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 June 30, 1999 Commission File Number 1-5620
------------- ------
SAFEGUARD SCIENTIFICS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1609753
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(state or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
800 The Safeguard Building, 435 Devon Park Drive Wayne, PA 19087
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (610) 293-0600
--------------
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 August 13, 1999
Common Stock 34,760,485
SAFEGUARD SCIENTIFICS, INC.
QUARTERLY REPORT FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION Page
------------------------------ ----
Item 1 - Financial Statements:
Consolidated Balance Sheets -
June 30, 1999 (unaudited) and December 31, 1998.......................................... 3
Consolidated Statements of Operations (unaudited) -
Three and Six Months Ended June 30, 1999 and 1998........................................ 4
Consolidated Statements of Cash Flows (unaudited) -
Six Months Ended June 30, 1999 and 1998.................................................. 5
Notes to Consolidated Financial Statements............................................... 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations...................................... 16
Item 3 - Quantitative and Qualitative Disclosures About Market Risk......................... 28
PART II - OTHER INFORMATION
---------------------------
Item 4 - Submission of Matters to a Vote of Security Holders................................ 29
Item 6 - Exhibits and Reports on Form 8-K................................................... 30
Signatures.................................................................................. 32
2
SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, December 31,
ASSETS 1999 1998
-------------------- -----------------
(UNAUDITED)
Current Assets
Cash and cash equivalents $ 55,933 $ 6,257
Short-term investments - 143,103
Receivables less allowances 435,803 296,093
Inventories 214,365 138,551
Other current assets 3,021 5,006
------------------ -----------------
Total current assets 709,122 589,010
Property, Plant, and Equipment, Net 69,560 96,840
Other Assets
Equity ownership in partner companies 577,888 288,336
Notes and other receivables 23,249 20,182
Excess of cost over net assets of businesses acquired, net 122,246 65,137
Other 20,059 9,185
------------------ -----------------
Total other assets 743,442 382,840
------------------ -----------------
Total Assets $1,522,124 $1,068,690
================== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current debt obligations $ 2,442 $ 2,366
Accounts payable 334,753 161,700
Accrued expenses 155,439 172,953
----------------- -----------------
Total current liabilities 492,634 337,019
Long-Term Debt 172,360 205,044
Deferred Taxes - 12,562
Minority Interest 96,221 98,544
Other Long-Term Liabilities 104,290 1,317
Convertible Subordinated Notes 200,000 71,345
Commitments and Contingencies
Shareholders' Equity
Common stock 3,480 3,280
Additional paid-in capital 133,666 62,470
Retained earnings 297,255 261,594
Accumulated other comprehensive income 24,630 37,294
Treasury stock, at cost (2,412) (21,779)
----------------- -----------------
Total shareholders' equity 456,619 342,859
----------------- -----------------
Total Liabilities and Shareholders' Equity $1,522,124 $1,068,690
================= =================
See notes to consolidated financial statements.
3
SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share data)
Three Months Ended, Six Months Ended,
June 30 June 30
------------------------------------- ---------------------------------------
1999 1998 1999 1998
---------------- ---------------- ---------------- ------------------
(UNAUDITED) (UNAUDITED)
Revenues
Net Sales
Product $730,137 $534,099 $1,155,604 $ 913,370
Service 79,246 68,435 153,664 131,062
---------------- ---------------- ---------------- ------------------
Total net sales 809,383 602,534 1,309,268 1,044,432
Other income, net 34,785 12,579 90,195 23,928
---------------- ---------------- ---------------- ------------------
Total revenues 844,168 615,113 1,399,463 1,068,360
Costs and Expenses
Cost of sales- product 671,596 479,669 1,059,908 813,089
Cost of sales- service 51,131 45,901 99,122 87,024
Selling and service 42,445 43,370 78,942 80,766
General and administrative 34,116 23,063 61,484 44,258
Depreciation and amortization 9,612 5,638 15,337 9,911
Interest and financing 8,796 6,691 16,528 12,494
(Income) loss from equity holdings, net 6,486 (2,742) 12,956 (4,247)
---------------- ---------------- ---------------- ------------------
Total costs and expenses 824,182 601,590 1,344,277 1,043,295
---------------- ---------------- ---------------- ------------------
Earnings Before Minority Interest and
Taxes on Income 19,986 13,523 55,186 25,065
Minority interest (2,274) (3,480) (323) (6,589)
---------------- ---------------- ---------------- ------------------
Earnings Before Taxes On Income 17,712 10,043 54,863 18,476
Provision for taxes on income 6,199 4,017 19,202 7,390
---------------- ---------------- ---------------- ------------------
Net Earnings $ 11,513 $ 6,026 $ 35,661 $ 11,086
================ ================ ================ ==================
Earnings Per Share
Basic $ .34 $ .19 $ 1.09 $ .35
Diluted $ .33 $ .18 $ 1.04 $ .33
Average Common Shares Outstanding
Basic 33,473 32,032 32,617 31,874
Diluted 35,670 32,750 35,318 32,582
See notes to consolidated financial statements.
4
SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Six Months Ended June 30,
------------------------------------------
1999 1998
----------------- ----------------
(UNAUDITED)
Operating Activities
Net earnings $ 35,661 $ 11,086
Adjustments to reconcile net earnings to cash provided (used)
by operating activities
Depreciation and amortization 15,337 9,911
Deferred income taxes (7,306) 5,322
(Income) loss from equity holdings, net 12,956 (4,247)
Other income, net from sales of securities and other gains (82,414) (16,566)
Minority interest, net 194 3,953
Cash provided (used) by changes in working capital items,
excluding the effect of business acquisitions
Receivables (140,864) (49,936)
Inventories 19,013 3,007
Accounts payable, accrued expenses, and other 138,700 73,849
----------------- ----------------
Cash provided (used) by operating activities (8,723) 36,379
Proceeds from sales of securities and other gains, net 65,193 29,303
----------------- ----------------
Cash provided by operating activities and
sales of securities and other gains, net 56,470 65,682
Other Investing Activities
Equity ownership and notes acquired, net (125,768) (50,141)
Business acquisitions, net of cash acquired (147,235) (45,490)
Capital expenditures (5,634) (10,796)
Proceeds from sale of building 39,791 -
Other, net (1,137) (1,057)
----------------- ----------------
Cash used by other investing activities (239,983) (107,484)
Financing Activities
Net borrowings (repayments) on revolving credit facilities (9,145) 40,268
Net borrowings (repayments) on term debt (25,372) 2,042
Issuance of convertible subordinated notes, net 193,998 -
Proceeds from financial instruments, net 71,205 -
Repurchase of Company common stock (2,695) (854)
Issuance of Company common stock 4,510 1,120
Issuance of subsidiary common stock 688 291
----------------- ----------------
Cash provided by financing activities 233,189 42,867
----------------- ----------------
Increase in Cash and Cash Equivalents 49,676 1,065
Cash and Cash Equivalents - beginning of year 6,257 5,382
----------------- ----------------
Cash and Cash Equivalents - End of Period $ 55,933 $ 6,447
================= ================
See notes to consolidated financial statements.
5
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
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 1998 Form 10-K should be
read in conjunction with the accompanying statements. These statements
include all adjustments (consisting only of normal recurring adjustments)
which the Company believes are necessary for a fair presentation of the
statements. The interim operating results are not necessarily indicative of
the results for a full year.
2. Reclassifications
-----------------
Certain amounts in the 1998 financial statements have been reclassified to
conform to the 1999 presentation.
3. Business Combinations
---------------------
In February 1999, the Company acquired an 80% fully diluted ownership in
aligne, Inc. in exchange for 441,518 shares of the Company's common stock
with a market value of approximately $17 million. aligne is a strategic
technology management consulting firm whose services include high level and
in-depth evaluations of complex sourcing alternatives, IT cost baselining and
benchmarking, vendor/customer negotiations, interim CIO services, IT
strategy, and IT process re-engineering. The transaction was accounted for as
a purchase and, accordingly, the consolidated financial statements reflect
the operations of aligne since the acquisition date. The acquisition resulted
in goodwill of approximately $17 million, which is being amortized over ten
years. One of the principal's of aligne was appointed as the Company's new
President and Chief Operating Officer.
In June 1999, the Company acquired a 75% fully diluted ownership in SOTAS,
Inc. for $10 million. SOTAS develops, markets, and sells telecommunications
technology and related products and services. The transaction was accounted
for as a purchase and, accordingly, the consolidated financial statements
reflect the operations of SOTAS since the acquisition date. The acquisition
resulted in goodwill of approximately $10 million, which is being amortized
over ten years.
During 1998, CompuCom completed three business combinations for approximately
$49 million in cash. In addition, CompuCom assumed liabilities of
approximately $95 million. These business combinations were accounted for as
purchases and, accordingly, the consolidated financial statements reflect the
operations of the acquired entities since the respective acquisition dates.
In May 1999, CompuCom purchased from ENTEX Information Services, Inc. certain
assets of its Technology Acquisition Services Division (TASD) in a cash
transaction. This acquisition was structured as an asset purchase. Under the
terms of the agreement, CompuCom paid approximately $137 million for the
acquired assets, which consisted primarily of inventory, certain fixed
assets, and the Erlanger, Kentucky distribution center. The transaction was
accounted for as a purchase and, accordingly, the consolidated financial
statements reflect the operations of the acquired entity since the
acquisition date. CompuCom has allocated the purchase price to the assets and
liabilities acquired based on estimated fair value as of the date of
acquisition. Such allocations have been based on preliminary estimates of
fair value which may be revised at a later date.
6
The following unaudited pro forma financial information (in thousands except
per share amounts) presents the combined results of operations of the Company
as if the acquisitions had occurred as of January 1, 1998, after giving
effect to certain adjustments, including amortization of goodwill, increased
interest expense on debt related to the acquisitions, and related income tax
effects. The pro forma results of operations are not indicative of the actual
results that would have occurred had the acquisitions been consummated at the
beginning of the period presented and is not intended to be a projection of
future results.
Three Months Ended Six Months Ended
June 30, 1998 June 30, 1998
------------- -------------
Total Revenues $1,170,905 $2,227,601
Net Earnings $ 3,262 $ 6,842
Diluted earnings per share $ 0.10 $ 0.20
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 Six Months Ended
June 30, 1999 June 30, 1999
------------- -------------
Total Revenues $1,032,712 $2,023,392
Net Earnings $ 8,497 $ 30,335
Diluted earnings per share $ 0.25 $ 0.89
4. Comprehensive Income
--------------------
Comprehensive income is the change in equity of a business enterprise during
a period resulting from transactions and other events and circumstances from
non-owner sources. Excluding net earnings, the Company's source of
comprehensive income is from net unrealized appreciation on its public
holdings classified as available-for-sale. The following summarizes the
components of comprehensive income (loss), net of income taxes, (in
thousands):
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- ----------------------------------
1999 1998 1999 1998
--------------------------------------------------------------------
(Unaudited)
Net Earnings $11,513 $6,026 $35,661 $11,086
-------- ---------------- -------------- ----------------
Other Comprehensive Income (Loss), Before Taxes:
Unrealized holding gains (losses) (4,815) (5,717) (10,982) 19,133
Reclassification adjustments (2,630) 2,178 (8,502) 1,058
Related Tax (Expense) Benefit:
Unrealized holding gains (losses) 1,685 1,944 3,844 (6,505)
Reclassification adjustments 921 (741) 2,976 (360)
-------- ---------------- -------------- -----------------
Other Comprehensive Income (Loss) (4,839) (2,336) (12,664) 13,326
-------- ---------------- -------------- -----------------
Comprehensive Income $ 6,674 $3,690 $22,997 $24,412
======== ================ ============== =================
7
5. Financial Instruments
---------------------
The Company may selectively enter into agreements to reduce the impact of
stock market volatility on its ownership in publicly traded companies. These
may include agreements to protect against a possible decline in the market
value of the particular company. The Company does not enter into agreements
for trading or speculative purposes. The counterparties to these agreements
are major financial institutions.
In March 1999, the Company entered into a forward sale contract related to
two million shares of its holdings in Tellabs, Inc. The Company pledged two
million shares of Tellabs for three years and in return received
approximately $71 million of cash. At the end of the term, the Company has
the option to deliver cash or Tellabs shares with a value determined by the
stock price of Tellabs at maturity. The number of Tellabs shares to be
delivered at maturity ranges from 1.6 million to two million shares (or the
cash value thereof). The proceeds from this transaction were used to pay down
a portion of the Company's bank revolving credit facility. The liability
related to this transaction is included in "Other Long-Term Liabilities" on
the Consolidated Balance Sheets.
In the third quarter of 1999, the Company intends to enter into an additional
forward sale contract on its remaining Tellabs holdings. Under these
contracts, all of the Company's holdings in Tellabs will be pledged under
forward sale contracts that expire in 2002. As a result of the restrictions
on the sale of these shares under the contracts, the Company intends to
change the classification of these holdings to available for sale in the
third quarter of 1999. As a result, the Company's holdings in Tellabs are
included in non-current assets under the caption "Equity Ownership in Partner
Companies" as of June 30, 1999.
All share data related to Tellabs common stock have been retroactively
adjusted to reflect a two-for-one stock split effective May 17, 1999.
6. Equity Ownership in Partner Companies
-------------------------------------
The following summarizes the Company's non-current holdings in partner
companies (in thousands). These holdings are classified according to the
applicable accounting method at June 30, 1999. Market value reflects the
price of publicly traded securities at the close of business at the
respective date. Unrealized appreciation reflects the net excess of market
value over carrying value of publicly traded securities classified as
available-for-sale under the cost method.
June 30, 1999 December 31, 1998
------------------------------------------ -------------------------------------------
Carrying Market Carrying Market
Value Value Value Value
------------------ ------------------- ------------------ --------------------
(Unaudited)
Equity Method
Cambridge $ 48,723 $168,554 $ 35,248 $190,217
ChromaVision 15,609 52,433 11,304 22,419
DocuCorp 9,942 11,805 3,226 8,035
OAO 16,222 20,735 16,472 16,551
Sanchez 10,914 217,728 10,620 91,965
USDATA 7,234 12,629 7,053 5,545
Non-public companies 142,578 99,648
------------------ ------------------
251,222 183,571
Cost Method
Tellabs 227,983 227,983 - -(A)
Diamond 2,583 21,553 3,120 21,337
e4L 1,457 17,646 2,035 32,299
First Consulting Group 9,115 6,185 8,490 11,308
Other public companies 8,836 14,492 5,579 11,648
Unrealized appreciation 37,885 57,368
Non-public companies 38,807 28,173
------------------ ------------------
$577,888 $288,336
================== ==================
(A) The market value of Tellabs of $143 million at December 31, 1998 is included
in "Short-term Investments" on the Consolidated Balance Sheets.
8
The following summarized unaudited financial information for partner
companies accounted for on the equity method at June 30, 1999 has been
compiled from the unaudited financial statements of the respective companies
and reflects certain historical adjustments (in thousands):
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------------------- --------------------------------------------
1999 1998 1999 1998
------------------- -------------------- ------------------- --------------------
Net Sales
Public companies $236,393 $205,082 $452,443 $395,783
Non-public companies:
Intellisource 35,667 34,381 72,708 68,476
Kanbay 11,092 8,680 20,464 15,825
MultiGen-Paradigm 6,286 3,798 9,762 8,930
QuestOne 4,295 1,600 8,231 3,709
Other 37,192 25,308 71,026 50,561
------------------- -------------------- ------------------- --------------------
$330,925 $278,849 $634,634 $543,284
=================== ==================== =================== ====================
7. Debt
----
The Company has available $200 million under its bank revolving credit
facilities. Of the $200 million, $150 million matures in May 2002 and is
secured by certain equity securities the Company holds of its publicly traded
partner companies (the Pledged Securities), including CompuCom. 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 had an original maturity date of April 1999, which the Company has
extended to April 2000. There were no borrowings outstanding under the total
facility at June 30, 1999.
In the first quarter of 1999, CompuCom sold its corporate headquarters
building in a sale/leaseback transaction. The proceeds from the sale were
used to pay down CompuCom's long-term debt. As part of the transaction,
CompuCom entered into a 20-year operating lease on the building.
In May 1999, CompuCom replaced its credit agreements with a $225 million
working capital facility and a $175 million receivables securitization
facility. The new $225 million working capital facility bears interest at a
rate of LIBOR plus an agreed upon spread and is secured by certain assets of
CompuCom. This facility is fully available subject to a borrowing base and
compliance with certain covenants. As of June 30, 1999, CompuCom had
sufficient collateral to enable it to fully utilize the working capital
facility, and had $155 million outstanding as of June 30, 1999. The working
capital facility will be reduced by $25 million in September 1999 and an
additional $25 million in May 2000, and matures in May 2002. On the new $175
million receivables securitization, the effective rate is based on a
designated short-term interest rate plus an agreed upon spread. This
securitization has a term of three years, subject to certain covenant
compliance. 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". The securitization
facility was fully utilized at June 30, 1999. CompuCom plans to increase the
securitization facility to $250-$300 million in the second half of 1999.
9
The following is a summary of long-term debt (in thousands):
June 30, December 31,
1999 1998
-------------------- ----------------------
(Unaudited)
Parent Company and Other Recourse Debt
Revolving credit facilities $ - $108,107
Other 15,649 15,874
-------------------- ----------------------
15,649 123,981
Subsidiary Debt (Non-Recourse to Parent)
CompuCom 157,391 83,429
Other 1,762 -
-------------------- ----------------------
Total debt 174,802 207,410
Current debt obligations (2,442) (2,366)
-------------------- ----------------------
Long-term debt $172,360 $205,044
==================== ======================
8. Convertible Subordinated Notes
------------------------------
In June 1999, the Company issued $200 million of 5% Convertible Subordinated
Notes (1999 Notes) due June 15, 2006. The 1999 Notes are convertible into the
Company's Common Stock at $77.625 per share, subject to adjustment under
certain conditions including rights offerings and Directed Share Subscription
Programs (DSSP) to the Company's shareholders. Interest is payable semi-
annually. The 1999 Notes are redeemable in whole or in part at the option of
the Company on or after June 18, 2002, for a maximum of 102.5% of face value
depending on the date of redemption and subject to certain restrictions. The
Company used approximately $111 million of the net proceeds to repay all of
the Company's outstanding indebtedness under its revolving credit facility
and borrowings from partner companies. In August 1999, the Company's
shareholders were given the opportunity to participate in the initial public
offering of Internet Capital Group through a DSSP. As a result, pursuant to
the terms of the 1999 Notes, the conversion rate of the Notes was adjusted to
$76.0786 per share as a result of the initial public offering of Internet
Capital.
In April 1999, the Company notified the holders of its previously issued
Convertible Subordinated Notes (1996 Notes) of its intent to redeem all of
the outstanding 1996 Notes on June 2, 1999. All holders converted the 1996
Notes into Common Stock and, as a result of the conversions, the Company
issued approximately 2.4 million shares.
10
9. Other Income
------------
Other income consists of the following (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- --------------------------------
1999 1998 1999 1998
-----------------------------------------------------------------------
(Unaudited)
Unrealized gain on Tellabs $35,910 $ - $ 79,605 $ -
Distributions from Venture Funds 1,889 6,161 4,590 6,161
Sales of securities 3,546 7,419 15,362 15,016
Administrative Service Fees 3,199 3,112 6,206 5,880
Other (9,759) (4,113) (15,568) (3,129)
=========== ========== =========== ==========
$34,785 $12,579 $ 90,195 $23,928
=========== ========== =========== ==========
The Company's holdings in Tellabs are classified as a trading security and,
accordingly, the effect of the change in market value of Tellabs is
reflected in the Company's results of operations. As discussed in Note 5,
the Company intends to change this classification in the third quarter of
1999, and future changes in the fair value of the Company's Tellabs holdings
following this change in classification will be recorded in shareholders'
equity.
Sales of securities in 1999 include the sale of the Company's holdings in
Excite and a portion of its holdings in Tellabs. Sales of securities in 1998
included the sale of a portion of its holdings in Cambridge.
Administrative service fees represent charges to certain partner companies
for operational and management services provided through a team of Safeguard
professionals dedicated to that partner company. Each team has expertise in
the areas of business/technology strategy, sales and marketing, operations,
finance, and legal and transactional support, and provides hands-on
assistance to the management of the partner companies in support of their
growth.
Other includes interest income, charges incurred in the disposition of
certain partner companies, and provisions for equity ownership in partner
companies and notes.
10. Restructuring
-------------
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. Of the
total amount, $2.4 million had been paid through December 31, 1998 and $9.4
million was paid in 1999 through June 30. The following is a summary of the
components of the restructuring charge (in thousands):
Restructuring Accrued at Accrued at
Charge December 31, 1998 June 30, 1999
------------- ----------------- -------------
Lease termination costs $ 7,259 $ 6,415 $2,007
Employee severance and related benefits 3,804 2,986 998
Disposal of assets, net of estimated proceeds 3,044 2,907 1,607
Other 2,330 1,780 107
------------- ----------------- -------------
Total $16,437 $14,088 $4,719
============= ================= =============
CompuCom expects the restructuring activities to be substantially completed
by the end of 1999 and believes the restructuring accrual is adequate.
11
11. Earnings Per Share
------------------
The calculations of Earnings Per Share (EPS) were (in thousands except per
share amounts):
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- -------------------------------------
1999 1998 1999 1998
----------- --------------- --------------- ---------------
(Unaudited) (Unaudited)
Basic EPS
---------
Net earnings $11,513 $ 6,026 $35,661 $11,086
=========== =============== =============== ===============
Average common shares outstanding 33,473 32,032 32,617 31,874
=========== =============== =============== ===============
Basic EPS $ .34 $ .19 $ 1.09 $ .35
=========== =============== =============== ===============
Diluted EPS
-----------
Net earnings $11,513 $ 6,026 $35,661 $11,086
Effect of: Public holdings (a) (160) (194) (44) (420)
Dilutive securities (b) 365 - 1,090 -
=========== =============== =============== ===============
$11,718 $ 5,832 $36,707 $10,666
=========== =============== =============== ===============
Average common shares outstanding 33,473 32,032 32,617 31,874
Effect of: Dilutive options 982 718 866 708
Dilutive securities (b) 1,215 - 1,835 -
----------- --------------- --------------- ---------------
Average number of common shares assuming dilution 35,670 32,750 35,318 32,582
=========== =============== =============== ===============
Diluted EPS $ .33 $ .18 $ 1.04 $ .33
=========== =============== =============== ===============
(a) Represents the dilutive effect of public company common stock
equivalents and convertible securities.
(b) Represents the dilutive effect of the Company's 1996 Notes for the
three and six months ended June 30, 1999. For the three months and
six months ended June 30, 1998, the 1996 notes were anti-dilutive;
and therefore, they do not impact the calculation of diluted EPS in
1998. The 1999 Notes are excluded from all periods presented, as
they are anti-dilutive.
12. Shareholders' Equity
--------------------
In May 1999, the Company approved an increase in the number of authorized
common shares to 500 million from 100 million and authorized 1 million
shares of blank check preferred stock in lieu of the 55,424 currently
authorized shares of preferred stock.
In connection with the conversion of the 1996 Notes into Common Stock (see
Note 8), the Company recorded in shareholders equity the principal amount of
the converted 1996 Notes as well as forfeited interest and the related
unamortized deferred charges totaling approximately $71.6 million.
12
13. Parent Company Financial Information
------------------------------------
Condensed Financial Information is provided to reflect the results of
operations and financial position of the "Parent Company", or the Company
without the effect of consolidating its less than wholly owned subsidiaries.
The following summarizes the Parent Company Balance Sheets of Safeguard
Scientifics, Inc. and its wholly owned subsidiaries (in thousands). These
Parent Company Balance Sheets differ from the Consolidated Balance Sheets
due to the exclusion of the assets and liabilities of the Company's less
than wholly owned subsidiaries, primarily CompuCom and Tangram, and, at June
30, 1999, aligne and SOTAS, with the carrying values of these companies
included in "Equity ownership in partner companies".
June 30, December 31,
1999 1998
----------------------- ------------------------
ASSETS (Unaudited)
Short-term investments $ - $143,103
Other current assets 66,889 30,766
Equity ownership in partner companies 730,857 413,596
Other 61,747 49,830
------------------- -------------------
Total assets $859,493 $637,295
=================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities $ 77,434 $ 80,824
Long-term debt 14,696 123,115
Other liabilities 110,744 19,152
Convertible subordinated notes 200,000 71,345
Shareholders' equity 456,619 342,859
------------------- -------------------
Total liabilities & shareholders' equity $859,493 $637,295
=================== ===================
The following summarizes the Parent Company's holdings in less than wholly
owned subsidiaries (in thousands). Market value reflects the price of
publicly traded securities at the close of business at the respective date.
June 30, 1999 December 31, 1998
---------------------------------------- ----------------------------------------
Carrying Market Carrying Market
Value Value Value Value
----------------- ------------------ ------------------ -----------------
(Unaudited)
Tellabs $227,983 $227,983 $ - $ -(a)
CompuCom 123,215 115,724 121,832 98,538
Tangram 3,935 30,693 3,428 41,795
Cambridge 48,723 168,554 35,248 190,217
Other public 122,274 375,206 130,076 221,107
Other 204,727 123,012
----------------- ------------------
$730,857 $413,596
================= ==================
(a) The market value of Tellabs of $143 million at December 31, 1998 is included
in "Short-term Investments" on the Consolidated Balance Sheets.
13
Parent Company Financial Information (continued)
------------------------------------------------
The following summarizes the Parent Company Statements of Operations of
Safeguard Scientifics, Inc. and its wholly owned subsidiaries (in
thousands). These Parent Company Statements of Operations differ from the
Consolidated Statements of Operations by excluding the revenues and related
costs and expenses of the Company's less than wholly owned subsidiaries,
primarily CompuCom and Tangram, and for the three and six months ended June
30, 1999, aligne and SOTAS, with the Company's share of the earnings or
losses of these companies reflected in the caption "(Income) loss from
equity holdings, net''.
Three Months Ended June 30, Six Months Ended June 30,
----------------------------------- ----------------------------------
1999 1998 1999 1998
------------ ------------------ ----------- ------------------
(UNAUDITED) (UNAUDITED)
Revenues
Other Income $33,403 $12,855 $89,085 $24,531
Costs and Expenses
Cost of sales and operating expenses 12,263 9,127 22,657 16,926
(Income) loss from equity holdings, net 4,357 (4,797) 11,798 (7,982)
------------ ------------------ ----------- ------------------
Total costs and expenses 16,620 4,330 34,455 8,944
------------ ------------------ ----------- ------------------
Earnings Before Taxes On Income 16,783 8,525 54,630 15,587
Provision for taxes on income 5,270 2,499 18,969 4,501
------------ ------------------ ----------- ------------------
Net Earnings $11,513 $ 6,026 $35,661 $11,086
============ ================== =========== ==================
14. Operating Segments
------------------
The Company's reportable segments consist of CompuCom, Tangram, general
corporate operations, and other. CompuCom's operations are defined in two
segments - sales of distributed desktop computer products (product); and
service and other, which includes configuration, network integration, and
technology support (service and other). Tangram's operations include the
design, development, sale, and implementation of enterprise-wide asset
tracking and software management solutions. General corporate operations
consist of identifying, acquiring, managing, and operating partner
companies, most of which are engaged in information technology businesses.
Other includes the operations of aligne and SOTAS.
14
The following summarizes information related to the Company's segments (in
thousands). All significant intersegment activity has been eliminated.
Three Months Ended June 30, Six Months Ended June 30,
--------------------------------- --------------------------------
1999 1998 1999 1998
------------- -------------- ------------- -------------
Net Sales (UNAUDITED) (UNAUDITED)
CompuCom
Product $ 728,043 $ 530,495 $ 1,149,335 $ 907,273
Service and Other 74,552 67,062 146,580 128,036
------------- -------------- ------------- -------------
802,595 597,557 1,295,915 1,035,309
Tangram 4,003 4,977 9,905 9,123
Other 2,785 - 3,448 -
------------- -------------- ------------- -------------
$ 809,383 $ 602,534 $ 1,309,268 $ 1,044,432
============= ============== ============= =============
Gross Margin(a)
CompuCom
Product $ 56,537 $ 50,528 $ 90,085 $ 94,408
Service and Other 25,355 21,626 50,278 41,911
------------- -------------- ------------- -------------
81,892 72,154 140,363 136,319
Tangram 3,419 4,810 8,180 8,000
Other 1,345 - 1,695 -
------------- -------------- ------------- -------------
$ 86,656 $ 76,964 $ 150,238 $ 144,319
============= ============== ============= =============
Operating Profit (Loss)
CompuCom
Product $ 2,060 $ 8,251 $ (6,717) $ 15,565
Service and Other 8,350 3,152 17,642 5,998
------------- -------------- ------------- -------------
10,410 11,403 10,925 21,563
Interest and financing, net (6,207) (4,260) (10,537) (8,015)
------------- -------------- ------------- -------------
4,203 7,143 388 13,548
------------- -------------- ------------- -------------
Tangram 283 396 755 447
------------- -------------- ------------- -------------
General Corporate
Other income, net 34,785 12,579 90,195 23,928
(Income) loss from equity holdings, net (6,486) 2,742 (12,956) 4,247
Interest and financing, net (2,589) (2,431) (5,991) (4,479)
General corporate expense, net (9,499) (6,662) (16,336) (12,131)
Minority interest (2,274) (3,480) (323) (6,589)
------------- -------------- ------------- -------------
13,937 2,748 54,589 4,976
------------- -------------- ------------- -------------
Other (711) (244) (869) (495)
------------- -------------- ------------- -------------
Earnings Before Taxes on Income $ 17,712 $ 10,043 $ 54,863 $ 18,476
============= ============== ============= =============
(a) Total gross margin reconciles to the Consolidated Statements of
Operations by subtracting cost of sales from net sales.
15
Management's Discussion and Analysis of
Financial Condition and Results of Operations
General
-------
Safeguard Scientifics, Inc. (the Company) is an information technology (IT)
holding company that identifies, acquires, operates and manages Internet-
focused companies and has interests in private equity funds. The Company is
now focusing on IT companies engaged in e-commerce, network infrastructure
activities and enterprise applications. The Company believes that these
sectors provide compelling opportunities for success driven by the rapid
growth of the Internet as a fundamental business tool. The Company generally
acquires ownership interests in companies that allow it to have a significant
influence over their direction and management. These positions may represent
either a majority or minority ownership interest, although the Company is
generally the largest shareholder of our partner companies. The Company
assigns a dedicated team assigned to each partner company and actively assists
our partner companies in their management, operations and finances.
The Company's principal mission is to promote long-term shareholder value.
Safeguard's approach reflects its belief that shareholder value is maximized
by retaining and promoting the entrepreneurial energy and creativity of the
managers of our partner companies. The entrepreneurs of its partner companies
generally retain significant equity interests in their businesses, and their
interests as shareholders remain aligned with the Company's. Safeguard
provides a full range of operational and management services through a team of
Safeguard professionals dedicated to that partner company. Each team has
expertise in the areas of business/technology strategy, sales and marketing,
operations, finance, and legal and transactional support, and provides hands-
on assistance to the management of the partner companies in support of their
growth. The level of involvement varies and in some circumstances includes
the provision of full-time interim personnel. Since Safeguard partners with
an indeterminate time frame, it seeks different ways to maximize the long-term
value of its partner companies. This is achieved through Rights IPOs directed
solely to holders of Safeguard Common Stock, Directed Share Subscription
Programs as part of traditional IPOs, mergers, sales, open-market
transactions, follow-on acquisitions or the divestiture of Safeguard's
position over time. Safeguard typically retains a significant ownership
position in a partner company after the partner company conducts its IPO.
The Company believes the best way to build future value for its shareholders
is to be involved in Internet markets. As the Company acquires interests in
more Internet-related companies, it could experience increased volatility in
its earnings, as many early stage Internet companies have operating losses.
For several years, the Company has had a financial model of exceeding the
prior year's quarterly earnings per share (EPS) by $.01. This was essentially
accomplished through sales of securities. Given the volatility of the
technology market, especially Internet-related stocks, the Company will no
longer sell securities solely to achieve a targeted EPS. As a result, the
Company's net earnings could fluctuate significantly from quarter to quarter.
There can be no guarantee that the Company will report net earnings in each
period.
As discussed in Note 5 to the Consolidated Financial Statements, the Company
intends to change the classification of its Tellabs holdings in the third
quarter of 1999. As a result, changes in the fair value of Tellabs holdings
will no longer be included in the Company's net earnings subsequent to the
change in classification. As disclosed in Note 9 to the Consolidated Financial
Statements, this amount has been significant in 1999.
Because many of our partner companies are not majority-owned subsidiaries,
changes in the value of our interests in partner companies and the income/loss
attributable to them could require us to register as an investment company at
some point in the future, unless we take action to avoid being required to
register. However, we believe that we can take steps to avoid being required
to register under the Investment Company Act which would not adversely affect
our operations or shareholder value.
16
Effect of Various Accounting Methods on the Consolidated Financial Statements
-----------------------------------------------------------------------------
Consolidation. The net sales and related costs and expenses of a partner
company are included in the Company's consolidated operating results if the
Company owns more than 50% of the outstanding voting securities of the partner
company. Participation of shareholders other than the Company in the earnings
or losses of a more than 50% owned partner company is reflected in the caption
"Minority interest" in the Consolidated Statements of Operations. Minority
interest adjusts consolidated net earnings to reflect only the Company's share
of the earnings or losses of the partner company. CompuCom Systems, Inc. and
Tangram Enterprise Solutions, Inc. are consolidated in 1999 and 1998. In
February and June 1999, the Company acquired an 80% and 75% fully diluted
ownership in aligne, Inc. and SOTAS. Inc., respectively. These transactions
were accounted for as purchases and, accordingly, the consolidated financial
statements reflect the operations of these companies since the acquisition
dates.
Equity Method. Partner companies in which the Company owns 50% or less of the
outstanding voting securities, in which significant influence is exercised,
are generally accounted for on the equity method of accounting. Significant
influence is presumed at a 20% ownership level; however, the Company applies
the equity method for certain companies in which it owns less than 20% of the
voting interest when it exerts significant influence through representation on
those companies' Boards of Directors and other means. On the equity method of
accounting, a partner company's revenues and related costs and expenses are
not included in the Company's consolidated operating results; however, the
Company's share of the earnings or losses of the partner company is reflected
in the caption "(Income) loss of equity holdings, net" in the Consolidated
Statements of Operations.
The net effect of a partner company's results of operations on the Company's
net earnings is the same under either consolidation accounting or the equity
method of accounting, as only the Company's share of the earnings or losses of
a partner company is included in the Company's net earnings in the
Consolidated Statements of Operations.
Cost Method. Partner companies not consolidated or accounted for on the
equity method are accounted for on the cost method of accounting under which
the Company's share of the earnings or losses of such companies is not
included in the Company's Consolidated Statements of Operations. However, the
effect of the change in market value of cost method holdings classified as
trading securities is reflected in the Company's results of operations each
reporting period.
Effect of Various Accounting Methods on the Presentation of the Consolidated
----------------------------------------------------------------------------
Financial Statements
--------------------
If the Company's ownership in any of the partner companies changes
significantly, the Company's consolidated revenues and related costs and
expenses may fluctuate primarily due to the applicable accounting method used
for recognizing its participation in the operating results of that company.
As mentioned below in Operations Overview, the Company's consolidated revenues
and related costs and expenses are significantly influenced by the results of
operations of CompuCom. At June 30, 1999, the Company owns approximately 51%
of CompuCom's outstanding common stock and owns preferred stock which gives it
60% of the vote for CompuCom's directors.
CompuCom competes in the computer reseller industry which has been undergoing
significant transformation and consolidation. Several of CompuCom's
competitors have been growing through acquisitions and others have been
acquired. In addition, companies previously engaged in the retail channel
have begun to enter the corporate reseller market, and several computer
manufacturers are beginning to sell directly to corporate customers,
heightening the competition.
17
As a result, while growing internally, CompuCom is also looking to strengthen
its market share through acquisitions, including one which was completed in
May 1999. If CompuCom were to use its stock for the acquisitions or if some
other dilutive event were to occur, the Company's voting interest in CompuCom
could decrease below 50%. Under current generally accepted accounting
principles, the Company would cease consolidating CompuCom's results and
instead would account for its holdings in CompuCom on the equity method
provided the Company maintained the ability to exercise significant influence
over CompuCom's ordinary course of business. The Company's share of CompuCom's
earnings on the equity method versus consolidation would differ only to the
extent that the Company's ownership of CompuCom changed. However, the
presentation of the Consolidated Statements of Operations and Balance Sheets
would change dramatically.
Note 13 to the Company's Consolidated Financial Statements summarizes the
Parent Company Statements of Operations and Balance Sheets of the Company for
the same periods presented in the Consolidated Financial Statements. These
statements differ from the Consolidated Financial Statements by excluding the
revenues, costs, expenses, assets, and liabilities of the Company's less than
wholly owned subsidiaries (primarily CompuCom and Tangram) and instead
treating these companies as if they were accounted for on the equity method.
The Company's share of the results of operations of less than wholly owned
subsidiaries is included in "(Income) loss of equity holdings, net" and the
carrying value of these companies is included in "Equity ownership in partner
companies" in the Parent Company Statements of Operations and Balance Sheets,
respectively.
Although the Parent Company Statements of Operations and Balance Sheets
presented in Note 13 are accurate relative to the Company's historical
Consolidated Financial Statements, they are not necessarily indicative of
future Parent Company Statements of Operations and Balance Sheets.
Operations Overview
--------------------
The Company's operations have been classified into the following business
segments: CompuCom, Tangram, general corporate operations, and other.
CompuCom's operations are further defined into two segments-sales of
distributed desktop computer products (product) and configuration, network
integration, and technology support (service and other). Tangram's operations
include the design, development, sale, and implementation of enterprise-wide
asset tracking and software management solutions. General corporate operations
consists of developing and operating partner companies, most of which are
engaged in information technology businesses. Other includes the operations of
aligne and SOTAS.
Three Months Ended June 30, 1999 Compared to June 30, 1998
Net sales increased 34% to $809 million in 1999 compared to $603 million in
1998 as CompuCom experienced a 34% sales increase. The increase at CompuCom
was due primarily to the acquisition of the Technology Acquisition Services
Division (TASD) of Entex Information Services, Inc. during the second quarter
of 1999. CompuCom's products have traditionally exhibited relatively short
life cycles and rapidly declining prices. As a result, CompuCom must sell more
units to generate the same amount of revenue as the prior year. During the
three months ended June 30, 1999, CompuCom continued to experience a decline
in average selling prices (ASPs) in desktops, laptops and servers when
compared to the prior year. However, the rate of decline in ASPs has slowed
compared to recent history. Due to the declining ASPs, CompuCom's growth in
desktop, laptop and server units shipped has outpaced its product revenue
growth. CompuCom's service sales increased 17% to $74 million in 1999 from
$63 million in 1998, which was primarily due to increases in both
configuration
18
and field engineering, both of which benefited by the increase in product unit
sales volume. CompuCom represented 99% of the Company's total consolidated net
sales in 1999.
The Company's overall gross margin was 10.7% in 1999 compared to 12.8% in
1998. The decrease is primarily attributable to reduced product gross margins
at CompuCom, which decreased to 7.8% in 1999 compared to 9.5% in 1998.
CompuCom attributes this decline to heightened competition from direct
marketers and other corporate resellers and a reduction in manufacturer
sponsored incentives. In the short term, CompuCom expects to continue to
experience lower product gross margin percentages when compared to the
comparable prior year period. CompuCom's service gross margin was 33.9% in
1999 compared to 31.3% in 1998. The increase was primarily caused by increased
performance in its field engineering business. In the short term, the Company
expects to continue to experience improved service gross margin percentages
when compared to the comparable prior year period.
Other income in 1999 includes an unrealized $35.9 million gain resulting from
the increase in the market price of Tellabs. Other income in 1999 also
includes the sale of a portion of the Company's holdings in Diamond and
distributions received from the Company's affiliated venture funds. Other
income in 1998 included the sales of a portion of the Company's interest in
Cambridge Technology Partners and distributions received from the Company's
affiliated venture funds. Partially offsetting other income in these years
were charges incurred in the disposition of certain partner companies, and
provisions for equity ownership in partner companies and notes. Other income
of varying magnitude has been realized in recent years, primarily as a result
of the change in the fair value of the Company's holdings in Tellabs and the
timing of sales of securities. Prior amounts are not necessarily indicative of
amounts which may be realized in the future. As discussed in Note 5 to the
Consolidated Financial Statements, the Company intends to change the
classification of its Tellabs holdings in the third quarter of 1999. As a
result, charges in the fair value of Tellabs holdings will no longer be
included in the Company's net earnings. Subsequent to the change in
classification.
(Income) loss from equity holdings, fluctuates with the Company's ownership
percentage and the operating results of partner companies accounted for on the
equity method. The change in income (loss) from equity holdings for the three
months ended June 30, 1999 compared to the same period in 1998 reflects
increased operating losses at certain partner companies, the elimination of
the Company's share of earnings of Coherent as a result of the
Coherent/Tellabs merger, an increase in the number of companies accounted for
on the equity method, a majority of which have operating losses, and reduced
operating results at Cambridge as a result of approximately $9 million of
non-recurring charges. The Company expects certain of its partner companies to
continue to invest in their products and services and to recognize operating
losses. Additionally, the Company expects to acquire interests in more
Internet-related companies, and many early stage Internet companies have
operating losses. As a result, losses from equity holdings could increase
significantly.
In 1999, the Company's public partner companies accounted for on the equity
method include Cambridge, ChromaVision, DocuCorp, OAO Technology Solutions
(OAOT), Sanchez, and USDATA Corporation.
Cambridge announced its second quarter 1999 results with revenue growth driven
by increased global demand for its Customer Management Solutions (up 45%) and
Interactive Solutions Services (up 41%). Net income was $1.2 million, or $.02
per share (diluted) compared to net income of $13.5 million, or $.21 per share
for the same period in 1998. Adjusted for certain items including a
repositioning charge of $8.9 million, charges for client receivables of $4.2
million and a gain of $2.2 million on the sale of an equity security, net
income would have been $7.9 million, or $.13 per share (diluted). Safeguard
owns approximately 16% of Cambridge's common stock at June 30, 1999.
19
During July 1999, the FDA cleared for marketing ChromaVision's ACIS(TM)
system, a powerful new tool that may help physicians detect cancer, infectious
diseases and genetic conditions earlier and more accurately, potentially
leading to improved patient treatment. This system can be applied to a vast
number of existing laboratory diagnostic tests and is designed to greatly
enhance a physician's ability to detect disease with detection sensitivity
more than 300 percent over existing manual testing methods. The FDA clearance
obtained is for use of the ACIS(TM) with a widely used staining method called
immunohistochemistry, commonly used in the evaluation of numerous disease
conditions. This single clearance enables the commercialization of five
ACIS(TM) tests scheduled for release in 1999 and paves the way for rapid
introduction of future ACIS(TM) tests. ChromaVision reported increased losses
in the second quarter of 1999 primarily due to planned increases in its sales
and marketing staff and technical personnel to support the commercialization
of ACIS(TM). Safeguard owns approximately 30% of ChromaVision's common stock
at June 30, 1999.
OAOT revenues increased 93% for the quarter due primarily to the acquisition
of OAO Services, Inc. in July 1998 and the consolidation of OAOT's United
Kingdom subsidiary which was previously accounted for under the equity method.
OAOT's return to profitability for the quarter ended June 30, 1999 compared to
the corresponding 1998 quarter was achieved through the improved profitability
of its traditional businesses coupled with reduced general and administrative
costs. Safeguard owns approximately 33% of OAOT's common stock at June 30,
1999.
Sanchez announced revenues for the quarter ended June 30, 1999 of $13.9
million, compared to $11.1 million for the same period in 1998. Net earnings
for the quarter approximated the results for the same period in 1998. Sanchez
played a lead role in the project integration and management for
WingspanBank.com. Sanchez's PROFILE/Anyware is the core production
application software that integrates the various systems required to offer
WingspanBank.com's full range of financial products and services. In
addition, Sanchez's e-commerce outsourcing center for top-tier financial
service providers, e-PROFILE, Inc., is providing data-center and back office
operations for WingspanBank.com. Sanchez also signed a licensing agreement
with Irish League of Credit Unions and announced that American Express
successfully implemented PROFILE/Anyware in the second quarter. Safeguard
owns approximately 27% of Sanchez's common stock at June 30, 1999.
USDATA announced its third consecutive profitable quarter with net income of
$.04 per share, for the quarter ended June 30, 1999, compared to a net loss of
$.03 per share, for the same period in 1998. In August 1999, USDATA completed
the acquisition of Smart Shop Software, Inc., which provides business software
to make-to-order small and medium manufacturers. Safeguard owns approximately
26% of USDATA's common stock at June 30, 1999, and increased its ownership to
38% in August 1999.
Selling and service expenses decreased slightly in absolute dollars primarily
due to CompuCom's cost reduction efforts related to the 1998 restructuring,
partially offset by costs related to the TASD acquisition, which resulted in
an increase in sales and sales support personnel and professional services
fees related to the integration of TASD into CompuCom's operations. Selling
and service expenses decreased as a percentage of sales to 5.2% from 7.2% for
the comparable period in 1998 primarily due to increased leverage of
CompuCom's infrastructure resulting from the TASD acquisition and its own cost
reduction efforts.
General and administrative expenses increased in absolute dollars and as a
percentage of sales primarily due to increased expenditures at CompuCom to
continue the expansion of its electronic commerce capabilities, increases in
distribution and administrative personnel to support CompuCom's revenue growth
related to the TASD acquisition, and increased expenses at the Company to
support the growing activities of its partner companies. CompuCom's general
and
20
administrative expenses are reported net of reimbursements by certain
manufacturers for specific training, promotional, and marketing programs.
These reimbursements offset the expenses incurred by CompuCom.
Depreciation and amortization increased primarily due to increased
amortization at CompuCom as a result of the acquisitions completed during the
second quarter of 1998.
Interest and financing expense increased in 1999 compared to 1998 primarily as
a result of amortization of fees at CompuCom resulting from the early
termination of CompuCom's financing arrangements, and higher borrowing levels
at CompuCom due to the acquisition of TASD. The increase was also due to
higher average borrowing levels by the Company to fund interests in new or
existing partner companies, and interest expense related to the issuance by
the Company of $200 million of Convertible Subordinated Notes in June 1999.
These increases were partially offset by the elimination of interest due to
the conversion of $71 million of the Company's 1996 Notes into the Company's
Common Stock in the second quarter of 1999.
Minority interest decreased as a result of decreased operating results at
CompuCom. Future profitability at CompuCom will depend on its ability to
successfully integrate the TASD acquisition into its operations, to
effectively manage inventory levels in response to changes in its major
suppliers' price protection and return programs, to grow its services
business, to effectively manage the utilization of service personnel, and to
respond to increased competition from its suppliers' direct selling
initiatives. It also depends on CompuCom's ability to reduce operating
expenses at a pace equal to the decline in margin percentages, competitive
pricing, short-term interest rate fluctuations, general economic conditions,
employee turnover and possible future litigation, as well as the risks and
uncertainties set forth from time to time in CompuCom's other public reports
and filings and public statements.
The Company's effective tax rate decreased to 35% in 1999 compared to 40% for
1998 due to the realization of previously unrecorded tax benefits attributable
to the difference between the book basis and tax basis of certain of the
Company's holdings as well as the application of lower tax rates against
realized investment gains.
The Company's net earnings increased in 1999 compared to 1998 primarily due to
higher gains related to the Company's holdings in Tellabs, partially offset by
decreased earnings at CompuCom and reduced operating results for partner
companies accounted for on the equity method. Other income of varying
magnitude have been realized in recent years. The Company's net earnings could
fluctuate significantly from period to period, depending on the operations of
its holdings accounted for on the equity method and the timing of sales of
securities. There can be no guarantee that the Company will report net
earnings in each period.
Six Months Ended June 30, 1999 Compared to June 30, 1998
Net sales increased 25% to $1.3 billion in 1999 compared to $1.0 billion in
1998 as CompuCom experienced a 25% sales increase. The increase at CompuCom
was due primarily to the acquisition of TASD during the second quarter of
1999. During the six months ended June 30, 1999, CompuCom continued to
experience a decline in ASPs in desktops, laptops and servers when compared to
the prior year. However, the rate of decline in ASPs has slowed compared to
recent history. Due to the declining ASPs, CompuCom's growth in desktop,
laptop and server units shipped has outpaced its product revenue growth.
CompuCom's service sales increased 19% to $143 million in 1999 from $120
million in 1998, which was primarily due to increases in both configuration
and field engineering, which are typically driven in part by product unit
sales volume. CompuCom represented 99% of the Company's total consolidated
net sales in 1999.
21
The Company's overall gross margin was 11.5% in 1999 compared to 13.8% in
1998. The decrease is primarily attributable to reduced product gross margins
at CompuCom, which decreased to 7.8% in 1999 compared to 10.4% in 1998.
CompuCom attributes this decline primarily to heightened competition from
direct marketers and other corporate resellers and a reduction in manufacturer
sponsored incentives. CompuCom's service gross margin was 33.9% in 1999
compared to 31.7% in 1998. The increase was primarily caused by increased
performance in its field engineering business.
Other income in 1999 includes a $79.6 million gain resulting from the increase
in the market price of Tellabs and a $5.9 million gain on the sales of Tellabs
stock. Other income in 1999 also includes the sale of the Company's holdings
in Excite and a portion of its holdings in Diamond and distributions received
from the Company's affiliated venture funds. Other income in 1998 included
the sales of a portion of the Company's interest in Cambridge and
distributions received from the Company's affiliated venture funds. Partially
offsetting in these years were charges incurred in the disposition of certain
partner companies, and provisions for equity ownership in partner companies
and notes. Other income of varying magnitude has been realized in recent
years, primarily as a result of the change in the fair value of the Company's
holdings in Tellabs and the timing of sales of securities. Prior amounts are
not necessarily indicative of amounts which may be realized in the future. As
discussed in Note 5 to the Consolidated Financial Statements, the Company
intends to change the classification of its Tellabs holdings in the third
quarter of 1999. As a result, changes in the fair value of Tellabs holdings
will no longer be included in the Company's net earnings.
(Income) loss from equity holdings fluctuates with the Company's ownership
percentage and the operating results of partner companies accounted for on the
equity method. The change in income (loss) from equity holdings for the six
months ended June 30, 1999 compared to the same period in 1998 reflects
increased operating losses at certain partner companies, the elimination of
the Company's share of earnings of Coherent a result of the Coherent/Tellabs
merger, an increase in the number of companies accounted for on the equity
method, a majority which have operating losses, and reduced operating results
at Cambridge as a result of approximately $9 million of non-recurring charges.
Selling and service expenses decreased in absolute dollars primarily due to
CompuCom's cost reduction efforts related to the 1998 restructuring, partially
offset by costs related to the TASD acquisition, which resulted in an increase
in sales and sales support personnel and professional services fees related to
the integration of TASD into CompuCom's operations. Selling and service
expenses decreased as a percentage of sales primarily due to increased
leverage of CompuCom's infrastructure resulting from the TASD acquisition and
its own cost reduction efforts.
General and administrative expenses increased in absolute dollars and as a
percentage of sales primarily due to increased expenditures at CompuCom to
continue the expansion of its electronic commerce capabilities, increases in
distribution and administrative personnel to support CompuCom's revenue growth
related to the TASD acquisition and increased expenses at the Company to
support the growing activities of its partner companies. CompuCom's general
and administrative expenses are reported net of reimbursements by certain
manufacturers for specific training, promotional, and marketing programs.
These reimbursements offset the expenses incurred by CompuCom.
Depreciation and amortization increased primarily due to increased
amortization at CompuCom as a result of the acquisitions completed during the
second quarter of 1998.
Interest and financing expense increased in 1999 compared to 1998 primarily as
a result of amortization of fees at CompuCom resulting from the early
termination of CompuCom's financing arrangements, and higher borrowing levels
at CompuCom due to the acquisition of TASD. The increase was also due to
higher average borrowing levels by the Company to fund interests in new or
existing partner companies.
22
Minority interest decreased as a result of decreased operating results at
CompuCom.
The Company's effective tax rate decreased to 35% in 1999 compared to 40% for
1998 due to the realization of previously unrecorded tax benefits attributable
to the difference between the book basis and tax basis of certain of the
Company's holdings as well as the application of lower tax rates against
realized securities gains.
The Company's net earnings increased significantly in 1999 compared to 1998
primarily due to higher gains related to the Company's holdings in Tellabs,
partially offset by decreased earnings at CompuCom and reduced operating
results for partner companies accounted for on the equity method. Other
income of varying magnitude have been realized in recent years. The Company's
net earnings could fluctuate significantly from period to period, depending on
the operations of its holdings accounted for on the equity method and the
timing of sales of securities. There can be no guarantee that the Company will
report net earnings in each period.
Liquidity and Capital Resources
-------------------------------
The Company has historically used its bank credit facility and proceeds from
sales of securities to fund its cash requirements. In addition, in February
1996, the Company issued $115 million of 6% Convertible Subordinated Notes
primarily to pay down its outstanding borrowings and fund commitments to new
and existing partner companies. These notes were all converted into the
Company's Common Stock prior to June 30, 1999. In June 1999, the Company
issued $200 million of 5% Convertible Subordinated Notes due June 2006. The
Notes are convertible into the Company's Common Stock at $77.625 per share,
subject to adjustment under certain conditions. The Company used approximately
$111 million of the net proceeds to repay all of the Company's outstanding
indebtedness under its revolving credit facility and borrowings from partner
companies.
In April 1999, the Company notified the holders of its 1996 Convertible
Subordinated Notes (1996 Notes) of its intent to redeem all of the outstanding
1996 Notes on June 2, 1999. Each 1996 Note was converted into shares of the
Company's Common Stock at $28.985 per share prior to the redemption date. The
Company issued 2.4 million shares as a result of the conversions.
In March 1999, the Company entered into a forward sale contract relating to
two million shares of its holdings in Tellabs, Inc. The Company pledged two
million shares of Tellabs for three years and in return received approximately
$71 million of cash. At the end of the term, the Company has the option to
deliver cash or Tellabs shares with a value determined by the stock price of
Tellabs at maturity. The number of Tellabs shares to be delivered at maturity
ranges from 1.6 million to two million shares (or the cash value thereof). The
proceeds from this financing transaction were used to pay down a portion of
the Company's bank revolving credit facility.
The Company has availability under its bank revolving credit facility of $200
million. Of the $200 million, $150 million matures in May 2002 and is secured
by certain equity securities the Company holds of its publicly traded partner
companies (the Pledged Securities), including CompuCom. The value of these
Pledged Securities exceeds the total availability under the bank revolving
credit facility. The remaining $50 million is unsecured, with availability
limited to the lesser of $50 million or 10% of the value of the Pledged
Securities. The $50 million facility matures in April 2000. There were no
borrowings outstanding under the facilities at June 30, 1999.
The Company has revolving credit facilities with certain partner companies
whereby the Company may borrow up to $20 million from these partner companies
on a revolving basis at a rate that varies with the Company's effective
borrowing rate. At June 30, 1999, there were no borrowings under these
agreements.
23
During the first half of 1999, the Company utilized approximately $41 million
to acquire interests in five new partner companies, including 4anything.com,
Extant, SOTAS and Vitts. The Company also utilized approximately $71 million
to acquire interests in its existing private partner companies and affiliated
venture funds. In addition, the Company acquired an interest in aligne in
exchange for 441,518 shares of the Company's Common Stock with a market value
of approximately $17 million, and purchased approximately $30 million of
shares of its publicly traded partner companies. During the first quarter of
1999, the Company sold a portion of its interests in Tellabs for net proceeds
totaling $47 million.
Availability under the Company's revolving credit facilities, cash and cash
equivalents at June 30, 1999, and other internal sources of cash flow are
expected to be sufficient to fund the Company's cash requirements through
1999, including commitments to new or existing partner companies and general
corporate requirements. The Company is contingently obligated for
approximately $32 million of guarantee commitments, and has committed capital
of approximately $115 million to various partner companies, venture funds, and
private equity partnerships, to be funded over the next several years.
Availability under the Company's bank credit facility is determined by the
market value of the publicly traded partner companies pledged as collateral.
If the stock markets experience a significant decline, availability under the
credit facilities could be reduced significantly and could have an adverse
effect on the Company's ability to borrow under the facilities. In addition,
the Company's ability to raise proceeds from sales of securities could also be
adversely effected. As a result, the Company's ability to acquire interests
in new partner companies and support its existing partner companies with
additional funding could be limited.
CompuCom maintains separate, independent financing arrangements, which are
non-recourse to the Company and are secured by certain assets of CompuCom.
During recent years, CompuCom has utilized bank financing arrangements and
internally generated funds to fund its cash requirements. During the quarter
ended March 31, 1999 CompuCom sold its corporate headquarters building in a
sale/leaseback transaction. The proceeds for the sale were approximately $40
million, of which $36 million was used to pay down long-term debt. As part of
the transaction, CompuCom entered into a 20-year operating lease on the
building.
In May 1999, CompuCom replaced its credit agreements with a $225 million
working capital facility and a $175 million receivables securitization
facility. The new $225 million working capital facility bears interest at a
rate of LIBOR plus an agreed upon spread and is secured by certain assets of
CompuCom. This facility is fully available subject to a borrowing base and
compliance with certain covenants. As of June 30, 1999, CompuCom had
sufficient collateral to enable it to fully utilize the working capital
facility, and had $155 million outstanding as of June 30, 1999. The working
capital facility will be reduced by $25 million in September 1999 and an
additional $25 million in May 2000, and matures in May 2002. On the new $175
million receivables securitization, the effective rate is based on a
designated short-term interest rate plus an agreed upon spread. This
securitization has a term of 3 years, subject to certain covenant compliance.
The securitization facility was fully utilized at June 30, 1999. CompuCom
plans to increase the securitization facility to $250-$300 million in the
second half of 1999. CompuCom does not expect its effective interest rate
under the new facilities to be materially different from the levels it
experienced in 1998.
CompuCom's liquidity continues to be negatively impacted by the increase in
the dollar volume of the rebate programs of its principal suppliers. Under
these programs, CompuCom is required to pay a higher initial price for product
and claim a rebate to reduce that price. The collection of these rebates can
take several months. Due to the increased volume of product sold under these
programs,
24
CompuCom's initial price for the product is often higher than the sales price
CompuCom can obtain from its customers. At June 1999, these programs are a
major factor in CompuCom's financing needs. At June 30, 1999, CompuCom was
owed approximately $83 million under these programs.
In May 1999, CompuCom purchased from ENTEX Information Services, Inc. certain
assets of its Technology Acquisition Services Division (TASD) in a cash
transaction. Under the terms of the agreement, CompuCom paid approximately
$137 million for the acquired assets.
Consolidated working capital decreased to $216 million at June 30, 1999 from
$252 million at December 31, 1998, primarily as a result of an increase in
receivables and inventory, and the change in classification of Tellabs to non-
current, partially offset by an increase in accounts payable, all a result of
the TASD acquisition by CompuCom.
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 June 30, 1999.
Year 2000 Readiness Disclosure
------------------------------
The Company is currently addressing the Year 2000 issue, which results from
the fact that many computer programs were previously written using two digits
rather than four to define the applicable year. Programs written in this way
may recognize a date ending in "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations. The Company has completed its assessment of its
computer information systems. The Company has replaced all computer systems
and software which were determined to be non-compliant. These replacements
were generally part of the Company's program of regularly upgrading its
computer systems, and the Company has not incurred and does not expect to
incur any material extraordinary expense to remediate its systems. The Company
has completed testing and implementation of its computer systems. The Company
has received verification from its vendors that its information systems are
Year 2000 ready. If the Company determines that any of its non-information
systems are non-compliant and are at risk to not be remedied in time, it will
develop a contingency plan.
The Company has engaged in a regular program of surveying its partner
companies regarding their Year 2000 readiness. The Company's most significant
consolidated subsidiary, CompuCom, has completed initial assessment of its
computer information systems, and plans to complete testing, remediation and
validation by September 1999. CompuCom completed three business acquisitions
during 1998 and one during 1999. CompuCom has integrated the operations of
those companies, including replacing their major information systems with
CompuCom's information systems. CompuCom has surveyed its vendors and
suppliers regarding their Year 2000 readiness, and has received confirmation
of compliance for the systems currently in use. CompuCom upgraded, replaced,
or decommissioned all non-compliant vendors' systems. As a reseller of
computer products, CompuCom only passes through to its customers the
applicable vendor's warranties; it makes no warranties regarding Year 2000
compliance on any of the products it resells. However, if one of CompuCom's
major vendors or suppliers is found to be Year 2000 non-compliant, CompuCom
could experience a material adverse effect on its results of operations.
CompuCom is currently developing a contingency plan to operate in the event
its computer systems or those of its vendors, suppliers, or customers are not
Year 2000 compliant. CompuCom currently anticipates that it will spend
approximately $1.4 million on Year 2000 compliance, of which approximately
$934,000 has been spent through June 1999.
25
The Company's other partner companies have completed or nearly completed
assessing their internal systems for Year 2000 readiness. The partner
companies are in varying stages of assessing Year 2000 readiness of their
vendors, business partners, and customers. The partner companies are also in
varying stages of developing contingency plans to operate in the event of a
Year 2000 problem. Most of the partner companies are in the business of
providing software products, information technology services, or outsourcing
services. Those partner companies which produce software or products with
embedded programming believe that the current version of their products are
Year 2000 compliant. Certain partner companies are continuing to determine the
extent to which previously sold software products and services were non-
compliant. Some older companies may not be able to assess products sold many
years ago. The partner companies generally have attempted to enter into
software license agreements and service agreements with their customers that
limit their liability, including for Year 2000 problems. Many of the software
companies' customers have maintenance agreements under which the company will
upgrade previously sold software to Year 2000 compliant versions. They are
generally encouraging their other customers to upgrade older non-compliant
versions to new compliant versions. The total cost and time which will be
incurred by the partner companies on the Year 2000 readiness effort cannot
presently be determined. There can be no assurance that all necessary work
will be completed in time, or that such costs will not materially adversely
impact one or more of such partner companies. In addition, required spending
on the Year 2000 effort will cause customers of most of the Company's partner
companies to reallocate at least part of their information systems budgets.
Although several partner companies have offerings which may be useful in such
efforts, such reallocations could materially adversely affect the results of
operations of many partner companies. A most reasonably likely worst case
scenario for the Company would arise if its partner companies were to be held
responsible by their clients for failure in the clients' IT systems due to
Year 2000 non compliance. Such claims could be complicated and costly to
defend, regardless of the merit of the claims.
Recent Accounting Pronouncement
-------------------------------
The Financial Accounting Standards Board (FASB) has issued Statements of
Financial Accounting Standards (SFAS) No. 137, Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB
Statement No. 133, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" and SFAS No. 135, "Recision of FASB Statement No. 75 and
Technical Corrections." SFAS No. 137 delays the effective date of SFAS No. 133
to be effective for all fiscal quarters of all fiscal years beginning after
June 15, 2000. SFAS No. 133 standardizes the accounting for derivative
instruments, including derivative instruments embedded in other contracts, by
requiring that an entity recognize those items as assets or liabilities in the
statement of financial position and measure them at fair value. SFAS No. 135
provides technical corrections to some 29 accounting pronouncements. It is
effective for fiscal years ending after February 15, 1999. Management has not
yet determined the impact that the adoption of these statements may have on
earnings, financial condition and liquidity of the Company. The Company plans
to adopt SFAS No. 133 by January 1, 2001 and SFAS No. 135 by December 31,
1999, respectfully, as permitted by these accounting standards.
Safe Harbor Statement
---------------------
Certain statements in this document describing the plans, goals, strategies,
intentions, forecasts, and expectations of the Company or its partner
companies constitute what are sometimes termed "forward-looking statements."
The following important factors could cause actual results to differ
materially from those in such forward-looking statements.
The information technology industry is highly competitive, characterized by
rapid product development cycles, frequent price reductions, and early product
obsolescence, and is generally dominated by companies with greater resources
than the Company and its partner companies. Certain of the Company's partner
companies offer complex products or services which have lengthy sales cycles,
which makes sales forecasts difficult to make, and can lead to substantial
fluctuations in quarterly operating results. Emerging technology companies,
including many of the Company's partner companies, often encounter obstacles
and delays in developing products, service offerings, and markets.
Competition to acquire successful emerging information technology companies is
substantial, particularly in the areas the Company is targeting. The Company
may not be able to invest in companies in the targeted areas at valuations it
considers to be reasonable. The Company is dependent on the financial market
for information technology companies in general and for initial public
offerings of those companies in particular. The market for securities of
internet-related companies in particular is extremely volatile. If those
markets become unfavorable for an extended period of time, the Company's
ability to complete rights offerings and IPO's of its partner companies when
planned and the Company's ability to generate gains from sales of securities
could be materially
26
adversely affected. In addition, the Company's ability to borrow under its
revolving credit facilities could be adversely affected as availability under
these facilities is determined by the value of the publicly traded securities
pledged by the Company as collateral. As a result, the Company's ability to
acquire interests in new partner companies and support its existing partner
companies with additional funding could be limited.
Clients of the Company's partner companies could reallocate part or all of
their information systems budgets to address the Year 2000 issue, which could
materially reduce the demand for the products and services of the Company's
partner companies. The Company's and its partner companies' business
operations could be materially adversely affected if they or their vendors,
business partners, or customers do not timely complete any necessary
remediation efforts to their own systems and products. There is likely to be
an extraordinary amount of litigation regarding the Year 2000 issue over the
next several years, and information technology providers may be attractive
targets for such litigation. Such litigation could have a material adverse
impact on the Company's and its partner companies' operations and financial
conditions.
27
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
Safeguard is exposed to equity price risks on its ownership interests in
publicly traded and other securities, most of which we acquired as private
companies and took public through rights offerings. These securities are
generally in companies in the information technology industry sector. Many of
the companies are considered small capitalization stocks. Safeguard typically
does not attempt to reduce or eliminate its market exposure on securities. A
20% decrease in equity prices would result in an approximate $140 million
decrease in the fair value of our publicly traded securities accounted for on
the equity method or classified as available-for-sale at June 30, 1999.
Approximately $218 million of the value of these equity securities at June 30,
1999 consisted of our holdings in Sanchez Computer Associates, and $169
million consisted of our holdings in Cambridge. A 20% decrease in equity
prices at June 30, 1999 would result in an approximate $46 million decrease in
the fair value of our holdings in Tellabs. Our Tellabs shares are classified
as trading securities. Fluctuations in the market price of trading securities
are included in net earnings. In March 1999, the Company entered into a
forward sale contract related to two million shares of its holding in Tellabs,
Inc. The Company pledged two million shares of Tellabs for three years and in
return received approximately $71 million in cash. At the end of the term, the
Company has the option to deliver cash or Tellabs shares with a value
determined by the stock price of Tellabs at maturity. The number of Tellabs
shares to be delivered at maturity ranges from 1.6 million to two million
shares (or the cash value thereof).
Availability under Safeguard's bank credit facilities is determined by the
market value of the publicly traded securities pledged as collateral. As of
June 30, 1999, Safeguard had sufficient collateral to enable it to fully
utilize this facility. Additionally, Safeguard is exposed to interest rate
risk primarily through its bank credit facility. At June 30, 1999, there were
no borrowings outstanding.
CompuCom is exposed to interest rate risk primarily through its receivables
securitization and working capital facilities. CompuCom utilizes borrowings on
these facilities to meet its working capital needs and other borrowing needs.
At June 30, 1999, the securitization facility had borrowings of approximately
$175 million and the working capital facility had borrowings of $115 million.
If CompuCom's effective interest rate were to increase 75 basis points (.75%),
the effect on the Company's financial statements would not be material.
28
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Company held its Annual Meeting of Shareholders on May 20, 1999.
At the meeting, the shareholders voted in favor of the following items listed
in the Proxy Statement dated April 12, 1999:
I. ELECTION OF DIRECTORS
FOR WITHHELD
---------- --------
Warren V. Musser 29,858,761 101,202
Judith Areen 29,851,636 108,327
Vincent G. Bell, Jr. 29,856,907 103,056
Michael J. Emmi 29,860,212 99,751
Robert A. Fox 29,857,262 102,701
Robert E. Keith, Jr. 29,864,450 95,513
Jack L. Messman 29,859,245 100,718
Russell E. Palmer 29,863,945 96,018
John W. Poduska, Sr., Ph.D. 29,865,620 94,343
Heinz Schimmelbusch, Ph.D. 29,860,960 99,003
Hubert J.P. Schoemaker, Ph.D. 29,380,606 579,357
Harry Wallaesa 29,862,016 97,947
Carl J. Yankowski 29,841,965 117,998
II. PROPOSAL TO ADOPT THE 1999 EQUITY COMPENSATION PLAN
FOR AGAINST ABSTAIN
---------- ------- -------
16,213,431 3,645,193 167,268
III. PROPOSAL TO APPROVE AN ADMENDMENT TO OUR ARTICLES OF INCORPORATION TO
INCREASE THE AUTHORIZED SHARES OF COMMON STOCK
FOR AGAINST ABSTAIN
---------- --------- -------
26,484,479 3,379,663 95,121
IV. PROPOSAL TO APPROVE AN AMENDMENT TO OUR ARTICLES OF INCORPORATION TO
INCREASE THE AUTHORIZED SHARES OF PREFERRED STOCK
FOR AGAINST ABSTAIN
---------- ------- -------
16,018,677 3,862,360 144,855
29
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
Number Description
------ -----------
2.1 Asset Purchase Agreement, dated as of May 10, 1999 by and
between CompuCom Systems, Inc. and Entex Information
Services, Inc./(2)/
4.1 Safeguard Scientifics, Inc. 1999 Equity Compensation
Plan*
4.2 Registration Rights Agreement between Safeguard
Scientifics, Inc. and Credit Suisse First Boston
Corporation*
4.3 Purchase Agreement of Safeguard Scientifics, Inc. to
issue and sell to Credit Suisse First Boston Corporation
Convertible Subordinated Notes due June 15, 2006.
(Exhibits omitted)*
10.1 Amendment to Amended and Restated Credit Agreement, dated
April 12, 1999, among Safeguard Scientifics, Inc.,
Safeguard Scientifics (Delaware), Inc., Safeguard
Delaware, Inc. and PNC Bank, N.A. (Exhibits
omitted)./(1)/
10.2 Form of Promissory Notes dated June 11, 1999 given by
certain executives for advances by Safeguard of income
tax withholdings on restricted stock grants*
10.3 Non-Competition, Referral and Non-Disclosure Agreement
dated as of May 10, 1999, by and between CompuCom
Systems, Inc. and ENTEX Information Services, Inc./(2)/
10.4 CompuCom Receivables MasterTrust I Pooling and Servicing
Agreement, dated as of May 7, 1999, between Norwest Bank
Minnesota National Association, CompuCom Systems, Inc.,
and CSI Funding, Inc.*
10.5 CompuCom Receivables MasterTrust I Pooling and Servicing
Agreement Series 1999-1 Supplement, dated as of May 7,
1999, among PNC Bank, National Association, Market Street
Capital Corporation, Norwest Bank Minnesota, National
Association, CompuCom Systems, Inc., and CSI Funding,
Inc.*
10.6 Inventory and Working Capital Financing Agreement, dated
as of May 11, 1999, between IBM Credit Corporation and
CompuCom Systems, Inc.*
10.7 Attachment A to Inventory and Working Capital Financing
Agreement dated May 11, 1999.*
30
10.8 Receivables Contribution and Sale Agreement dated May 7,
1999 between CompuCom Systems, Inc. and CSI Funding, Inc.*
27 Financial Data Schedule (electronic filing only)*
* filed herewith
(1) Incorporated by reference from registrant's Form 10-Q for the
quarter ended March 31, 1999 dated May 17, 1999 and made a part
hereof by such reference.
(2) Incorporated by reference from registrant's 8-K dated May 10, 1999
and made a part hereof by such reference.
(b) On May 25, 1999, the Company filed a report on Form 8-K dated May 10,
1999 in conjunction with the acquisition of certain assets of Entex
Information Systems, Inc.'s Technology Acquisition Services Division by
CompuCom Systems, Inc., the Company's majority-owned subsidiary. CompuCom
purchased product inventory, certain fixed assets and Entex's Kentucky
distribution center for approximately $137 million in cash.
On July 26, 1999, the Company filed a report on Form 8-K/A which amended
Item 7 of the Form 8-K filed by the Company on May 25, 1999 to include
financial statements that were not available at the time of the filing of
the initial report.
31
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: August 16, 1999 /s/ Harry Wallaesa
------------------------------------------------------
Harry Wallaesa
President and Chief Operating Officer
Date: August 16, 1999 /s/ Michael W. Miles
------------------------------------------------------
Michael W. Miles
Senior Vice President and Chief Financial Officer
(Principal Financial and Principal Accounting Officer)
32