Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998 Commission File Number 1-5620
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SAFEGUARD SCIENTIFICS, INC.
(Exact name of Registrant as specified in its charter)
Pennsylvania 23-1609753
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
800 The Safeguard Building
435 Devon Park Drive, Wayne, PA 19087
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610) 293-0600
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of Each Class on which registered
------------------- ----------------------
Common Stock ($.10 par value) New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
Aggregate market value of common stock held by non-affiliates (based on the
closing price on the New York Stock Exchange) on March 25, 1999 was
approximately $1.84 billion. For purposes of determining this amount only,
Registrant has defined affiliates as including (a) the executive officers named
in Part III of this 10-K report, (b) all directors of Registrant, and (c) each
stockholder that has informed Registrant by March 25, 1999 that it is the
beneficial owner of 10% or more of the outstanding common stock of Registrant.
The number of shares outstanding of the Registrant's Common Stock, as of March
25, 1999 was 32,149,402.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference in this Form 10-K:
PART I
Item 1(b) Note 15 on page 54 of the Annual Report to Stockholders
for the year ended December 31, 1998, which page is filed as
part of Exhibit 13 hereto.
PART II
Items 5, 6,
7 and 8 Pages 33 to 56 of the Annual Report to Stockholders for the
year ended December 31, 1998, which pages are filed as part of
Exhibit 13 hereto.
PART III
Items 10, 11,
12 and 13 Definitive Proxy Statement relative to the May 20, 1999 annual
meeting of stockholders of Registrant, to be filed within 120
days after the end of the year covered by this Form 10-K
Report.
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PART I
ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF THE BUSINESS
OVERVIEW
Safeguard Scientifics, Inc. is a diversified information technology company that
develops, operates and manages emerging growth information technology companies.
We are currently focusing on emerging opportunities in eCommerce, enterprise
applications, and network infrastructure, all of which are expected to benefit
from the growing use of the Internet as a fundamental business tool. We work
closely with our partnership companies to provide numerous operational and
management services to build value in preparation for public rights offerings
and beyond. These services include active strategic management, operating
guidance, merger and acquisition assistance, board and management recruitment,
and innovative financing. Safeguard operates as a long-term partner. Our
partnership companies include public and privately held companies that together
form a community of shared resources. Safeguard also participates in managing
and working with several venture capital funds.
We believe that Safeguard's strategy of operating through separate partnership
companies rather than through wholly owned subsidiaries or divisions enables us
to achieve superior returns for our stockholders. This strategy enables us to
partner with highly motivated entrepreneurs who have significant equity
ownership stakes in their companies and the chance to reap the rewards of taking
their companies public. We further enhance the returns to our stockholders by
taking selected partnership companies public through our rights offering
process. This process gives our stockholders the opportunity to acquire direct
ownership in selected partnership companies at their IPO price. Not all of our
private partnership companies are appropriate for a rights offering. We also
consider mergers, sales, and traditional IPOs in evaluating the best way to
enhance the value of our private companies. For traditional IPOs we are
considering a program to direct a part of the shares to be offered to Safeguard
stockholders. We currently refer to this as a "subscription offering." After
taking a partnership company public, Safeguard generally retains a significant
ownership interest and board representation, and continues to provide strategic,
managerial, and operational support.
Safeguard is currently active in the Internet through the involvement of over 10
of our partnership companies, including Internet Capital Group. We recognized
the growing importance of the Internet early on, and we sponsored the formation
of Internet Capital Group in 1996 to focus exclusively on developing, operating,
and managing business-to-business eCommerce companies. Because of the tremendous
growth of the Internet in recent years and the success of Internet Capital
Group, we have recently decided to broaden Safeguard's involvement in Internet
markets in order to continue to build value for our stockholders. We are
concentrating on segments that we believe will have staying power in the
volatile Internet markets.
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We define eCommerce as the organization of information and the processing of
business transactions over the Internet (intranets and extranets). The
transactions can be of any type, including those between customers and sellers,
employers and employees, or organizations and their members. eCommerce can
extend existing business models or enable entirely new ones. eCommerce markets
we are seeking to develop include business-to-consumer interaction, content
aggregation and management, emerging technology areas such as intelligent
agent-based searching and tasking, and Internet professional services.
Enterprise applications are software solutions that integrate key operational
aspects of entire organizations. We are seeking to develop opportunities that
provide novel front office enterprise applications, professional services to
integrate, implement and support enterprise applications, and the hosting of
enterprise applications.
Network infrastructure products and services include computing and
communications tools that enable companies to deploy eCommerce and enterprise
applications. Many companies do not have the infrastructures in place to support
leading edge eCommerce and enterprise applications. Network infrastructure
markets we are seeking to develop include network security products and
services, companies that service the ISP market, telecommunications services
that enable eCommerce, products that optimize customers' existing investments in
eCommerce and enterprise applications, and infrastructure management solutions.
Many early and mid-stage Internet companies have operating losses. As we acquire
interests in more of these companies, we could experience significantly
increased equity losses from affiliates.
Safeguard's public partnership companies are: Cambridge Technology Partners,
Inc. (Nasdaq:CATP), ChromaVision Medical Systems, Inc. (Nasdaq:CVSN), CompuCom
Systems, Inc. (Nasdaq:CMPC), Diamond Technology Partners, Incorporated
(Nasdaq:DTPI), DocuCorp International, Inc. (Nasdaq:DOCC), OAO Technology
Solutions, Inc. (Nasdaq:OAOT), Sanchez Computer Associates, Inc.(Nasdaq:SCAI),
Tangram Enterprise Solutions, Inc. (Nasdaq:TESI), and USDATA Corporation
(Nasdaq:USDC).
Safeguard's private partnership companies include: 4anything.com, aligne, Arista
Knowledge Systems, Diablo Research Company, eMerge Vision Systems, Extant,
Integrated Visions, The Intellisource Group, Internet Capital Group, Kanbay,
MegaSystems, MultiGen-Paradigm, Pac-West Telecomm, Pacific Title/Mirage,
QuestOne Decision Sciences, US Interactive, Whisper Communications, Who? Vision
Systems, and XL Vision.
Safeguard also participates in management of the following venture funds:
EnerTech Capital Partners, Pennsylvania Early Stage Partners, Safeguard
International Fund, SCP Private Equity Partners, and TL Ventures I, II, and III.
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RECENT DEVELOPMENTS
Stock market conditions for much of 1998 negatively affected the IPO market. As
a result, Safeguard completed only one rights offering rather than three as
planned. Instead, Safeguard redirected its efforts to strengthening its existing
partnership companies and acquiring interests in new partnership companies.
o The rights offering for DocuCorp International was successfully
completed in the first quarter of 1998. DocuCorp is a provider of
enterprise-wide document automation software products and services.
o Safeguard acquired interests in seven new partnership companies
during 1998: Arista, Integrated Visions, Kanbay, Pennsylvania Early
Stage Partners, Pac-West Telecomm, US Interactive, and Who? Vision.
During the first quarter of 1999, Safeguard acquired interests in
4anything.com, Extant, and aligne.
o Coherent Communication Systems Corporation merged with Tellabs in
August 1998, and Safeguard received approximately 3.5 million shares
of Tellabs common stock in exchange for our holdings in Coherent.
o Integrated Systems Consulting Group merged with First Consulting
Group in December 1998, and Safeguard received common stock and
warrants in First Consulting Group common stock in exchange for our
holdings in ISCG.
o Sentry Technology Group was sold to the Meta Group Inc. in October
1998 for Meta stock and warrants.
o RMS Information Systems merged with Intellisource during the second
quarter of 1998, and Safeguard's shares in RMS were exchanged for
Intellisource shares.
o Our partnership companies completed twelve business acquisitions
during 1998.
o Pennsylvania Early Stage Partners was formed in early 1998 in
cooperation with the Commonwealth of Pennsylvania and the
Pennsylvania Public School Employees Retirement System to invest in
seed stage companies primarily in Pennsylvania.
o In late 1998 CompuCom announced a restructuring plan to move to a
virtual office model and a reduction in workforce, which should
result in significant operating cost savings.
ITEM 1 (b). FINANCIAL INFORMATION ABOUT OPERATING SEGMENTS
Information on net sales, operating profit, and assets employed for each
operating segment of Safeguard's business for the three year period ended
December 31, 1998 is contained in Note 15 to the Consolidated Financial
Statements on page 54 of Safeguard's Annual Report to
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Stockholders for the year ended December 31, 1998, which is filed as part of
Exhibit 13 hereto and is incorporated herein by reference.
ITEM 1 (c). NARRATIVE DESCRIPTION OF BUSINESS
OVERVIEW OF OPERATING SEGMENTS
In 1998, Safeguard adopted SFAS 131, which requires the reporting of operating
segments using the "management approach" versus the "industry approach"
previously required. Safeguard's reportable segments for 1998 consist of general
corporate operations, CompuCom, and Tangram. General corporate operations
consist of developing, operating, and managing emerging growth, information
technology partnership companies, excluding our majority-owned subsidiaries,
CompuCom and Tangram, and participating in the management of venture capital
funds. CompuCom's operations include sales of distributed desktop computer
products, and configuration, network integration, and technology support.
Tangram's operations include the design, development, sale, and implementation
of enterprise-wide asset tracking and software management solutions. CompuCom
and Tangram are majority-owned subsidiaries of Safeguard.
GENERAL CORPORATE OPERATIONS
Operating Strategy
Safeguard seeks to identify companies which are capable of being market leaders
in segments of the information technology industry and which are at a stage of
development that would benefit from Safeguard's support, financing, and market
knowledge. Safeguard generally seeks to acquire a large enough stake in a
partnership company to enable us to have significant influence over the
management and policies of the company and to realize a large enough return to
compensate us for our investment of management time and effort, as well as
capital.
We gain exposure to emerging companies through our reputation as a successful
developer and operator of information technology companies, referrals from our
existing partnership companies, our relationship with venture capital and
private equity funds, our sponsorship of such organizations as the Eastern
Technology Council, entrepreneurial centers at Lehigh University, Temple
University and the University of Pennsylvania, a new eCommerce center at Drexel
University, and the participation of our officers and employees in various
non-profit and charitable organizations. We consider our access to potential
partnership companies to be good.
Emerging companies traditionally seek financing for growth from two primary
sources: independent private venture capital funds and corporate strategic
investors. Each of these sources has disadvantages for the emerging company.
Venture capital funds generally are established for a limited term and their
primary goal is to maximize their financial return within a short time frame. A
venture capital fund often seeks to liquidate its investment in the emerging
company by encouraging either an early initial public offering or a sale. In
addition, traditional venture capital funds generally have limited resources
available to provide managerial and operational support to an emerging company.
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Corporate strategic investors are typically large corporations that invest in
emerging companies to obtain access to a promising product or technology without
incurring the initial cost of development or the diversion of managerial time
and attention necessary to develop new products or technologies. Often these
investments involve both financing support to the emerging company as well as an
arrangement under which the strategic investor obtains access to the products or
technology of the emerging company. While strategic investors are generally able
to provide business development support, the rationale behind the investment of
a strategic investor may be incompatible with the development of the emerging
company. Strategic investors often discourage the emerging company from becoming
a public company.
We believe that our relationship with our partnership companies offers the
benefits of both the venture capital model and the strategic investor model
without the related drawbacks. Safeguard has both the capital and managerial
resources to provide financing and strategic, managerial, and operational
support as needed by an emerging company. In addition, we encourage emerging
companies to achieve the superior returns on investment generally provided by
public offerings, but only if and when it is appropriate for the development of
the business of that emerging company. Because of our unique process of taking
partnership companies public through rights offerings to Safeguard stockholders,
we continue our involvement with partnership companies after their initial
public offerings. This support is often crucial to help a company adjust to the
challenges imposed by the public financial markets.
Our corporate staff provides hands-on assistance to the managers of our
partnership companies in the areas of management, financial, marketing, tax,
risk management, human resources, legal and technical services. We have assisted
partnership companies by providing or locating and structuring financing,
identifying and implementing strategic initiatives, providing marketing
assistance, identifying and recruiting executives and directors, assisting in
the development of equity incentive arrangements for executives and employees,
and providing assistance in structuring, negotiating, documenting, financing,
implementing and integrating mergers and acquisitions.
We also provide a supportive environment to the managers of our partnership
companies by organizing numerous opportunities for them to interact with
managers of other partnership companies to share strategies, ideas, and insights
and to forge business relationships. Twice a year we gather the senior managers
of all of our partnership companies, both private and public, for a "Senior
Partners" conference. We also convene periodic "CFO Conferences" for senior
financial managers of the partnership companies and occasional sessions on more
specific topics, such as investor relations and human resources. While we
encourage our partnership companies to develop business opportunities with each
other, we do not require them to do so. Each partnership company is responsible
for its own success, and it must be free to work with other organizations that
will provide the maximum contribution to its success. Competition for business
even within Safeguard helps keep each partnership company focused on being the
best of breed in their market.
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In recent years, Safeguard has tended to acquire substantial minority ownership
interests rather than majority interests in many of its partnership companies.
In many of these cases, Safeguard, either alone or in conjunction with our
associated venture funds, is the largest single stockholder, and exercises
significant influence over the company. We also generally obtain significant
board representation in these companies.
We believe that the entrepreneurial energy and creativity of the managers of our
partnership companies is an essential component of their success. Our business
strategy of keeping partnership companies as independent businesses with the
chance to go public, rather than folding them into the parent company, is
designed to maintain the necessary entrepreneurial environment. The
entrepreneurs and their teams retain or are granted equity ownership and
incentives in their own companies in order to keep them focused on creating
value for their stockholders, including Safeguard.
Our goal is to maximize the value of our partnership companies for Safeguard's
stockholders, often by taking partnership companies public through a rights
offering at the appropriate time. A rights offering is an initial public
offering of a partnership company directed to Safeguard's stockholders. It
involves the grant by a partnership company to Safeguard's stockholders of
transferable rights to buy shares of the partnership company's stock at the IPO
price. Safeguard stockholders are able to exercise the rights, thereby
participating in initial public offerings of high-growth technology companies
which are usually reserved for large institutional investors, or they may sell
the rights. Safeguard generally retains a significant ownership in partnership
companies after taking them public and also generally retains significant
participation on each company's board of directors. Between our direct
continuing ownership interest in public partnership companies and the strong
identification in the public financial markets of the companies as "Safeguard
rights offering" companies, we retain a substantial interest in the continuing
success of the companies after their IPOs and substantial influence over their
management and strategic direction. Growth in the value of the public
partnership companies benefits Safeguard and also directly benefits our
stockholders who continue to hold the shares purchased in the rights offering.
Not all of our private partnership companies are appropriate for a rights
offering. We also consider mergers, sales, and traditional IPOs in evaluating
the best way to enhance the value of our private companies. Each time one of our
partnership companies undertakes a traditional IPO, we presently intend to try
to direct a part of the shares to be offered to Safeguard stockholders. We are
presently referring to this as a "subscription offering."
Public Partnership Companies
Cambridge Technology Partners is an international management consulting and
systems integration firm. Cambridge combines management consulting, IT strategy
consulting, process innovation and implementation, custom and package software
deployment (including ERP applications), network services, Internet professional
services, and training to rapidly deliver end-to-end business solutions for
clients. Cambridge provides the majority of its services on a fixed-time,
fixed-price model with client involvement at all stages of the process. In
performing
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its services, Cambridge employs a rapid development methodology and conducts
facilitated workshops that bring together key client users, executives, and IT
professionals to achieve consensus on the business case, strategic objectives,
and functionality of a business solution. Cambridge believes that this approach
permits the delivery of results in unprecedented time frames -- typically within
three to twelve months. Upon completion of initial consulting engagements,
Cambridge typically designs and develops one or more strategic software
applications, which often include custom and third-party package software, and
then rolls-out such applications to the organization's end-users. A significant
portion of Cambridge's engagements include an eCommerce component. While the
early stages of a client engagement may result in a relatively small amount of
revenue, a client engagement which involves the design and development of a
strategic software application typically results in fees ranging from $1 million
to $6 million. Because of the size of these assignments, clients may undertake
projects on an irregular basis. However, no customer accounted for more than 5%
of net revenues in 1998. Revenue growth has been negatively impacted by a
general slowdown in the growth of demand and increased competition. Cambridge
has 53 offices and more than 4,400 employees worldwide. Cambridge had 1998
revenues of $612 million, an increase of 40% over 1997. At March 22, 1999,
Safeguard owns approximately 13% of Cambridge's fully diluted common stock.
ChromaVision Medical Systems is a laboratory medical diagnostics company that
develops and manufactures an Automated Cellular Imaging System (ACIS(TM)) for a
wide variety of clinical and research applications. ChromaVision currently
markets the products to research centers and is previewing the system to
university medical centers and commercial laboratories in anticipation of
receiving clearance from the FDA for use of ACIS for immunohistochemical
applications based on a filing made in November 1998, which would result in
several commercialized applications. The ACIS and one application, leukocyte
alkaline phosphatase (LAP), were cleared in June 1997. The ChromaVision ACIS is
designed to identify cells with specific characteristics within a sample of
cells on a microscope slide by detecting color produced by the reaction between
common laboratory reagents and the cells of interest. The intelligent microscope
platform automates the scanning of patient samples and uses proprietary imaging
software to capture digital images of the cell samples to detect the presence,
count the number, and measure the intensity of targeted cells. The system offers
substantial flexibility because the software can be configured to identify
different stains and cellular staining characteristics, thereby allowing the
system to be adopted for use with different reagents to identify a broad range
of targeted cellular conditions.
ChromaVision believes that the ChromaVision ACIS will be attractive to
healthcare providers and beneficial to their patients because of its ability to
deliver superior diagnostic solutions, thus reducing the need for more invasive
or more costly procedures. Tests have demonstrated that the ChromaVision ACIS
can locate a single abnormal cell among 120 million normal cells. This improved
detection capability enables the ChromaVision ACIS to be applied to high-value
rare event detection procedures, including micrometastases/minimum residual
disease cancer detection.
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ChromaVision's initial targeted applications are:
o Breast cancer - ChromaVision is testing the ACIS for use with DAKO's
FDA-cleared HercepTest(TM) to measure the HER-2 protein, which is an
indicator for the use of Genentech's FDA-cleared Herceptin(TM)
breast cancer therapy.
o Micrometastases (MM) and minimum residual disease (MRD) - Clinical
tests indicate that the ACIS can be used to accurately and
cost-effectively detect and quantify MM and MRD, which would make
the ACIS a useful tool for detecting and monitoring various types of
cancer.
o Quantitative viral load for HIV.
o Triple Plus(TM) screen for Down syndrome in fetuses. Clinical trials
are still ongoing for this application.
ChromaVision has signed an exclusive distribution and development agreement with
Sigma Diagnostics for the Triple Plus(TM) and has signed an agreement with DAKO
Corporation to jointly develop, market and sell a tissue-based diagnostic
system, for which HercepTest will be the first application. ChromaVision intends
to offer its systems to hospitals and laboratories on a "per click" basis,
charging a fee for each time the laboratory uses the system to perform a
diagnostic procedure.
ChromaVision is currently marketing its products to physicians and researchers
throughout the world for research use, but it is still a development stage
company and had no material commercial revenues in 1998. Commencement of
commercial revenue generating activities will be contingent on successful
completion of clinical tests and, in most cases, obtaining FDA or foreign
regulatory approvals. ChromaVision is an XL Vision company. At March 22, 1999,
Safeguard owns 23% of ChromaVision's fully diluted stock.
Diamond Technology Partners is a management consulting firm that synthesizes
business strategy with information technology to deliver innovative "digital
strategies," business strategies for the digital age. Diamond delivers its
strategic consulting and information technology solutions through a single,
integrated multi-disciplinary team. Diamond serves clients across the U.S. and
internationally in financial services, consumer products, consumer services,
telecommunications, energy, insurance, and healthcare industries. Diamond had
revenues of $76.2 million for calendar year 1998 compared to $63.2 million for
calendar year 1997. At March 22, 1999, Safeguard owns approximately 7% of
Diamond's fully diluted stock.
DocuCorp is a leading provider of document automation software, professional
services, and process/print outsourcing with over 800 customers in the
insurance, utilities, financial services, and other information-intensive
industries. DocuCorp automates open-architecture, enterprise-wide, high-volume
creation, publishing, archival, and management (including workflow) of
strategic, personalized documents (such as bill presentment, insurance policies,
direct mail correspondence, invoices, and other customer-oriented documents) for
both print and electronic applications including the Internet. DocuCorp had
revenues of $25.2 million for the six months ended January 31, 1999, a 14%
increase over the same period in 1997. At March 22, 1999, Safeguard owns 9% of
the fully diluted stock of DocuCorp.
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OAO Technology Solutions is an enterprise information technology infrastructure
solution company. OAOT provides a wide range of outsourced information
technology ("IT") solutions and professional services, including the operation
of large-scale data center complexes and networks (high volume system of
computers and information networks), distributed systems management,
applications software development and maintenance, staffing services, enterprise
resource planning, integration, implementation and training services, and
software solutions for the managed care market. OAOT provides these solutions
and services, generally on a long-term, fixed-price contractual basis, to its
strategic customers which are global providers of IT outsourcing services. OAOT
works with these strategic customers as part of the IT outsourcing team in
providing services to a wide range end-user customers accepting delivery
responsibility for specific functional roles within the outsourcing engagements.
OAOT's primary strategic customers have been IBM's Global Services and Compaq
Computer Corporation, which accounted for 67% and 23.4% of OAOT's 1998 revenues,
respectively. OAOT acquired OAOT Services and Enterprise Technology Group in
1998 to expand its service offerings. Greg Pratt, formerly CEO of Enterprise
Technology Group, was named the new CEO of OAOT. In January 1999 the company
announced a large multi-year applications development and maintenance contract
with IBM Global Services. OAOT's revenues were $113.3 million in 1998, a 34%
increase from 1997. A significant part of the growth was from the July 1998
acquisition of OAOT Services, Inc.
OAOT's strategy is to build long-term relationships with strategic customers by
understanding their business needs and by providing specific services within
large-scale outsourcing engagements more cost-effectively than other
alternatives. By offering fixed-price contracts, OAOT reduces the execution and
pricing risk for its strategic customers in their large-scale outsourcing
engagements. OAOT has developed and is continuing to expand its international
service delivery capabilities in order to leverage its strategic customers'
increasingly global IT outsourcing efforts.
Large-scale outsourcing engagements typically involve the acquisition of IT
assets by the outsourcing provider from the engagement client. These assets can
range from fixed assets, such as entire data centers and computer networks, to
personnel, such as data center, help desk and programming staff. OAOT's role in
outsourcing engagements usually involves the retention of IT personnel from the
engagement client. By retaining employees as part of its new outsourcing
engagements, to date, OAOT's growth has not been impeded by the availability of
qualified technical personnel and OAOT has avoided the significant staffing
costs and expenses normally associated with new engagements within the IT
services industry. OAOT's future success is highly dependent on its
relationships with a small number of strategic customers and its ability to
effectively manage its fixed-price contracts. At March 22, 1999, Safeguard owns
27% of OAOT's outstanding stock.
Sanchez Computer Associates designs, develops, markets, implements, and supports
a comprehensive banking software system called PROFILE(R) for financial services
organizations worldwide. Sanchez's highly flexible PROFILE family of products is
comprised of several
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integrated modules which operate on open client-server platforms. The primary
module, called PROFILE/Anyware, is a highly flexible, multi-currency,
multi-language bank production system which supports deposit, loan, customer,
transaction processing and bank management requirements through multiple
distribution channels, including the Internet. In early 1999, Sanchez announced
a new service offering called e-PROFILE.com, designed to provide financial
institutions with the ability to offer differentiated direct banking services to
customers via a dedicated e-banking service center. The company will charge a
fee per account processed for its e-PROFILE service, as opposed to up front
license fees and, when used by the customer, implementation service fees and
annual maintenance fees for its PROFILE products.
The PROFILE system is currently licensed to 37 clients in 14 countries serving
in excess of 350 financial institutions. In any given year, the company
typically has three to four customers who each account for in excess of 10% of
its total annual revenues, although in 1998, only one customer exceeded 10% of
total revenues. Sanchez utilizes a direct sales force and strategic
relationships with Compaq, Hewlett-Packard, IBM, PricewaterhouseCoopers,
ComputerLand SA of Poland, and others to market, sell, implement, and support
its products worldwide. Currently, Sanchez is targeting three market segments:
the top-tier banking market (the top 1,000 global banks; the direct banking
market (the on line retail banking business conducted via alternate distribution
channels); and emerging market banks.
Sanchez had total revenues of $44.1 million for 1998, a 53% increase over 1997.
More than half of revenues were from software license fees, with the balance
primarily from implementation, consulting services, and maintenance fees.
Sanchez spent $11.7 million in 1998 on product development. At March 22, 1999,
Safeguard owns approximately 24% of Sanchez's fully diluted stock.
USDATA Corporation is a global supplier of real-time manufacturing application
development software and development tools and related consulting services that
enable an organization's information systems to supervise, monitor, and control
manufacturing and other automated processes and to interface with management
information systems. USDATA's family of software products, marketed under the
name FactoryLink(R), provides a powerful set of software tools designed for
users who are technically competent but who may not be experienced software
programmers.
Its real-time data management capabilities enable customers to reduce operating
costs, shorten cycle times, improve product quality, and increase productivity.
USDATA faces intense competition from larger businesses that offer broader
arrays of integrated solutions.
In mid-1998, USDATA sold its system integration and hardware servicing business.
This business has historically been engaged in the design and turnkey
implementation of integrated third-party data collection systems that allow
remote, real-time data collection using a variety of automatic identification
techniques.
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USDATA'S 1998 revenues from continuing operations were $22.9 million compared to
$22.4 million for 1997.
At March 22, 1999, Safeguard owns approximately 28% of USDATA's fully diluted
stock.
Private Partnership Companies
The following are Safeguard's significant private partnership companies.
4anything.com is a network of vertical community portals, with approximately
2,000 vertical portals. Its portals feature vertically integrated content,
commerce, search, and community. The company generates revenues from
advertising, directories, lead generation, and eCommerce. Pennsylvania Early
Stage Partners provided the first round of financing to 4anything.com in 1998,
and Safeguard acquired 20% of 4anything.com's fully diluted stock in the first
quarter of 1999. The company is still in the development stage and had nominal
revenues in 1998. It expects to commence a significant marketing launch in April
1999.
aligne incorporated is a strategic technology management consulting firm. Its
services include high level and in-depth evaluations of complex sourcing
alternatives, IT cost baselining and benchmarking, vendor/customer negotiations,
interim CIO services, IT strategy, and IT process reengineering. aligne's
clients include Fortune 500 companies in addition to a number of Safeguard
partnership companies. aligne was founded by Harry Wallaesa, now Safeguard's
President and COO. Safeguard acquired 80% of aligne's fully diluted stock in
February 1999.
Arista Knowledge Solutions provides complete solutions for the management of
information and knowledge in global applications. Arista's first product,
Accredix(TM), is under development and targets the Internet-based and
network-based distributed learning market, enabling users to deliver, manage,
and access any type of digital content, track activity with all learners,
accommodate commercial transactions, protect intellectual property rights, and
report learner activities and progress in extreme detail. Accredix can perform
these functions on a real-time basis while acting as a flexible, network-based
interface for learners, instructors, and managers. The company expects to
release the beta version of Accredix in the first half of 1999 and the
commercial version in the second or third quarter of 1999. The company's target
markets include corporate global learning customers, the education industry, and
the military. Arista is a development stage company with nominal revenues in
1998. At March 22, 1999, Safeguard owns approximately 40% of the fully diluted
stock of Arista.
Diablo Research Corporation is a contract engineering company with expertise in
data transmission and control, software and firmware design, digital and RF ASIC
design, functions/systems test design, design services for chip vendors, and
mechanical and industrial design. A number of Diablo's engagements result in the
creation of valuable technology assets which can potentially be spun out into
independent companies. Diablo has previously spun out Whisper Communications to
commercialize its two-way wireless automatic meter reading technology. Diablo
had 1998 revenues of $21.8 million. The company made management
13
changes during 1998 to improve its internal processes and operations. At March
22, 1999, Safeguard owns units representing 17% of Diablo's fully diluted
ownership units. Diablo is a limited liability company.
eMerge Vision Systems provides a comprehensive package of eCommerce business
solutions and health management services to the food animal sciences industry.
eMerge Vision's Internet-based information system improves customers' ability to
manage multiple aspects of their business, including health, yield, and
inventory, through a "practice integrated website.(TM)" The company conducts
online cattle auctions which reduces the cost of buying livestock and improves
the health of the animals by reducing the number of times the animals are
transported. The company's infrared technology helps improve detection of sick
animals, and its feed supplements help restore the animals' health. eMerge
Vision's initial target market is the North American cattle industry. eMerge
Vision is an XL Vision company. eMerge Vision has refocused its business
strategy toward food animal sciences, and its 1998 revenues were primarily from
discontinued operations. At March 22, 1999, Safeguard owns 31% of eMerge
Vision's fully diluted stock.
Extant offers wholesale extranet and virtual private network services to
Competitive Local Exchange Carriers (CLECs) and Internet Service Providers
(ISPs). Extant acts as a market maker for CLECs and ISPs, providing a low cost
transport and internet protocol data network that significantly lowers the
information industry's barriers to entry. Extant brings together these
telecommunication providers as a community, offering a high quality, low cost,
responsive information network on which they can exchange traffic among
themselves at better than competitive rates and present to their customers the
appearance of a global footprint. Safeguard acquired 20% of Extant's fully
diluted stock in March 1999.
Integrated Visions is a provider of network security solutions based on
biometric authentication, initially to the healthcare industry. The company's
Privacy Curtain(TM) software enables secure and convenient access to
computerized patient records on intranets, extranets, and across the Internet
for telemedicine applications using biometrics, including fingerprint
identification technologies from Who? Vision Systems. The company's Clinical
Single Sign-On(TM) solution eliminates the need for multiple passwords and
provides compliance with patient record privacy legislation. Integrated Visions'
customers include The Mayo Clinic and Scott & White Medical Center. Integrated
Visions is an XL Vision company. Integrated Visions is a development stage
company and had nominal revenues in 1998. At March 22, 1999, Safeguard owns
approximately 47% of the fully diluted stock of Integrated Visions.
The Intellisource Group is a unique "Services Integrator(TM)" providing
integrated support for its customers' back-office activities, such as facilities
management, communications, accounting, human resources, document management,
etc. The company is the result of a merger in 1998 between two Safeguard
partnership companies, Intellisource, Inc. and RMS Information Systems, Inc.
Intellisource has a joint venture with Shell Services, which received a
long-term outsourcing contract for Shell Oil, and has obtained additional
long-term contracts from Oglethorpe Power, Avon, NASA, and others.
Intellisource's future success depends on its ability
14
to effectively manage its fixed-price contracts and to leverage the resources in
its existing engagements to generate and support additional business.
Intellisource had combined 1998 revenues of $135.3 million compared to $112.2
million in 1997. The company is focused on strategies to help it achieve
profitability. At March 22, 1999, Safeguard owns 36% of the fully diluted stock
of Intellisource.
Internet Capital Group was organized in 1996 with Safeguard's sponsorship as the
first Internet operating company to partner exclusively with leading
business-to-business eCommerce firms. Like Safeguard, Internet Capital provides
operational assistance, capital support, expertise, and a strategic network of
business relationships intended to maximize the long-term potential of its
collaborative network of more than 25 business-to-business eCommerce partnership
companies. In February 1999, VerticalNet became Internet Capital's first
partnership company to complete an IPO. At March 22, 1999, Safeguard owns 24% of
the fully diluted stock of Internet Capital.
Kanbay is an IT consulting firm utilizing a multi-site approach to provide
competitively priced system integration solutions. It places project leadership
at the client site and leverages a large group of IT professionals located in
Pune, India. Kanbay assists organizations through IT development and support
outsourcing services, enterprise systems implementation, and systems compliance
and renovation projects. Kanbay also focuses on the implementation and
integration of packaged solutions for the financial industry as well as customer
care, billing, and customer retention for the telecommunications industry.
Kanbay was profitable on 1998 revenues of $35.7 million. At March 22, 1999,
Safeguard owns 28% of the fully diluted stock of Kanbay.
MegaSystems is a full service provider of products and services for the large
format movie theater industry. MegaSystems' technologically advanced large
format projection systems provide low cost, turn-key solutions to meet the needs
of large format theater operators. MegaSystems produced a large format motion
picture on the 1998 Winter Olympics under an exclusive license from the
International Olympic Committee. MegaSystems revenues for 1998 were $2.3
million. At March 22, 1999, Safeguard owns 49% of MegaSystems' fully diluted
stock.
MultiGen-Paradigm develops and markets leading real-time 3D authoring software
tools and turn-key image generator solutions, enabling commercial and military
customers to interactively create, edit, and view applications for visual
simulation, simulation-based training, game development, broadcasting, and urban
simulation. The company released WindowsNT versions of its products in 1998. The
company's Solutions Center provides customers with customized services,
including integration and content development. The company is the result of the
September 1998 merger between MultiGen, Inc. and Paradigm Simulation. The
company's combined 1998 revenues were $16.5 million. At March 22, 1999,
Safeguard owns 20% of MultiGen's fully diluted stock.
Pac-West Telecomm is a high growth, profitable, switch-based CLEC (Competitive
Local Exchange Carrier) with operations in California. The company has three
switches serving all of California and has points-of-presence in each of the 11
local access and transport areas (LATAs) in California, allowing it to originate
and terminate traffic in every LATA in the state. The
15
company has also established a strong position in providing Internet Service
Providers (ISPs) with communications solutions. Pac-West Telecomm closed a $150
million debt offering in later 1998 to finance its expansion plans. The company
has over 41,000 ISP lines in service, and had 1998 revenues of $42.2 million. At
March 22, 1999, Safeguard owns 16% of the fully diluted stock of Pac-West
Telecomm.
Pacific Title/Mirage consists of two divisions: Optical and Digital. The Optical
Division provides traditional film effects and services to the majority of
today's motion pictures. The Digital Division provides digital effects and
character animation for the entertainment industry. The company's proprietary
Lifef/x(TM) technology can be used to digitally create photo-realistic animation
of real or fictional characters for use in film, television, and the Internet.
The company had 1998 revenues of $21.6 million compared to $18.6 million in
1997. A significant part of 1998 revenues were generated by a single project.
Other than that project, 1998 revenues were negatively affected by a slowdown in
the motion picture industry and management difficulties. The company is actively
pursuing restructuring alternatives to reduce its losses. At March 22, 1999,
Safeguard owns 49% of the fully diluted stock of Pacific Title/Mirage.
QuestOne Decision Sciences, formerly Technology Systems Corp. develops software
tools and support services that provide enterprise decision optimization
capabilities via breakthrough integrated financial-response time-resource
capacity analysis methods. Areas of application include product development,
product management, capital investments, strategic cycle time reduction, and
mission critical process improvement. QuestOne's client base includes several
Fortune 500 companies. QuestOne's 1998 revenues were $11.6 million compared to
$4.8 million in 1997. At March 22, 1999, Safeguard owns 34% of QuestOne's fully
diluted stock.
US Interactive is an Internet professional services company that draws on a
unique combination of business strategy, marketing, and technology disciplines
to engineer electronic enterprise solutions. The company completed a merger with
Digital Evolution in July 1998, and serves a number of Global 2000 clients. The
company had combined 1998 revenues of $16.6 million compared to $13.1 million in
1997. At March 22, 1999, Safeguard owns 14% of the fully diluted stock of US
Interactive.
Whisper Communications was formed as a spin-out from Diablo Research Company in
1996. Whisper has developed a patented two way, fixed base automatic meter
reading technology which will allow utilities to remotely read meters (gas,
water, or electric) via the use of radio frequency technology and a wireless
communications backbone. Whisper has a large multi-year supply contract as a
subcontractor to Schlumberger to provide automatic meter readers to Illinois
Power, which is currently in the final acceptance phase. Whisper is a
development stage company and had nominal revenues in 1998. At March 22, 1999,
Safeguard owns 27% of the fully diluted stock of Whisper.
Who? Vision Systems is a personal identification company that applies unique
fingerprint imaging technologies to create highly reliable, cost effective
network and eCommerce security products. Who? Vision, an XL Vision spin out in
1998, believes that the ability to e-thenticate(TM)
16
- - bind transactions to a particular person, not just a particular machine - is a
critical need for the broader adoption of eCommerce. Who? Vision entered into a
strategic partnership with Philips Flat Display Systems to develop and market a
new line of flat fingerprint sensors. The company's proprietary patent pending
TactileSense(TM) technology, combined with patented and patent pending
technologies from Philips, gives it the ability to become a market-leading
provider of fingerprint sensors for use in portable net devices such as laptops,
PDAs, cell phones, and smart cards. Who? Vision is a development stage company
with no 1998 revenues. The company expects to begin commercial production of its
first-generation product in the second quarter of 1999 and its flat fingerprint
sensor in the second half of 1999. At March 22, 1999, Safeguard owns 27% of Who?
Vision's fully diluted stock.
XL Vision specializes in developing application-specific electronic imaging
solutions to meet specific customer needs and identifiable market needs. XL
Vision has refined its business model to invent, incubate, and spin out highly
differentiated, high-value imaging technology businesses. XL Vision's first spin
out company, ChromaVision Medical Systems (Nasdaq: CVSN), completed its initial
public offering as a Safeguard rights offering in 1997. XL Vision has also spun
out eMerge Vision Systems, Who? Vision Systems, and Integrated Visions. At March
22, 1999, Safeguard owns 55% of XL Vision's fully diluted stock.
Safeguard's ownership percentages in certain of the partnership companies
described above include shares which Safeguard has granted to certain of its
executives under its long term incentive plan. These grants are subject to
certain restrictions, and Safeguard continues to control the voting of these
shares until the restrictions lapse.
Venture Capital and Private Equity Funds
Safeguard also participates in managing seven venture capital and private equity
funds. These funds invest in early stage, rapidly growing and/or established
businesses, and have co-invested in certain of Safeguard's partnership
companies. The following table lists these funds. While Safeguard's focus is on
the information technology industry, the funds also invest in health care, life
sciences, service-related companies, technology companies in the energy
utilities markets, basic process industries, and later stage companies in
various industries. These funds made a total of 28 new investments in 1998 and
have a total of 104 companies in their portfolios at year end. Safeguard has
contributed a total of $41.8 million to these partnerships, and has received
total distributions of $28.1 million, including $12.3 million in 1998.
Technology Leaders I and Technology Leaders II are fully invested (including
reserves set aside for follow-on investments), and Radnor Venture Partners is
being closed out.
17
Total Capital % Owned by Year
Name of Fund Commitments Safeguard(1) Established
- ------------ ----------- ------------ -----------
Technology Leaders I $ 61,000,000 4% 1992
Technology Leaders II 113,000,000 4% 1994
TL Ventures III 285,000,000 4% 1996
EnerTech Capital Partners 50,000,000 6% 1996
Safeguard International Fund 228,000,000 11% 1996
SCP Private Equity Partners 265,000,000 8% 1996
Pennsylvania Early Stage Partners 50,000,000 20% 1998
(1) Represents the percentage of the outstanding general and limited
partnership interests in each fund owned by Safeguard.
COMPUCOM
CompuCom is a leading provider of information technology products and technology
management services to large and medium sized businesses throughout the United
States. CompuCom helps Fortune 1000 companies manage information technology to
achieve their business goals by providing a wide range of services in
provisioning, support, and technology management. Products and technology
management services are sold through a direct sales force to over 6,000 business
customers nationwide. CompuCom's majority-owned subsidiary, ClientLink, offers
software application development services.
CompuCom is an authorized dealer of major distributed desktop computer products,
networking and related products, peripherals, and software for a number of
manufacturers, including Compaq Computer Corporation ("Compaq"), International
Business Machines Corporation ("IBM"), Hewlett-Packard Company ("HP"), Toshiba
America Information Systems, Intel Corporation, and Microsoft Corporation. To
further meet the needs of its customers, CompuCom provides a variety of services
including LAN/WAN project services, consulting, asset tracking, network
management, help desk, field engineering, configuration, software management,
distribution, and procurement utilizing network applications such as Novell
Netware, Windows NT, Windows 95 and Windows 98, and IBM OS/2 Warp.
CompuCom believes the key to improving its net revenue and net earnings
performance is the expansion of its higher margin services business, both
internally and through strategic acquisitions, as well as focusing on lowering
its cost structure through expense control and participation in programs
designed to increase inventory turns. CompuCom's target customers are becoming
increasingly dependent on information technology to compete effectively in
today's markets. As a result, the decision making process that organizations
face when planning, selecting and implementing technology solutions is becoming
more complex and requires many of these organizations to outsource the
management and support of their technology needs.
18
CompuCom's product sales accounted for 87% of Safeguard's total net sales in
1998, compared to 86% in 1997 and 88% in 1996. CompuCom's services sales
accounted for 12% of Safeguard's total net sales in 1998 and 1997, compared to
8% in 1996. CompuCom's business tends to be subject to seasonal fluctuations,
with the highest revenue levels generally occurring in the fourth quarter.
Backlog is not considered to be a meaningful indicator of CompuCom's future
business prospects due to the short order fulfillment cycle. Large corporate
businesses accounted for the majority of CompuCom's net sales in 1998. However,
no one customer accounted for more than 10% of such sales.
CompuCom markets its product procurement, configuration, field engineering,
network management, help desk services, and technology management services
primarily through its direct sales force and service personnel. In late 1998,
CompuCom significantly restructured its operations by closing its physical
branch offices and moving to a virtual office model. The company also adopted a
plan to reduce its workforce by 10%. Sales and service representatives who
worked out of the branch offices continue to service customers in all of its
markets and the representatives access corporate information and support over
CompuCom's intranet and remote communications facilities.
CompuCom's customers generally require rapid fulfillment of product orders. To
meet these requirements and to assure itself of a continuous allotment of
products from its vendors, CompuCom maintains adequate levels of inventory
funded through credit facilities and vendor credit.
CompuCom provides product support to its customers primarily through inside
sales representatives ("ISRs") mostly based at its customer center, located in
Dallas, Texas. Each ISR works closely with CompuCom's direct sales
representatives. The primary goal of the customer center is to provide greater
support to CompuCom's customers while allowing CompuCom's direct sales force to
focus on soliciting new business and providing the necessary support for the
customers' more complex service needs. As of December 31, 1998, CompuCom
employed 335 full-time direct sales representatives and 400 customer center
personnel.
CompuCom configures and ships desktop products at its 300,000 square foot
distribution center in Paulsboro, NJ, its 104,000 square foot distribution
center in Stockton, CA, and its new 78,000 square foot center which is
co-located on the Compaq campus in Houston, TX. The company believes its
co-location arrangement with Compaq will further reduce its operating costs and
increase efficiency. The company is also beginning co-location programs with IBM
and Toshiba during the first half of 1999.
In order to remain profitable in the face of shrinking product gross margins,
CompuCom has continuously worked to improve its operating efficiency by
streamlining its business processes as evidenced by its recent restructuring and
its participation in co-location programs with its vendors. CompuCom is using
integrated enterprise-wide information systems to automate its operations,
including a corporate intranet for internal use and extranets to facilitate
eCommerce with its customers. CompuCom believes that this focus on business
process reengineering and
19
technology-enhanced operations gives it one of the lowest operating cost
structures in its industry and provides a demonstration to its customers of the
benefits of its product and service offerings.
Product margins declined in 1998 compared to 1997 due primarily to heightened
competition from direct marketers and other resellers. CompuCom believes that
gross margins will continue to decline in 1999, and will be reactive to
industry-wide changes. Future profitability will depend on the ability to
effectively manage inventory in response to changes in suppliers price
protection and return programs, to retain and hire quality service personnel
while effectively managing the utilization of such personnel, to respond to
increased competition from its suppliers' direct selling initiatives, and to
continue to reduce operating expenses.
The computer reseller industry is characterized by intense competition,
primarily in the areas of price, product availability and breadth of product
line and service. CompuCom competes for potential clients, including national
accounts, with numerous resellers and distributors. Many established desktop
computer manufacturers (including some of the company's vendors), direct
marketers, systems integrators and resellers of distributed desktop or
networking products compete with the company in the configuration and
distribution of computer systems and equipment. In addition, direct marketers
have had a distinct pricing advantage over resellers such as CompuCom. In
response to the increased competition, particularly from direct marketers, a
number of the company's competitors have sought to increase their market share
through acquisitions. The company expects the consolidation in the industry will
continue in 1999. In order to keep pace, CompuCom expects to pursue additional
strategic acquisitions. To help combat the direct marketers' pricing advantage,
CompuCom and its major vendors are in the process of developing and implementing
strategies designed to reduce costs through reductions in inventory levels. In
the highly fragmented computer services business, CompuCom competes with several
larger competitors; other corporate resellers pursuing high-end service
opportunities, as well as smaller computer services companies. Some of these
competitors have financial, technical, manufacturing, sales, marketing and other
resources that are substantially greater than that of CompuCom. There can be no
assurance that CompuCom will be able to continue to compete successfully with
new or existing competition. If CompuCom uses its stock for acquisitions or if
some other dilutive event were to occur, Safeguard's voting interest in CompuCom
could be diluted below 50%, in which event Safeguard would no longer consolidate
CompuCom's financial results under current generally accepted accounting
principles. See "Management's Discussion and Analysis General" beginning on page
33 of Safeguard's Annual Report to Stockholders filed as part of Exhibit 13
hereto. CompuCom employed approximately 4,800 full-time employees as of December
31, 1998.
At March 22, 1999, Safeguard owns 56% of CompuCom's fully diluted stock.
TANGRAM
Tangram develops and markets asset tracking software and software distribution
solutions that enable automated enterprise-wide information system management.
The company markets to Fortune 1000 companies and their foreign equivalents and
to government agencies that are
20
managing heterogeneous enterprises and mission-critical applications. Tangram's
primary product line is Asset Insight(R), an enterprise-wide asset tracking
solution that enables corporations to track current and historical information
about hardware, software and configuration changes and associate this
information with desktop users and departments across the enterprise. With this
information, decision makers can track changes in their hardware and software
assets, manage their Year 2000 risks, forward plan technology requirements
(including calculating the cost of software and hardware upgrades), optimize
end-user productivity, reduce total cost of asset ownership, identify missing
hardware components, and resolve desktop problems quickly.
Tangram markets Asset Insight through value added resellers, systems integrators
and other channel partners. Tangram markets and sells its other products and
services, including implementation of customized solutions incorporating its
AM:PM and other products, directly to its customers in North America and through
a network of independent distributors internationally.
Tangram spent $5.3 million for product development in 1998, compared to $5.0
million in 1997 and $3.4 million in 1996.
Because of its complexity, Asset Insight has a relatively long sales cycle.
Effective management of the sales process is critical to Tangram's future
success. In the broader market for asset management products and services,
competition is intense, and many of Tangram's actual and potential competitors
have substantially greater resources than Tangram and offer integrated products
providing broader asset management solutions. At March 22, 1999, Safeguard owns
57% of Tangram's fully diluted stock.
Other Segment Information
Export sales in each segment for the three year period ended December 31, 1998
were less than 5% of the segment's total sales in each of those years. Backlog
is not considered to be a meaningful indication of future business prospects for
any of the Company's operating segments.
OTHER INFORMATION
The operations of Safeguard and its partnership companies are subject to
environmental laws and regulations. Safeguard does not believe that expenditures
relating to those laws and regulations will have a material adverse effect on
the business, financial condition or results of operations of Safeguard.
EMPLOYEES
At December 31, 1998, Safeguard and its consolidated subsidiaries have
approximately 5,120 employees, of which approximately 94% are employed by
CompuCom. Safeguard believes relations with employees are good.
21
RISK FACTORS REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this report describing the plans, goals, strategies,
intentions, and expectations of Safeguard or its partnership companies or
anticipated events, constitute what are sometimes termed forward-looking
statements. The following important factors could cause actual results to differ
materially from those in such forward-looking statements.
Competition to invest in or acquire successful emerging information technology
companies is substantial. The information technology industry is highly
competitive, characterized by rapid product development cycles, frequent price
reductions, and early product obsolescence, and is generally dominated by
companies with greater resources than Safeguard and its partnership companies.
In addition, there is an overall scarcity of available employees with
information technology skills, which could lead to increased costs of operations
and restrict internal growth.
Certain of Safeguard's partnership companies offer complex products or services
which have lengthy sales cycles, which makes sales forecasts difficult to make,
and can lead to substantial fluctuations in quarterly operating results.
Emerging technology companies often encounter obstacles and delays in developing
products, service offerings, and markets. If Safeguard's private partnership
companies encounter more delays and obstacles than anticipated, Safeguard's
ability to complete rights offerings when planned could be delayed.
Safeguard is dependent on the market for information technology companies in
general and for initial public offerings of those companies in particular. If
such markets were to become weak for an extended period of time, Safeguard's
ability to complete rights offerings when planned, and Safeguard's ability to
generate gains from sales of securities, could be materially adversely affected.
In addition, Safeguard's ability to borrow under its revolving credit facilities
could be adversely affected as availability under these facilities is determined
by the value of the publicly traded securities pledged by Safeguard as
collateral. The market for securities of Internet-related companies is extremely
volatile, and Safeguard's participation in Internet-related companies could
cause Safeguard's stock to become more volatile.
The impact that the Year 2000 issue will have on the information technology
industry over the next few years is a material uncertainty. Businesses and
government agencies which are clients of Safeguard's partnership companies could
reallocate part or all of their information systems budgets to address the Year
2000 issue, which could materially reduce the demand for the products and
services of Safeguard's partnership companies. In addition, Safeguard's and its
partnership companies' business operations could be materially adversely
affected if they do not timely complete any required remediation efforts or if
their vendors, business partners, or customers do not timely complete
remediation of any systems on which Safeguard or its partnership companies rely.
See also Item 7 - "Management's Discussion and Analysis of Financial Condition
and Results of Operations." In general, there is likely to be an extraordinary
amount of litigation regarding the Year 2000 issue over the next several years
and information technology providers could be attractive targets for such
litigation. This litigation could have a
22
material adverse impact on Safeguard's and its partnership companies' operations
and financial conditions.
ITEM 1(d). FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND
EXPORT SALES
Safeguard does not believe that foreign or geographic area sales are material or
significant to an understanding of its business and operations during the
three-year period ended December 31, 1998. Where appropriate, information
concerning export sales of Safeguard's partnership companies is discussed in
Item 1(c) "Narrative Description of Business."
ITEM 1(e). EXECUTIVE OFFICERS
Information about Safeguard's executive officers can be found in Part III of
this report under "Item 10. Directors and Executive Officers of Registrant."
ITEM 2. PROPERTIES
Safeguard owns the office park in which its corporate headquarters and
administrative offices are located in Wayne, Pennsylvania. The headquarters
building is subject to a $3.6 million mortgage bearing interest at 9.75%, which
amortizes over a 30 year term and is callable by the lender at any time
beginning in 2002. The principal properties of CompuCom and Tangram consisted of
the following as of March 22, 1999:
OPERATING SEGMENT/LOCATION TYPE OF FACILITY LEASE EXPIRES
COMPUCOM
Dallas, TX Corporate/Operations *
Paulsboro, NJ Distribution Center 2001(1)
Stockton, CA Distribution Center 1999
Houston, TX Compaq co-location 2000 (2)
facility
TANGRAM
Cary, NC Office/Distribution 2004
(*) Owned facility.
(1) CompuCom has a cancellation option exercisable at any time after August
1999.
(2) Terminable by either party on 60 days notice.
CompuCom expects to complete a sale-leaseback transaction on its corporate and
operations facility in the first quarter of 1999.
In the opinion of management, the properties are in good condition and repair
and are adequate for the particular operations for which they are used.
CompuCom's corporate/operations facility
23
in Dallas contains 250,000 square feet of office space in two buildings on 20
acres. The other facilities of the company generally are capable of supporting
increased activity without any significant capital expenditures.
ITEM 3. LEGAL PROCEEDINGS
Safeguard and its subsidiaries are involved in various claims and legal actions
arising in the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse effect on
Safeguard's consolidated financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the solicitation
of proxies or otherwise, during the fourth quarter of 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Safeguard incorporates by reference the information contained under the caption
"Common Stock Data" on page 56 of its Annual Report to Stockholders for the year
ended December 31, 1998 which page is filed as part of Exhibit 13 hereto.
ITEM 6. SELECTED FINANCIAL DATA
Safeguard incorporates by reference the information contained under this caption
on page 33 of its Annual Report to Stockholders for the year ended December 31,
1998 which page is filed as part of Exhibit 13 hereto.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Safeguard incorporates by reference the information contained under this caption
on pages 33 through 39 of its Annual Report to Stockholders for the year ended
December 31, 1998 which pages are filed as part of Exhibit 13 hereto.
For the month of February 1999, CompuCom was out of compliance with one covenant
ratio of its existing receivables securitization facility. CompuCom does not
expect this violation to negatively impact negotiations relative to the
replacement securitization facility or to negatively impact its liquidity.
24
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Safeguard is exposed to equity price risks on its securities in publicly traded
partnership companies, most of which we acquired as private companies and took
public through rights offerings. These securities are generally in companies in
the information technology industry sector. Many of the companies are considered
small capitalization stocks. As of December 31, 1998, we had not attempted to
reduce or eliminate our market exposure on these securities. A 20% decrease in
equity prices would result in an approximate $113 million decrease in the fair
value of our investments accounted for on the equity method or classified as
available-for-sale at the end of 1998. Approximately $190 million of the value
of these equity securities at the end of 1998 consisted of our holdings in
Cambridge. A 20% decrease in equity prices at the end of 1998 would result in an
approximate $29 million decrease in the fair value of our holdings in Tellabs,
which we acquired in the merger of Coherent into Tellabs. Our Tellabs shares are
classified as trading securities. Fluctuations in the market price of trading
securities are included in net earnings. In late March 1999, the Company
completed a hedging transaction to partially protect against possible declines
in the price of a portion of its Tellabs holdings.
Availability under Safeguard's bank credit facilities is determined by the
market value of the publicly traded partnership companies pledged as collateral.
At December 31, 1998, our ability to borrow would not be impacted unless equity
prices decreased more than 25%. A price decrease of 50% would reduce the
availability on our $200 million bank credit facilities by approximately $33
million. At December 31, 1998, $88.1 million was outstanding under the $200
million bank revolving credit facility.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Safeguard incorporates by reference the information on pages 40 through 56 of
its Annual Report to Stockholders for the year ended December 31, 1998 which
pages are filed as part of Exhibit 13 hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS:
The following persons were executive officers of the Registrant at March 22,
1999:
25
OFFICER
NAME AGE SINCE POSITION
- ---- --- ------- --------
Warren V. Musser 72 1953 Chairman of the Board and
Chief Executive Officer
Harry Wallaesa (1) 48 1999 President and Chief Operating Officer
Edward R. Anderson (2) 52 1994 President and Chief Executive
Officer, CompuCom Systems
Jerry L. Johnson (3) 51 1995 Executive Vice President
Thomas C. Lynch (4) 56 1995 Executive Vice President and Chief
Operating Officer, CompuCom Systems
Michael W. Miles (5) 41 1992 Senior Vice President and Chief
Financial Officer
James A. Ounsworth(6) 56 1991 Senior Vice President, General
Counsel and Secretary
Stephen J. Andriole (7) 49 1997 Senior Technology Officer
(1) Mr. Wallaesa became President and Chief Operating Officer of Safeguard in
March 1999. Before joining Safeguard, Mr. Wallaesa served as President and
Chief Executive Officer of aligne incorporated, a strategic technology
management consulting firm which he co-founded in 1996. From 1985 through
1995, Mr. Wallaesa was the Chief Information Officer and Vice President of
management information systems at Campbell Soup Company, a global
manufacturer and marketer of high quality, branded convenience food
products.
(2) Mr. Anderson has served as President and Chief Executive Officer of
CompuCom Systems, Inc., a subsidiary of Safeguard, since January 1994 and
served as Chief Operating Officer from August 1993 through December 1993.
Prior to joining CompuCom, Mr. Anderson served from May 1988 to July 1993
as President and Chief Operating Officer of Computerland Corporation (now
known as Vanstar), a computer reseller.
(3) Mr. Johnson was promoted to Executive Vice President in March 1999. He
served as Senior Vice President from September 1995 until March 1999.
Prior to joining Safeguard, Mr. Johnson served at US West, a Regional Bell
Operating Company, from 1985 through 1995, most recently as Vice President
of Network Technology Services.
(4) Mr. Lynch joined CompuCom in October 1998. Prior to that time, Mr. Lynch
was Senior Vice President of Safeguard from 1995 through 1998. In 1995 Mr.
Lynch retired from the U.S. Navy as an Admiral after 31 years, including
serving as Superintendent of the U.S. Naval Academy from 1991 through 1994
and the Director of the Navy Staff 1994 through 1995.
(5) Mr. Miles was promoted to Senior Vice President in January 1998. He has
served as Vice President and Chief Financial Officer since January 1997
and has been with Safeguard
26
since 1984 in various financial positions, including Vice President and
Corporate Controller.
(6) Mr. Ounsworth was promoted to Senior Vice President in November 1995. He
has served as Vice President, Secretary and General Counsel since December
1991. Prior to joining Safeguard, Mr. Ounsworth was a partner in the
Philadelphia law firm of Pepper, Hamilton & Scheetz, and before that he
was a nuclear engineer in the U.S. Navy.
(7) Dr. Andriole joined Safeguard in the Fall of 1997 from CIGNA Corporation,
where he was Senior Vice President for Technology Strategy & Chief
Technology Officer from 1995 to 1997. From 1990 to 1995, he was a
Professor of Information Systems & Computer & Electrical Engineering at
Drexel University. During the 1970s, Dr. Andriole was Director of
Cybernetics Technology at the Defense Advanced Research Projects Agency
(ARPA), the agency that developed much of the infrastructure for the
Internet.
DIRECTORS:
Safeguard incorporates by reference the information contained under the caption
"Election of Directors" in its definitive Proxy Statement relative to its May
20, 1999 annual meeting of stockholders, to be filed within 120 days after the
end of the year covered by this Form 10-K Report pursuant to Regulation 14A
under the Securities Exchange Act of l934, as amended.
DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K:
Safeguard incorporates by reference the information contained under the caption
"Section 16(a) Beneficial Ownership Reporting Compliance" in its definitive
Proxy Statement relative to its May 20, 1999 annual meeting of stockholders, to
be filed within 120 days after the end of the year covered by this Form 10-K
Report pursuant to Regulation 14A under the Securities Exchange Act of l934, as
amended.
ITEM 11. EXECUTIVE COMPENSATION
Safeguard incorporates by reference the information contained under the captions
"Board of Directors' --Additional Information" and "Executive Compensation and
Other Arrangements" in its definitive Proxy Statement relative to its May 20,
1999 annual meeting of stockholders, to be filed within 120 days after the end
of the year covered by this Form 10-K Report pursuant to Regulation 14A under
the Securities Exchange Act of l934, as amended.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Safeguard incorporates by reference the information contained under the caption
"Stock Ownership of Directors and Officers" in its definitive Proxy Statement
relative to its May 20,
27
1999 annual meeting of stockholders, to be filed within 120 days after the end
of the year covered by this Form 10-K Report pursuant to Regulation 14A under
the Securities Exchange Act of l934, as amended.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Safeguard incorporates by reference the information contained under the caption
"Relationships and Related Transactions with Management and Others" in its
definitive Proxy Statement relative to its May 20, 1999 annual meeting of
stockholders, to be filed within 120 days after the end of the year covered by
this Form 10-K Report pursuant to Regulation 14A under the Securities Exchange
Act of l934, as amended.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following Financial Statements and Schedules are filed as part of this
report:
Consolidated Financial Statements Balance Sheets - December 31, 1998 and 1997
Operations - years ended December 31, 1998, 1997, and 1996
Cash Flows - years ended December 31, 1998, 1997, and 1996
Stockholders' Equity - years ended December 31, 1998, 1997, and 1996
Comprehensive Income - years ended December 31, 1998, 1997, and 1996
Notes to Consolidated Financial Statements Independent Auditors' Report
Statement of Management's Financial Responsibility
Quarterly Financial Data
Financial Statement Schedules
Independent Auditors' Report
Schedule I - Condensed Consolidated Financial Information of Registrant
Schedule II - Valuation and Qualifying Accounts
(b) Reports on Form 8-K
None.
(c) Exhibits
The following is a list of exhibits required by Item 601 of Regulation S-K filed
as part of this Report. Where so indicated by footnote, exhibits which were
previously filed are incorporated
28
by reference. For exhibits incorporated by reference, the location of the
exhibit in the previous filing is indicated in parentheses.
EXHIBIT NO. EXHIBIT
- ----------- -------
3.1 Amended and Restated Articles of Incorporation of Safeguard
(20)(Exhibit 3.1)
3.2 By-laws of Safeguard, as amended (6)(Exhibit 3.2)
4.1** 1990 Stock Option Plan, as amended (20)(Exhibit 4.3)
4.2** Stock Option Plan for Non-Employee Directors (11) (Exhibit 4.8)
4.3** Safeguard Scientifics, Inc. Amended and Restated Stock Savings Plan
(14) (Exhibit 4.9)
4.4** First Amendment to Safeguard Scientifics, Inc. Stock Savings Plan
(20)(Exhibit 4.6)
4.5** Safeguard Scientifics, Inc. Stock Savings Plan Trust Agreement
(5)(Exhibit 4.2)
4.6 Trust Indenture Agreement dated February 1, 1996 (17) (Exhibit
10.34)
4.7 Purchase Agreement dated February 1, 1996 between Safeguard
Scientifics, Inc. and JP Morgan Securities, Inc. (17) (Exhibit
10.35)
10.1** Safeguard Scientifics Money Purchase Pension Plan (6)(Exhibit 10.3)
10.2** First Amendment to Safeguard Scientifics Money Purchase Pension
Plan (11) (Exhibit 10.2)
10.3** Second Amendment to Safeguard Scientifics Money Purchase Pension
Plan (14) (Exhibit 10.3)
10.4** Third Amendment to Safeguard Scientifics Money Purchase Pension
Plan (17) (Exhibit 10.4)
10.5** Safeguard Scientifics Money Purchase Pension Plan Trust Agreement
(6)(Exhibit 10.4)
10.6** Safeguard Management Incentive Compensation Plan (7)(Exhibit 10.3)
10.7** Safeguard Scientifics, Inc. Long Term Incentive Plan, as amended
and restated effective June 15, 1994 (14) (Exhibit 10.6)
10.8** Safeguard Scientifics, Inc. Deferred Compensation Plan (2)(Exhibit
10.12)
29
10.9** Form of Promissory Notes dated February 12, 1997 given by certain
executives for advances by Safeguard of income tax withholdings on
restricted stock grants (20)(Exhibit 10.11)
10.10** Form of Amendment to Promissory Notes dated , 1999 *
10.11 Asset Acquisition Agreement dated April 15, 1997 for the sale of
certain assets of Premier Solutions Ltd. to a subsidiary of Sungard
Data Systems Inc. (exhibits omitted) (21)(Exhibit 10.1)
10.12 Stock Exchange Agreement dated as of February 26, 1999 among
Safeguard Scientifics, Inc., aligne Incorporated, and the
shareholders of aligne Incorporated (exhibits and schedules
omitted)*
10.13 Amended and Restated Credit Agreement, dated April 17, 1998, among
Safeguard Scientifics, Inc., Safeguard Scientifics (Delaware),
Inc., Safeguard Delaware, Inc. and PNC Bank, N.A. (exhibits
omitted)(25)(Exhibit 10.1)
10.14 Amended and Restated Master Security and Administration Agreement,
dated as of September 25, 1996, among CompuCom Systems, Inc.,
NationsBank of Texas, N.A., CSI Funding, Inc. and Enterprise
Funding Corporation (exhibits omitted) (19) (Exhibit 10.3)
10.15 Amendment No. 1 dated December 5, 1996 to Amended and Restated
Master Security Agreement among CompuCom Systems, Inc., NationsBank
of Texas, CSI Funding, Inc. and Enterprise Funding Corporation
(20)(exhibit 10.16)
10.16 Amended and Restated Credit Agreement, dated as of November 3,
1997, among CompuCom Systems, Inc., certain lenders party hereto,
and NationsBank of Texas, N.A., as administrative lender (exhibits
and schedules omitted) (24)(Exhibit 10.27)
10.17 Amendment No. 1 to Amended and Restated Credit Agreement, dated as
of June 26, 1998, among CompuCom Systems, Inc., certain lenders
party hereto, and NationsBank of Texas, N.A., as administrative
lender (exhibits omitted)(26)(Exhibit 10.2)
10.18 Amended and Restated Receivables Purchase Agreement, dated as of
November 3, 1997, between CompuCom Systems, Inc. and CSI Funding,
Inc. (exhibits omitted) (24)(Exhibit 10.28)
10.19 Amended and Restated Transfer and Administration Agreement, dated
as of November 3, 1997, among CSI Funding, Inc., CompuCom Systems,
Inc., Enterprise Funding Corporation and NationsBank, N.A.
(exhibits omitted) (24)(Exhibit 10.29)
30
10.20** Executive Employment Agreement dated October 24, 1997 between
Edward Anderson and CompuCom Systems, Inc. (24)(Exhibit 10.32)
10.21** Employment Agreement Amendment dated February 19, 1999 between
Edward Anderson and CompuCom Systems, Inc.*
10.22** Promissory Note dated February 12, 1997 from Edward Anderson to
CompuCom Systems, Inc. (20)(Exhibit 10.22)
10.23** First Amendment to Term Note dated February 19, 1999 from Edward
Anderson to CompuCom Systems, Inc.*
10.24** Pledge Agreement dated August 31, 1994 between Edward Anderson and
CompuCom Systems, Inc. (14) (Exhibit 10.27)
10.25** Term Note dated October 22, 1998 from Edward Anderson to CompuCom
Systems, Inc.*
10.26** Pledge Agreement dated October 22, 1998 from Edward Anderson to
CompuCom Systems, Inc.*
10.27** Stock Option Grant Agreement between CompuCom Systems, Inc. and
Thomas C. Lynch, dated as of October 22, 1998 (27)(Exhibit 10.4)
10.28** Term Note dated December 23, 1998 from Thomas Lynch to CompuCom
Systems, Inc.*
10.29** Pledge Agreement dated December 23, 1998 from Thomas Lynch to
CompuCom Systems, Inc.*
10.30** Term Note dated December 23, 1998 from Thomas Lynch to Safeguard
Scientifics, Inc.*
10.31** Security Agreement dated December 23, 1998 between Thomas Lynch and
Safeguard Scientifics, Inc.*
10.32** Note Agreement dated October 6, 1998, between Safeguard Delaware,
Inc. and Donald R. Caldwell (27)(Exhibit 10.3)
11 Computation of Per Share Earnings * (included in Note 7 to the
Consolidated Financial Statements on page 50 of Safeguard's Annual
Report to Stockholders for year ended December 31, 1998, which page
is filed as part of Exhibit 13 hereto)
13 Pages 33 to 56 of Annual Report to Stockholders for year ended
December 31, 1998 *
31
21 List of Subsidiaries*
23.1 Consent of KPMG LLP, independent auditors*
23.2 Consent and Report of PricewaterhouseCoopers LLP, independent
auditors*
23.3 Consent and Report of PricewaterhouseCoopers LLP, independent
auditors*
23.4 Consent and Report of PricewaterhouseCoopers LLP, independent
auditors*
23.5 Consent and Report of Arthur Andersen LLP, independent auditors*
23.6 Consent and Report of Deloitte & Touche LLP, independent auditors*
27 Financial Data Schedule for the year ended December 31, 1998*
- ----------
* Filed herewith.
** These exhibits relate to compensatory plans, contracts or arrangements in
which directors and/or executive officers of the registrant may
participate.
(1) Filed on March 30, 1981 as an exhibit to the Annual Report on Form 10-K
(No. 1-5620) and incorporated herein by reference.
(2) Filed on March 30, 1987 as an exhibit to Annual Report on Form 10-K (No.
1-5620) and incorporated herein by reference.
(5) Filed on December 13, 1991 as an exhibit to Form 8-K (No. 1-5620) and
incorporated herein by reference.
(6) Filed on March 30, 1992 as an exhibit to Form 10-K (No. 1-5620) and
incorporated herein by reference.
(7) Filed on March 31, 1993 as an exhibit to Form 10-K (No. 1-5620) and
incorporated herein by reference.
(11) Filed on March 30, 1994 as an exhibit to Form 10-K (No. 1-5620) and
incorporated herein by reference.
(14) Filed on March 30, 1995 as an exhibit to Form 10-K (No. 1-5620) and
incorporated herein by reference.
(17) Filed on April 1, 1996 as an exhibit to Form 10-K (No. 1-5620) and
incorporated herein by reference.
(18) Filed on May 15, 1996 as an exhibit to Form 10-Q (No. 1-5620) and
incorporated herein by reference.
(19) Filed on November 12, 1996 as an exhibit to Form 10-Q (No. 1-5620) and
incorporated herein by reference.
(20) Filed on March 31, 1997 as an exhibit to Form 10-K (No. 1-5620) and
incorporated herein by reference.
32
(21) Filed May 15, 1997 as an exhibit to Form 10-Q (No. 1-5620) and
incorporated herein by reference.
(22) Filed August 14, 1997 as an exhibit to Form 10-Q (No. 1-5620) and
incorporated herein by reference.
(23) Filed November 14, 1997 as an exhibit to Form 10-Q (No. 1-5620) and
incorporated herein by reference.
(24) Filed March 31, 1998 as an exhibit to Form 10-K (No. 1-5620) and
incorporated herein by reference.
(25) Filed on May 15, 1998 as an exhibit to Form 10-Q (No. 1-5620) and
incorporated herein by reference.
(26) Filed August 14, 1998 as an exhibit to Form 10-Q (No. 1-5620) and
incorporated herein by reference.
(27) Filed November 16, 1998 as an exhibit to Form 10-Q (No. 1-5620) and
incorporated herein by reference.
33
(d) Financial Statement Schedules
Independent Auditors' Report
The Board of Directors and Shareholders
Safeguard Scientifics, Inc.:
Under date of February 8, 1999, we reported on the consolidated balance sheets
of Safeguard Scientifics, Inc. and subsidiaries as of December 31, 1998 and
1997, and the related consolidated statements of operations, cash flows,
shareholders' equity and comprehensive income for each of the years in the
three-year period ended December 31, 1998, as contained in the 1998 annual
report to shareholders. These consolidated financial statements and our report
thereon are incorporated by reference in the annual report on Form 10-K for the
year 1998. In connection with our audits of the aforementioned consolidated
financial statements, we also audited the related consolidated financial
statement schedules as listed in the accompanying index. These financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statement schedules
based on our audits.
In our opinion, based on our audits and the reports of other auditors, such
financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
/s/ KPMG LLP
Philadelphia, Pennsylvania
February 8, 1999
34
Safeguard Scientifics, Inc.
Schedule I
Condensed Consolidated Balance Sheets
December 31, 1998 and 1997
(in thousands)
Assets
1998 1997
--------- ---------
Current Assets
Cash and cash equivalents $ 1,486 $ 680
Short-term investments 143,103 --
Notes and other receivables 27,783 6,157
Other current assets 1,497 4,873
--------- ---------
Total current assets 173,869 11,710
Property, Plant and Equipment, Net 24,455 13,142
Other Assets
Investments in unconsolidated subsidiaries and
affiliates 413,596 310,877
Notes and other receivables 22,069 21,669
Other 3,306 2,756
--------- ---------
Total other assets 438,971 335,302
========= =========
Total Assets $ 637,295 $ 360,154
========= =========
Liabilities and Shareholders' Equity
1998 1997
--------- ---------
Current Liabilities
Current debt obligations $ 866 $ 333
Accounts payable 383 888
Accrued expenses 79,575 17,304
--------- ---------
Total current liabilities 80,824 18,525
Long-Term Debt 123,115 29,689
Deferred Taxes 17,902 12,846
Other Liabilities 1,250 1,143
Convertible Subordinated Notes 71,345 90,881
Shareholders' Equity
Common stock 3,280 3,280
Additional paid-in capital 62,470 49,952
Retained earnings 261,594 151,471
Accumulated other comprehensive income 37,294 15,706
Treasury stock, at cost (21,779) (13,339)
--------- ---------
Total shareholders' equity 342,859 207,070
========= =========
Total Liabilities and Shareholders' Equity $ 637,295 $ 360,154
========= =========
See notes to condensed consolidated financial statements.
35
Safeguard Scientifics, Inc.
Schedule I
Condensed Consolidated Statements of Operations
Years Ended December 31, 1998, 1997, and 1996
(in thousands except per share amounts)
1998 1997 1996
-------- -------- --------
Revenues
Net sales $ -- $ 15,982 $ 30,286
Securities and other gains, net 193,665 24,025 26,011
Other income 15,888 14,223 10,273
-------- -------- --------
Total revenues 209,553 54,230 66,570
Costs and Expenses
Cost of sales -- 10,908 19,223
Selling, general, and administrative 24,425 25,162 22,712
Depreciation and amortization 1,443 2,169 3,818
Interest 10,706 7,150 8,623
Equity in loss (income) of unconsolidated
subsidiaries and affiliates, net of taxes 1,846 (14,873) (12,345)
-------- -------- --------
Total costs and expenses 38,420 30,516 42,031
-------- -------- --------
Earnings Before Taxes on Income 171,133 23,714 24,539
Provision for taxes on income 61,010 2,213 4,612
-------- -------- --------
Net Earnings $110,123 $ 21,501 $ 19,927
======== ======== ========
Earnings Per Share
Basic $ 3.46 $ .69 $ .67
Diluted $ 3.22 $ .66 $ .61
Average Common Shares Outstanding
Basic 31,833 31,249 29,900
Diluted 34,914 31,996 31,348
See notes to condensed consolidated financial statements.
36
Safeguard Scientifics, Inc.
Schedule I
Condensed Consolidated Statements of Cash Flows
Years Ended December 31, 1998, 1997, and 1996
(in thousands)
1998 1997 1996
--------- -------- ---------
Operating Activities
Net earnings $ 110,123 $ 21,501 $ 19,927
Adjustments to reconcile net earnings to cash
provided (used) by operating activities
Depreciation and amortization 1,443 2,169 3,818
Deferred income taxes 41,447 (2,313) 109
Equity in loss (income) of unconsolidated
subsidiaries and affiliates, net of taxes 1,846 (14,873) (12,345)
Securities and other gains, net (193,665) (24,025) (26,011)
Cash provided (used) by changes in working capital items
Receivables (17,408) 3,349 (5,746)
Accounts payable, accrued expenses, and other 32,311 2,638 5,624
--------- -------- ---------
Cash (used) by operating activities (23,903) (11,554) (14,624)
Proceeds from securities and other gains, net 93,207 67,294 41,982
--------- -------- ---------
Cash provided by operating activities and securities
and other gains, net 69,304 55,740 27,358
Other Investing Activities
Investments and notes acquired, net (137,495) (80,518) (64,110)
Capital expenditures (3,142) (7,871) (5,985)
Other, net -- 3,408 (5,592)
--------- -------- ---------
Cash (used) by other investing activities (140,637) (84,981) (75,687)
Financing Activities
Net borrowings (repayments) on revolving credit facilities 85,907 22,200 (63,425)
Net borrowings on term debt 769 3,371 455
Issuance of Convertible Subordinated Notes, net -- -- 112,109
Repurchase of company common stock (18,672) (9,488) --
Issuance of company common stock 4,135 5,819 5,210
--------- -------- ---------
Cash provided by financing activities 72,139 21,902 54,349
--------- -------- ---------
Increase (Decrease) in Cash and Cash Equivalents 806 (7,339) 6,020
Cash and cash equivalents - beginning of year 680 8,019 1,999
--------- -------- ---------
Cash and Cash Equivalents - End of Year $ 1,486 $ 680 $ 8,019
========= ======== =========
See notes to condensed consolidated financial statements.
37
Notes to Condensed Consolidated Financial Statements
NOTE 1 - PRINCIPLES OF CONSOLIDATION
The Condensed Consolidated (also referred to as "Parent Company") Financial
Statements include the accounts of Safeguard Scientifics, Inc. (the Company) and
its wholly owned subsidiaries. These statements differ from the Consolidated
Financial Statements presented in the Company's Annual Report to Shareholders by
not consolidating the Company's less than wholly owned subsidiaries, primarily
CompuCom and Tangram, and instead treating these companies as if they were
accounted for on the equity method.
The Company sold its Pioneer Metal Finishing division (Pioneer) in mid-1997. The
Condensed Consolidated Statements of Operations include net sales and costs and
expenses of $16.0 million and $14.6 million, respectively, in 1997, and $28.6
million and $26.3 million, respectively, in 1996, related to Pioneer.
Subsequent to the sale of Pioneer, the Company's revenues consist of securities
and other gains and other income, which consists primarily of administrative
service fees charged to partnership companies and associated venture funds and
interest income generally derived from loans to partnership companies.
NOTE 2 - DEBT
1998 1997
--------- --------
(in thousands)
Revolving credit facilities $ 108,107 $ 22,200
Mortgage note, 9.75%, payable monthly through 2002 3,420 3,456
Mortgage notes, 6.1% to 7.8%, payable monthly through 2017 4,954 4,045
Mortgage note, 7.75%, payable monthly through 2021 6,239
Other 1,261 321
--------- --------
Total debt 123,981 30,022
Current debt obligations (866) (333)
--------- --------
Long-term debt $ 123,115 $ 29,689
========= ========
Aggregate maturities of long-term debt during future years are as follows (in
millions): $0.9 - 1999; $0.7 - 2000; $0.7 - 2001; $108.9 - 2002; $1.2 - 2003;
and $11.6 - thereafter.
Interest paid in 1998, 1997, and 1996 was $11.5 million, $6.9 million, and $6.3
million, respectively, of which $4.9 million, $5.8 million, and $3.4 million in
1998, 1997, and 1996, respectively, related to the Company's Convertible
Subordinated Notes, and $1.1 million in 1996 related to commercial real estate
debt.
38
Safeguard Scientifics, Inc. and Subsidiaries
Schedule II
Valuation and Qualifying Accounts
(in thousands)
Balance Additions
Beginning Charged to Balance
DESCRIPTION of Year Operations Deductions Other End of Year
- ----------- ------- ---------- ---------- ----- -----------
(1)
Allowance for doubtful accounts
Year ended December 31, 1996 $ 2,644 $ 1,472 $ 995 $ (33) (2) $ 3,088
Year ended December 31, 1997 $ 3,088 $ 2,183 $ 1,829 $ (570) (3) $ 2,872
Year ended December 31, 1998 $ 2,872 $ 3,049 $ 1,350 $ 198 (4) $ 4,769
Inventory reserves
Year ended December 31, 1996 $ 9,524 $ 15,529 $ 16,119 $ 8,934
Year ended December 31, 1997 $ 8,934 $ 14,844 $ 13,854 $ 9,924
Year ended December 31, 1998 $ 9,924 $ 14,204 $ 16,326 $ 7,802
Investment reserves
Year ended December 31, 1996 $ 6,956 $ 4,461 $ 6,132 $ 802 $ 6,087
Year ended December 31, 1997 $ 6,087 $ 9,032 $ 6,701 $ 468 $ 8,886
Year ended December 31, 1998 $ 8,886 $ 31,773 $ 2,666 $ 37,993
Restructuring
Year ended December 31, 1998 $ - $ 16,437 $ - $ (2,349) (5) $ 14,088
(1) Net write-offs.
(2) Sale of the Phoenix location of Pioneer Metal Finishing and the Commercial
Real Estate operations.
(3) Sale of Pioneer Metal Finishing and Premier Solutions Ltd.
(4) Acquisition of Dataflex.
(5) Payments against restructuring reserve.
39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: March 26, 1999 SAFEGUARD SCIENTIFICS, INC.
By: /s/ Warren V. Musser
------------------------------------
Warren V. Musser, Chairman and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Dated: March 26, 1999 /s/ Warren V. Musser
------------------------------------
Warren V. Musser,
Chairman and Chief Executive Officer
(Principal Executive Officer)
Dated: March 26, 1999 /s/ Michael W. Miles
------------------------------------
Michael W. Miles,
Senior Vice President and Chief
Financial Officer (Principal
Financial and Accounting Officer)
Dated: March 26, 1999 /s/ Judith Areen
------------------------------------
Judith Areen, Director
Dated: March 26, 1999 /s/ Vincent G. Bell, Jr.
------------------------------------
Vincent G. Bell, Jr., Director
Dated: March 26, 1999
------------------------------------
Michael Emmi, Director
Dated: March 26, 1999 /s/ Robert A. Fox
------------------------------------
Robert A. Fox, Director
Dated: March 26, 1999 /s/ Delbert W. Johnson
------------------------------------
Delbert W. Johnson, Director
Dated: March 26, 1999 /s/ Robert E. Keith, Jr.
------------------------------------
Robert E. Keith, Jr., Director
Dated: March 26, 1999 /s/ Peter Likins
------------------------------------
Peter Likins, Director
Dated: March 26, 1999 /s/ Jack L. Messman
------------------------------------
Jack L. Messman, Director
Dated: March 26, 1999 /s/ Russell E. Palmer
------------------------------------
Russell E. Palmer, Director
Dated: March 26, 1999 /s/ John W. Poduska, Sr.
------------------------------------
John W. Poduska Sr., Director
Dated: March 26, 1999 /s/ Heinz Schimmelbusch
------------------------------------
Heinz Schimmelbusch, Director
Dated: March 26, 1999 /s/ Hubert J.P. Schoemaker
------------------------------------
Hubert J. P. Schoemaker, Director
Dated: March 26, 1999 /s/ Harry Wallaesa
------------------------------------
Harry Wallaesa, Director
EXHIBIT INDEX
The following is a list of exhibits required by Item 601 of Regulation S-K filed
as part of this Report. Where so indicated by footnote, exhibits which were
previously filed are incorporated by reference. For exhibits incorporated by
reference, the location of the exhibit in the previous filing is indicated in
parentheses.
EXHIBIT
NO. EXHIBIT
- --- -------
3.1 Amended and Restated Articles of Incorporation of Safeguard
(20)(Exhibit 3.1)
3.2 By-laws of Safeguard, as amended (6)(Exhibit 3.2)
4.1** 1990 Stock Option Plan, as amended (20)(Exhibit 4.3)
4.2** Stock Option Plan for Non-Employee Directors (11) (Exhibit 4.8)
4.3** Safeguard Scientifics, Inc. Amended and Restated Stock Savings Plan
(14) (Exhibit 4.9)
4.4** First Amendment to Safeguard Scientifics, Inc. Stock Savings Plan
(20)(Exhibit 4.6)
4.5** Safeguard Scientifics, Inc. Stock Savings Plan Trust Agreement
(5)(Exhibit 4.2)
4.6 Trust Indenture Agreement dated February 1, 1996 (17) (Exhibit 10.34)
4.7 Purchase Agreement dated February 1, 1996 between Safeguard
Scientifics, Inc. and JP Morgan Securities, Inc. (17) (Exhibit 10.35)
10.1** Safeguard Scientifics Money Purchase Pension Plan (6)(Exhibit 10.3)
10.2** First Amendment to Safeguard Scientifics Money Purchase Pension Plan
(11) (Exhibit 10.2)
10.3** Second Amendment to Safeguard Scientifics Money Purchase Pension Plan
(14) (Exhibit 10.3)
10.4** Third Amendment to Safeguard Scientifics Money Purchase Pension Plan
(17) (Exhibit 10.4)
10.5** Safeguard Scientifics Money Purchase Pension Plan Trust Agreement
(6)(Exhibit 10.4)
10.6** Safeguard Management Incentive Compensation Plan (7)(Exhibit 10.3)
10.7** Safeguard Scientifics, Inc. Long Term Incentive Plan, as amended and
restated effective June 15, 1994 (14) (Exhibit 10.6)
10.8** Safeguard Scientifics, Inc. Deferred Compensation Plan (2)(Exhibit
10.12)
10.9** Form of Promissory Notes dated February 12, 1997 given by certain
executives for advances by Safeguard of income tax withholdings on
restricted stock grants (20)(Exhibit 10.11)
10.10** Form of Amendment to Promissory Notes dated , 1999 *
10.11 Asset Acquisition Agreement dated April 15, 1997 for the sale of
certain assets of Premier Solutions Ltd. to a subsidiary of Sungard
Data Systems Inc. (exhibits omitted) (21)(Exhibit 10.1)
10.12 Stock Exchange Agreement dated as of February 26, 1999 among Safeguard
Scientifics, Inc., aligne Incorporated, and the shareholders of aligne
Incorporated (exhibits and schedules omitted)*
10.13 Amended and Restated Credit Agreement, dated April 17, 1998, among
Safeguard Scientifics, Inc., Safeguard Scientifics (Delaware), Inc.,
Safeguard Delaware, Inc. and PNC Bank, N.A. (exhibits
omitted)(25)(Exhibit 10.1)
10.14 Amended and Restated Master Security and Administration Agreement,
dated as of September 25, 1996, among CompuCom Systems, Inc.,
NationsBank of Texas, N.A., CSI Funding, Inc. and Enterprise Funding
Corporation (exhibits omitted) (19) (Exhibit 10.3)
10.15 Amendment No. 1 dated December 5, 1996 to Amended and Restated Master
Security Agreement among CompuCom Systems, Inc., NationsBank of Texas,
CSI Funding, Inc. and Enterprise Funding Corporation (20)(exhibit
10.16)
10.16 Amended and Restated Credit Agreement, dated as of November 3, 1997,
among CompuCom Systems, Inc., certain lenders party hereto, and
NationsBank of Texas, N.A., as administrative lender (exhibits and
schedules omitted) (24)(Exhibit 10.27)
10.17 Amendment No. 1 to Amended and Restated Credit Agreement, dated as of
June 26, 1998, among CompuCom Systems, Inc., certain lenders party
hereto, and NationsBank of Texas, N.A., as administrative lender
(exhibits omitted)(26)(Exhibit 10.2)
10.18 Amended and Restated Receivables Purchase Agreement, dated as of
November 3, 1997, between CompuCom Systems, Inc. and CSI Funding, Inc.
(exhibits omitted) (24)(Exhibit 10.28)
10.19 Amended and Restated Transfer and Administration Agreement, dated as
of November 3, 1997, among CSI Funding, Inc., CompuCom Systems, Inc.,
Enterprise Funding Corporation and NationsBank, N.A. (exhibits
omitted) (24)(Exhibit 10.29)
10.20** Executive Employment Agreement dated October 24, 1997 between Edward
Anderson and CompuCom Systems, Inc. (24)(Exhibit 10.32)
10.21** Employment Agreement Amendment dated February 19, 1999 between Edward
Anderson and CompuCom Systems, Inc.*
10.22** Promissory Note dated February 12, 1997 from Edward Anderson to
CompuCom Systems, Inc. (20)(Exhibit 10.22)
10.23** First Amendment to Term Note dated February 19, 1999 from Edward
Anderson to CompuCom Systems, Inc.*
10.24** Pledge Agreement dated August 31, 1994 between Edward Anderson and
CompuCom Systems, Inc. (14) (Exhibit 10.27)
10.25** Term Note dated October 22, 1998 from Edward Anderson to CompuCom
Systems, Inc.*
10.26** Pledge Agreement dated October 22, 1998 from Edward Anderson to
CompuCom Systems, Inc.*
10.27** Stock Option Grant Agreement between CompuCom Systems, Inc. and Thomas
C. Lynch, dated as of October 22, 1998 (27)(Exhibit 10.4)
10.28** Term Note dated December 23, 1998 from Thomas Lynch to CompuCom
Systems, Inc.*
10.29** Pledge Agreement dated December 23, 1998 from Thomas Lynch to CompuCom
Systems, Inc.*
10.30** Term Note dated December 23, 1998 from Thomas Lynch to Safeguard
Scientifics, Inc.*
10.31** Security Agreement dated December 23, 1998 between Thomas Lynch and
Safeguard Scientifics, Inc.*
10.32** Note Agreement dated October 6, 1998, between Safeguard Delaware, Inc.
and Donald R. Caldwell (27)(Exhibit 10.3)
11 Computation of Per Share Earnings * (included in Note 7 to the
Consolidated Financial Statements on page 50 of Safeguard's Annual
Report to Stockholders for year ended December 31, 1998, which page is
filed as part of Exhibit 13 hereto)
13 Pages 33 to 56 of Annual Report to Stockholders for year ended
December 31, 1998 *
21 List of Subsidiaries*
23.1 Consent of KPMG LLP, independent auditors*
23.2 Consent and Report of PricewaterhouseCoopers LLP, independent
auditors*
23.3 Consent and Report of PricewaterhouseCoopers LLP, independent
auditors*
23.4 Consent and Report of PricewaterhouseCoopers LLP, independent
auditors*
23.5 Consent and Report of Arthur Andersen LLP, independent auditors*
23.6 Consent and Report of Deloitte & Touche LLP, independent auditors*
27 Financial Data Schedule for the year ended December 31, 1998*
- ----------
* Filed herewith.
** These exhibits relate to compensatory plans, contracts or arrangements in
which directors and/or executive officers of the registrant may
participate.
(1) Filed on March 30, 1981 as an exhibit to the Annual Report on Form 10-K
(No. 1-5620) and incorporated herein by reference.
(2) Filed on March 30, 1987 as an exhibit to Annual Report on Form 10-K (No.
1-5620) and incorporated herein by reference.
(5) Filed on December 13, 1991 as an exhibit to Form 8-K (No. 1-5620) and
incorporated herein by reference.
(6) Filed on March 30, 1992 as an exhibit to Form 10-K (No. 1-5620) and
incorporated herein by reference.
(7) Filed on March 31, 1993 as an exhibit to Form 10-K (No. 1-5620) and
incorporated herein by reference.
(11) Filed on March 30, 1994 as an exhibit to Form 10-K (No. 1-5620) and
incorporated herein by reference.
(14) Filed on March 30, 1995 as an exhibit to Form 10-K (No. 1-5620) and
incorporated herein by reference.
(17) Filed on April 1, 1996 as an exhibit to Form 10-K (No. 1-5620) and
incorporated herein by reference.
(18) Filed on May 15, 1996 as an exhibit to Form 10-Q (No. 1-5620) and
incorporated herein by reference.
(19) Filed on November 12, 1996 as an exhibit to Form 10-Q (No. 1-5620) and
incorporated herein by reference.
(20) Filed on March 31, 1997 as an exhibit to Form 10-K (No. 1-5620) and
incorporated herein by reference.
(21) Filed May 15, 1997 as an exhibit to Form 10-Q (No. 1-5620) and
incorporated herein by reference.
(22) Filed August 14, 1997 as an exhibit to Form 10-Q (No. 1-5620) and
incorporated herein by reference.
(23) Filed November 14, 1997 as an exhibit to Form 10-Q (No. 1-5620) and
incorporated herein by reference.
(24) Filed March 31, 1998 as an exhibit to Form 10-K (No. 1-5620) and
incorporated herein by reference.
(25) Filed on May 15, 1998 as an exhibit to Form 10-Q (No. 1-5620) and
incorporated herein by reference.
(26) Filed August 14, 1998 as an exhibit to Form 10-Q (No. 1-5620) and
incorporated herein by reference.
(27) Filed November 16, 1998 as an exhibit to Form 10-Q (No. 1-5620) and
incorporated herein by reference.