENTIFICS (DELAWARE) INC.
SAFEGUARD DELAWARE, INC.
AND
PNC BANK, NATIONAL ASSOCIATION
AND
THE OTHER LENDERS NOW OR
HEREAFTER A PARTY HERETO
=============================================================
<PAGE>
AMENDED AND RESTATED
CREDIT AGREEMENT
AGREEMENT (the "Agreement") made as of this 18th day of April, 2000, by and
among Safeguard Scientifics, Inc., a Pennsylvania corporation ("SSI" or a
"Borrower"), Safeguard Scientifics (Delaware) Inc., a Delaware corporation
("SSD" or a "Borrower") and Safeguard Delaware, Inc., a Delaware corporation
("SDI" or a "Borrower" and, collectively with SSI and SSD, the "Borrowers"), PNC
Bank, National Association and the other lending institutions listed from time
to time on Schedule A attached hereto and incorporated herein that are parties
to this Agreement (collectively, "Lenders" and singly, a "Lender"), PNC Bank,
National Association, a national banking association, as issuer of letters of
credit hereunder (in such capacity, "Issuer"), and PNC Bank, National
Association, as administrative and collateral agent for the Issuer and Lenders
hereunder (in such capacity, "Agent").
The Borrowers have requested Lenders to establish certain credit facilities
and Lenders are willing to do so under and subject to the terms hereof. This
Agreement amends and restates that certain Credit Agreement among PNC Bank,
National Association, the Borrowers and certain of the Lenders dated April 17,
1998, as amended prior to the date hereof (as amended, the "Prior Credit
Agreement").
NOW, THEREFORE, the parties hereto, intending to be legally bound hereby,
agree as follows:
Article 1. Definitions.
-----------
1.1 Terms Defined.
--------------
As used in this Agreement, the following terms shall have the following
respective meanings set forth below or set forth in the section referred to
following such term:
"Advance" or "Advances" - Revolving Loan I Advance(s) and Revolving Loan II
Advance(s).
"Borrowing Base" - as of any date, the product of (x) the value (as
determined in accordance with Section 2.15 hereof) of the Collateral Coverage
Securities, multiplied by (y) 10%.
"Business Day" - any day other than Saturday, Sunday or any other day on
which commercial banks in Pennsylvania and New York are authorized or required
by law or executive order to close.
"Capitalized Lease Obligations" - as to any Person, any obligations of such
Person to pay rent or other amounts under a lease of (or other agreement
conveying the right to use) real and/or personal property which obligations are
required to be classified and accounted for as a capital lease on a balance
sheet of such Person under generally accepted accounting principles. For
purposes of this Agreement, the amount of such obligations shall be the
capitalized amount thereof, determined in accordance with generally accepted
accounting principles.
"Certificate" - a certificate executed either by the president, the
treasurer or controller or any vice president of any Borrower.
<PAGE>
"Closing" - the transactions provided for in Sections 4.1 and 4.2 hereof.
"Collateral" - the collateral provided for herein and in the Security
Documents.
"Collateral Coverage Base" - a dollar amount equal to the following
percentages of the value of the Collateral Coverage Securities, in no event,
however, to exceed the lesser of (i) as to Collateral Coverage Securities which
constitute "margin stock" pursuant to Regulation U of the Board of Governors of
the Federal Reserve System, 12 C.F.R. 221 et seq. ("Regulation U"), 50% (or the
then maximum "loan value" for margin stock pursuant to Regulation U) of the
value of such Collateral Coverage Securities, and (ii) the following dollar
maximum specified for each type of Collateral Coverage Securities, provided that
--------
the following dollar maximum for such Collateral Coverage Securities will, with
the exception of the dollar maximum specified for ICG, be inapplicable at such
time as Borrowers own (directly or indirectly) less than 15% of the applicable
issuing corporation's securities which have ordinary voting power for the
election of directors (with an "N/A" designation in the "Maximum $" column below
constituting Borrowers' representation to Lenders that Borrowers presently own
less than 15% of the applicable issuing corporation's securities which have
ordinary voting power for the election of directors), and provided further that
----------------
with respect to Collateral Coverage Securities issued by ICG which are subject
to so-called broker lock-up agreements the dollar maximum shall be $50,000,000:
<TABLE>
<CAPTION>
Securities % Maximum $
---------- ------ ---------
<S> <C> <C>
ICG 15.0% $150 Million/$50 Million
Compucom 33.33% $75 Million
Cambridge 50.% $125 Million
Tangram 25.% $10 Million
USDATA 33.33% $25 Million
Sanchez 40.% $75 Million
Brandywine 25.% N/A
ChromaVision 25.% $25 Million
OAO 25.% $25 Million
DocuCorp. 25.% $25 Million
eMerge 25.% $25 Million
Pac-West 25.% $25 Million
US Interactive 25.% $25 Million
New Public Companies 25.% $25 Million
</TABLE>
-2-
<PAGE>
"Collateral Coverage Securities" - Pledged Securities consisting of common
stock issued by one or more of the following corporations but only as long as
(A) such securities are traded on a recognized national securities exchange, on
the NASDAQ national or small-cap market or on the over-the-counter market and
(B) such securities are not Restricted Securities:
(i) CompuCom Systems, Inc. ("CompuCom")
(ii) Cambridge Technology Partners (Massachusetts), Inc.
("Cambridge")
(iii) OAO Technology Solutions, Inc. ("OAO")
(iv) DocuCorp International, Inc. ("DocuCorp")
(y) eMerge Interactive, Inc. ("e-Merge")
(vi) Tangram Enterprise Solutions, Inc. ("Tangram")
(vii) USDATA Corporation ("USDATA")
(viii) ChromaVision Medical Systems, Inc. ("ChromaVision")
(ix) Sanchez Computer Associates, Inc. ("Sanchez")
(x) Brandywine Realty Trust ("Brandywine")
(xi) Pac-West Telecomm, Inc. ("Pac-West")
(xii) Internet Capital Group ("ICG")
(xiii) US Interactive, Inc.
(xiv) New Public Companies
"Commitment Termination Date I" - April 17, 2005.
"Commitment Termination "Date II" - April 17, 2001.
"Compliance Certificate" - as defined in Section 4.2(h) hereof
"Cost of Prepayment" - with respect to prepayment of principal earning
interest at the LIBOR Rate, an amount equal to the present value, if positive,
of the product of (a) the difference between (i) the yield, on the beginning
date of the applicable Rate Period, of a U.S. Treasury obligation with a
maturity similar to the applicable Rate Period minus (ii) the yield on the
-----
prepayment date, of a U.S. Treasury obligation with a maturity similar to the
remaining maturity of the applicable Rate Period, and (b) the principal amount
to be prepaid, and (c) the number of years, including fractional years, from the
prepayment date to the end of the applicable Rate Period. The yield on any U.S.
Treasury obligation shall be determined by reference to Federal Reserve
Statistical Release H.15(519) "Selected Interest Rates". For purposes of making
present value calculations, the yield to maturity of a similar maturity U.S.
Treasury obligation on the prepayment date shall be deemed the discount rate.
The Cost of Prepayment shall also apply to any payments made after acceleration
of the maturity.
-3-
<PAGE>
"Debt Instrument" - as defined in Section 7.4(a) hereof.
"Default" - an event which with notice or the lapse of time or both would
constitute an Event of Default.
"Dollars" and "$" - lawful money of the United States of America.
"Equity Interests" - any loans, advances or extensions of credit (other
than guaranties) or any purchase of any debt or equity security, including
without limitation, capital stock, bonds, debentures, notes, general partnership
interests, limited partnership interests, warrants or other rights, all whether
certificated or uncertificated.
"ERISA" - as defined in Section 3.14 hereof
"Event of Default" - as defined in Article 7 hereof.
"Fed Funds Rate" - The daily rate of interest announced from time to time
by the Board of Governors of the Federal Reserve System in publication H.15, or
any successor publication, as the "Federal Funds Rate".
"Financial Statements" -
(a) The audited balance sheets of SSI and its Subsidiaries (including,
without limitation, SSD) at December 31, 1998, and the related audited
consolidated statements of operations, shareholder's equity and cash flows, and
the notes thereto, of SSI and its Subsidiaries for the above mentioned year
certified without qualification or explanatory paragraphs by independent
certified public accountants satisfactory to the Agent;
(b) The unaudited consolidating balance sheets of SSI and its Subsidiaries
(including without limitation, SSD), as at September 30, 1999, and the unaudited
internal consolidating statement of operations of SSI and its Subsidiaries
(including, without limitation, SSD) for the nine months then ended; and
(c) The unaudited consolidated balance sheets of SSI and its Subsidiaries
(including, without limitation, SSD) as at September 30, 1999, and the related
unaudited consolidated statement of operations and cash flows, and the notes
thereto, of SSI and its Subsidiaries for the nine months then ended.
"Funded Debt" - as of any date, without duplication, all Indebtedness for
borrowed money, including without limitation outstanding Advances (including the
face amount of outstanding Letters of Credit) and unreimbursed draws on Letters
of Credit, but excluding Subordinated Indebtedness.
"Indebtedness" - with respect to any Person, all (i) liabilities or
obligations which in accordance with generally accepted accounting principles
would be included in determining total liabilities as shown on the liability
side of a balance sheet of such Person at the date as of which Indebtedness is
to be determined, including, without limitation, Capitalized Lease Obligations
of such Person; and (ii) liabilities or obligations secured by Liens on any
assets of such Person, whether or not such liabilities or obligations shall have
been assumed by it.
"Interest Coverage Ratio" - as of any date, the ratio of (a) Pre Tax
Earnings plus cash interest expense for the twelve (12) months ending on such
date to (b) the cash interest expense for such twelve (12) month period.
-4-
<PAGE>
"IRS" - as defined in Section 3.14 hereof.
"Leases" - leases and subleases (other than the leases or subleases the
obligation to pay rent or other amounts under which is a Capitalized Lease
Obligation), licenses, easements, grants, pole attachment and conduit or trench
agreements and other attachment rights and similar instruments under which any
Borrower has the right to use real or personal property or rights of way.
"Lending Office" - 1600 Market Street, Philadelphia, Pennsylvania 19103 or
such other office as the Agent may from time to time specify to the Borrowers as
the office at which Advances are to be made.
"Letters of Credit" - as defined in Section 2.1.1 hereof.
"Liabilities" - for the purposes of calculating Indebtedness to Tangible
Net Worth and for the purposes of determining "Liabilities" of Borrowers hereof,
Liabilities shall not include minority shareholder interest which may appear on
a balance sheet of SSI, prepared in accordance with generally accepted
accounting principles, consistently applied.
"Lien" - any interest in Property securing an obligation owed to, or a
claim by, a Person other than the owner of the Property, whether such interest
is based on the common law, statute or contract, and including but not limited
to the security interest or lien arising from a mortgage, encumbrance, pledge,
conditional sale or trust receipt or a lease, consignment or bailment for
security purposes. The term "Lien" shall include reservations, exceptions,
encroachments, easements, rights-of-way, covenants, conditions, restrictions,
leases and other title exceptions and encumbrances affecting Property. For the
purpose of this Agreement, any Borrower shall be deemed to be the owner of any
Property which it has acquired or holds subject to a conditional sale agreement
or other arrangement pursuant to which title to the Property has been retained
by or vested in some other person for security purposes.
"Loan Documents" - this Agreement, the Notes, the Security Documents and
all other documents executed and delivered in connection herewith or therewith,
including all amendments, modifications and supplements of or to all such
documents.
"Loans" - the Revolving Loan I and the Revolving Loan II.
"Majority Lenders" - at any time, Lenders holding Pro Rata Percentages
aggregating at least 66.67% at such time.
"Material Adverse Effect" - any specified event, condition or occurrence as
to any Borrower which individually or in the aggregate with any other such
event, condition or occurrence and whether through the effect on such Borrower's
business, property, prospects, profits or condition (financial or otherwise) or
otherwise could reasonably be expected to result in, to the extent not fully
covered by insurance, any liability, loss, forfeiture, penalty, costs, fine,
expense, payment or other monetary obligation or loss of property in excess of
$10,000,000.00 as to any Borrower or as to all Borrowers taken as a whole.
"Monetization/Sub Debt Annual Limit" - $400,000,000.
"New Public Companies" - corporations in which a Borrower hereafter
acquires common stock.
"Notes" - the Revolving Loan Notes.
-5-
<PAGE>
"Obligations" - the obligations of the Borrowers to pay the principal of
and interest on the Notes and to satisfy and perform all of their other existing
and future obligations, liabilities and indebtedness to Agent, Issuer and each
Lender hereunder and under any of the other Loan Documents, including, without
limitation, any extensions, modifications, restatements, renewals thereof and
substitutions therefor.
"Person" - an individual, partnership, corporation, trust or unincorporated
organization, or a government or agency or political subdivision thereof.
"Pledge Agreement" - The Pledge Agreement between Agent and Borrowers dated
the date hereof, as the same may hereafter be amended from time to time.
"Pledged Securities" - Securities owned by the Borrowers pledged as
collateral from time to time for the performance of the Borrowers' Secured
Obligations.
"Post-Default Rate" - in respect of any amounts not paid when due (whether
at stated maturity, by acceleration or otherwise), a rate per annum during the
period commencing on the due date until such amounts are paid in full equal to
2% per annum above the rate(s) otherwise applicable to such amounts as provided
for in Section 2.8 hereof.
"Pre-Tax Earnings" - gross revenues and other proper income credits, plus
any cash proceeds realized on the sale of securities, less all proper income
charges other than taxes on income, all determined in accordance with generally
accepted accounting principles; provided that there shall not be included in
---------
such revenues or charges (a) any gains resulting from the write-up of assets;
(b) any proceeds of any life insurance policy; (c) earnings (or losses) from
minority interests of the Borrowers; (d) earnings (or losses) from equity
investments carried on an equity basis to the extent not received by the
Borrowers; (e) any gain or loss, other than a gain or loss on the sale of stock,
which is classified as "extraordinary" in accordance with generally accepted
accounting principles; or (f) any book gain (or loss) on the sale of securities.
Pre-Tax Earnings can be less than zero for all purposes of this Agreement.
"Prime Rate" - the interest rate which Agent announces from time to time at
its Principal Office as its prime rate. Each change in any interest rate
provided for herein based upon the Prime Rate resulting from a change in the
Prime Rate shall take effect at the time of such change in the Prime Rate. The
Borrowers acknowledge that such Prime Rate is not tied to an external rate of
interest or index and does not necessarily reflect the lowest rate of interest
actually charged by the Agent to any particular class or category of customer.
"Principal Office" - Agent's principal office presently located at 1600
Market Street, Philadelphia, Pennsylvania 19103.
"Pro Rata Percentage" - The percentage set forth opposite each Lender's
name on Schedule A.
"Property" - any interest in any kind of property or asset, whether real,
personal or mixed or tangible or intangible.
"Quarterly Dates" - the last Business Day of each March, June, September
and December.
"Restricted Securities" - securities now or hereafter owned by a Borrower
which such Borrower is, or Agent or any Lender if acquired from Borrowers as
pledgor would be, prohibited under applicable federal or state law or
regulations, or pursuant to private contract (including so-called broker lock-up
agreements), from publicly offering or selling in open market transactions
-6-
<PAGE>
throughout the United States. For this purpose securities which can lawfully be
sold pursuant to Rule 144 of the Securities Act of 1933, as amended, subject
only to volume limitations set forth in Rule 144(e), are not "Restricted
Securities" solely by reason of such volume limitations. Notwithstanding the
foregoing, securities issued by ICG shall not constitute Restricted Securities
solely by reason that they are subject to so-called broker lock-up agreements
although the maximum dollar amount of outstanding Advances against such
securities shall be limited as set forth in the definition of Collateral
Coverage Securities.
"Revolving Credit Period I" - as defined in Section 2.1.1 hereof.
"Revolving Credit Period II" - as defined in Section 2.1.2 hereof.
"Revolving Loan I" - as defined in Section 2.1.1 hereof.
"Revolving Loan II" - as defined in Section 2.1.2 hereof.
"Revolving Loan Commitment I" - $250,000,000, as the same may be reduced
pursuant to Section 2.2 hereof.
"Revolving Loan Commitment II" - $50,000,000, as the same may be reduced
pursuant to Section 2.2 hereof.
"Revolving Loan I Advance" and "Revolving Loan II Advance" - as defined in
Sections 2.1.1 and 2.1.2 hereof.
"Revolving Loan Notes" - as defined in Section 2.9 hereof.
"Secured Obligations" - all Obligations other than Borrowers' obligation to
pay the principal of or interest or fees on the Revolving Loan II.
"Securities Monetization" - the transfer by a Borrower of stock pursuant
to a transaction substantially identical to that provided for in the Sails
Mandatorily Exchangeable Securities Contract dated as of August 30, 1999 among
SSD, Credit Suisse Financial Products and CSFP, Inc., and which is otherwise
satisfactory to the Agent and the Majority Lenders in their reasonable business
judgment. In the event of any disagreement between the parties as to whether a
transaction proposed to be entered into by the Borrowers constitutes a
"Securities Monetization" for purposes hereof, the good faith determination by
the Agent shall be conclusive.
"Security Documents" - as defined in Section 2.14 hereof.
"Sub Debt Aggregate Sub Limit" - $500,000,000.
"Subordinated Indebtedness" - unsecured Indebtedness of the Borrowers the
holder of which has agreed with or for the benefit of the Lenders pursuant to a
written agreement satisfactory to Agent and the Majority Lenders that the
principal of and interest on such Indebtedness will not be repaid in any
liquidation or dissolution of the Borrowers until all obligations and
indebtedness of Borrowers to Lenders have been repaid in full and Lenders'
lending commitment to Borrowers has terminated, and which is otherwise
satisfactory to Agent in its reasonable business judgment. In the event of any
disagreement between the parties as to whether a transaction proposed to be
entered into by the Borrowers constitutes Subordinated Indebtedness for purposes
hereof, the good faith determination by the Agent shall be conclusive.
"Subsidiary" - any corporation at least a majority (meaning in excess of
50%) of the securities of which having ordinary voting power for the election of
directors (other than
-7-
<PAGE>
securities having such power only by reason of the occurrence of a contingency)
are at the time owned, directly or indirectly, by any of the Borrowers, by one
or more of their Subsidiaries, or by the Borrowers and one or more of their
Subsidiaries.
"Tangible Net Worth" - the excess of total assets over the sum of total
liabilities (excluding Subordinated Indebtedness) and minority shareholder
interests, to be determined in accordance with generally accepted accounting
principles consistent with those applied in the preparation of the Financial
Statements, excluding, however, from the determination of total assets (a) all
assets which would be classified as intangible assets under generally accepted
accounting principles, including, without limitation, goodwill (whether
representing the excess of cost over book value of assets acquired or
otherwise), patents, trademarks, trade names, copyrights, franchises, and
deferred charges (including, without limitation, unamortized debt discount and
expense, organization costs and research and development costs); (b) treasury
stock; (c) cash set apart and held in sinking or other analogous funds
established for the purpose of redemption or other retirement of capital stock;
(d) to the extent not already deducted from total assets, reserves for
depreciation, depletion, obsolescence and/or amortization of properties and all
other reserves or appropriations of retained earnings which, in accordance with
generally accepted accounting principles, should be established in connection
with the businesses conducted by the Borrowers; (e) to the extent not provided
for in clause (a) or (d) above, the amount, if any, by which the value of any
assets or business hereafter acquired at the time of the acquisition thereof
unreasonably exceeds the book value thereof on the books of the Person from whom
such assets or business were so acquired (before any write-up of such book value
by such Person in contemplation of such acquisition if such write-up shall have
occurred within nine (9) months prior to the date of signing of any contract
relating to such acquisition); and (f) loans to employees for purchasing stock
of the Borrowers or any Subsidiaries.
1.2 Directly or Indirectly.
-----------------------
Where any provision in this Agreement refers to action to be taken by any
Person, or which such Person is prohibited from taking, such provisions shall be
applicable whether such action is taken directly or indirectly by such Person.
1.3 Accounting Terms; Test Group.
-----------------------------
(a) Any accounting terms used in this Agreement which are not
specifically defined shall have the meanings customarily given thereto in
accordance with generally accepted accounting principles. If the generally
accepted accounting principles in effect on the date hereof shall change, the
terms calculated herein under such principles shall be changed accordingly.
(b) The financial covenants set forth in Sections 6.8, 6.9 and 6.10
hereof shall be computed on a consolidated basis for SSI, excluding, however,
all Subsidiaries other than if another Borrower.
Article 2. Amount and Terms of Loans; Collateral.
--------------------------------------
2.1.1 Revolving Loan I.
-----------------
(a) (i) Subject to the terms and conditions of this Agreement, each
Lender hereby establishes for Borrowers a revolving credit facility
(collectively, the "Revolving Loan I") pursuant to which Lenders will make cash
loans and Issuer will issue Letters of Credit hereinafter provided for in this
Section 2.1.1 (individually, a "Revolving Loan I Advance" and, collectively, the
"Revolving Loan I Advances") to or for the account of the Borrowers, at any time
and from time to time during the period (the "Revolving Credit Period I") from
the date hereof to and including the Commitment Termination Date I, in an
aggregate principal amount at
-8-
<PAGE>
any one time outstanding (including, without duplication, the face amount of all
outstanding Letters of Credit and unreimbursed draws on Letters of Credit) up to
but not exceeding the lesser of the Revolving Loan Commitment I as then in
effect or the Collateral Coverage Base. Subject to the terms of this Agreement,
during the Revolving Credit Period I the Borrowers may borrow, repay and
reborrow (all as provided herein).
(ii) On or before the last Business Day of each week, Borrowers
shall execute a Borrowing Base Certificate ("Borrowing Base Certificate")
prepared by Borrowers and certified by their corporate controller or chief
financial officer setting forth the present values of the Collateral and
Borrowers' compliance with the Collateral Coverage Base and the Borrowing Base.
(iii) Each Lender agrees severally to make cash Revolving Loan I
Advances to Borrowers, as a part of the Revolving Loan I, subject to the terms
of this Agreement, up to such Lender's Pro Rata Percentage of the Revolving Loan
I, as more fully set forth in Section 2.5 hereof.
(b) (i) During the Revolving Credit Period I, Borrowers may obtain
letters of credit (each a "Letter of Credit" and, collectively, "Letters of
Credit") from the Issuer, on behalf of all Lenders, in an aggregate amount not
to exceed $20,000,000 (measured by the face amount thereof) at any time
outstanding, upon prior approval of the Issuer, on such terms (including without
limitation the expiry date, which Borrowers agree will in no event be twelve
months beyond the Commitment Termination Date I) as the Issuer may require and
with such documentation, including Issuer's then standard Letter of Credit
Application and Security Agreement, as shall be satisfactory in form and
substance to the Issuer. Borrowers will pay to Agent, for the account of each
Lender in accordance with their Pro Rata Percentages, a letter of credit fee for
each Letter of Credit issued hereunder in the amount of 1% per annum of the face
amount of such Letter of Credit, payable quarterly in arrears (measured from the
date of issuance) (the "L/C Fee"). Borrowers will pay to Issuer, for its own
account, all issuance, negotiation, draw and other administrative fees from time
to time assessed by Issuer in accordance with Issuer's then standard fee
schedule for the issuance and administration of letters of credit.
(ii) (A) Immediately upon the issuance of any Letter of
Credit, Issuer is deemed to have granted to each other Lender, and each other
Lender is hereby deemed to have acquired, an undivided participating interest
(without recourse to or warranty by Issuer), in accordance with each such other
Lender's respective Pro Rata Percentage, in all of Issuer's rights and
liabilities with respect to such Letter of Credit. Each Lender shall be directly
and unconditionally obligated to Issuer, according to its Pro Rata Percentage,
to reimburse Issuer for any draws not reimbursed by Borrowers in accordance with
the terms hereof, made at any time without regard to the occurrence of a Default
or Event of Default (including, without limitation, any draw made following the
commencement of any bankruptcy, reorganization, receivership, liquidation or
dissolution proceeding with respect to any Borrower) under any Letter of Credit
outstanding under the Revolving Loan I.
(B) Each Letter of Credit issued from time to time under
the Revolving Loan I which remains undrawn (and the amounts of draws on Letters
of Credit prior to payment as hereinafter set forth) shall reduce dollar for
dollar the amount available to be borrowed by Borrowers under the Revolving Loan
I.
(C) In the event of any request for drawing under any
Letter of Credit by the beneficiary thereof, Issuer shall promptly notify
Borrowers and Borrowers shall immediately reimburse Issuer on the day when such
drawing is honored, including by way of a cash Revolving Loan I Advance under
the Revolving Loan I if otherwise available pursuant to
-9-
<PAGE>
this Agreement. Borrowers' reimbursement obligation for draws under Letters of
Credit shall herein be referred to collectively as Borrowers' "Reimbursement
Obligations". All of Borrowers' Reimbursement Obligations hereunder with respect
to Letters of Credit shall apply unconditionally and absolutely to, and shall be
joint and several with respect to, Letters of Credit issued hereunder on behalf
of Borrowers.
(D) (1) In the event that Borrowers shall fail to
reimburse Issuer as provided in subpart (C) above in an amount equal to the
amount of the drawing honored by Issuer under a Letter of Credit, Issuer shall
promptly notify each Lender of the unreimbursed amount of such drawing and of
such Lender's participation therein based on such Lender's Pro Rata Percentage.
Each Lender shall make available to Issuer an amount equal to its respective
participation in same day funds, at the office of Issuer specified in such
notice, not later than 1:00 p.m. (Philadelphia time) on the Business Day after
the date notified by Issuer. In the event that any Lender fails to make
available to such Issuer the amount of such Lender's participation based on such
Lender's Pro Rata Percentage in such Letter of Credit, as provided in this
Section 2.1.1(b), Issuer shall be entitled to recover such amount on demand from
such Lender together with interest at the Fed Funds Rate for one (1) Business
Day and thereafter at two (2) percentage points above the Agent's Prime Rate.
Nothing in this Section shall be deemed to relieve any Lender from its
obligation to pay all amounts payable by it under this Section with respect to
any Letter of Credit issued by Issuer or to prejudice any rights that Issuer may
have against a Lender as a result of any default by such Lender hereunder and no
Lender shall be responsible for the failure of any other Lender to pay its
respective participation, based on its Pro Rata Percentage, payable under this
Section.
(2) In connection with the failure of any Lender to
make available to Issuer the amount of such Lender's participation in any Letter
of Credit, such Lender hereby agrees to indemnify Issuer from and against any
and all costs and expenses (including, without limitation, reasonable attorneys'
fees, allocated costs of internal counsel and the costs in connection with any
related litigation) which Issuer may incur or be subject to as a consequence,
direct or indirect, of the failure of such Lender to make available its
participation in such Letter of Credit. Notwithstanding anything to the contrary
contained in this Section, no Lender failing to provide its participation in any
Letter of Credit shall have any obligation to indemnify Issuer in respect of any
liability incurred by Issuer arising solely out of the gross negligence or
willful misconduct of Issuer.
(E) The obligation of Borrowers to reimburse Issuer for
drawings made (or Lenders for cash Revolving Loan I Advances made to cover
drawings made) under the Letters of Credit and the obligations of Lenders to
Issuer under Section 2.1.1(b)(ii)(D) shall be unconditional and irrevocable and
shall be paid strictly in accordance with the terms of this Agreement under all
circumstances including, without limitation, the following circumstances:
(1) any lack of validity or enforceability of any
Letter of Credit;
(2) the existence of any claim, setoff, defense or
other right that Borrowers or any other Person may have at any time against a
beneficiary or any transferee of any Letter of Credit (or any Person for whom
any such beneficiary or transferee may be acting), Issuer, Agent, any Lender or
any other Person, whether in connection with this Agreement, the transactions
contemplated herein or any unrelated transaction;
(3) any draft, demand, certificate or any other
document presented under any Letter of Credit proving to be forged, fraudulent,
invalid or insufficient in any respect or any statement therein being untrue or
inaccurate in any respect;
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<PAGE>
(4) payment by Issuer under any Letter of Credit
against presentation of a demand, draft or certificate, or other document that
does not comply with the terms of such Letter of Credit unless Issuer shall have
acted with willful misconduct or gross negligence in issuing such payment; or
(5) the fact that a Default or Event of Default shall
have occurred and be continuing.
(F) (1) In addition to amounts payable as elsewhere
provided in this Section, without duplication, Borrowers hereby agree to
protect, indemnify, pay and save Issuer, Agent and Lenders harmless from and
against any and all claims, demands, liabilities, damages, losses, costs,
charges and expenses (including reasonable attorneys' fees) which Issuer may
incur or be subject to as a consequence, direct or indirect, of (A) the issuance
of the Letters of Credit or (B) the failure of Issuer to honor a drawing under
any Letter of Credit as a result of any act or omission, whether rightful or
wrongful, of any present or future de jure or de facto government or
-------- ---------
governmental authority (all such acts or omissions herein called "Government
Acts").
(2) As between Borrowers and Issuer, Agent, and
Lenders, Borrowers assume all risks of the acts and omissions of, or misuse of
the Letters of Credit issued by Issuer by, the respective beneficiaries of such
Letters of Credit. In furtherance and not in limitation of the foregoing, Issuer
shall not be responsible: (a) for the form, validity, sufficiency, accuracy,
genuineness or legal effects of any document submitted by any party in
connection with the application for and issuance of such Letters of Credit, even
if it should in fact prove to be in any or all respects invalid, insufficient,
inaccurate, fraudulent or forged; (b) for the validity or sufficiency of any
instrument transferring or assigning or purporting to transfer or assign any
such Letter of Credit or the rights or benefits thereunder or proceeds thereof,
in whole or in part, that may prove to be invalid or ineffective for any reason;
(c) for failure of the beneficiary of any such Letter of Credit to comply fully
with conditions required in order to draw upon such Letter of Credit so long as
Issuer acts in good faith and without gross negligence or willful misconduct;
(d) for errors, omissions, interruptions or delays in transmission or delivery
of any messages, by mail, cable, telegraph, telex or otherwise, whether or not
they are in cipher, unless any of the foregoing are caused by Issuer's gross
negligence or willful misconduct; (e) for errors in interpretation of technical
terms; (f) for any loss or delay in the transmission of any document required in
order to make a drawing under any such Letter of Credit or of the proceeds
thereof, unless caused by Issuer's gross negligence or willful misconduct; (g)
for the misapplication by the beneficiary of any such Letter of Credit of the
proceeds of any drawing under such Letter of Credit; and (h) for any
consequences arising from causes beyond the control of Issuer, including,
without limitation, any Government Acts. None of the above shall affect, impair,
or prevent the vesting of any of Issuer's rights or powers hereunder.
(3) In furtherance and extension and not in
limitation of the specific provisions hereinabove set forth, any action taken or
omitted by Issuer in connection with the Letters of Credit issued by it or the
related certificates, if taken or omitted in good faith, shall not create any
liability on the part of Issuer to Borrowers.
(4) The term "Lender" shall, unless the context
otherwise indicates, include the Issuer in its individual capacity as a Lender.
2.1.2 Revolving Loan II.
------------------
(a) (i) Subject to the terms and conditions of this Agreement,
each Lender hereby establishes for Borrowers a revolving credit facility
(collectively, the "Revolving Loan
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II") pursuant to which Lenders will make cash loans hereinafter provided for in
this Section 2.1.2 (individually, a "Revolving Loan II Advance" and,
collectively, the "Revolving Loan II Advances") to or for the account of the
Borrowers, at any time and from time to time during the period (the "Revolving
Credit Period II") from the date hereof to and including the Commitment
Termination Date II, in an aggregate principal amount at any one time
outstanding up to but not exceeding the lesser of the Revolving Loan Commitment
II or the Borrowing Base. Subject to the terms of this Agreement, during the
Revolving Credit Period II the Borrowers may borrow, repay and reborrow (all as
provided herein).
(ii) Each Lender agrees severally to make Revolving Loan II
Advances to Borrowers, as part of the Revolving Loan II, subject to the terms of
this Agreement, up to such Lender's Pro Rata Percentage of the Revolving Loan
II, as more fully set forth in Section 2.5 hereof.
2.2 Changes in Revolving Loan Commitments.
--------------------------------------
The Borrowers shall be entitled to terminate or reduce the Revolving Loan
Commitment I and/or the Revolving Loan Commitment II, provided that the
Borrowers shall give notice of each such termination or reduction to the Agent
as provided in Section 2.3 hereof and that any partial reduction of either
Revolving Loan Commitment shall be in an aggregate amount equal to $100,000 or
an integral multiple thereof, and, provided further, that Borrowers shall have
the right hereunder to reduce or terminate the Revolving Loan Commitment I only
if the Revolving Loan Commitment II has been terminated. Any such termination or
reduction shall be permanent and irrevocable.
2.3 Notices.
--------
SSI, as agent hereunder for the Borrowers, shall give the Agent telephonic
and written notice of each termination or reduction of either of the Revolving
Loan Commitments, each borrowing, and repayment of either Revolving Loan. All
requests for borrowings shall be made, subject to the terms and conditions of
this Agreement and subject further to the terms of Section 2.5(c) hereof, by
telephonic or facsimile request of any Borrower. Agent may rely upon any and all
telephonic, facsimile and written requests purported to be made by any Borrower
through any of its officers. Each such written notice shall be irrevocable and
shall be effective only if received by the Agent not later than 1:00 p.m.,
Philadelphia time, on the date which is: (a) in the case of each notice of
termination one Business Day prior to the date of the related termination, and
(b) in the case of a notice of borrowing or reduction, the Business Day on which
the requested borrowing or reduction is to be made, subject, as to borrowings
for which the LIBOR Rate is being selected, to the provisions of Section 2.8(c)
hereof.
2.4 Fees. (a) The Borrowers shall pay to the Agent, for the account of
-----
each Lender in accordance with their Pro Rata Percentages, a commitment fee at
the rate of four-tenths of one percent (4/10%) per annum on the daily average
unused amount of the Revolving Loan Commitment I and at a rate of three-tenths
of one percent (3/10%) per annum on the daily average unused amount of the
Revolving Loan Commitment II (which in each case shall be calculated as the
applicable Revolving Loan Commitment minus all cash advances outstanding under
the related Revolving Loan on the date of such calculation) during each calendar
quarter for the period from the date hereof to and including the earlier of the
date on which the applicable Revolving Loan Commitment is terminated or the
applicable Commitment Termination Date. The commitment fee shall be payable
quarterly in arrears on the Quarterly Dates and on the earlier of the date the
applicable Revolving Loan Commitment is terminated or the applicable Commitment
Termination Date.
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<PAGE>
(b) The Borrowers shall concurrently with the execution hereof, pay to
the Agent, for the account of each Lender in accordance with their Pro Rata
Percentages, an amendment fee in the aggregate amount of $100,000.
(c) The Borrowers shall pay to Agent, for its own account, a non-
refundable Agent Fee (the "Agent Fee") in such amount as to which Agent and
Borrowers may from time to time agree.
2.5 Borrowings.
-----------
(a) Except as otherwise provided in subparts (b), (c) and (e) below,
upon receiving a request for a cash Advance in accordance with Section 2.3
hereof, Agent shall prior to 2:00 p.m. or as soon as reasonably practical
thereafter notify all Lenders of the request. Each Lender shall advance its
applicable Pro Rata Percentage of the requested Advance to Agent by remitting
federal funds, immediately available, to Agent pursuant to Agent's instructions
prior to 3:00 p.m. Philadelphia time or as soon as is reasonably practicable
thereafter on the date of such notice. Subject to the satisfaction of the terms
and conditions hereof, and receipt by the Agent of all required funds from the
other Lenders, Agent shall make the requested Advance available to the Borrowers
by crediting such amount to SSI's operating account with Agent, or to such other
account as SSI may from time to time designate to Agent, as soon as is
reasonably practicable thereafter on the day on which such Advance was
requested.
(b) In lieu of the foregoing, Agent may, in its discretion (and
without any obligation to do so or continue to do so), fund the Pro Rata
Percentage of an Advance (including any cash Revolving Loan I Advance to
reimburse Issuer for unreimbursed draws under a Letter of Credit) on behalf of
any one or more Lenders (unconditionally and absolutely obliging such affected
Lender to reimburse Agent in full without deduction or setoffs for its portion
of such Advance) with a settlement among Lenders on the following Business Day
or under such other settlement procedures as Agent and Lenders may mutually
agree upon from time to time.
(c) In lieu of the funding procedure set forth in subparts (a) and (b)
above, Agent hereby establishes for the Borrower an interim line of credit
(herein, the "Swing Line") under which Agent will, for its own account except as
otherwise set forth in this Section 2.5(c), fund cash Revolving Loan I Advances
under the Revolving Loan I, subject to the following terms and conditions:
(i) all cash Revolving Loan I Advances, so long as the same do
not exceed $15,000,000 in the aggregate at any time
outstanding, shall be made from the Swing Line instead of
the Revolving Loan I;
(ii) principal outstanding under the Swing Line will accrue
interest at the Agent's Prime Rate as otherwise set forth
in Section 2.8 (a) hereof, which interest shall, except as
provided in subpart (vii) below, be entirely for Agent's
own account;
(iii) all principal payments made by Borrower on account of the
Revolving Loan I shall be applied first to principal
outstanding under the Swing Line prior to application
thereof to the principal of the Revolving Loan I;
(iv) if there is neither any Advance under nor repayment of
principal on account of the Swing Line for seven (7)
consecutive Business Days, the unpaid principal of the
Swing Line as of the expiration of such seven (7) Business
Day period shall be funded by Banks
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<PAGE>
under the Revolving Loan I in accordance with subpart (a)
or (b) above, as the case may be;
(v) the Swing Line will be advanced pursuant to the procedures
set forth in and will otherwise be subject to the terms of
the Working Cash Agreements referred to in Section 4.2
hereof;
(vi) except as otherwise specifically set forth in this subpart
(c), Advances under the Swing Loan are subject to the same
terms and conditions of this Agreement which are
applicable to the Revolving Loan I and shall be deemed to
be "Obligations" and "Secured Obligations" of the
Borrowers for all purposes of this Agreement, and in no
event will the outstanding principal of the Swing Line,
when taken together with the outstanding principal of the
Revolving Loan I (including the face amount of Letters of
Credit and outstanding Reimbursement Obligations), exceed
the Revolving Loan Commitment I; and
(vii) immediately upon the making by Agent of each cash Advance
under the Swing Line (each such advance being herein
called a "Swing Loan"), Agent is deemed to have granted to
each Lender, and each Lender is hereby deemed to have
acquired, an undivided participating interest (without
recourse to or warranty by Agent), in accordance with each
such Lender's respective Pro Rata Percentage, in all of
Agent's rights and liabilities with respect to such Swing
Loan. In the event that the Obligations are accelerated
incident to an Event of Default, Agent shall promptly
notify each Lender of the unpaid principal balance of all
Swing Loans and all of such Lender's participation therein
based on such Lender's Pro Rata Percentage. Each Lender
shall make available to Agent an amount equal to its
respective participation in same day funds, at the office
of Agent specified in such notice, not later than 1:00
p.m. (Philadelphia time) on the Business Day after the
date notified by Agent. In the event that any Lender fails
to make available to Agent the amount of such Lender's
participation based on such Lender's Pro Rata Percentage
in such Swing Loans, Agent shall be entitled to recover
such amount on demand from such Lender together with
interest at the Fed Funds Rate for one (1) Business Day
and thereafter at two (2) percentage points above the
Agent's Prime Rate. Agent shall distribute to each other
Lender which has paid all amounts payable by it under this
subpart (c) with respect to any Swing Loans, such other
Lender's share, based on such Lender's Pro Rata
Percentage, of all payments received by Agent from
Borrower in payment of such Swing Loans, when such
payments are received.
(d) Neither Agent nor any other Lender shall be obligated, for any
reason whatsoever, to advance the share of any other Lender. If such
corresponding amount is not made available to Agent by such Lender on the date
the Advance is to be made and Agent elects (at its discretion, without any
obligation to do so) to make such Lender's share of the Advance (including any
cash Revolving Loan I Advance to reimburse Issuer for unreimbursed draws under a
Letter of Credit), Agent shall be entitled to recover such amount on demand from
such Lender, together with interest in respect of each day during the period
commencing on the date such amount was made available to the Borrowers (or on
that date Agent required such funds to
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<PAGE>
be advanced pursuant to the settlement procedures established by Agent) and
ending on (but excluding) the date Agent recovers such amount, at a per annum
rate equal to the Fed Funds Rate for the first Business Day and thereafter at
two (2) percentage points above the Agent's Prime Rate. Agent shall also be
entitled to recover any and all losses and damages (including without
limitation, attorneys' fees) from any Lender failing to so advance upon demand
of Agent. Agent may set off the obligations of a Lender under this paragraph
against any distributions or payments of the Obligations which Agent would
otherwise make available to such Lender. To the extent any Lender fails to
provide or delays providing its respective Pro Rata Percentage of any requested
Advance, such Lender's Pro Rata Percentage of all payments of the Obligations
(but not its Pro Rata Percentage of Advances required to be funded by such
Lender) shall decrease to reflect the actual percentage which its actual
outstanding Advances bears to the total outstanding Advances of all Lenders.
2.6 Use of Proceeds of Loans.
-------------------------
The proceeds of the Revolving Loans shall be used solely for general
corporate purposes, including for acquisition of Equity Interests subject to the
limitations set forth in Section 6.6 hereof.
2.7 Payment of Loan.
----------------
(a) Unless sooner accelerated pursuant to the terms hereof, the
applicable Revolving Loan shall be due and payable on the applicable Commitment
Termination Date. Borrowers will, on the Commitment Termination Date I, provide
Bank with cash collateral in an amount equal to 105% of the face amount of all
issued and outstanding Letters of Credit issued under this Agreement.
(b) Except to the extent otherwise set forth in this Agreement, all
payments of principal and of interest on the Revolving Loans, and all other fees
and charges and any other Obligations of Borrowers hereunder, shall be made to
Agent at its Principal Office, in United States dollars, in immediately
available funds, not later than 1:00 p.m. Philadelphia time on the date on which
such payment is due. Agent and each Lender, on behalf of all Lenders, shall have
the unconditional right and discretion to charge any Borrower's operating
account with any such respective institution for all of Borrowers' Obligations
as they become due from time to time under this Agreement including without
limitation, interest, principal, fees and reimbursement of expenses.
Alternatively, Agent may in its discretion (and Borrowers hereby authorize Agent
to) direct the Lenders to make a cash Advance under the applicable Revolving
Loan (subject to the terms and provisions of this Agreement) in a sum sufficient
to pay all interest accrued and payable on the Obligations during the
immediately preceding month and to pay all costs, fees and expenses owing
hereunder.
2.8 Interest.
---------
(a) Subject to the provisions of subsection (c) hereof and subject
further to the provisions of Section 2.5(c)(ii), the Borrowers shall pay
interest on the unpaid principal amount of each Advance for the period
commencing on the date of such Advance until such Advance shall be paid in full,
at a rate per annum equal to Agent's Prime Rate. Notwithstanding the foregoing,
the Borrowers shall pay interest on any Advance, and on any other amount payable
by the Borrowers hereunder (including, to the extent permitted by law, interest)
which shall not be paid in full when due (whether at stated maturity, by
acceleration or otherwise, and including all reimbursement obligations on
Letters of Credit which are not immediately repaid from an Advance or otherwise)
for the period commencing on the due date thereof until the payment in full at
the Post-Default Rate. Except as provided in the next sentence, accrued interest
on the Loans shall be payable (i) monthly in arrears within 10 days of
Borrowers' receipt of a bill
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<PAGE>
therefor, and (ii) on the earlier of the date the applicable Revolving Loan
Commitment is terminated or the applicable Commitment Termination Date. Interest
payable at the Post-Default Rate shall be payable from time to time on demand of
the Agent. Interest shall continue to accrue and be paid at the applicable rate
provided herein even after Default, an Event of Default, entry of judgment
against any or all of the Borrowers or the commencement of any bankruptcy,
reorganization or insolvency proceeding, and any such judgment entered in
connection with the enforcement hereof or the collection of the Obligations
shall earn interest at the Post-Default Rate.
(b) Notwithstanding any provision herein or in the Notes, the total
liability for payments of interest, or in the nature of interest, shall not
exceed the limits imposed by any applicable laws. If the terms of this Agreement
or the Security Documents, the Notes, or any other agreement or instrument
entered into in connection herewith require or shall require Borrowers to pay
interest in excess of amounts allowed by law, the rate of interest payable shall
be reduced immediately, without action by Lenders or Agent, to the applicable
maximum rate, and any excess payment made by Borrowers at any time shall be
immediately and automatically applied to the unpaid balance of the outstanding
principal due hereunder and not to the payment of interest. In the event of
acceleration of sums due hereunder, the total charges for interest and in the
nature of interest shall not exceed the maximum allowed by law, and any excess
portions of such charges which may have been prepaid and cannot be applied to
repayment of principal shall be refunded to Borrowers. Borrowers agree that in
determining whether or not any interest payable under this Agreement, the Notes
or the Security Documents exceeds the highest applicable rate permitted by law,
any non-principal payment including, without limitation, fees, costs, Post-
Default Rate and late charges, shall be deemed to the extent permitted by law to
be an expense, fee or penalty not deemed interest by law.
(c) (i) As used in this Section 2.8(c), the following terms shall
have the following meanings:
(A) "Good Business Day" means any day when both Agent and
-----------------
banks in London, England are open for business.
(B) "LIBOR Rate" means for any day during each Rate Period
------------
(a) the per annum rate of interest (computed on a basis of a year of 360 days
and actual days elapsed) determined by Agent as being the composite rate
available to Agent at approximately 11:00 a.m., London time in the London
Interbank Market, as referenced by Telerate (page 3750), in accordance with the
usual practice in such market, for the Rate Period elected by Borrowers, in
effect two (2) Good Business Days prior to the funding date for a requested
LIBOR Rate advance for deposits of dollars in amounts equal (as nearly as may be
estimated) to the amount of the LIBOR Rate advance which shall then be loaned by
the Lenders to Borrowers as of the time of such determination, as such rate (the
"Base Rate") may be adjusted by the reserve percentage applicable during the
Rate Period in effect (or if more than one such percentage shall be applicable,
the daily average of such percentages for those days in such Rate Period during
which any such percentage shall be so applicable) under regulations issued from
time to time by the Board of Governors of the Federal Reserve System (or any
successor) for determining the maximum reserve requirement (including, without
limitation, any emergency, supplemental or other marginal reserve requirement)
for the Agent with respect to liabilities or assets consisting of or including
"Eurocurrency Liabilities" as such term is defined in Regulation D of the Board
of Governors of the Federal Reserve System, as in effect from time to time,
having a term equal to such Rate Period ("Eurocurrency Reserve Requirement"),
plus (b) 1.25 percentage points. Such reserve adjustment shall be effectuated by
- ----
calculating, and the LIBOR Rate shall be equal to, (a) the quotient of (i) the
Base Rate divided by (ii) one minus the Eurocurrency Reserve Requirement, plus
----
(b) 1.25 percentage points.
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(C) "Notification" means telephonic notice (which shall be
------------
irrevocable) by Borrowers to Agent that Borrowers have requested that the LIBOR
Rate, as quoted by Agent from time to time upon Borrower's request for quotation
made not less than one (1) Business Day prior to the requested date of
quotation, shall apply to some portion of the principal amount of either of the
Revolving Loans in accordance with the provisions of this Section 2.8(c), which
notice shall be given no later than 11:00 a.m. Philadelphia time, on the day
which is at least 2 Business Days prior to the Business Day on which such
election is to become effective, which notice shall specify (i) that the LIBOR
Rate option is being selected; (ii) the principal amount of cash Advances under
the Loans to be subject to such rate; (iii) whether such amount is a new
advance, a renewal of a previous request of such rate, a conversion from one
interest rate to another, or a combination thereof; (iv) the Rate Period(s)
selected; and (y) the date on which such request is to become effective (which
date shall be a date selected in accordance with Section 2.8(c) (ii) hereof).
(D) "Rate Period" means for any portion of principal under
-----------
the Loans for which Borrowers elect the LIBOR Rate the period of time for which
such rate shall apply to such principal portion. Rate periods for principal
earning interest at the LIBOR Rate shall be for periods of 30, 60, 90 or 180
days and for no other length of time, provided, that, no Rate Period may end on
other than a Business Day or after the applicable Commitment Termination Date.
(ii) (A) Subject to the terms of this Section 2.8 (c) (ii), by
giving Notification, Borrowers may request to have all or a portion of the
outstanding principal of cash Advances under the Loans (other than Swing Loans)
as hereinafter permitted earn interest at the LIBOR Rate as follows: (1) with
respect to the principal amount of any cash Advance under the Loans, from the
date of such Advance until the end of the Rate Period specified in the
Notification; and/or (2) with respect to the principal amount of any portion of
cash Advances under the Loans outstanding and earning interest at the LIBOR Rate
at the time of the Notification related to such principal amount, from the
expiration of the then current Rate Period related to such principal amount
until the end of the Rate Period specified in the Notification; and/or (3) with
respect to all or any portion of the principal amount of cash Advances under the
Loans outstanding and earning interest at the Prime Rate at the time of
Notification, from the date set forth in the Notification until the end of the
Rate Period specified in the Notification.
(B) Borrowers understand and agree: (1) that subject to the
provisions of this Agreement, the Prime Rate and the LIBOR Rate may apply
simultaneously to different parts of the outstanding principal of cash Advances
under the Loans, (2) that the LIBOR Rate applicable to any portion of
outstanding principal may be different from the LIBOR Rate applicable to any
other portion of outstanding principal, (3) that no more than 8 portions of
principal of cash Advances under the Loans bearing interest at the LIBOR Rate
may be outstanding at any one time, (4) that the minimum amount of principal for
which any LIBOR Rate election may be made shall be $5,000,000, and (5) that
Agent shall have the right to terminate any Rate Period, and the interest rate
applicable thereto, prior to maturity of such Rate Period, if Agent determines
in good faith (which determination shall be conclusive) that continuance of such
interest rate has been made unlawful by any Law to which any Lender may be
subject, in which event the principal to which such terminated Rate Period
relates thereafter shall earn interest at the Prime Rate.
(C) After expiration of any Rate Period, any principal
portion corresponding to such Rate Period which has not been converted or
renewed in accordance with this Section 2.8(c) (ii) shall earn interest
automatically at the Prime Rate from the date of expiration of such Rate Period
until paid in full, unless and until the Borrowers request and Agent approves a
conversion to the LIBOR Rate in accordance with this Section 2.8. With respect
to any cash Advances (whether an advance of new funds or an already outstanding
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amount), if Borrowers fail to request the LIBOR Rate option by giving Bank a
Notification, or if Agent fails to approve such request when made, such
principal amount shall earn interest at the Prime Rate.
(D) Borrowers shall indemnify Lenders against any and all
loss or expense (including loss of margin) which any Lender has sustained or
incurred as a consequence of (a) any payment of any principal amount earning
interest at the LIBOR Rate on a day other than the last day of the corresponding
Rate Period (whether or not any such payment is made pursuant to acceleration
upon or after an Event of Default, demand by Agent otherwise made under this
Agreement, by reason of an application of proceeds incident to an insured loss
or condemnation of property, or for any other reason, and whether or not any
such payment is consented to by Agent, unless Agent shall have expressly waived
such indemnity in writing); (2) any attempt by a Borrower to revoke in whole or
part any Notification given pursuant to this Agreement; (3) any attempt by
Borrowers to convert or renew any principal amount earning interest at the LIBOR
Rate on a day other than the last day of the corresponding Rate Period (whether
or not such conversion or renewal is consented to by Agent, unless Agent shall
have expressly waived such indemnity in writing); or (4) any breach of or
default by any Borrower.
2.9 Notes.
------
Contemporaneously herewith, Borrowers shall execute and deliver to each
Lender their Notes in the principal amount of such Lender's Pro Rata Share of
each of the Revolving Loans (each a "Revolving Loan Note"), evidencing
Borrowers' unconditional joint and several obligations to repay such Lender's
Pro Rata Percentage of each of the Revolving Loans.
2.10 Computations; Application of Payments.
--------------------------------------
(a) Interest on the Loans and commitment fees shall be computed on the
basis of a year of 360 days and actual days elapsed (including the first day but
excluding the last) in the period for which payable;
(b) Each payment of principal and interest made by any Borrower
hereunder shall be applied first on account of due and unpaid interest and the
balance, if any, toward reduction of the unpaid principal balance of the
Revolving Loans. As between the Revolving Loan I and the Revolving Loan II,
Borrowers shall, prior to the occurrence of an Event of Default and provided
that Borrowers are in full compliance with the Collateral Coverage Base and the
Borrowing Base, have the right to designate the applicable Revolving Loan to
which principal payments are to be applied; after an Event of Default and/or
should Borrowers not be in compliance with the Collateral Coverage Base or the
Borrowing Base, principal shall be applied to either of the Loans and in any
order as Agent shall determine in its discretion.
2.11 Minimum Amount of Borrowings.
-----------------------------
Except for borrowings which exhaust the full remaining amount of the
applicable Revolving Loan Commitment, each cash Advance under the Revolving
Loans shall be in the amount of $100,000 or an integral multiple thereof.
2.12 Set-Off.
--------
Each of the Borrowers hereby agrees that, in addition to (and without
limitation of) any right of set-off, banker's lien or counterclaim any Lender
may otherwise have, each Lender and any affiliate of any Lender or any such
participant shall be entitled, at its option, and for the ratable benefit of all
Lenders, to offset balances held by it at any of its offices against any
principal of or interest on the Revolving Loans hereunder which is not paid when
due (regardless
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<PAGE>
of whether such balances are then due to such Borrower), in which case it shall
promptly notify such Borrower thereof, provided that its failure to give such
notice shall not affect the validity of any such offset.
2.13 Prepayment.
-----------
The Revolving Loans may be prepaid in whole or in part and from time to
time, provided that in the event that such of the principal of the Revolving
Loans earning interest at the LIBOR Rate at the time of repayment is repaid
prior to the last day of the applicable Rate Period (whether or not any such
repayment is made pursuant to acceleration upon or after an Event of Default,
demand by Agent otherwise made under this Agreement, by reason of an application
of proceeds incident to an insured loss or condemnation of property, or for any
other reason), Borrowers shall, together with such repayment, pay to Agent, for
the account of Lenders, the Cost of Prepayment.
2.14 Collateral.
-----------
(a) Borrowers hereby agree that their grant of a security interest in
the Collateral contained in the Pledge Agreement, in other security and
collateral agreements of Borrowers and all other agreements executed in
connection herewith and all collateral, liens, security interests and pledges
created by Borrowers described therein cover and secure all of the Secured
Obligations.
(b) The Pledge Agreement, and the aforesaid agreements, instruments
and documents, are sometimes hereinafter referred to collectively as the
"Security Documents."
2.15 Valuation of Collateral Coverage Securities; Sale.
--------------------------------------------------
The value of the Collateral Coverage Securities shall be based on market
value as determined on a recognized national securities exchange or by the
NASDAQ national or small-cap market, or on the over-the-counter market, all as
of the close of the last previous trading day. Any determination of the value of
the Collateral Coverage Securities by the Agent through its brokerage services
shall be conclusive and binding on Borrowers absent manifest error. Borrowers
may sell Collateral Coverage Securities in accordance with the terms of the
Pledge Agreement so long as after giving effect to any such sale, Borrowers are
not in violation of the Collateral Coverage Base or the Borrowing Base and the
proceeds thereof shall be paid over to Agent as provided in the Pledge
Agreement.
Article 3. Representations and Warranties.
-------------------------------
The Borrowers hereby represent and warrant to each Lender that:
3.1 Organization.
-------------
(a) Each Borrower is a corporation duly organized, validly existing
and in good standing under the laws of its respective state of incorporation, as
set forth in Exhibit 3.1 hereto; each Borrower has the power to own its assets
and to transact the business in which it is presently engaged and in which it
proposes to be engaged. The authorized and outstanding shares of capital stock
of each Borrower is accurately and completely listed in Exhibit 3.1. All such
shares which are issued and outstanding have been duly and validly issued and
are fully paid and nonassessable, are, as to SSD and SDI, owned by the Persons
referred to on Exhibit 3.1 and, as to SSI, are publicly traded, in each case
free and clear of any mortgage, pledge, lien or encumbrance. Except as set forth
in Exhibit 3.1, there are not outstanding any warrants, options, contracts or
commitments of any kind entitling any person to purchase or otherwise acquire
any
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<PAGE>
shares of capital stock of any Borrower, nor are there outstanding any
securities which are convertible into or exchangeable for any shares of capital
stock of any Borrower. Except as set forth on Exhibit 3.1, no Borrower has any
Subsidiary (other than another Borrower).
(b) There are no jurisdictions other than as set forth on Exhibit 3.1
hereto in which the character of the properties owned or proposed to be owned by
the Borrowers or in which the transaction of the business of any of the
Borrowers as now conducted or as proposed to be conducted requires or will
require any Borrower to qualify to do business in any such other jurisdiction
where the failure to do so would have a Material Adverse Effect on such
Borrower.
3.2 Power, Authority, Consents.
---------------------------
Each Borrower has the power to execute, deliver and perform this Agreement,
the Notes and the Security Documents to be executed by it, and to borrow
hereunder. Each Borrower has taken all necessary action to authorize (i) the
borrowing hereunder on the terms and conditions of this Agreement, (ii) the
execution, delivery and performance of this Agreement, the Notes, the Security
Documents to be executed by it and all other agreements, instruments and
documents provided for herein or therein. No consent or approval of any person
(including, without limitation, any stockholder of the Borrowers), no consent or
approval of any landlord or mortgagee, no waiver of any lien or right of
distraint or other similar right and no consent, license, approval,
authorization or declaration of any governmental authority, bureau or agency, is
or will be required in connection with the execution, delivery or performance by
any Borrower, as the case may be, or the validity, enforcement or priority of,
this Agreement, the Notes, the Security Documents (or any Lien created and
granted thereunder) or any other agreements, instruments or documents to be
executed or delivered pursuant hereto or thereto, except as set forth on Exhibit
3.2 annexed hereto, each of which either will have been duly and validly
obtained on or prior to the date hereof and will then be in full force and
effect, or is designated on Exhibit 3.2 as waived by the Agent.
3.3 No Violation of Law or Agreements.
----------------------------------
The execution and delivery by each Borrower of this Agreement, the Notes
and the Security Documents executed by it and any other agreements, instruments
or documents to be executed and delivered by it hereunder, and performance by it
hereunder and thereunder will not, if the same would have a Material Adverse
Effect, violate any provision of law or conflict with or result in a breach of
any order, writ, injunction, ordinance, resolution, decree of any court or
governmental authority, bureau or agency, domestic or foreign, or certificate of
incorporation or bylaws of any Borrower or create (with or without the giving of
notice or lapse of time, or both) a default under or breach of any agreement,
bond, note or indenture to which any Borrower is a party, or by which it is
bound or any of its properties or assets is affected, or result in the
imposition of any Lien of any nature whatsoever upon any of the properties or
assets owned by or used in connection with the business of such Borrower, except
for the liens and security interests created and granted pursuant to the
Security Documents.
3.4 Due Execution, Validity, Enforceability.
----------------------------------------
This Agreement has been duly executed and delivered by each Borrower and
constitutes, and the Notes and each of the Security Documents to be executed by
a Borrower, upon execution and delivery by such Borrower in accordance with the
terms hereof, will constitute, the valid and legally binding obligation and
agreement of such Borrower, as the case may be, enforceable in accordance with
its terms.
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<PAGE>
3.5 Properties, Priority of Liens.
------------------------------
All of the Collateral is owned by Borrowers, free and clear of any Lien of
any nature whatsoever, except as provided for in the Security Documents to be
executed and delivered pursuant hereto. The Liens which will be created and
granted by the Security Documents upon their execution and delivery by the
parties thereto, will thereupon and thereafter constitute valid first Liens on
the properties and assets covered by the Security Documents as security for the
Secured Obligations, subject to no Lien other than in favor of the Lenders.
3.6 Judgments, Actions, Proceedings.
--------------------------------
There are no outstanding judgments, and no actions, suits or proceedings
pending or threatened before any court, governmental authority, bureau,
commission, board, instrumentality or agency, with respect to or affecting any
Borrower or any of their Properties, which would have a Material Adverse Effect,
nor is there any reasonable basis for the institution of any such action, suit
or proceeding, whether or not covered by insurance, nor are there any such
actions or proceedings in which any Borrower is a plaintiff or complainant where
the amount demanded or sued for exceeds $10,000,000, except as set forth on
Exhibit 3.6 annexed hereto.
3.7 No Defaults.
------------
None of the Borrowers is in default under any agreement, ordinance,
resolution, decree, bond, note, indenture, order or judgment to which it is a
party or by which it is bound, or any other agreement or other instrument by
which any of the properties or assets owned by it or used in the conduct of its
business is affected, and each Borrower has complied and is in compliance with
all applicable laws, ordinances and regulations applicable to them, where any of
the foregoing would have a Material Adverse Effect.
3.8 Burdensome Documents.
---------------------
Except as set forth on Exhibit 3.8 annexed hereto, none of the Borrowers is
a party to or bound by, nor are any of the properties or assets owned by any of
the Borrowers or used in the conduct of their respective businesses affected by,
any agreement, ordinance, resolution, decree, bond, note, indenture, order or
judgment, or subject to any restriction, which would have a Material Adverse
Effect.
3.9 Financial Statements.
---------------------
The Borrowers have delivered to each Lender the Financial Statements. Each
of the Financial Statements is true and complete and presents fairly in all
material respects the consolidated financial position of SSI and its
Subsidiaries, including, without limitation, SSD, and the results of their
respective operations and, if applicable, changes in cash flows, as at the dates
and for the period referred to therein; and has been prepared in accordance with
generally accepted accounting principles applied on a basis consistent with that
of the prior period (except as disclosed therein or in the notes thereto, and
with respect to the unaudited financial statements as of September 30, 1999 and
for the period then ended, subject to normal year-end audit adjustments). There
has been no material adverse change in the financial position or operations of
any Borrower or Subsidiary since September 30, 1999 except as set forth in
Exhibit 3.9 hereto. No Borrower or any Subsidiary of a Borrower has any material
obligation, liability or commitment, direct or contingent, which is not
reflected in the Financial Statements.
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<PAGE>
3.10 Tax Returns.
------------
Each of the Borrowers has filed all federal, state and local tax returns
required to be filed by it and has not failed to pay any taxes, or interest and
penalties relating thereto, on or before the due dates thereof. There are no
waivers or agreements by any Borrower for the extension of time for the
assessment of any tax. Except for tax liabilities not in excess of $1,000,000 in
the aggregate with respect to the Borrowers and except to the extent that
reserves therefor are reflected in the Financial Statements, (a) there are no
material federal, state or local tax liabilities of any Borrower due or to
become due for any tax year ended on or prior to December 31, 1998 whether
incurred in respect of or measured by the income of such Borrower which are not
properly reflected in the Financial Statements, and (b) there are no material
claims pending or, to the knowledge of any Borrower, proposed or threatened
against any Borrower for past federal, state or local taxes, except those, if
any, as to which proper reserves are reflected in the Financial Statements.
3.11 Intangible Assets.
------------------
Except as set forth in Exhibit 3.11 hereto, to each Borrower's knowledge,
each of the Borrowers possesses all necessary franchises, patents, licenses,
trademarks, trademark rights, trade names, trade name rights and copyrights to
conduct its business as now conducted and as proposed to be conducted, without
any conflict with the franchises, patents, licenses, trademark rights, trade
names, trade name rights and copyrights of others.
3.12 Name Changes.
-------------
Except as described in Exhibit 3.12 hereto, none of the Borrowers has
within the six-year period immediately preceding the date of this Agreement,
changed its name, been the surviving entity of a merger or consolidation, or
acquired all or substantially all of the assets of any Person.
3.13 Full Disclosure.
----------------
None of the Financial Statements, nor any certificate, opinion, or any
other statement made or furnished in writing to any Lender by or on behalf of
any of the Borrowers in connection with this Agreement or the transactions
contemplated herein, contains any untrue statement of a material fact, or omits
to state a material fact necessary in order to make the statements contained
therein or herein not misleading, as of the date such statement was made. There
is no fact known to any Borrower which has, or would in the now foreseeable
future have, a Material Adverse Effect, which fact has not been set forth
herein, in any of the Financial Statements or any certificate, opinion, or other
written statement so made or furnished to any Lender.
3.14 ERISA.
------
(a) The Borrowers have no pension or other employee benefit plans
which are subject to the provisions of Title IV of ERISA (any such plans which
have been or may hereafter be adopted or assumed by the Borrowers are
hereinafter referred to individually as a "Plan" and, collectively, as the
"Plans"), the application of which could give rise to direct or contingent
liabilities of the Borrowers to the Pension Benefit Guaranty Corporation
("PBGC"), the Department of Labor or the Internal Revenue Service ("IRS"). None
of the Borrowers is a participating employer in any Plan under which more than
one employer makes contributions as described in Sections 4063 and 4064 of
ERISA. The Borrowers have no withdrawal liability to any multiemployer plan and
no withdrawal from any multiemployer plan is contemplated or pending by any of
the Borrowers.
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<PAGE>
(b) The Borrowers are and have at all times been in full compliance
with all applicable provisions of ERISA.
(c) With respect to any of the Plans, Borrowers have no knowledge of
any Reportable Event, as described in Section 4043 of ERISA, except that there
has or may have occurred (1) a reduction in the number of active participants as
described in Section 4043(b) (3) of ERISA; (2) a termination or partial
termination; or (3) a merger or consolidation with, or transfer of assets to,
another plan. The Borrowers have no outstanding liability to the PBGC for reason
of any such Reportable Event, and the Borrowers have not received any notice
from the PBGC that any of the Plans should be terminated or from the Secretary
of the Treasury that any partial or full termination of any of the Plans has
occurred.
(d) No termination proceedings with respect to any of the Plans have
been commenced and have not yet been concluded.
(e) With respect to any of the Plans, there has not occurred any
prohibited transaction (as defined in Section 406 of ERISA or Section 4975 of
the Internal Revenue Code) for which a prohibited transaction exemption has not
been provided by statute or regulation, ruling or opinion issued by the
Department of Labor or Internal Revenue Service and which may result in the
imposition upon the Borrowers of any prohibited transaction excise tax or civil
liability under Section 502(i) of ERISA.
(f) The Borrowers have made all required contributions under the Plans
for all periods through and including the date hereof or adequate accruals
therefor have been provided for as shown in the Financial Statements. No
"accumulated funding deficiency" (as defined in section 302 of ERISA) has
occurred with respect to any of the Plans.
For purposes of this Agreement, all references to "ERISA" shall be deemed to
refer to the Employee Retirement Income Security Act of 1974 (including any
sections of the Internal Revenue Code of 1986 amended by it), as heretofore
amended and as it may hereafter be amended or modified, and all regulations
promulgated thereunder, and all references to the Borrowers in this Section
3.14, or in any other Section of this Agreement relating to ERISA, shall be
deemed to refer to the Borrowers and all other entities which are part of a
controlled or affiliated group or under common control with the Borrowers within
the meaning of Sections 414(b), 414(c) and 415(h) of the Internal Revenue Code
of 1986, as amended, and Section 4001 (a) (2) of ERISA.
3.15 Employee Grievances.
--------------------
There are no actions or proceedings pending or, to the best of any
Borrower's knowledge, threatened against any Borrower, by or on behalf of or
with respect to its employees, which would have a Material Adverse Effect.
3.16 Indebtedness.
-------------
There is set forth on Exhibit 3.16 hereto a true and complete schedule of
all Indebtedness for borrowed money (including guaranties of borrowed money) and
Capitalized Lease Obligations of the Borrowers in existence as of the date of
this Agreement, setting forth with respect to all such Indebtedness, the
holders, the payment schedules and the interest or other charges payable.
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<PAGE>
3.17 Investment Company.
-------------------
No Borrower is an "investment company" registered or required to be
registered under the Investment Company Act of 1940, as amended, nor is any
Borrower controlled by such a company.
Article 4. The Closings; Conditions to the Loans.
--------------------------------------
4.1 The Closing.
------------
Subject to the satisfaction of the conditions precedent set forth in
Section 4.2 hereof, the Closing shall take place at the offices of Reed Smith
Shaw & McClay, LLP, counsel to the Agent, simultaneously with the execution and
delivery of this Agreement.
4.2 Conditions to Initial Advance.
------------------------------
The obligation of Lenders to lend the initial Advance shall be subject to
the fulfillment to the satisfaction of the Agent (but, as between the Lenders
and the Agent, subject to Section 8.15 hereof) of the following conditions
precedent:
(a) Each Borrower shall have executed and delivered to Agent the
Notes.
(b) Each Borrower shall have executed and delivered to Agent the
Pledge Agreement as required by Section 2.14 hereof.
(c) [INTENTIONALLY OMITTED]
(d) Borrowers shall, in connection with the Swing Line, have executed
and delivered to Agent a Working Cash Line of Credit, Investment Swap Rider and
a Working Cash Trust Agreement (the "Working Cash Agreements").
(e) Counsel to the Borrowers shall have delivered to Agent its
opinion, in form and substance satisfactory to Agent.
(f) Agent shall have received copies of the following:
(i) All of the consents, approvals and waivers referred to on
Exhibit 3.2 hereto, except only those which, as stated on Exhibit 3.2, shall not
be delivered and each such consent, waiver and approval so delivered shall be in
form and substance satisfactory to Lenders;
(ii) Copies of all corporate action (including, without
limitation, directors' resolutions and stockholders' consents) taken by each
Borrower to authorize the execution, delivery and performance of any agreement,
instruments and documents to which it is a party pursuant hereto or in
connection herewith, and an incumbency certificate with respect to each such
corporation in each case certified by its respective secretary;
(iii) Such other documents, including UCC-1 Financing Statements
and UCC-3 Amendment Statements (or other document necessary to grant or perfect
a lien on personal property or real estate under the applicable law of a
particular jurisdiction) as any Lender may require;
(g) (i) The Borrowers shall have complied and shall then be in
compliance with all of the terms, covenants and conditions of this Agreement;
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<PAGE>
(ii) There shall exist no Event of Default or Default; and
(iii) The representations and warranties contained in Article 3
hereof shall be true in all material respects;
(h) Agent shall have received a Certificate (a "Compliance
Certificate") of the president, a vice president, the treasurer or the corporate
controller of each Borrower dated the date of the Closing certifying that the
conditions set forth in Subsection 4.2(g) hereof are satisfied on such date;
(i) The Borrowers shall have delivered to Agent, initialed by the
Borrowers for identification, copies of the Financial Statements (prior receipt
of which Agent acknowledges); and
(j) All legal matters incident to the transactions contemplated hereby
shall be satisfactory to counsel to Agent.
4.3 Conditions to Subsequent Advances.
----------------------------------
The obligation of Lenders to make each Advance subsequent to the initial
Advance shall be subject to the fulfillment to the satisfaction of Agent (but,
as between the Lenders and the Agent, subject to Section 8.15 hereof) of the
following conditions precedent:
(a) Except with respect to borrowings under the Swing Line, Agent
shall have received a request for a borrowing as provided for in subsection 2.3
hereof.
(b) Agent shall have received a Borrowing Base Certificate as
required by Section 2.1.1(a)(ii) hereof, and the matters contained in Section
4.2(g) hereof shall be true as of such date.
(c) All legal matters incident to such advance shall be satisfactory
to counsel to Agent.
Article 5. Delivery of Financial Reports, Documents and Other Information.
---------------------------------------------------------------
While either Revolving Loan Commitment or any Advance remains
outstanding, so long as any Borrower is indebted to the Lenders and until
payment in full of the Notes and full and complete performance of all of their
other obligations arising hereunder, the Borrowers shall deliver to Agent and to
each Lender:
5.1 Annual Financial Statements.
----------------------------
(a) Annually, as soon as available, but in any event within 100 days
after the last day of each of its fiscal years, a consolidated Balance Sheet of
SSI and its Subsidiaries as at such last day of the fiscal year, and
consolidated Statements of operations, shareholders' equity and cash flows of
SSI and its Subsidiaries for such fiscal year, each prepared in accordance with
generally accepted accounting principles consistently applied, each to be in
reasonable detail and certified without qualification or explanatory paragraphs
by KPMG Peat Marwick or another firm of independent certified public accountants
satisfactory to Agent.
(b) Annually, as soon as available, but in any event within 100 days
after the last day of each of its fiscal years, the unaudited Balance Sheet of
SSI as at such last day of the fiscal year, and the unaudited Statements of
operations of SSI for such fiscal year, in each case prepared on both a
consolidated basis for SSI and its Subsidiaries and on a consolidated basis for
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<PAGE>
SSI excluding all Subsidiaries other than if another Borrower and prepared in
accordance with generally accepted accounting principles consistently applied,
each to be in reasonable detail and certified by SSI's chief financial officer
or corporate controller and in each case showing the calculation of the
covenants in Sections 6.8, 6.9 and 6.10 hereof.
5.2 Quarterly Financial Statements.
-------------------------------
(a) As soon as available, but in any event within 45 days after the
end of the first three fiscal quarterly periods of each fiscal year, an
unaudited consolidated Balance Sheet of SSI and its Subsidiaries, as at such
last day of the fiscal quarter, and an unaudited consolidated statement of
operations of SSI and its Subsidiaries for such fiscal quarter, and with respect
to the second and third fiscal quarters such statements shall also include
statements of operations and cash flows for the period from the commencement of
the then current fiscal year to the end of such quarter, each to be in
reasonable detail and certified by the chief financial officer or corporate
controller of the Borrowers as having been prepared in accordance with generally
accepted accounting principles consistently applied, subject to year-end audit
adjustments.
(b) As soon as available, but in any event within 45 days after the
end of each of the first three fiscal quarterly periods of each fiscal year,
unaudited consolidating Balance Sheets of SSI and its Subsidiaries as at such
last day of such fiscal quarter, and unaudited consolidating statements of
operations of SSI and its Subsidiaries, for such fiscal quarter, and with
respect to the second and third fiscal quarters, such statements shall also
include consolidating statements of operations for the period from the
commencement of the current fiscal year to the end of such quarter, each to be
in reasonable detail.
(c) As soon as available, but in any event within 45 days after the
end of the first three fiscal quarterly periods of each fiscal year, an
unaudited Balance Sheet of SSI as at such last day of the fiscal quarter, and an
unaudited statement of operations of SSI for such fiscal quarter, and with
respect to the second and third fiscal quarters such statements shall also
include statements of operations for the period from the commencement of the
then current fiscal year to the end of such quarter, in each case prepared on a
consolidated basis for SSI excluding all Subsidiaries other than if another
Borrower and to be in reasonable detail and certified by the chief financial
officer or corporate controller of the Borrowers as having been prepared in
accordance with generally accepted accounting principles consistently applied,
subject to year-end audit adjustments, and in each case showing the calculation
of the covenants in Sections 6.8, 6.9 and 6.10 hereof.
(d) As soon as available, but in any event within 45 days after the
end of each fiscal quarter, a cash availability schedule in the form of Annex I
hereto.
5.3 Additional Information.
-----------------------
Promptly after a written request therefor, such other financial data or
information evidencing compliance with the requirements of this Agreement, the
Notes and the Security Documents, as Agent or any Lender may reasonably request
from time to time.
5.4 No Default Certificate.
-----------------------
At the same time as it delivers the financial statements required under the
provisions of Sections 5.1 and 5.2, a Certificate of the president, treasurer,
corporate controller or any vice president of SSI, to the effect that no Event
of Default hereunder, or Default, has occurred and is continuing, or, if such
cannot be so certified, specifying in reasonable detail the exceptions, if any,
to such statement. Such certificate shall be accompanied by a detailed
calculation indicating compliance with the covenants contained in Sections 6.8,
6.9 and 6.10 hereof.
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<PAGE>
5.5 Copies of Other Reports.
------------------------
Promptly upon receipt thereof, copies of all other final reports submitted
to the Borrowers by its independent accountants in connection with any annual or
interim audit of the books of the Borrowers made by such accountants.
5.6 Copies of Documents.
--------------------
Promptly upon their becoming available, copies of any (a) financial
statements, notices (other than routine correspondence), requests for waivers
and proxy statements delivered by any Borrower to any other lending institution
or to its stockholders (as such); (b) material non-routine correspondence or
material official notices received by any Borrower from any federal, state or
local governmental authority which regulates the operations of such Borrower;
(c) registration statements and any amendments and supplements thereto, and any
regular and periodic reports, if any, filed by any Borrower with any securities
exchange or with the Securities and Exchange Commission or any governmental
authority succeeding to any or all of the functions of the said Commission
(including without limitation form 10-K not later than 90 days after the last
day of each fiscal year of SSI and form 10-Q not later than 45 days after the
last day of each fiscal quarter of SSI); (d) all form 8-Ks not later than 15
days after filing; and (e) letters of comment or material non-routine
correspondence sent to any Borrower by any such securities exchange or such
Commission in relation to such corporation and its affairs.
5.7 Notice of Defaults.
-------------------
Promptly, notice of the occurrence of an Event of Default hereunder, or
Default which would have a Material Adverse Effect.
5.8 ERISA Notices.
--------------
(a) Concurrently with such filing, a copy of each annual report which
is filed with respect to each Plan with the Secretary of Labor or the PBGC; and
(b) promptly, upon their becoming available, copies of (i) all non-
routine correspondence with the PBGC, the Secretary of Labor or any
representative of the IRS with respect to any Plan; (ii) copies of all reports
received by any Borrower from its actuary with respect to any Plan; and (iii)
copies of any notices of Plan termination filed by any Plan Administrator (as
those terms are used in ERISA) with the PBGC and of any notices from the PBGC to
any Borrower with respect to the intent of the PBGC to institute involuntary
termination proceedings; and (iv) copies of all non-routine correspondence with
the plan sponsor with respect to any multiemployer plan.
Article 6. Covenants.
----------
While either Revolving Loan Commitment or any Advance remains outstanding,
so long as any Borrower is indebted to the Lenders and until payment in full of
the Notes and full and complete performance of all of its other obligations
arising hereunder:
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<PAGE>
6.1 Payment of Taxes and Claims.
----------------------------
The Borrowers will pay and discharge before they become delinquent:
(a) all taxes, assessments, and governmental charges or levies
imposed upon each such corporation, its income or its Property;
(b) all claims or demands of materialmen, mechanics, carriers,
warehousemen, landlords and other like persons which, if unpaid, might result in
the creation of a Lien upon any Borrower's Property;
(c) all claims, assessments, or levies required to be paid by any
such entity pursuant to any agreement, contract, law, ordinance, or governmental
rule or regulation governing any pension, retirement, profit-sharing or any
similar plan of any Borrower; and
(d) all other obligations and liabilities of each Borrower;
where in any such case the failure to pay or discharge would have a Material
Adverse Effect; provided, that items of the foregoing description need not be
paid while being contested in good faith and by appropriate proceedings and
provided further that a bond is filed in cases where the filing of a bond is
necessary to avoid the creation of a Lien against the Collateral.
6.2 Maintenance of Properties, Insurance, Records and Corporate Existence;
----------------------------------------------------------------------
Inspections and Audits; etc.
----------------------------
The Borrowers will:
(a) Property. Maintain their respective Properties in good
---------
condition, working order and repair, subject to normal wear and tear.
(b) Insurance.
----------
(i) Maintain, with financially sound and reputable insurers,
insurance with respect to their respective Properties and businesses against
such casualties and contingencies of such types and in such amounts as is
customary in the case of corporations of established reputations engaged in the
same or a similar business and file with Agent upon its request a detailed list
of the insurance then in effect, stating the names of the insurance companies,
the amounts and rates of insurance, dates of the expiration thereof and the
properties and risks covered thereby.
(ii) Pay all premiums to the PBGC as may be required for the
plan termination and insolvency insurance provided by the PBGC.
(c) Financial Records. Keep proper books of record and account in a
------------------
manner satisfactory to Agent in which full, true and correct entries in
accordance with generally accepted accounting principles shall be made of all
dealings or transactions in relation to its business activities.
(d) Maintenance of Existence. Subject to the terms of Section 6.7
-------------------------
hereof, do or cause to be done all things necessary to preserve and keep in full
force and effect its corporate existence and all franchises, rights and
privileges necessary for the proper conduct of businesses and continue to engage
in the same type of business as it is presently engaged.
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(e) Delivery of Amendments. Promptly deliver to Agent copies of any
-----------------------
amendments or modifications to its certificate of incorporation or by-laws,
certified, with respect to the certificate of incorporation, by the Secretary of
State of its jurisdiction of incorporation and, with respect to the by-laws, by
the Secretary of the corporation.
(f) Notice of Disputes. Promptly notify Agent in writing of any
-------------------
litigation, legal proceeding or dispute which might result in liability in
excess of $10,000,000 whether or not fully covered by insurance.
(g) Compliance with Law. Comply with all laws, ordinances,
--------------------
governmental rules and regulations to which such entity is subject (including,
without limitation, ERISA and environmental laws) and obtain any licenses,
permits, franchises, or other governmental authorizations necessary to the
ownership of their respective Properties or to the conduct of their respective
businesses, where in any such event the failure to do so would have a Material
Adverse Effect.
(h) Inspections and Audits. Permit each Lender to make or cause to
-----------------------
be made, at the Borrowers' expense (which expense shall be limited to a
reasonable amount prior to any Default), inspections and audits of any books,
records and papers of each Borrower and to make extracts therefrom, or to make
inspections and examinations of any properties and facilities of any Borrower on
reasonable notice, at all such reasonable times and as often as any Lender may
reasonably require.
6.3 Indebtedness.
-------------
The Borrowers shall not create, incur, permit to exist or have
outstanding any Indebtedness (for this purpose not including Subordinated
Indebtedness, which is addressed in Section 6.21 hereof), except:
(a) Indebtedness of the Borrowers to the Lenders under this Agreement
and the Notes;
(b) Taxes, assessments and governmental charges, current trade
accounts payable, accrued expenses, customer payments received in advance and
deferred liabilities other than for borrowed money (e.g., deferred compensation
and deferred taxes), in each case incurred and continuing in the ordinary course
of business;
(c) Existing Indebtedness for borrowed money set forth on Exhibit
3.16 annexed hereto;
(d) Purchase money Indebtedness (including Capitalized Lease
Obligations) hereafter incurred for equipment or real estate in an amount not to
exceed $3,000,000 at any time outstanding in the aggregate for the Borrowers;
and
(e) Indebtedness of Borrowers owing to Persons in which Equity
Interests have been or hereafter are acquired (as permitted in Section 6.6
hereof) in an aggregate amount not to exceed $20,000,000 at any time
outstanding.
6.4 Liens.
------
No Borrower will cause or permit in the future (upon the happening of a
contingency or otherwise) any of their respective Properties, whether now owned
or hereafter acquired, to be subject to a Lien except:
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(a) Liens created by the Security Documents;
(b) Liens for taxes or other governmental charges which are not
delinquent or which are being contested in good faith and for which a reserve
shall have been established as required in accordance with generally accepted
accounting principles;
(c) Pledges or deposits to secure obligations under workmen's
compensation laws or similar legislation; pledges or deposits to secure
performance in connection with bids, tenders, contracts (other than contracts
for the payment of money) or leases to which any of the Borrowers is a party;
deposits to secure public or statutory obligations; materialmen's, mechanics',
carriers', workmen's, repairmen's or other like liens, or deposits to obtain the
release of such liens, in an aggregate amount with respect to the Borrowers not
exceeding $1,500,000 at any one time outstanding; and deposits to secure surety,
appeal or customs bonds on which any of the Borrowers is the principal; as to
all of the foregoing, however, only to the extent arising and continuing in the
ordinary course of business;
(d) Existing Liens set forth on Exhibit 3.16 annexed hereto; and
(e) Purchase Money Liens on equipment and real estate to secure
purchase money Indebtedness permitted by Section 6.3 (d) hereof.
Further, no Borrower will enter into or permit to exist any agreement with
any Person which by its terms prohibits any Borrower from granting Agent or any
Lender a lien on or security interest or pledge of the Collateral.
6.5 Guaranties.
-----------
The Borrowers shall not assume, endorse, be or become liable for, or
guarantee, the obligation of any Person, except:
(a) by the endorsement of negotiable instruments for deposit or
collection in the ordinary course of business;
(b) guaranties existing on the date hereof as set forth on Exhibit
3.16 hereto, provided that $3,000,000 of the Pioneer guaranty as described in
Exhibit 3.16 shall be counted toward the Fifty Million Dollars ($50,000,000)
referred to in subpart (c) below;
(c) future guaranties to the extent that, after giving effect to such
future guaranties, the aggregate amount of all guaranties by the Borrowers
(including those referred to in Paragraph (b) hereof and excluding those
referred to in Paragraph (a) hereof) would not exceed Fifty Million Dollars
($50,000,000.00) at any time outstanding, provided that in no event will any
such guaranty(ies) heretofore or hereafter issued for the indebtedness or
obligations of any one Person exceed $10,000,000 in the aggregate at any time
outstanding.
For the purposes hereof, the term "guaranties" shall mean any obligation to
pay money on behalf of or in regard to another Person, including without
limitation any obligation as guarantor, surety, purchaser, indemnitor, lessee,
repurchaser, investor, contributor, subscriber, lender or otherwise. It is
intended that the term "guaranties" be interpreted in the broadest sense
possible and the examples in the foregoing sentence are illustrations and not
limitations.
Furthermore, reimbursement obligations with respect to Letters of Credit
shall not be "guaranties" for purposes of this Section 6.5.
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<PAGE>
6.6 Equity Interests and Loans.
---------------------------
The Borrowers may acquire Equity Interests in other Persons, in addition to
Equity Interests existing on the date of Closing and disclosed in Exhibit "6.6"
hereto, subject to the following limitations:
(a) (i) Borrowers may only invest in any fiscal year, whether as
further Equity Interests in a Person in which an Equity Interest has previously
been acquired or as a new Equity Interest in a new Person, $75,000,000 per
Equity Interest for up to two such Equity Interests and $50,000,000 per Equity
Interest for other Equity Interests.
(ii) Notwithstanding subpart (a) (i) above, the term "Equity
Interest" as used therein shall not include a transaction which would otherwise
constitute an Equity Interest but for which the consideration given by Borrowers
in connection therewith consists entirely of capital stock issued by SSI
(herein, "Non Cash Investments"), provided that should any such stock thereafter
be redeemed in whole or in part for cash, the cash so paid will be deemed an
"Equity Interest" in the fiscal year so paid.
(b) Borrowers shall notify Agent of any Equity Interest in any Person
in which no previous Equity Interest has been acquired by any Borrower, within a
reasonable period after acquiring such Equity Interest, and shall provide Agent
with full information on the Equity Interest, including without limitation,
balance sheets, statements of income, statements of stockholders equity and such
other information that Agent may request.
For purposes of measuring the amount of Equity Interests, an Equity Interest
shall be deemed acquired in the year in which a Borrower becomes contractually
obligated to make a payment notwithstanding that the payment is acquired in a
later year.
6.7 Consolidation and Merger.
-------------------------
No Borrower will consolidate with or merge into any other Person other than
another Borrower or permit any other Person to consolidate with or merge into
any Borrower.
6.8 Tangible Net Worth.
-------------------
The Borrowers shall have and maintain Tangible Net Worth of not less than
$519,084,000 as of September 30, 1999, increasing by the sum of (i) 75% of after
tax earnings plus (ii) 100% of additional equity (including Subordinated
Indebtedness), for all periods after September 30, 1999 (determined on a
cumulative basis), tested as set forth in Section 1.3 hereof.
6.9 Funded Debt to Tangible Net Worth.
----------------------------------
The Borrowers shall not permit the ratio of Funded Debt to Tangible Net
Worth to be greater than 0.70 to 1 as of the end of any fiscal quarter,
commencing with fiscal quarter ending December 31, 1999, tested as set forth in
Section 1.3 hereof.
6.10 Interest Coverage Ratio.
------------------------
The Borrowers shall not permit the Interest Coverage Ratio to be less than
1.25 to 1 as of the end of any fiscal quarter, commencing with fiscal quarter
ending December 31, 1999, tested as set forth in Section 1.3 hereof.
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6.11 Change of Business; Sale of Assets.
-----------------------------------
The Borrowers shall not make any material change in its business or in the
nature of its operations or liquidate or dissolve itself (or suffer any
liquidation or dissolution) or convey, sell, lease, or otherwise dispose of any
of its Properties, assets or business, except in the ordinary course of business
for a fair consideration, or dispose of any shares of stock or any Indebtedness
of others owing to any Borrower whether now owned or hereafter acquired;
provided, however, that nothing contained in this Section 6.11 shall prohibit
(i) the sale of any Equity Interest, the stock of which Equity Interest is not a
part of the Pledged Securities, so long as Agent has consented to the sale of
such Equity Interest in writing, or (ii) the acquiring of any Equity Interest
permitted under Section 6.6 hereof, or (iii) sales of Pledged Securities in the
ordinary course of any Borrower's business provided that Borrowers are at all
times in compliance with the Collateral Coverage Ratio and the Borrowing Base
and subject to the terms of Section 4(c) of the Pledge Agreement.
6.12 Leases.
-------
The Borrowers shall not enter into any leases (other than leases giving
rise to Capitalized Lease Obligations) to the extent that, after giving effect
to any such lease, the aggregate amount of rental payments and all other
payments by the Borrowers under such leases in any fiscal year of SSI would
exceed $10,000,000.
6.13 Issuance of Stock.
------------------
The Borrowers will not permit SSD or SDI to issue, sell or dispose of any
shares of stock of any class, excluding stock hereafter issued pursuant to
outstanding warrants, options, option plans, contracts or commitments listed in
Exhibit 3.1.
6.14 Fiscal Year.
------------
The Borrowers shall not change their fiscal year.
6.15 Dividends. The Borrowers shall not pay or declare any cash dividends
----------
other than to another Borrower.
6.16 ERISA Compliance; Obligations.
------------------------------
(a) The Borrowers shall:
(i) comply in all material respects with all applicable
provisions of ERISA now or hereafter in effect;
(ii) promptly notify the Agent in writing of the occurrence of
any Reportable Event, as defined in ERISA, together with a description of such
Reportable Event and a statement of the action that any such Borrower intends to
take with respect thereto, together with a copy of the notice (if any) thereof
given to the PBGC; and
(iii) promptly notify Agent in writing of any proposed
withdrawal from a multiemployer plan.
(b) The Borrowers will not:
(i) be or become obligated to the PBGC or any multiemployer
plan in excess of $500,000; or
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(ii) be or become obligated to the IRS with respect to excise
or other penalty taxes provided for in those provisions of the Internal Revenue
Code which were enacted pursuant to ERISA, as now in effect or hereafter amended
or supplemented, in excess of $500,000.
6.17 Prepayments.
------------
None of the Borrowers will make any voluntary or optional prepayment of any
Indebtedness for borrowed money incurred or permitted to exist under the terms
of this Agreement, other than Indebtedness evidenced by the Notes, subject to
the prepayment terms hereof, and other than with respect to the Subordinated
Indebtedness.
6.18 Securities Monetizations.
------------------------
Securities Monetizations will not be subject to any of the other covenants
set forth in this Section 6, including without limitation Section 6.3
(Indebtedness), 6.4 (Liens) and 6.11 (Sale of Assets) hereof, but instead will
be subject to the following limitations:
(a) the entire net proceeds from such Securities Monetization will
concurrently with Borrowers' receipt thereof be paid against the principal of
the Loans (subject to Borrowers' right to re-borrow if otherwise permitted under
the terms of this Agreement);
(b) no Default or Event of Default shall be outstanding as of the
date on which such transaction is to be closed or would result therefrom,
including an Event of Default by reason of non-compliance with the Collateral
Coverage Base or the Borrowing Base as a result of such Securities Monetization;
and
(c) the combined aggregate amount of all Securities Monetizations
(measured by the consideration received by the Borrowers in exchange for the
"transferred" stock) and all Subordinated Indebtedness (as defined and as
otherwise permitted by Section 6.21 and measured by principal amount) incurred
on or after January 1, 2000 will not exceed in any fiscal year the
Monetization/Sub Debt Annual Limit.
6.19 Letters of Credit.
------------------
The Borrowers shall not obtain any letters of credit or enter into any
agreements or execute any obligations with respect to letters of credit except
with respect to Letters of Credit issued by Issuer pursuant hereto.
6.20 Dispositions.
-------------
The Borrowers shall notify Agent of the disposition of the capital stock or
other ownership interest in any Person by telephone at the latest
contemporaneously therewith followed promptly by written notice. In the event of
the disposition of Pledged Securities written notice shall not be later than
twenty-four (24) hours after the time when Agent is to deliver such Pledged
Securities. The proceeds of the sale of any Collateral shall be applied as set
forth in Section 4(c) of the Pledge Agreement.
6.21 Subordinated Indebtedness.
-------------------------
(a) Subordinated Indebtedness will not be subject to the prohibition
contained in Section 6.3 (Indebtedness) hereof but instead will be subject to
the limitations that (A) the combined aggregate amount of principal of all
Subordinated Indebtedness and all Securities
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<PAGE>
Monetizations (as permitted and measured in Section 6.18 hereof) incurred on and
after January 1, 2000 shall not exceed the Monetization/Sub Debt Annual Limit
and (B) the aggregate amount of all Subordinated Indebtedness incurred after
January 1, 2000 through the Commitment Termination Date I will not exceed the
Sub Debt Aggregate Sub Limit.
(b) In the event that any Subordinated Indebtedness is by its terms
convertible to stock of SSI, or in the event that Borrowers have the option to
redeem Subordinated Indebtedness prior to maturity, Borrowers may issue stock of
SSI in connection with any such conversion or redemption, subject to the change
of ownership limitation set forth in Section 7.10 hereof, provided that
Borrowers will exercise such optional redemption right only when it reasonably
and in good faith appears to Borrowers that the holder will accept SSI stock in
full payment thereof, such as by reason of the then price per share being in
excess of the then conversion price, although Borrowers may, subject to the
other terms hereof, make a cash payment for such redemption if nevertheless
required by the holder.
Article 7. Events of Default; Remedies.
----------------------------
Any one or more of the following events shall constitute an Event of
Default:
7.1 Payments.
---------
(a) Failure to make any payment of principal or interest upon any of
the Notes, or to make any payment of the commitment fees, within seven (7) days
after the date upon which any such payment is due; or
(b) Should the principal balance (including the face amount of
outstanding Letters of Credit and unreimbursed draws under Letters of Credit)
outstanding under the Revolving Loan I at any time exceed the Collateral
Coverage Base or should the principal balance outstanding under the Revolving
Loan II at any time exceed the Borrowing Base; or
7.2 Covenants.
----------
Failure by any Borrower to perform or observe any of their respective
agreements contained in Article 6 hereof (except Sections 6.1, 6.2, 6.8, 6.9,
6.10 or 6.16(a) of Article 6); or
7.3 Other Covenants.
----------------
Failure by any Borrower to perform or observe any other term, condition or
covenant of this Agreement not described in Section 7.2 above, the Notes, the
Security Documents, or any other agreement or document delivered pursuant hereto
or thereto which shall remain unremedied for a period of thirty (30) days after
notice thereof shall have been given by Agent to SSI; or
7.4 Other Defaults.
---------------
(a) Failure by any Borrower to perform or observe any term, condition
or covenant of any bond, note, debenture, loan agreement, indenture, guaranty,
trust agreement, mortgage or similar instrument (including, without limitation,
any debt which is subordinated to the obligations created pursuant to this
Agreement) to which any Borrower is a party or by which it is bound, or by which
any of its Properties or assets may be affected (a "Debt Instrument"), and, as a
result thereof (assuming the giving of appropriate notice thereof, if required),
Indebtedness in excess of $6,000,000 which is included therein or secured or
covered thereby shall have been declared due and payable prior to the date on
which such Indebtedness would otherwise become due and payable; or
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(b) Any event or condition referred to in any Debt Instrument shall
have occurred or failed to occur, and, as a result thereof, Indebtedness in
excess of $6,000,000 which is included therein or secured or covered thereby
shall have been declared due and payable prior to the date on which such
Indebtedness would otherwise become due and payable; or
(c) Failure to pay any Indebtedness for borrowed money in excess of
$6,000,000 due at final maturity or pursuant to demand under any Debt
Instrument.
7.5 Representations and Warranties.
------------------------------
Any representation or warranty made in writing to Agent or any Lender in
any of the Loan Documents or in connection with the making of the Loans, or any
certificate, statement or report made or delivered in compliance with this
Agreement, shall have been false or misleading in any material respect when made
or delivered; or
7.6 Bankruptcy.
-----------
(a) Any Borrower shall make an assignment for the benefit of
creditors, file a petition in bankruptcy, be adjudicated insolvent or bankrupt,
suffer an order for relief under any federal bankruptcy law, petition or apply
to any tribunal for the appointment of a receiver, custodian, or any trustee for
it or a substantial part of its assets, or shall commence any proceeding under
any bankruptcy, reorganization, arrangement, readjustment of debt, dissolution
or liquidation law or statute of any jurisdiction, whether now or hereafter in
effect; or there shall have been filed any such petition or application, or any
such proceeding shall have been commenced against it, which remains undismissed
for a period of sixty (60) days or more; or any order for relief shall be
entered in any such proceeding; or any Borrower by any act or omission shall
indicate its consent to, approval of or acquiesced in any such petition,
application or proceeding or the appointment of a custodian, receiver or any
trustee for it or any substantial part of any of its properties, or shall suffer
any custodianship, receivership or trusteeship to continue undischarged for a
period of sixty (60) days or more; or
(b) Any Borrower shall generally not pay its debts as such debts
become due; or
(c) Any Borrower shall have concealed, removed, or permitted to be
concealed or removed, any part of its property, with intent to hinder, delay or
defraud its creditors or any of them, or made or suffered a transfer of any of
its property which may be fraudulent under any bankruptcy, fraudulent conveyance
or similar law; or shall have made any transfer of its property to or for the
benefit of a creditor at a time when other creditors similarly situated have not
been paid; or shall have suffered or permitted, while insolvent, any creditor to
obtain a Lien upon any of its property through legal proceedings or distraint
which is not vacated within sixty (60) days from the date thereof; or
7.7 Judgments.
----------
Any judgment against any Borrower or any attachment, levy of execution
against any of their respective properties for any amount in excess of
$9,000,000 shall remain unpaid, unstayed on appeal, undischarged, unbonded or
undismissed for a period of sixty (60) days or more; or
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<PAGE>
7.8 ERISA.
------
(a) The termination of any Plan or the institution by the PBGC of
proceedings for the involuntary termination of any Plan, in either case, with a
vested unfunded liability in excess of $6,000,000; or
(b) Failure by any Borrower to fund, in accordance with the
applicable provisions of ERISA, each of the Plans hereafter established or
assumed by it provided, that such failure to fund shall not constitute an Event
of Default hereunder unless such failure shall continue for 5 days after the
date on which such funding was required; or
(c) The withdrawal by any Borrower from any multiemployer plan giving
rise to a withdrawal liability in excess of $6,000,000; or
7.9 Liens.
------
Any of the Liens created and granted to the Lenders under the Security
Documents shall at any time fail to be valid, first, perfected Liens, subject to
no other Lien; or
7.10 Ownership.
----------
Any Person shall acquire more than 30 percent of the issued and outstanding
capital stock of SSI.
7.11 Remedies.
---------
(a) In addition to all other rights, options and remedies granted or
available to Agent or Lenders under this Agreement or the other Loan Documents
or otherwise available at law or in equity, upon or at any time after the
occurrence and during the continuance of a Default or an Event of Default, all
obligations of Lenders to make further Advances shall, at Agent's discretion
(but, as between Agent and Lenders, subject to Section 8.15 hereof), cease.
(b) In addition to all other rights, options and remedies granted or
available to Agent under this Agreement or the other Loan Documents, Agent may,
in its discretion (but, as between Agent and Lenders, subject to Section 8.15
hereof), upon or at any time after the occurrence and during the continuance of
an Event of Default, terminate the Loans and declare the Obligations immediately
due and payable, all without demand, notice, presentment or protest or further
action of any kind (it also being understood that the occurrence of any of the
events or conditions set forth in Section 7.6 shall automatically cause an
acceleration of the Obligations).
(c) In addition to all other rights, options and remedies granted or
available to Agent, under this Agreement or the other Loan Documents, upon or at
any time after the occurrence and during the continuance of an Event of Default,
Borrowers shall be obligated to deliver and pledge to Agent, on behalf of all
Lenders, cash collateral in the amount of all outstanding Letters of Credit.
(d) In addition to all other rights, options and remedies granted or
available to Agent under this Agreement or the other Loan Documents, Agent may
in its discretion (but, as between Agent and Lenders, subject to Section 8.15
hereof), upon or at any time after the acceleration of the Obligations following
occurrence of an Event of Default, exercise all rights under the UCC and any
other applicable law or in equity, and under all Loan Documents permitted to be
exercised after the occurrence of an Event of Default.
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<PAGE>
(e) All rights and remedies granted Agent and the Lenders hereunder
and under the other Loan Documents, or otherwise available at law or in equity,
shall be deemed concurrent and cumulative, and not alternative remedies, and
Agent and the Lenders (subject, as between the Agent and the Lenders, to the
provisions of Section 8.15 hereof) may proceed with any number of remedies at
the same time until all Obligations are satisfied in full. The exercise of any
one right or remedy shall not be deemed a waiver or release of any other right
or remedy, and Agent, upon or at any time after the occurrence of an Event of
Default, may proceed against any Borrower, at any time, under any agreement,
with any available remedy and in any order.
Article 8. The Agent.
----------
As between Agent, on one hand, and Lenders, on the other hand, Agent and
each Lender, who are now or shall become parties to this Agreement, agree as
follows:
8.1 Appointment and Authorization. Each Lender, and each subsequent holder
-----------------------------
of any of the Notes by its acceptance thereof, hereby irrevocably appoints and
authorizes Agent to take such action on its behalf and to exercise such powers
under this Agreement as are delegated to Agent by the terms hereof, together
with such powers as are reasonably incidental thereto. Subject to the provisions
of this Agreement, Agent will handle all transactions relating to the Loans and
all other Obligations, including, without limitation, all transactions with
respect to Letters of Credit, this Agreement, the Loan Documents and all related
documents, in accordance with its usual banking practices. Except as otherwise
expressly provided herein, Borrowers are hereby authorized by Lenders to deal
solely with Agent in all transactions which affect Lenders under this Agreement
and the Loan Documents. The rights, privileges and remedies accorded to Agent
hereunder shall be exercised by Agent on behalf of all of the Lenders.
8.2 General Immunity. In performing its duties as Agent hereunder, Agent
-----------------
will take the same care as it takes in connection with loans in which it alone
is interested. Subject to Section 8.6 of this Agreement, neither Agent nor any
of its directors, officers, agents or employees shall be liable for any action
taken or omitted to be taken by it or them hereunder or in connection herewith
except such action or omission to the extent caused from its or their own gross
negligence or willful misconduct unless such action was taken or omitted to be
taken by Agent at the direction of Majority Lenders.
8.3 Consultation with Counsel. Agent may consult with legal counsel and
--------------------------
any other professional advisors or consultants deemed necessary or appropriate
and selected by Agent and shall not be liable for any action taken or suffered
in good faith by it in accordance with the advice of such counsel.
8.4 Documents. Agent shall not be under a duty to examine into or pass
----------
upon the effectiveness, genuineness or validity of this Agreement or any of the
Notes or any other instrument or document furnished pursuant hereto or in
connection herewith, and Agent shall be entitled to assume that the same are
valid, effective and genuine and what they purport to be. In addition Agent
shall not be liable for failing to make any inquiry concerning the accuracy,
performance or observance of any of the terms, provisions or conditions of such
instrument or document. Agent shall furnish to Lenders copies of all notices and
financial statements received from Borrowers hereunder.
8.5 Rights as a Lender. With respect to its applicable Pro Rata
-------------------
Percentage of the Loans, PNC Bank National Association shall have the same
rights and powers hereunder as any other Lender and may exercise the same as
though it were not Agent, and the term "Lender" or "Lenders" shall, unless the
context otherwise indicates, include Agent in its individual capacity as a
"Lender". Subject to the provisions of this Agreement, Agent may accept deposits
from,
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lend money to and generally engage in any kind of banking or trust business with
Borrowers and their affiliates and Subsidiaries as if it were not Agent.
8.6 Responsibility of Agent. It is expressly understood and agreed that
------------------------
the obligations of Agent hereunder are only those expressly set forth in this
Agreement and that Agent shall be entitled to assume that no Default or Event of
Default has occurred and is continuing, unless Agent has actual knowledge of
such fact. Except to the extent Agent is required by Lenders pursuant to the
express terms hereof to take a specific action, Agent shall be entitled to use
its discretion with respect to exercising or refraining from exercising any
rights which may be vested in it by, or with respect to taking or refraining
from taking any action or actions that it may be able to take under or in
respect of, this Agreement and the Loan Documents. Agent shall incur no
liability under or in respect of this Agreement and the Loan Documents by acting
upon any notice, consent, certificate, warranty or other paper or instrument
believed by it to be genuine or authentic or to be signed by the proper party or
parties, or with respect to anything that it may do or refrain from doing in the
reasonable exercise of its judgment, or that may seem to it to be necessary or
desirable under the circumstances. It is agreed among Agent and Lenders that
Agent shall have no responsibility to carry out audits or otherwise examine the
books and records or properties of Borrowers, except as Agent in its sole
discretion deems appropriate or as otherwise expressly required hereunder. The
relationship between Agent and each Lender is and shall be that of agent and
principal only and nothing herein shall be construed to constitute Agent a joint
venturer with any Lender, a trustee or fiduciary for any of Lenders or for the
holder of a participation therein nor impose on Agent duties and obligations
other than those set forth herein.
8.7 Collections and Disbursements.
------------------------------
(a) Agent will have the right to collect and receive all payments of
the Obligations, and to collect and receive all reimbursements for draws made
under the Letters of Credit, together with all fees, charges or other amounts
due under this Agreement and the Loan Documents, and Agent will remit to each
Lender, according to its applicable Pro Rata Percentage, all such payments
actually received by Agent (subject to any required clearance procedures) in
accordance with the settlement procedures established by Agent from time to
time, provided that each Lender acknowledges that the Agent Fee and issuance and
other administrative fees for Letters of Credit and interest on the Swing Line
may be retained by Agent for its own account.
(b) If any such payment, other than the Agent Fee, received by Agent
is rescinded or otherwise required to be returned for any reason at any time,
whether before or after termination of this Agreement and the Loan Documents,
each Lender will, upon written notice from Agent, promptly pay over to Agent its
Pro Rata Percentage of the amount so rescinded or returned, together with
interest and other fees thereon if also required to be rescinded or returned.
(c) All payments by Agent and Lenders to each other hereunder shall
be in immediately available funds. Agent will at all times maintain proper books
of account and records reflecting the interest of each Lender in the Revolving
Loans, in a manner customary to Agent's keeping of such records, which books and
records shall be available for inspection by each Lender at reasonable times
during normal business hours, at such Lender's sole expense. Agent may treat the
payees of any Revolving Loan Note as the holder thereof until written notice of
the transfer thereof shall have been received by Agent. In the event that any
Lender shall receive any payments in reduction of the Revolving Loans in an
amount greater than its applicable Pro Rata Percentage in respect of
indebtedness to Lenders evidenced hereby (including, without limitation amounts
obtained by reason of setoffs), such Lender shall hold such excess in trust for
--------
Agent (on behalf of all other Lenders) and shall promptly remit to Agent such
excess amount so that the amounts received by each Lender hereunder shall at all
times be
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in accordance with its applicable Pro Rata Percentage. To the extent necessary
for each Lender's actual percentage of all outstanding Advances to equal its
applicable Pro Rata Percentage, any Lender having a greater share of any
payment(s) than its applicable Pro Rata Percentage shall acquire a participation
in the applicable Pro Rata Percentage of the other Lenders as determined by
Agent.
8.8 Indemnification. Lenders hereby each indemnify Agent (and Issuer with
----------------
respect to Letters of Credit) ratably according to each Lender's Pro Rata
Percentage, from and against any and all liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, expenses or disbursements
of any kind or nature whatsoever that may be imposed on, incurred by or asserted
against Agent (or Issuer, as the case may be) in any way relating to or arising
out of this Agreement or any other Loan Document or any action taken or omitted
by Agent (or Issuer, as the case may be) under or related to this Agreement,
provided that no Lender shall be liable for any portion of such liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses or disbursements to the extent resulting from Agent's (or Issuer's, as
the case may be) gross negligence or willful misconduct unless such action was
taken or omitted by Agent (or Issuer, as the case may be) at the direction of
the Majority Lenders. Agent shall have the right to deduct, from any amounts to
be paid by Agent to any Lender hereunder, any amounts owing to Agent by such
Lender by virtue of this paragraph.
8.9 Expenses.
---------
(a) All out-of-pocket costs and out-of-pocket expenses incurred by
Agent and not reimbursed on demand by Borrowers, in connection with the
amendment, administration, termination, work-out, forbearance and enforcement of
the Revolving Loans (including, without limitation, audit expenses, counsel fees
and expenditures to protect, preserve and defend Agent's and each Lender's
rights and interest under the Loan Documents) shall be shared and paid on demand
by Lenders pro rata based on their applicable Pro Rata Percentage.
(b) Agent may deduct from payments or distributions to be made to
Lenders such funds as may be necessary to pay or reimburse Agent for such costs
or expenses.
8.10 No Reliance. By execution of or joining in this Agreement, each
------------
Lender acknowledges that it has entered into this Agreement and the Loan
Documents solely upon its own independent investigation and is not relying upon
any information supplied by or any representations made by Agent. Each Lender
shall continue to make its own analysis and evaluation of Borrowers. Agent makes
no representation or warranty and assumes no responsibility with respect to the
financial condition of any Borrower, any obligor or any account debtor of any
Borrower; the accuracy, sufficiency or currency of any information concerning
the financial condition, prospects or results of operations of any Borrower; or
for sufficiency, authenticity, legal effect, validity or enforceability of the
Loan Documents. Agent assumes no responsibility or liability with respect to the
collectibility of the Obligations or the performance by Borrowers of any
obligation under the Loan Documents.
8.11 Reporting. During the term of this Agreement, Agent will, to the
---------
extent not required to be delivered by Borrowers to each Lender pursuant to the
other terms of this Agreement, promptly furnish each Lender with copies of all
financial statements and Borrowing Base Certificates of Borrowers to be
delivered to or obtained by Agent hereunder. Agent will immediately notify
Lenders when it receives actual knowledge of any Event of Default under the Loan
Documents.
8.12 Removal of Agent. Agent may resign at any time upon giving thirty
-----------------
(30) days prior written notice thereof to Lenders and Borrowers. Agent may be
removed as Agent hereunder upon the written direction of such of the other
Lenders having 66.67% of the Pro Rata
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Percentage of all Lenders other than Agent. Upon any resignation or removal of
Agent, the Lenders (exclusive of Agent) shall have the right to appoint a
successor Agent by majority vote of the other Lenders (based upon the Pro Rata
Percentages of the other Lenders). Upon the acceptance of the appointment as a
successor Agent hereunder by such successor Agent, such successor Agent shall
thereupon succeed to and become vested with all rights, powers, obligations and
duties of the retiring Agent and the retiring Agent shall be discharged from its
duties and obligations hereunder.
8.13 Action on Instructions of Lenders. With respect to any provision of
----------------------------------
this Agreement, or any issue arising thereunder, concerning which Agent is
authorized to act or withhold action by direction of Lenders (including the
Majority Lenders), Agent shall in all cases be fully protected in so acting, or
in so refraining from acting, hereunder in accordance with written instructions
signed by such Lenders. Such instructions and any action taken or failure to act
pursuant thereto shall be binding on all Lenders and on all holders of the
Revolving Loan Notes.
8.14 Several Obligations. The obligation of each Lender is several, and
--------------------
neither Agent nor any other Lender shall be responsible for the obligation and
commitment of any other Lender.
8.15 Consent of Lenders.
-------------------
(a) Except as expressly provided herein, Agent shall have the sole
and exclusive right and obligation to service, administer and monitor the
Revolving Loans and the Loan Documents, including without limitation, exercising
or refraining from exercising all rights, remedies, privileges and options under
the Loan Documents, the determination as to the basis on which and extent to
which Advances may be made and the determination as to whether draws should be
honored for Letters of Credit, and the right to modify, waive or alter the terms
of the Loan Documents and grant such indulgences, forbearances and other waivers
as it shall determine.
(b) Notwithstanding anything to the contrary contained in
subparagraph (a) above, Agent shall not, without the prior written consent of
all Lenders: (i) extend any payment date for any obligation owing to the Lenders
under the Loan Documents or either of the Commitment Termination Dates, (ii)
reduce any interest rate (other than the interest rate on the Swing Line)
applicable to the Revolving Loans or any fee (other than the Agent Fee and
issuance and other administrative fees for Letters of Credit) or other amount
payable to the Lenders hereunder, (iii) increase either the Revolving Loan
Commitments or change the definition of the Collateral Coverage Base or
Borrowing Base, (iv) release any obligor from the Obligations except in
connection with termination of the Revolving Loans and full payment and
satisfaction of all Obligations, (v) amend the definition of Majority Lenders,
(vi) amend this Section 8.15, (vii) knowingly waive for a period in excess of
three (3) Business Days the requirement that Borrower deliver a Borrowing Base
Certificate in accordance with Section 2.1.1 (a) (ii) hereof, (viii) release any
of the Collateral except upon a sale thereof by Borrowers to the extent
permitted by and subject to the terms of the Pledge Agreement, or (ix) knowingly
waive or fail to enforce any remedy available under the Loan Documents upon an
Event of Default under Sections 7.1 or 7.6(a) hereof, or fail to terminate all
obligations of Lenders or the Issuer to make any further loans or other credit
extensions (including Letters of Credit) under the Revolving Loans at any time
after Agent has actual knowledge (including by reason of its receipt of written
notice thereof from a Lender or the Borrowers) of the occurrence of any Event of
Default under Sections 7.1 or 7.6(a) hereof or of any Default which with the
lapse of time referred to in Section 7.6(a) hereof would constitute an Event of
Default under Section 7.6(a).
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(c) Notwithstanding anything to the contrary contained in
subparagraph (a) above, Agent shall not, without the prior written consent of
the Majority Lenders: (i) modify, knowingly and intentionally waive or amend the
covenants or Events of Default ("Controlled Covenants") set forth in Sections
5.1, 5.2, 5.4, 5.7, 6.1, 6.2(d), 6.3, 6.4, 6.5, 6.6, 6.7, 6.8, 6.9, 6.10, 6.11,
6.12, 6.14, 6.15, 6.16, 6.18, 6.20, 6.21,7.4, 7.5, 7.7, 7.8, 7.9 and 7.10
hereof, (ii) fail to provide Borrowers, within 20 days after Agent's obtaining
actual knowledge thereof, with notice of noncompliance by Borrowers with any of
the Controlled Covenants, (iii) knowingly waive or fail to declare the
Obligations due and payable and enforce any Event of Default incident to
noncompliance by Borrowers with the Controlled Covenants, or (iv) fail to
terminate all obligations of Lenders and Issuer to make any further loans or
other credit extensions (including Letters of Credit) under the Revolving Loans
at any time after the declaration by Agent of an Event of Default incident to
noncompliance by Borrowers with any of the Controlled Covenants. With respect to
any Controlled Covenant compliance or noncompliance with which is contingent on
a Material Adverse Effect, the reasonable good faith determination of the Agent
shall control.
(d) Subject in all events to subparts (b) and (c) above, in the
course of the enforcement by Agent of Borrowers' Obligations after an
acceleration of the Obligations, Agent shall have the sole and exclusive right
and obligation, after consultation (to the extent reasonably practicable under
the circumstances) with all Lenders, to exercise or refrain from exercising any
particular right, remedy, privilege or option under the Loan Documents in a
manner which in its reasonable judgment it reasonably deems prudent under the
circumstances to the end of collecting the Obligations, including realization of
Collateral, and may incur all such expenses it reasonably and in good faith
deems necessary under the circumstances.
(e) To the extent Agent is required to obtain or otherwise elects to
seek the consent of Lenders to an action Agent desires to take or omit to take,
if any Lender fails to notify Agent, in writing, of its consent or dissent to
any request of Agent hereunder within ten (10) days of such Lender's receipt of
such request, such Lender shall be deemed to have given its consent thereto.
8.16 Participation and Assignments. No Lender shall voluntarily (other
------------------------------
than to a successor in interest by operation of law or pursuant to a transfer of
assets in connection with a business combination or to a Federal Reserve Bank)
or involuntarily transfer, assign, participate or otherwise set over all or any
part of its share in the Revolving Loans other than to an affiliate, without the
prior written consent of Agent, which consent shall not be unreasonably
withheld.
8.17 Other Credit Facilities of PNC Bank, National Association. Each
---------------------------------------------------------
Lender acknowledges that PNC Bank, National Association ("PNC") has heretofore
established for various entities various credit facilities ("Other Credit
Facilities") secured by, inter alia, the guaranties of SSI, SSD and SDI. The
parties further acknowledge that Borrowers may now have or hereafter establish
with PNC or an affiliate of PNC one or more deposit or custodian accounts. PNC
agrees with each other Lender that any amounts at any time realized by PNC, or
an affiliate thereof, on behalf of PNC, by virtue of any set-off exercised at
any time against or in the enforcement of any lien at any time obtained on said
deposit or custodian accounts shall, notwithstanding in what capacity as against
the Borrowers any such set-off is exercised or lien obtained, be first applied
against the Revolving Loans and all other Obligations of Borrowers hereunder
until paid in full before any thereof shall be applied against the principal
balance of the Other Credit Facilities.
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Article 9. Miscellaneous Provisions.
-------------------------
9.1 Fees and Expenses.
------------------
The Borrowers, jointly and severally, will promptly (and in any event
within 30 days after receipt of an invoice or statement therefor) pay all
reasonable costs of preparing and complying with this Agreement and of the
performance by all of the Borrowers of and compliance by all of them with all
agreements and conditions contained herein and in the other Loan Documents on
their part to be performed or complied with (including, without limitation, all
costs of filing or recording any assignment, financing statements and other
documents), and the reasonable fees and expenses and disbursements of: (i)
counsel to the Agent in connection with the preparation, execution and delivery,
administration, interpretation, work-out and enforcement of this Agreement, the
Notes, the Security Documents, the other Loan Documents and all other
agreements, obligations, instruments and documents relating to this transaction
and (ii) counsel to each Lender but only to the extent incurred after a
declaration of an Event of Default in connection with the work-out and
enforcement of this Agreement, the Notes and the Security Documents and limited
as to each such Lender to $25,000 in the aggregate. The Borrowers, jointly and
severally, shall at all times protect, indemnify, defend and save harmless the
Agent and each Lender from and against any and all claims, actions, suits and
other legal proceedings (commenced or asserted by or against them), and
liabilities, damages, costs, interest, charges, counsel fees and other expenses
and penalties which any of them may, at any time, sustain or incur by reason of
or in consequence of or arising out of the execution and delivery of this
Agreement, the consummation of the transactions contemplated hereby, the breach
by Borrowers of any of their covenants contained herein and/or the enforcement
by Agent of its rights and remedies herein and/or in the other Loan Documents,
except and to the extent that Borrowers prove that such claim, action, suit,
liability, etc. was caused by the gross negligence or willful misconduct or
manifest bad faith of the Lender or Agent in question. The provisions of this
Section 9.1 shall survive the payment of the Notes or any disposition thereof by
any Lender and the termination of this Agreement.
9.2 Taxes.
------
If, under any law in effect on the date of the closing of the Loans
hereunder, or under any retroactive provision of any law subsequently enacted,
it shall be determined that any Federal, state or local tax is payable in
respect of the issuance of the Notes, or in connection with the filing or
recording of any assignment, financing statements, or other documents (whether
measured by the amount of indebtedness secured or otherwise) as contemplated by
this Agreement, then the Borrowers will pay any such tax and all interest and
penalties, if any, and will indemnify each Lender against and save it harmless
from any loss or damage resulting from or arising out of the nonpayment or delay
in payment of any such tax. If any such tax or taxes shall be assessed or levied
against any Lender, such Lender may notify the Borrowers and make immediate
payment thereof, together with interest or penalties in connection therewith,
and shall thereupon be entitled to and shall receive immediate reimbursement
therefor from the Borrowers. Notwithstanding any other provision contained in
this Agreement, the covenants and agreements of the Borrowers in this Section
9.2 shall survive payment of the Notes and the termination of this Agreement.
9.3 Payments.
---------
All payments by the Borrowers on account of principal, interest and other
charges (including any indemnities) shall be made to Agent at its Principal
Office, in lawful money of the United States of America in immediately available
funds, by wire transfer or otherwise, not later than 1:00 p.m. Philadelphia time
on the date such payment is due. Any such payment made on such date but after
such time shall, if the amount paid bears interest, be deemed to have been
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made on and interest shall continue to accrue and be payable thereon until the
next succeeding Business Day. If any payment of principal or interest becomes
due on a day other than a Business Day, such payment shall be made on the next
succeeding Business Day and such extension shall be included in computing
interest in connection with such payment. All payments hereunder and under the
Notes shall be made without set-off or counterclaim and in such amounts as may
be necessary in order that all such payments shall not be less than the amounts
otherwise specified to be paid under this Agreement and the Notes (after
withholding for or on account of (i) any present or future taxes, levies,
imposts, duties or other similar charges of whatever nature imposed by any
government or any political subdivision or taxing authority thereof, other than
any tax (except those referred to in clause (ii) below) on or measured by the
net income of the Lenders pursuant to applicable federal, state and local income
tax laws, and (ii) deduction of an amount equal to the taxes on or measured by
the net income of any Lender payable by such Lender with respect to the amount
by which the payments required to be made under this sentence exceed the amounts
otherwise specified to be paid in this Agreement and the Notes.
9.4 Survival of Agreements and Representations, Waiver of Trial by Jury.
--------------------------------------------------------------------
All agreements, representations and warranties made herein shall survive
the delivery of this Agreement and the Notes. EACH BORROWER AND LENDER
IRREVOCABLY WAIVES TRIAL BY JURY AND THE RIGHT THERETO IN ANY LITIGATION IN ANY
COURT WITH RESPECT TO, IN CONNECTION WITH, OR ARISING OUT OF, THIS AGREEMENT,
THE NOTES, THE SECURITY DOCUMENTS, ANY OF THE OTHER LOAN DOCUMENTS, OR ANY
INSTRUMENT OR DOCUMENT DELIVERED PURSUANT TO THIS AGREEMENT, OR THE VALIDITY,
PROTECTION, INTERPRETATION, COLLECTION OR ENFORCEMENT THEREOF.
9.5 Lien on and Set-off of Deposits.
--------------------------------
As security for the due payment and performance of all the Obligations,
each Borrower hereby grants to each Lender a lien on and security interest in
any and all deposits or other sums at any time credited by or due from such
Lender to such Borrower, whether in regular or special depository accounts or
otherwise, and any and all monies, securities and other property of such
Borrower, and the proceeds thereof, now or hereafter held or received by or in
transit to such Lender from or for such Borrower, whether for safekeeping,
custody, pledge, transmission, collection or otherwise, and any such deposits,
sums, monies, securities and other property may at any time be set-off,
appropriated and applied by Lenders against any of the obligations, indebtedness
or liabilities hereunder, under the Notes and under the Security Documents, in
each case for the ratable benefit of all Lenders, whether or not any such
obligation is then due or is secured by any collateral, or, if it is so secured,
whether or not the collateral is considered to be adequate.
9.6 Modifications, Consents and Waivers; Entire Agreement.
------------------------------------------------------
No modification, amendment or waiver of or with respect to any provision of
this Agreement, the Notes, the Security Documents, or any of the other Loan
Documents and all other agreements, instruments and documents delivered pursuant
hereto or thereto, nor consent to any departure by any Borrower from any of the
terms or conditions thereof, shall in any event be effective unless it shall be
in writing and signed by the Agent (subject, as between Lenders and Agent, to
the provisions of Section 8.15 hereof) and then any such waiver or consent shall
be effective only in the specific instance and for the purpose for which given.
No consent to or demand on any Borrower in any case shall, of itself, entitle it
to any other or further notice or demand in similar or other circumstances. This
Agreement embodies the entire agreement and understanding among the parties
hereto and supersedes all prior agreements and understandings
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relating to the subject matter hereof, provided that any and all liens granted
--------
pursuant to the Prior Credit Agreement and/or any of the documents executed in
connection therewith, including the lien created by the Pledge Agreement of even
date therewith, will remain in full force and effect as security for the Secured
Obligations.
9.7 Remedies Cumulative.
--------------------
Each and every right granted to the Agent hereunder or under any other
document delivered hereunder or in connection herewith, or allowed it by law or
equity, shall be cumulative and may be exercised from time to time. No failure
on the part of the Agent to exercise, and no delay in exercising, any right
shall operate as a waiver thereof, nor shall any single or partial exercise of
any right preclude any other or future exercise thereof or the exercise of any
other right. The due payment and performance of any Borrower's indebtedness,
liabilities and obligations under the Notes and this Agreement shall be without
regard to any counterclaim, right of offset or any other claim whatsoever which
such Borrower may have against any Lender and without regard to any other
obligation of any nature whatsoever which any Lender may have to such Borrower
and no such counterclaim or offset shall be asserted by such Borrower in any
action, suit or proceeding instituted by Agent for payment or performance of
such Borrower's indebtedness, liabilities or obligation under the Notes, this
Agreement, the Security Documents or otherwise.
9.8 Further Assurances.
-------------------
At any time and from time to time, upon the request of the Agent or the
Majority Lenders, the Borrowers shall execute, deliver and acknowledge or cause
to be executed, delivered and acknowledged, such further documents and
instruments and do such other acts and things as the Agent or the Majority
Lenders may reasonably request in order to fully effect the purposes of this
Agreement, the Notes, the Security Documents, the other Loan Documents and any
other agreements, instruments and documents delivered pursuant hereto or in
connection with the Loans.
9.9 Notices.
--------
(a) Any notice, request, demand, direction or other communication
(for purposes of this Section 9.9 only, a "Notice") to be given to or made upon
any party hereto under any provision of this Agreement shall be given or made by
telephone or in writing (which includes by means of electronic transmission
(i.e., "e-mail")) or facsimile transmission or by setting forth such Notice on a
site on the World Wide Web (a "Website Posting") if Notice of such Website
Posting (including the information necessary to access such site) has previously
been delivered to the applicable parties hereto by another means set forth in
this Section 9.9 in accordance with this Section 9.9; provided, however, that no
requests or notices with respect to funding or utilization of the facilities, no
payment notices, no notices of Events of Default, and no requests for waivers or
consents shall be effective if transmitted by e-mail or Website Posting. Any
such Notice must be delivered to the applicable parties hereto at the addresses
and numbers set forth under their respective names on the signature pages hereto
or in accordance with any subsequent unrevoked Notice from any such party that
is given in accordance with this Section 9.9. Any Notice shall be effective:
(i) In the case of hand-delivery, when delivered;
(ii) If given by mail, four days after such Notice is deposited
with the United States Postal Service, with first-class postage prepaid, return
receipt requested;
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(iii) In the case of a telephonic Notice, when a party is
contacted by telephone, if delivery of such telephonic Notice is confirmed no
later that the next Business Day by hand-delivery, a facsimile or electronic
transmission, a Website Posting or an overnight courier delivery of a
confirmatory Notice (received at or before noon on such next Business Day);
(iv) In the case of facsimile transmission, when sent to the
applicable party's facsimile machine's telephone number, if the party sending
such Notice receives confirmation of the delivery thereof from its own facsimile
machine;
(v) In the case of electronic transmission, when actually
received;
(vi) In the case of a Website Posting, upon delivery of a
Notice of such posting (including the information necessary to access such site)
by another means set forth in this Section 9.9; and
(vii) If given by any other means (including by overnight
courier), when actually received.
Any Lender giving a Notice to another Lender or to a Borrower shall
concurrently send a copy thereof to the Agent, and the Agent shall promptly
notify the other Lenders of its receipt of such Notice.
(b) Each of the Borrowers hereby revocably appoints SSI as its agent
to give and receive any notice, request, report and other communication pursuant
to this Agreement, and for such other purposes as are provided for herein. Each
of the Borrowers agrees that the Agent may rely and act upon, without any
investigation or inquiry as to the authority or power to give, or accuracy or
reasonableness of, and each of the Borrowers will be unconditionally and
irrevocably bound and obligated by any instructions, notice, request, report or
other communication given by SSI to the Bank.
9.10 Counterparts.
-------------
This Agreement may be signed in any number of counterparts with the same
effect as if the signatures thereto and hereto were upon the same instrument.
9.11 Construction; Governing Law; Jurisdiction.
------------------------------------------
The headings used in this Agreement are for convenience only and shall not
be deemed to constitute a part hereof. All uses herein of the masculine gender
or of the feminine or neuter gender or plural or singular terms includes the
other as the context may require. This Agreement, the Notes, the Security
Documents, the other Loan Documents and all other documents and instruments
executed and delivered in connection herewith and therewith, shall be governed
by, and construed and interpreted in accordance with, the laws of the
Commonwealth of Pennsylvania applicable to contracts executed and to be
performed therein. The Borrowers and each Lender hereby irrevocably consent to
the jurisdiction of the Courts of Common Pleas of the Commonwealth of
Pennsylvania and of the United States District Court for the Eastern District of
Pennsylvania in any and all actions and proceedings in connection with this
Agreement, the Notes or the Security Documents and irrevocably consent, in
addition to any method of service of process permissible under applicable law,
to service of process by certified mail, return receipt requested to the
addresses of Borrowers as set forth herein and the address of Lenders set forth
on the signature page hereto. The Borrowers and Lenders agree that in any action
or proceeding brought by them in connection with this Agreement or the
transactions contemplated hereby, exclusive jurisdiction shall be in the courts
of the Courts of Common Pleas of the
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Commonwealth of Pennsylvania, and the United States District Court for the
Eastern District of Pennsylvania.
9.12 Severability.
-------------
The provisions of this Agreement are severable, and if any clause or
provision shall be held invalid or unenforceable in whole or in part in any
jurisdiction, then such invalidity or unenforceability shall affect only such
clause or provision, or part thereof, in such jurisdiction and shall not in any
manner affect such clause or provision in any other jurisdiction, or any other
clause or provision in this Agreement in any jurisdiction. Each of the
covenants, agreements and conditions contained in this Agreement is independent
and compliance by any Borrower with any of them shall not excuse noncompliance
by any Borrower with any other.
9.13 Binding Effect; No Assignment or Delegation.
--------------------------------------------
This Agreement shall be binding upon and inure to the benefit of each
Borrower, Agent and each Lender, and its successors and permitted assignees. The
rights and obligations of each Borrower under this Agreement shall not be
assigned or delegated without the prior written consent of all Lenders, and any
purported assignment or delegation without such consent shall be void.
9.14 Joint and Several Obligations.
------------------------------
(a) All of the indebtedness, liabilities and obligations of the
Borrowers under this Agreement and the Loan Documents shall be the joint and
several obligations of the Borrowers.
(b) Each Borrower agrees that the Agent may, in its discretion,
without affecting or modifying the joint and several obligations of each
Borrower for all of the Indebtedness, liabilities and obligations under this
Agreement and the Loan Documents including, without limitation, the Obligations,
(i) release, discharge, compromise or settle with, or grant indulgences to,
refuse to proceed or take action against, any one or more of the Borrowers with
respect to their respective obligations under this Agreement, including, without
limitation, the Obligations, (ii) release, surrender, modify, impair, exchange,
substitute or extend the period or duration of time for the performance,
discharge or payment of, refuse to enforce, compromise or settle its Lien
against, any and all deposits and other property or assets on which the Agent or
any Lender may have a Lien or which secures any of the Indebtedness, liabilities
and obligations, including without limitation, the Obligations of any Borrower
under this Agreement, (iii) amend, modify, alter or restate, in accordance with
their respective terms, this Agreement or any of the Loan Documents or
otherwise, accept deposits or other property from, or enter into transactions of
any kind or nature with, any one or more of the Borrowers, and (iv) disburse all
or part of the proceeds of the Loans as instructed by SSI as agent for all of
the Borrowers, without inquiry or investigation of any kind by the Agent as to
the use of such proceeds (each Borrower confirms that it will be directly or
indirectly benefited by each and every Advance and any and all other advances
under this Agreement or any of the Loan Documents).
9.15 Third Party.
------------
No rights are intended to be created hereunder for the benefit of any third
party donee, creditor or incidental beneficiary.
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9.16 Confidentiality of Information.
-------------------------------
Unless otherwise consented to by the Borrowers in writing, each of the
Lenders and the Agent agrees (on behalf of itself and each of its affiliates,
directors, officers, employees and representatives) to use its customary
precautions to keep confidential, in accordance with its customary procedures
for handling confidential information of the same nature and in accordance with
safe and sound banking practices, any non-public information supplied to it by
the Borrowers pursuant to this Agreement, it being agreed and understood that
each of Agent, Lenders and Borrowers would be in possible violation of
securities laws of the United States and various states if non-public
information is provided by Borrowers to the Agent or Lenders prior to filing
with the Securities and Exchange Commission and the information is not kept
confidential and its use restricted exclusively for purposes of information on
and administration of the Loans; provided that, subject to the aforesaid,
--------
nothing herein shall limit the disclosure of any such information (a) to the
extent required by statute, rule, regulation or judicial process, (b) to counsel
for any Lender or the Agent, (c) to bank examiners, auditors or accountants, (d)
to the Agent or any of the Lenders, (e) in connection with any litigation to
which any one or more of the Lenders or the Agent is a party, and (f) to any
other bank or financial institution which hereafter becomes or which reasonably
appears to any Lender or Agent to be interested in becoming a Lender hereunder
or a participant or assignee of any Lender so long as such prospective bank
agrees to comply with the requirements of this section.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
SAFEGUARD SCIENTIFICS, INC.
By: /s/ Gerald Blitstein
--------------------------------------------
Address: 800 The Safeguard Building
435 Devon Park Drive
Wayne, PA 19087
Attn: Gerald Blitstein,
Senior Vice President/
Chief Financial Officer
Facsimile:
E-mail:
SAFEGUARD SCIENTIFICS (DELAWARE) INC.
By: /s/ Gerald Blitstein
--------------------------------------------
Address: 800 The Safeguard Building
435 Devon Park Drive
Wayne, PA 19087
Attn: Gerald Blitstein,
Senior Vice President/
Chief Financial Officer
Facsimile:
E-mail:
SAFEGUARD DELAWARE, INC.
By: /s/ Gerald Blitstein
--------------------------------------------
Address: 800 The Safeguard Building
435 Devon Park Drive
Wayne, PA 19087
Attn: Gerald Blitstein,
Senior Vice President/
Chief Financial Officer
Facsimile:
E-mail:
CONTINUED.....
-48-
<PAGE>
PNC BANK, NATIONAL ASSOCIATION, as Agent, Lender
and Issuer
By: /s/ Joseph Meterchick
--------------------------------------------
Address: Joseph Meterchick
1600 Market Street,
22nd Floor
Philadelphia, PA 19103
Facsimile: 215-585-6987
E-mail: [email protected]
cc: One PNC Plaza, 22nd Floor
Multi-Bank Loan Administration
249 5th Avenue
Pittsburgh, PA 15222
Attn: Arlene Ohler
Facsimile:
E-mail: [email protected]
FIRST UNION NATIONAL BANK
By: /s/ Michael Ziegler
--------------------------------------------
Address: 1339 Chestnut Street
The Widener Building
Philadelphia, PA 19103
Attn: Michael Ziegler
Facsimile No.: 215-786-5199
E-mail:
U.S. BANK NATIONAL ASSOCIATION
By: /s/ Mark Olmon
--------------------------------------------
Address: 601 2nd Avenue South - MPFP0702
Minneapolis, MN 55402-4302
Attn: Mark Olmon, Vice President
Facsimile No.: 612-973-0825
E-mail:
MELLON BANK, N.A.
By: /s/ J. Wade Bell
--------------------------------------------
Address: Mellon Bank Center
Corporate Banking, 7th Floor
1735 Market Street
Philadelphia, PA 19106
Attn: J. Wade Bell
Facsimile No.: (215) 553-4899
E-mail: [email protected]
CONTINUED.......
-49-
<PAGE>
NATIONAL CITY BANK OF PENNSYLVANIA
By: /s/ Charles P. Bugajski
--------------------------------------------
Address: National City Bank
Corporate Banking
20 Stanwix Street
Pittsburgh, PA 15222-4802
Attn: Charles P. Bugajski, V.P.
Facsimile No.: 412-644-6224
E-mail:
SUMMIT BANK
By: /s/ Jeff Southworth
--------------------------------------------
Address: 7111 Valley Green Road, Suite 150
Ft. Washington, PA 19034-2209
Attn: Mr. Jeff Southworth
Facsimile No.: 215-836-4052
E-mail: [email protected]
COMERICA BANK
By: /s/ Alan M. Jepsen
--------------------------------------------
Address: 55 Almaden Blvd., 2nd Fl.
San Jose, CA 95113
Attn: Mr. Alan M. Jepsen, VP
Facsimile No.: 408-556-5889
E-mail:
BANK OF AMERICA, N.A.
By: /s/ Jouni J. Korhonen
--------------------------------------------
Address: 555 California Street, 41st Fl.
San Francisco, CA 94104
Attn: Mr. Jouni J. Korhonen
Facsimile No.: 415-622-0632
E-mail:
[email protected]
CONTINUED.....
-50-
<PAGE>
WILMINGTON TRUST
By: /s/ Thomas Raymond
--------------------------------------------
Address: 795 E. Lancaster Avenue
Villanova, PA 19085
Attn: Mr. Thomas Raymond
Facsimile No.: 610-520-1425
E-mail:
-51-
<PAGE>
EXHIBIT 10.5
EXECUTIVE EMPLOYMENT AGREEMENT
THIS AGREEMENT, dated March 13, 2000 is made and entered into by and
between CompuCom Systems, a Delaware corporation ("Employer"), and Anthony F.
Pellegrini, an executive employee of Employer ("Executive").
Recitals
A. Executive is employed by Employer in an executive capacity and
Executive has agreed to continue as an employee of Employer pursuant to the
terms of this Agreement.
B. Employer desires that the Executive continue as an employee of
Employer in order to provide the necessary leadership and senior management
skills that are important to the success of Employer. Employer believes that
retaining the Executive's services as an employee of Employer and the benefits
of his business experience are of material importance to Employer and Employer's
shareholders.
Agreement
NOW, THEREFORE, in consideration of Executive's continued employment by
Employer and the mutual promises and covenants contained herein the receipt and
sufficiency of which is hereby acknowledged, Employer and Executive intend by
this Agreement to specify the terms and conditions of Executive's employment
relationship with Employer.
Section I. General Duties of Employer and Executive.
1.1 Employer agrees to employ Executive and Executive agrees to accept
employment by Employer and to serve Employer in an executive capacity upon the
terms and conditions set forth herein. The duties and responsibilities of
Executive shall include those described for the particular position held by
Executive while employed hereunder in the Bylaws of Employer or other documents
of Employer, and shall also include such other or additional duties, for
Employer, as may from time-to-time be assigned to Executive by the Board of
Directors of Employer or any duly authorized committee thereof. The executive
capacity that Executive shall hold while this Agreement is in effect shall be
that position as determined by the Board of Directors, or any duly authorized
committee thereof, from time to time in its sole discretion. While employed
hereunder, the initial position that Executive shall hold (until such time as
such position may be changed as aforesaid) shall be the position of Senior Vice
President of Sales.
1.2 While employed hereunder, Executive shall obey the lawful directions
of the Board of Directors of Employer, or any duly authorized committee thereof,
and shall use his best efforts to promote the interests of Employer and to
maintain and to promote the reputation thereof. While employed hereunder,
Executive shall devote his time, efforts, skills and attention to the affairs of
Employer in order that he/she shall faithfully perform his duties
<PAGE>
and obligations hereunder and such as may be assigned to or vested in him by the
Board of Directors of Employer, or any duly authorized committee thereof.
1.3. While this Agreement is in effect, Executive may from time to
time engage in any businesses or activities that do not compete directly and
materially with Employer, provided that such businesses or activities do not
materially interfere with his performance of the duties assigned to him in
compliance with this Agreement by the Board of Directors of Employer or any duly
authorized committee thereof. In any event, Executive is permitted to (i) invest
his personal assets as a passive investor in such form or manner as Executive
may choose in his discretion, (ii) participate in various charitable efforts,
and (iii) serve as a director or officer of any other entity or organization
that does not compete with Employer.
Section 2. Compensation and Benefits.
2.1. As compensation for services to Employer, Employer shall pay to
Executive, while this Agreement is in effect, a salary at a monthly rate of
$16,666.67. Any increases to such rate shall be at the discretion of the
Compensation Committee duly elected by the Board of Directors. The salary shall
be payable in equal bi-weekly installments, subject only to such payroll and
withholding deductions as may be required by law and other deductions applied
generally to employees of Employer for insurance and other employee benefit
plans. In addition, Executive shall be entitled to participate in the Company's
Management Incentive Compensation Plan ("MICP") at a rate of 50% of base salary.
This bonus will be subject to the parameters set forth by the Compensation
Committee each year and the amount of payment will be determined by such
Committee.
2.2. Upon Executive's furnishing to Employer customary and reasonable
documentary support (such as receipts or paid bills) evidencing costs and
expenses incurred by him in the performance of his services and duties hereunder
(including, without limitation, travel and entertainment expenses) and
containing sufficient information to establish the amount, date, place and
essential character of the expenditure, Executive shall be reimbursed for such
costs and expenses in accordance with Employer's normal expense reimbursement
policy.
2.3. Executive shall have the right to participate in medical, dental
insurance plans, 401(k) plan, life insurance or other plans existing in benefit
of executive officers of Employer.
2.4. Executive shall be entitled to such vacation (in no event less
than three (3) weeks per year), holidays and other paid or unpaid leaves of
absence as consistent with Employer's normal policies or as otherwise approved
by the Board of Directors.
2.5. Executive agrees to submit to and Company agrees to pay for one
complete physical examination on an annual basis at the Cooper Clinic (or
similar medical clinic) in Dallas, Texas.
<PAGE>
Section 3. Preservation of Business; Fiduciary Responsibility.
3.1. Executive shall use his best efforts to preserve the business and
organization of Employer, to keep available to Employer the services of present
employees and to preserve the business relations of Employer. Executive shall
not commit any act, or in any way assist others to commit any act, that would
injure Employer. So long as the Executive is employed by Employer, Executive
shall observe and fulfill proper standards of fiduciary responsibility attendant
upon his service and office.
Section 4. Initial Term; Extensions of the Term.
The term of this Agreement shall commence on the effective date hereof and
be ongoing until the employment relationship is terminated for reasons outlined
in this agreement.
Section 5. Termination. Employer or Executive may terminate Executive's
employment under this Agreement at any time, but only on the following terms:
5.1. Executive may terminate his employment under this Agreement at any
time upon at least thirty (30) days prior written notice to Employer.
5.2. Employer may terminate Executive's employment under this Agreement at
any time, without prior notice, for "due cause" upon the good faith
determination by the Board of Directors of Employer that "due cause" exists for
the termination of the employment relationship. As used herein, the term "due
cause" shall mean any of the following events:
(i) any intentional misapplication by Executive of Employer's
funds, or any other act of dishonesty injurious to Employer committed by
Executive; or
(ii) Executive's conviction of a crime involving moral turpitude; or
(iii) Executive's illegal use or possession of any controlled
substance or chronic abuse of alcoholic beverages; or
(iv) Executive's breach, non-performance or non-observance of any of
the terms of this Agreement if such breach, non-performance or non-
observance shall continue beyond a period of ten (10) business days
immediately after notice thereof by Employer to Executive; or
(v) any other action by the Executive involving willful and
deliberate malfeasance or gross negligence in the performance of
Executive's duties.
5.3. In the event Executive is incapacitated by accident, sickness or
otherwise so as to render Executive mentally or physically incapable of
performing the services required under Section 1 of this Agreement for a period
of one hundred eighty (180) consecutive business days, and such incapacity is
confirmed by the written opinion of two (2) practicing
<PAGE>
medical doctors licensed by and in good standing in the state in which they
maintain offices for the practice of medicine, upon the expiration of such
period or at any time reasonably thereafter, or in the event of Executive's
death, Employer may terminate Executive's employment under this Agreement upon
giving Executive or his legal representative written notice at least thirty (30)
days' prior to the termination date. Executive agrees, after written notice by
the Board of Directors of Employer or a duly authorized committee or officer of
Employer, to submit to examinations by such practicing medical doctors selected
by the Board of Directors of Employer or a duly authorized committee or officer
of Employer.
5.4 Employer may terminate Executive's employment under this Agreement
at any time for any reason whatsoever, even without "due cause," by giving a
written notice of termination to Executive, in which case the employment
relationship shall terminate immediately upon the giving of such notice.
Section 6. Effect of Termination.
6.1 In the event the employment relationship is terminated (a) by
Executive upon thirty (30) days' written notice pursuant to Subsection 5.1
hereof, (b) by Employer for "due cause" pursuant to Subsection 5.2 hereof, or
(c) by Executive breaching this Agreement by refusing to continue his employment
and failing to give the requisite thirty (30) days' written notice, all
compensation and benefits shall cease as of the date of termination, other
than: (i) those benefits that are provided by retirement and benefit plans and
programs specifically adopted and approved by Employer for Executive that are
earned and vested by the date of termination, (ii) Executive's pro rata annual
salary through the date of termination, and (iii) those benefits required by law
to be made available to terminating employees.
6.2 If Executive's employment relationship is terminated pursuant to
Subsection 5.3 hereof due to Executive's incapacity or death, Executive (or, in
the event of Executive's death, Executive's legal representative) will be
entitled to those benefits tht are provided by retirement and benefits plans and
programs specifically adopted and approved by Employer for Executive that are
earned and vested at the date of termination and, even though no longer employed
by Employer, shall continue to receive salary compensation (payable in the
manner as prescribed in the second sentence of Subsection 2.1) for one year.
6.3 If Employer (i) terminates the employment of Executive other than
pursuant to Subsection 5.2 hereof for "due cause" or other than for a disability
or death pursuant to Subsection 5.3 hereof, (ii) demotes the Executive to a
position below the level of the position described in Subsection 1.1, (iii)
decreases Executive's salary below the level or reduces the employee benefits
and perquisites below the level provided for by the terms of Section 2 hereof,
other than as a result of any amendment or termination of any employee and/or
executive benefit plan or arrangement, which amendment or termination is
applicable to all qualifying executives of Employer, then such action by
Employer, unless consented to in writing by Executive, shall be deemed to be a
constructive termination by Employer of Executive's employment (a "Constructive
Termination"). In the event of a Constructive Termination, at any time from the
start of this Agreement, March 13, 2000 through March 13, 2001, the Executive
shall be entitled to receive, the balance of payment remaining for the year
2000, in a lump sum within ten (10) days after the date of the Constructive
<PAGE>
Termination, plus an amount equal to one year of salary. In the event of a
Constructive Termination at any time after March 13, 2001, the Executive shall
be entitled to receive, in a lump sum within (10) days after the date of the
Constructive Termination, an amount equal to one year of salary. The Company
will also provide outplacement assistance to Executive in an amount not to
exceed $25,000, is so desired by the Executive.
6.4. For purposes of this Section 6, the term "salary" shall mean the
sum of (i) the annual rate of compensation provided to Executive by Employer
under Subsection 2.1 immediately prior to the Constructive Termination plus (ii)
the earned cash annual bonuses or other cash incentive compensation paid to
Executive (based upon most recent position) by Employer for the only calendar
year period immediately preceding the year in which there shall occur a
Constructive Termination.
6.5. In the event of a Constructive Termination, all other rights and
benefits Executive may have under the employee and/or executive benefit plans
and arrangements of Employer generally shall be determined in accordance with
the terms and conditions of such plans and arrangements.
Section 7. Covenants of Noncompetition.
7.1. Executive acknowledges that he/she has received and/or will
receive specialized knowledge and training from Employer during the term of this
Agreement, and that such knowledge and training would provide an unfair
advantage if used to compete with Employer. In order to avoid such unfair
advantage, Executive agrees that while he/she is employed with Employer and for
a period equal to one (1) year after the date of a voluntary termination of
employment (the "Restricted Period"), he shall not, directly or indirectly,
individually or as an owner, lender, consultant, adviser, independent
contractor, employee, partner, officer, director or in any other capacity, alone
or in association with other persons or entities, own, assist, finance,
participate in or be employed by any business or other endeavor that is in any
way in competition with Employer in any business at the time the termination
occurs, including, but not limited to, computer resellers, service companies
providing the same services as CompuCom, and computer retail companies.
Executive also agrees that, for the Restricted period, he/she will not, either
directly or indirectly, solicit any employee or other independent contractor of
the Employer to terminate his employment or contract with the Employer. In the
event of a Constructive Termination or termination due to change in control,
Executive will not compete for the same period of time for which payments are
received in accordance with Subsection 6.3.
7.2. Executive represents and acknowledges to Employer that his
education, experience and/or abilities are such that he/she can obtain
employment in a non-competing business, and that enforcement of the terms of
this Agreement through temporary and/or permanent injunctive relief will not
prevent him from earning a livelihood and will not cause an undue hardship upon
him. Executive hereby acknowledges that $16,666.67 of his monthly salary
described in Subsection 2.1 is paid by Employer in consideration for Executive's
agreement to be bound by the non-competition provisions of this Agreement.
Section 8. Inventions.
<PAGE>
8.1. Any and all inventions, product, discoveries, improvements,
processes, formulae, manufacturing methods or techniques, designs or styles
(collectively, "Inventions") made, developed or created by Executive, alone or
in conjunction with others, during regular hours of work or otherwise, during
the term of Executive's employment with the Employer and for a period of one (1)
year thereafter that may be directly or indirectly related to the business of,
or tests being carried out by, the Employer, or any of its subsidiaries, shall
be promptly disclosed by Executive to Employer and shall be the Employer's
exclusive property.
8.2. Executive will, upon the Employer's request and without
additional compensation, execute any documents necessary or advisable in the
opinion of the Employer's counsel to direct the issuance of patents to the
Employer with respect to Inventions that are to be the Employer's exclusive
property under this Section 8 or to vest in the Employer title to such
Inventions; the expense of securing any patent, however, shall be borne by the
Employer.
8.3. Executive will hold for the Employer's sole benefit any
Invention that is to be the Employer's exclusive property under this Section 8
for which no patent is issued.
8.4. Executive grants to Employer a royalty-free, nonexclusive
irrevocable license for any Inventions developed prior to the employment with
the Company that he has not reserved that are used by Executive in the
performance of his duties for the Employer. Employee represents and warrants
that any work produced by Executive will not, to the best knowledge of
Executive, infringe on any other person's or entity's copyright or other
proprietary rights, and Employee will hold the Employer harmless from any claims
and losses based on such infringements.
Section 9. No Violation. Executive represents that he is not bound
by any agreement with any former employer or other party that would be violated
by Executive's work for Employer.
Section 10. Confidential and Proprietary Information.
10.1. Executive acknowledges and agrees that he/she will not, without
the prior written consent of the Employer, at any time during the term of this
Agreement or any time thereafter, except as may be required by competent legal
authority or as required by the Employer to be disclosed in the course of
performing Executive's duties under this Agreement for the Employer, use or
disclose to any person, firm or other legal entity, any confidential records,
secrets or information related to the Employer or any parent, subsidiary or
affiliated person or entity (collectively, "Confidential Information").
Confidential Information shall include, without limitation, information about
the Employer's Inventions, customer lists, customer contracts, vendor contracts,
and non-public financial information. Executive acknowledges and agrees that
all Confidential Information of Employer and/or its affiliates that he has
acquired, or may acquire, were received, or will be received in confidence and
as a fiduciary of the Employer. Executive will exercise utmost diligence to
protect and guard such Confidential Information.
<PAGE>
10.2. Executive agrees that he will not take with him upon the
termination of this Agreement, any document or paper, or any photocopy or
reproduction or duplication thereof, relating to any Confidential Information.
Section 11. Return of Employer's Property. Upon the termination of
this Agreement or whenever requested by Employer, Executive shall immediately
deliver to Employer all property in his possession or under his control
belonging to Employer, in good condition, ordinary wear and tear expected.
Section 12. Injunctive Relief. Executive acknowledges that the
breach, or threatened breach, by the Executive of the provisions of this
Agreement shall cause irreparable harm to the Employer, which harm cannot be
fully redressed by the payment of damages to the Employer. Accordingly, the
Employer shall be entitled, in addition to any other right or remedy it may have
at law or in equity, to an injunction enjoining or restraining Executive from
any violation of threatened violation of this Agreement.
Section 13. Arbitration.
13.1. As concluded by the parties and as evidenced by the signatures
of the parties, any dispute between the parties arising out of any section of
this Agreement except Sections 7, 8 and 10, will, on the written notice of one
party served on the other, be submitted to arbitration complying with and
governed by the provisions of the Texas General Arbitration Act, Articles 224
through 238-20 of the Texas Revised Civil Statutes.
13.2. Each of the parties will appoint one person as an arbitrator to
hear and determine the dispute and if they are unable to agree, then the two
arbitrators so chosen will select a third impartial arbitrator whose decision
will be final and conclusive upon the parties.
13.3. The expenses of such arbitration will be borne by the losing
party or in such proportion as the arbitrators decide.
13.4. A material or anticipatory breach of any section of this
Agreement shall not release either party from the obligations of this Section
13.
Section 14. Miscellaneous.
14.1. If any provision contained in this Agreement is for any reason
held to be totally invalid or unenforceable, such provision will be fully
severable, and in lieu of such invalid or unenforceable provision there will be
added automatically as part of this Agreement a provision as similar in terms
as may be valid and enforceable.
14.2. All notices and other communications required or permitted
hereunder or necessary or convenient in connection herewith shall be in writing
and shall be deemed to have been given when mailed by registered mail or
certified mail, return receipt requested, as follows (provided that notice of
change of address shall be deemed given only when received):
<PAGE>
if to Employer: CompuCom Systems, Inc.
7171 Forest Lane
Dallas, Texas 75230
Attn: Chief Financial Officer
if to Executive: Anthony F. Pellegrini
or to such other names or addresses as Employer or Executive, as the case may
be, shall designate by notice to the other party hereto in the manner specified
in this Subsection 14.2.
14.3. This Agreement shall be binding upon and inure to the
benefit of Employer, its successors, legal representatives and assigns, and upon
Executive, his heirs, executors, administrators, representatives, legatees and
assigns. Executive agrees that his rights and obligations hereunder are personal
to him and may not be assigned without the express written consent of Employer.
14.4. This Agreement replaces and merges all previous agreements
and discussions relating to the same or similar subject matters between
Executive and Employer with respect to the subject matter of this Agreement.
This Agreement may not be modified in any respect by any verbal statement,
representation or agreement made by any employee, officer, or representative of
Employer or by any written agreement unless signed by an officer of Employer who
is expressly authorized by Employer to execute such document.
14.5. The laws of the State of Texas will govern the interpretation,
validity and effect of this Agreement without regard to the place of execution
or the place for performance thereof, and Employer and Executive agree that the
state and federal courts situated in Dallas County, Texas shall have personal
jurisdiction over Employer and Executive to hear all disputes arising under this
Agreement. This agreement is to be at least partially performed in Dallas
County, Texas, and, as such, Employer and Executive agree that venue shall be
proper with the state or federal courts in Dallas County, Texas to hear such
disputes. In the event either Employer or Executive is not able to effect
service of process upon the other with respect to such disputes, Employer and
Executive expressly agree that the Secretary of State for the State of Texas
shall be an agent of Employer and/or the Executive to receive service of process
on behalf of Employer and/or the Executive with respect to such disputes.
14.6. Executive and Employer shall execute and deliver any and all
additional instruments and agreements that may be necessary or proper to carry
out the purposes of this Agreement.
<PAGE>
14.7. The descriptive headings of the several sections of this
Agreement are inserted for convenience only and do not constitute a part of this
Agreement.
14.8. If either party should file a lawsuit against the other to
enforce any right such party has hereunder, the prevailing party shall also be
entitled to recover reasonable attorney's fees and costs of suit in addition to
any other relief awarded such prevailing party.
14.9. This Agreement may be executed in one or more counterparts,
all of which shall be considered one and the same agreement.
14.10. Executive acknowledges that Executive has had the opportunity
to read this Agreement and discuss it with advisors and legal counsel, if
Executive has so chosen. Executive also acknowledges the importance of this
Agreement and that Employer is relying on this Agreement in continuing an
employment relationship with Executive.
The undersigned, intending to be legally bound, have executed this
Agreement on the date first written above.
EMPLOYER:
CompuCom Systems, Inc.
By:
-----------------------------------
Its:
-----------------------------------
EXECUTIVE:
/s/ ANTHONY F. PELLEGRINI 2/25/2000
----------------------------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 2000 AND THE CONSOLIDATED STATEMENT
OF OPERATIONS FOR THE 3 MONTHS ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 4,658
<SECURITIES> 0
<RECEIVABLES> 228,093
<ALLOWANCES> 5,464
<INVENTORY> 101,175
<CURRENT-ASSETS> 345,140
<PP&E> 105,205
<DEPRECIATION> 51,113
<TOTAL-ASSETS> 1,551,809
<CURRENT-LIABILITIES> 258,291
<BONDS> 265,024
0
0
<COMMON> 10,740
<OTHER-SE> 655,559
<TOTAL-LIABILITY-AND-EQUITY> 1,551,809
<SALES> 507,308
<TOTAL-REVENUES> 579,196
<CGS> 468,905
<TOTAL-COSTS> 515,919
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,698
<INCOME-PRETAX> 5,435
<INCOME-TAX> 15,937
<INCOME-CONTINUING> 29,598
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,598
<EPS-BASIC> 0.28
<EPS-DILUTED> 0.26
</TABLE>
