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Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997 Commission File
Number 1-5620
SAFEGUARD SCIENTIFICS, INC.
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(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
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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 20, 1998 was
approximately $1.0 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
shareholder that has informed Registrant by March 20, 1998 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
20, 1998 was 31,955,366.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference in this Form 10-K:
PART I
Item 1(b) Page 33 of the Annual Report to Shareholders for the year ended
December 31, 1997, which page is filed as part of Exhibit 13
hereto.
PART II
Items 5, 6,
7 and 8 Pages 27 to 46 of the Annual Report to Shareholders for the
year ended December 31, 1997, 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 7, 1998
annual meeting of shareholders 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. ("Safeguard" or the "Company") is engaged in the
business of identifying, acquiring interests in, and developing
entrepreneurially-driven partnership companies, most of which are engaged in
information technology businesses, broadly defined to include all activities
related to the acquisition, processing and dissemination of information and
related technology to improve business and personal productivity. The most
significant of Safeguard's partnership companies are engaged in the delivery of
personal computer services, including procurement and configuration of personal
computers, application software and related products, network integration, and
technical support. In addition, partnership companies in the information
technology industry are engaged in outsourcing and the development, sale, and
implementation of strategic business software and services, imaging equipment
and software, multimedia technology and services, and telecommunications
technology.
Safeguard develops these partnership companies by providing active strategic
management, operating guidance, acquisition and disposition assistance, board
and management recruitment, and innovative financing. Safeguard also
participates in the management of several associated venture funds. The Company
realizes value for its shareholders through the appreciation of the Company's
Common Stock, by taking partnership companies public (generally through an offer
by a partnership company to Safeguard shareholders of rights to purchase stock
of the partnership company in its initial public offering [a "rights
offering"]), through the continued operations of partnership companies, and
through the sale of partnership companies. The partnership company generally
sells newly-issued shares in a rights offering, although Safeguard and other
stockholders usually sell some of their shares in the rights offering as well.
In either case, 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 completed
three rights offerings in 1997 and eight since 1990, including Cambridge
Technology Partners, Inc. ("Cambridge")(NASDAQ:CATP), Coherent Communications
Systems Corporation ("Coherent")(NASDAQ:CCSC), USDATA Corporation
("USDATA")(NASDAQ:USDC), Integrated Systems Consulting Group, Inc.
("ISCG")(NASDAQ:ISCG), Sanchez Computer Associates, Inc.
("Sanchez")(NASDAQ:SCAI), Diamond Technology Partners, Incorporated
("Diamond")(NASDAQ:DTPI), ChromaVision Medical Systems, Inc.
("ChromaVision")(NASDAQ:CVSN), and OAO Technology Solutions, Inc.
("OAO")(NASDAQ:OAOT). In February 1998, a rights offering commenced for DocuCorp
International, Inc. ("DocuCorp")(NASDAQ:DOCC), which is expected to be completed
in March 1998.
RECENT DEVELOPMENTS
The Company met its goal to complete three rights offerings in 1997, bringing to
its shareholders Diamond, a management consulting firm that develops
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digital business strategies to improve its clients' competitive positions,
ChromaVision, a developer of an automated cellular imaging system for use in a
wide variety of clinical and research applications, and OAO, a provider of a
wide range of outsourced information technology solutions and professional
services.
Consolidated net sales for 1997 were $1.99 billion, a 4% decrease from 1996. The
decrease was primarily attributable to the sale of Premier Solutions and Pioneer
Metal Finishing during 1997 and decreased product sales at CompuCom Systems, the
Company's largest business unit, as CompuCom primarily focused on increasing
earnings through growth in its higher-margin services business in 1997.
CompuCom's earnings increased by 26% over 1996 (before non-recurring gains).
CompuCom's share of the Company's consolidated net sales has risen steadily from
76% in 1990 to 98% in 1997. CompuCom is a leading provider of network
integration services to large- and medium-sized businesses throughout the
United States.
In 1997, Safeguard invested in three significant new partnership companies,
eMerge Vision Systems, Technology Systems Corporation, and Pacific Title/Mirage.
Safeguard invested in another new partnership company, Who?Vision Systems, an XL
Vision spin out company, in February 1998. Safeguard intends to continue its
strategy, begun in 1996, to seek to establish new relationships each year with
only a select number of partnership companies and to make larger investments in
the companies. Safeguard also made follow-on investments in Intellisource,
MultiGen, and Whisper Communications, among others, to support their
continued growth.
In February 1998, the Company commenced a rights offering for DocuCorp
International, a provider of enterprise-wide document automation software
products and services, which was created by a May 1997 merger between FormMaker
Software, a previous Safeguard partnership company, and Image Sciences, Inc.
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 "catalyst" stage companies primarily in
Pennsylvania.
SCP Private Equity Partners completed its fundraising with $265 million of
capital committed.
Cambridge completed a major strategic acquisition of UK based Peter Chadwick
Holdings Limited, and added over 1,200 net new employees during the year.
Coherent continued its strong growth, and in February 1998 announced an
agreement to merge with Tellabs, subject to stockholder and regulatory
approvals.
Several partnership companies completed acquisitions to further their growth,
including ISCG, OAO, Sanchez, RMS Information Systems, and The Intellisource
Group.
Intellisource secured major long-term outsourcing contracts with Shell Services,
Oglethorpe Power and Avon.
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Whisper Communications signed a major contract to provide automatic meter
reading technology to Illinois Power in partnership with Schlumberger.
XL Vision solidified its model for incubating and spinning out new imaging
technology companies, with one company (ChromaVision) completing a Safeguard
rights offering, a second company (eMerge Vision Systems) completing a spin-out
in 1997, and a third company (Who?Vision Systems) completing a spin-out in 1998.
Safeguard sold Pioneer Metal Finishing to Pioneer's management team, and
assisted in completing the sale of two other partnership companies, Premier
Solutions and DLB Systems.
During 1997, Safeguard amended its bank revolving credit facility by
increasing availability from $100 million to $150 million, reducing the
interest rate on LIBOR traunches, and extending the maturity to May 2001.
Safeguard is in the process of further increasing its facility to $200
million in 1998. CompuCom also amended its credit arrangements by extending
the maturity to November 2002 and by a modification to its Securitization
Facility. (See Item 8, Financial Statements and supplementary data, Footnote
3.)
ITEM 1 (b). FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
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Information on net sales, operating profit, depreciation and amortization,
capital expenditures and assets employed for each segment of the Company's
business for the three-year period ended December 31, 1997 is contained under
the caption "Financial Information--Industry Segments" on page 33 of the
Company's Annual Report to Shareholders for the year ended December 31, 1997,
which page is filed as part of Exhibit 13 hereto and is incorporated herein by
reference.
ITEM 1 (c). NARRATIVE DESCRIPTION OF BUSINESS
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STRATEGY AND GENERAL BUSINESS
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 business development and
management support, financing, and market knowledge. Safeguard generally invests
in companies in which it can purchase a large enough stake to enable it to have
significant influence over the management and policies of the company and to
realize a large enough return to compensate it for its investment of management
time and effort, as well as capital.
Safeguard gains exposure to emerging companies through its reputation as a
historically successful developer of information technology companies, its
relationship with eight venture capital and private equity funds, Radnor Venture
Partners, Technology Leaders I, Technology Leaders II, TL Ventures III, SCP
Private Equity Partners, Safeguard International Fund, EnerTech Capital
Partners, and Pennsylvania Early Stage Partners, as well as through its
sponsorship of such organizations as the Eastern Technology Council and
entrepreneurial centers at Lehigh University, Temple University and the
University of Pennsylvania, and the participation of its officers and
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employees in various non-profit and charitable organizations. Safeguard
considers its 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.
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.
Safeguard believes that its relationship with its 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, Safeguard encourages
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 Safeguard's
unique process of taking partnership companies public through "rights offerings"
to Safeguard shareholders, as described below, Safeguard continues its
involvement with its 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.
Safeguard's corporate staff provides hands-on assistance to the managers of its
partnership companies in the areas of management, financial, marketing, tax,
risk management, human resources, legal and technical services. Safeguard has
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.
Safeguard also provides a supportive environment to the managers of its
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
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Safeguard gathers the senior managers of all of its partnership companies, both
private and public, for a "Senior Partners" conference. Safeguard also convenes
periodic "CFO Forums" for senior financial managers of the partnership companies
and occasional sessions on more specific topics, such as investor relations and
human resources.
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 its associated venture funds, is the largest single shareholder, and
exercises significant influence over the company. Safeguard also generally
obtains significant board representation in these companies. Safeguard
accounts for these companies on an equity basis, recording its share of the
company's net earnings or losses under the caption "Income from equity
investments, net" in the Consolidated Statements of Operations. Safeguard's
equity investee companies have become increasingly important to its
operations and success in recent years relative to its consolidated
subsidiaries. Item 14(d), Schedule I contains the Company's Condensed
Consolidated Financial Statements without the consolidation of its
majority-owned subsidiaries, CompuCom and Tangram.
Safeguard believes that the entrepreneurial energy and creativity of the
managers of its partnership companies is an essential component of its success.
The Company's business strategy of keeping its 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 shareholders, including Safeguard.
Safeguard's goal is to maximize the value of its partnership companies for
Safeguard's shareholders, often by taking its 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
shareholders. It involves the grant by a partnership company to Safeguard's
shareholders of transferable rights to buy shares of the partnership company's
stock at a price established by the partnership company, Safeguard, and the
underwriter, and supported by two independent valuations. Safeguard shareholders
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 at the prevailing
market price, assuming a market develops. Safeguard generally retains a
significant ownership in its partnership companies after taking them public.
Safeguard generally also retains significant participation on each company's
board of directors. Between Safeguard's direct continuing ownership interest
in its public partnership companies and the strong identification in the
public financial markets of the companies as "Safeguard rights offering"
companies, Safeguard retains 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 its
shareholders who continue to hold the shares purchased in the rights
offering. Safeguard's goal is to take three companies public per year through
rights offerings.
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However, the development of emerging companies is subject to many uncertainties,
and there can be no assurance that Safeguard will be successful in completing
three rights offerings in any given year.
OVERVIEW OF BUSINESS SEGMENTS
As of the end of 1997, Safeguard and its majority owned subsidiaries have
operations in a single industry segment: Information Technology. During 1997
the Company sold its Metal Finishing operations. The Information Technology
segment consists of: Microcomputer Systems and Services (the delivery of
personal computer services, including procurement and configuration of
personal computers, application software and related products, network
integration, and technical support); and Information Solutions (the design,
development, sale and implementation of enterprise-wide asset tracking and
software management solutions). In Microcomputer Systems and Services, the
Company operates through its majority-owned subsidiary, CompuCom Systems,
Inc. and its subsidiaries ("CompuCom")(NASDAQ:CMPC). In Information
Solutions, the Company operates through its majority-owned subsidiary,
Tangram Enterprise Solutions, Inc. ("Tangram")(NASDAQ:TESI). The Company sold
its other subsidiary in Information Solutions, Premier Solutions Ltd., in
1997. The Company also actively participates in numerous additional private
and public information technology companies in which it holds significant
minority ownership interests.
INFORMATION TECHNOLOGY SEGMENT
Microcomputer Systems and Services
CompuCom is a leading provider of network integration 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 services are sold by a direct sales force
to over 3,500 business customers through 41 sales and service centers located
in and serving large metropolitan areas nationwide.
CompuCom is an authorized dealer of major distributed desktop computer
products, networking and related 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 and Windows
95, and IBM OS/2 Warp.
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Net sales for CompuCom have grown at a compounded rate of 22% over the past
five years, while net earnings have grown by 37% compounded annually over the
same period. Excluding after-tax nonrecurring gains of $3.4 million in 1997,
net earnings over that period have grown at a compounded rate of 34%.
CompuCom believes sales and net earnings performance is a result of its
continued focus on customer satisfaction, along with the enhancement and
growth of its services capabilities created by a strategy of growth through
existing operations and strategic acquisitions. The services business is an
integral part of CompuCom's strategy to provide customers with the
value-added service solutions to meet their technology needs. 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.
CompuCom's product sales accounted for 86% of Safeguard's total net sales in
1997, compared to 88% in 1996 and 1995. CompuCom's services sales accounted for
12% of Safeguard's total net sales in 1997, compared to 8% in 1996 and 7% in
1995. CompuCom's business tends to be subject to seasonal fluctuations, with the
highest revenue levels generally occurring in the fourth quarter.
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, operating
through 41 sales and service centers. CompuCom focuses on meeting the
business objectives of large corporate businesses, which accounted for the
majority of CompuCom's net sales in 1997. However, no one customer accounted
for in excess of 10% of such sales.
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 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 customer's more complex
service needs. As of December 31, 1997, CompuCom employed 335 full-time direct
sales representatives and 423 customer center personnel, of whom 308 worked at
the customer center in Dallas and 115 worked on-site at certain customer
locations.
During 1996, CompuCom helped to create GlobalServe, an international alliance of
computer product and service suppliers.
In order to remain profitable in the face of narrow product gross margins,
CompuCom has continuously worked to improve its operating efficiency by
streamlining its business processes and through the use of integrated
enterprise-wide information systems, automation of operations, a corporate
intranet, and an internet-based commerce system for customers. CompuCom believes
that this focus on 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.
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Although product margins improved in 1997 compared to 1996, CompuCom believes
that gross margins will continue to be reactive to industry-wide changes. Future
profitability will depend on the ability to retain and hire quality service
personnel while effectively managing the utilization of such personnel,
increased focus on providing technical service and support to customers, product
demand, competition, manufacturers' product availability and pricing strategies,
effective utilization of vendor programs, successful design and implementation
of the final assembly programs of its major vendors, and control of operating
expenses.
The computer reseller industry is highly competitive, primarily in the areas
of price, product availability, and breadth of product line. Recently, direct
marketers have had a pricing advantage over resellers such as CompuCom. In
order to combat this disadvantage, CompuCom is participating in the design
and implementation of the final assembly programs of its three largest
desktop computer vendors, Compaq, HP and IBM. CompuCom's ability to assemble
systems to customers specifications on a "build to order" basis should
increase product availability and reduce costs to its customers by allowing
more efficient inventory management. The industry has been undergoing a
significant transformation and consolidation, with a number of CompuCom's
competitors being acquired or increasing in size through acquisitions. In
addition, larger companies previously engaged in the retail channel have
begun to enter the corporate reseller market. As a result, CompuCom is
seeking to grow through acquisitions to continue to compete successfully in
the market. In March 1998, CompuCom announced that it signed a nonbinding
letter of intent to acquire Computer Integration Corp. for cash, subject to
CIC stockholder approval. If CompuCom uses its stock for acquisitions or 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 27 of the Company's Annual Report to Shareholders filed as
part of Exhibit 13 hereto.
At February 28, 1998, Safeguard owns approximately 51% of CompuCom's outstanding
common stock plus preferred stock which gives the Company up to 60% of the
votes for CompuCom's directors.
Information Solutions
Tangram provides enterprise-wide solutions, including asset tracking and
electronic software distribution for large heterogeneous computing
environments, encompassing mainframe, UNIX-based mini and LAN server
platforms. Asset Insight(TM), an information technology asset tracking
product launched in 1996, allows businesses to track changes in their
information technology asset base (including hardware and software), forward
plan technology requirements, optimize end-user productivity, and calculate
the cost of software and hardware upgrades. AM:PM(R) is Tangram's industry
leading solution for automated software distribution, data distribution and
collection, and remote resource management. AM:PM, along with expert
consulting services, provides businesses with solutions to manage an
enterprise's heterogeneous and remote information technology systems. In
addition, technology offerings from the consulting group include Asset
Compass, a technology integration of Tangram's asset tracking product, Asset
Insight, and Tangram's software distribution product, AM:PM, together with a
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graphic user interface that facilitates task management of distribution,
creation, scheduling, and tracking functions.
Tangram operates through two divisions: Enterprise Solutions, focused on
marketing Asset Insight; and Consulting Solutions, focused on implementing
customized solutions incorporating its AM:PM and other products. The Enterprise
Solutions division markets Asset Insight through value added resellers, systems
integrators and other channel partners. The Consulting Solutions division
markets and sells its products and services directly to its customers in North
America and through a network of independent distributors internationally.
Tangram is expending significant amounts to continue to develop and improve
Asset Insight and to develop its distribution channels in order to establish and
maintain a market leadership position for asset tracking software. 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. Tangram's future success will
depend on its ability to enhance its product line over time and adapt to
changing market conditions in order to maintain a leadership position in the
market for asset tracking solutions.
At February 28, 1998, Safeguard owns approximately 67% of Tangram's
outstanding common stock.
In 1997, Premier Solutions was sold to a third party, and Safeguard recorded a
gain of $6.3 million on the sale.
Product Development Expenses
For Information Solutions, the Company spent $5.0 million, or approximately
35% of Information Solutions net sales, for product development in 1997,
compared to $3.4 million, or approximately 30% of Information Solutions net
sales, for product development in 1996 and $3.1 million or approximately 25%
of net sales in 1995.
Other Segment Information
Export sales in the Information Technology segment for the three-year period
ended December 31, 1997 were less than 5% of the segment's total sales in each
of those years. Backlog for this segment, most of which was accounted for at
year-end by CompuCom, is not considered to be a meaningful indication of future
business prospects due to CompuCom's relatively short order fulfillment cycle.
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OTHER INFORMATION
In 1997, Safeguard sold its Pioneer Metal Finishing division to the management
group at Pioneer. Safeguard recorded a pre-tax gain of $3.4 from the sale and
deferred an additional gain pending collection of the purchase notes and other
contingencies.
The operations of the Company and its partnership companies are subject to
environmental laws and regulations. The Company 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 the
Company.
OTHER PARTNERSHIP COMPANIES
Public Companies
Safeguard uses the equity method of accounting for companies in which it owns
less than a majority of the outstanding voting securities but exercises
significant influence through representation on those companies' Boards and
other means. Public partnership companies accounted for on the equity method in
1997 included Cambridge, ChromaVision, Coherent, OAO, Sanchez, and USDATA.
Cambridge is an international management consulting and systems integration
firm. Cambridge combines management consulting, IT strategy, process innovation
and implementation, custom and package software deployment, network 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 its
services, Cambridge employs a rapid development methodology that features an
iterative approach 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.
In the fourth quarter of 1997, Cambridge strengthened its management consulting
practice through the acquisition of Peter Chadwick Holdings Limited ("Peter
Chadwick"). Based in the United Kingdom, Peter Chadwick provides change
implementation services for operational strategies and performance improvement.
Peter Chadwick enables Cambridge to enhance its ability to provide end-to-end
business transformation services to clients by identifying opportunities for
business operations change, implementing those changes, and deploying supporting
applications. Peter Chadwick's service offerings will be provided through
Cambridge's "Cambridge Management Consulting" unit.
Cambridge's management consulting and information technology services are
offered at three levels -- the enterprise-wide, specific business process and
application software levels of an organization. Upon completion of initial
consulting engagements, Cambridge typically designs, and develops one or more
strategic software applications, which often include custom and third-party
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package software, and then rolls-out such applications to the organization's
end-users. These software applications are selected and designed to achieve a
competitive advantage, enhance the efficiency and functionality of specific
business processes, and support financial goals. Cambridge also provides
network services and IT strategy services to help clients establish their
internal IT strategies and implement the recommended technology solutions.
While the early stages of a client engagement may result in a relatively
small amount of revenues, a client engagement which involves the design and
development of a strategic software application typically results in fees
ranging from $1 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 1997, 1996, or 1995. Cambridge
had 1997 revenues of $406.7 million.
At February 28, 1998, Safeguard owns approximately 16% of Cambridge's
outstanding common stock.
ChromaVision is a laboratory medicine diagnostics company that develops and
manufactures an automated cellular imaging system 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 two FDA filings in 1998, which could
result in several commercialized applications. The ChromaVision
Automated Cellular Imaging System ("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. ChromaVision's ACIS 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 seeks to establish the
ChromaVision ACIS as the preferred platform for multiple diagnostic
applications.
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. Preliminary 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 a variety of diagnostic situations, such as high-value rare event
detection procedures, which include the detection of minute quantities of cancer
cells that have spread to parts of the body away from a tumor's primary
location.
ChromaVision has completed clinical trials and has received 510(k) clearance
from the FDA to market the ChromaVision ACIS with a stain (marker) to screen
blood for malignancy. ChromaVision plans to expand this clearance for a
higher-value use of the ChromaVision ACIS in its intended first commercial
application called Triple Plus(TM), a procedure using a related cytochemical
13
measurement as a marker in the prenatal screen of maternal blood for
indicating the risk of Down syndrome in fetuses. ChromaVision commenced
clinical trials for its Triple Plus(TM) application in 1997. Assuming the
clinical trials for prenatal screening are successfully completed,
ChromaVision anticipates that it will commercialize this application in the
second half of 1998. ChromaVision has signed an exclusive distribution and
development agreement with Sigma Diagnostics for the Triple Plus(TM).
ChromaVision is also evaluating the use of the ChromaVision ACIS for various
cancer applications, including for prostate, breast, lung and colorectal
cancer.
ChromaVision is currently a development stage company with no commercial
revenues. Commencement of revenue generating activities will be contingent on
successful completion of clinical trials and, in most cases, obtaining FDA or
foreign regulatory approvals. ChromaVision completed its rights offering in
August 1997. At February 28, 1998, Safeguard owns approximately 26% of
ChromaVision's outstanding common stock.
Coherent develops, manufactures and markets voice quality enhancement products
for wireless (including digital cellular and personal communication systems
("PCS")), satellite-based, cable communication systems, and wireline
telecommunications systems throughout the world. Coherent's principal product
lines are transmission products and conference products. Coherent's products
utilize a proprietary high speed reduced instruction set computer ("RISC")
microchip coupled with proprietary software to enhance the quality of voice
communications during a telephone call in several ways, including eliminating
echoes inherent in modern telecommunications systems and hands free telephone
and teleconference usage. Coherent's products are compatible with domestic and
foreign telecommunications systems.
Coherent sells its transmission products to network operators and other
end-users through its direct sales force and third-party distributors, and to
telecommunications equipment manufacturers through its direct sales force.
Coherent's products are used globally by major wireless and wireline
telecommunications companies and network operators, including AT&T Wireless,
British Telecom, Cable & Wireless, Cellular One, Cisco Systems, Deutsche
Telekom, France Telecom, Motorola, Nokia, NORTEL, Telia Mobitel, and Telefonos
de Mexico, among others. Coherent historically has experienced its greatest
success selling its transmission products internationally, where competition is
based principally on technological characteristics. Competition in the U.S. has
been more price sensitive. Coherent's strategy for future growth is to continue
to develop new software products running on its echo canceller platforms to
support new telecommunications technologies, and to continue to develop and
expand strategic relationships with major telecommunications network operators,
telecommunications equipment manufacturers, and telecommunications equipment
distributors.
Coherent's conference products include Consortium(R) Conferencing System(TM), an
automated teleconference bridge; ConferenceMaster(R), a high quality
teleconferencing system; and Voicecrafter(TM), a line of audio systems. In
February 1998, Coherent announced an agreement to merge with Tellabs in a
stock-for-stock deal, subject to various conditions including stockholder and
regulatory approvals. There is no assurance such approvals will be obtained.
Coherent had 1997 revenues of $73.7 million.
14
At February 28, 1998, Safeguard owns approximately 31% of Coherent's outstanding
common stock.
OAO provides a wide range of outsourced information technology ("IT") solutions
and professional services, including the operation of large-scale megacenter
complexes and networks (high volume system of computers and information
networks), distributed systems management ("DSM"), applications software
development and maintenance, staffing services and other IT services. OAO
provides these solutions and services, generally on a long-term, fixed-price
contractual basis, to its Strategic Clients which are global providers of IT
outsourcing services. OAO works with these Strategic Clients as part of the IT
outsourcing team in providing services to a wide range of corporate clients
("Engagement Clients"), accepting delivery responsibility for specific
functional roles within the outsourcing engagements. OAO's primary Strategic
Clients have been IBM's Global Services ("IBM") and Digital Equipment
Corporation ("Digital"), which accounted for 66.2% and 24.1% of OAO's 1997
revenues, respectively. OAO's revenues were $84.7 million in 1997. For the years
ended December 31, 1997, 1996 and 1995, approximately 60.8%, 73.8%, and 92.0% of
OAO's revenues, respectively, were derived from fixed-price contracts. As of
December 31, 1997, OAO had over 1,600 employees in 18 company offices and 96
engagement locations in the United States, Canada, Mexico, Brazil and the United
Kingdom.
OAO's strategy is to build long-term relationships with Strategic Clients 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, OAO reduces the execution and
pricing risk for its Strategic Clients in their large-scale outsourcing
engagements. OAO has developed and is continuing to expand its international
service delivery capabilities in order to leverage its Strategic Clients'
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. OAO'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, OAO's growth has not been impeded by the availability of
qualified technical personnel and OAO has avoided the significant staffing costs
and expenses normally associated with new engagements within the IT services
industry. OAO's future success is highly dependent on its relationships with a
small number of Strategic Clients and its ability to effectively manage its
fixed-price contracts.
At February 28, 1998, Safeguard owns approximately 30% of OAO's outstanding
common stock.
Sanchez completed its rights offering in December 1996. Sanchez 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 three
15
integrated modules which operate on open client-server platforms. The primary
module, called PROFILE, is a multi-currency core processing system which
supports deposit, loan, customer, transaction processing and bank management
requirements through multiple distribution channels, including the Internet.
Historically, Sanchez has focused its marketing efforts in Central Europe and
North America. Currently, Sanchez is targeting three market segments: the
emerging banking market (banks with little installed enterprise-wide automation)
in which Sanchez seeks to expand its current market share, the direct banking
market (large financial services institutions throughout the world engaging in
on-line retail banking business conducted via alternate distribution channels
such as the Internet) in which Sanchez is seeking to expand on recent successes,
and the top-tier bank market (the 1,000 largest global and regional banks in the
world) in which Sanchez is seeking to build on its current client base and
establish itself as a significant participant. Sanchez believes that the growth
of electronic commerce will result in a large increase in the volume of
financial transactions which occur on-line as well as a greater demand for
customized direct banking products and services. Sanchez also believes that the
systems architecture in most top-tier banks is significantly outdated, and that
many of these institutions are actively evaluating replacements for their
traditional legacy software environments. Sanchez believes that significant
opportunities exist for its PROFILE product in both of those markets. The
direct banking market is a relatively new market, and the top-tier banking
market is characterized by customers who tend to rely on long standing
relationships with established vendors. There is no assurance that Sanchez will
be able to successfully establish itself in either of these markets.
Sanchez markets PROFILE products through alliances with Digital Equipment
Corporation, Hewlett-Packard, Oracle, Price Waterhouse, and IBM, as well as its
own enhanced direct sales force.
Sanchez had total revenues of $28.3 million for 1997, approximately one-half of
which were from software license fees, with the balance primarily from
implementation, consulting services, and maintenance fees. In March 1998 Sanchez
announced the acquisition of Greystone Technology Corporation, the developer of
certain high performance database systems used in conjunction with PROFILE.
At February 28, 1998, Safeguard owns approximately 25% of Sanchez's outstanding
common stock, and warrants which could increase its ownership to 27%.
USDATA is a global supplier of real-time manufacturing application software and
development tools, and related consulting services. USDATA's products and
services help automate manufacturing and process control applications. Its
real-time data management capabilities enable customers to reduce operating
costs, shorten cycle times, improve product quality and increase productivity.
USDATA produces automation software tools 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
16
technically competent but who may not be experienced software programmers.
USDATA's software business generated $22.4 million of net revenues during 1997.
In February 1998, USDATA announced its intention to dispose of 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.
At February 28, 1998, Safeguard owns approximately 25% of USDATA's outstanding
common stock, and warrants which could increase its ownership to 30%.
Private Companies
The following are Safeguard's significant private partnership companies.
Diablo Research Corporation is a contract engineering company with expertise in
radio frequency technology and applications, CEBUS technology for home
automation, and fixed wireless applications for the telecommunications industry.
Safeguard is working with Diablo to refine its business model as a technology
incubator which can spin out a series of independent companies to commercialize
its various technologies. Diablo has previously spun out Whisper Communications
to commercialize its two-way wireless automatic meter reading technology. Diablo
had 1997 revenues of $24.1 million. At February 28, 1998, Safeguard owns units
representing 18% of Diablo's outstanding ownership units.
Diablo is a limited liability company.
Educational Marketing Concepts, Inc. is in the process of producing two
large-format films with the International Olympic Committee; and provides
various services to non-profit and other corporations. In February 1998, EMC
entered into an agreement with two other corporations pursuant to which, and
subject to the satisfaction of various conditions, the three corporations
will be reorganized into a single entity under a parent corporation, MegaMax
Systems, Inc. The combined entity intends to provide a full range of
projection equipment, content and service to the giant screen film and
theater industry. At February 28, 1998, Safeguard owns 12% of EMC's
outstanding commmon stock and warrants which could increase its ownership to
22%. Finalization of certain other transactions could further increase
ownership to 37%.
eMerge Vision Systems, Inc. provides rapid response development of application
specific thermal imaging solutions. Thermal imaging systems detect minute
differences in infrared radiation (heat) emitted by all living and inanimate
objects to create an electronic image of the objects and background. EVS is
developing systems for the transportation and security markets that can provide
pictures of surrounding environments through darkness and fog, and systems for
the equine, animal sciences, and medical markets that can detect certain
physical conditions such as inflammations and tissue damage. EVS is a
development stage company which was formed in 1997 as a spin out from XL Vision,
Inc. At February 28, 1998, Safeguard owns non-voting convertible preferred stock
which, if converted, would give it ownership of up to 62% of EVS' outstanding
common stock.
The Intellisource Group, Inc. provides integrated outsourcing services,
called "Intellisourcing," for all of its customers' non-core activities, such
as facilities management, communications, accounting, human resources,
document management, etc. Intellisource has established 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,
and others. Intellisource's future success depend on its ability to
effectively manage its fixed-price contracts and to leverage the resources in
its existing engagements to generate and support additional business. At
February 28, 1998, Safeguard owns convertible preferred stock which represents
45% of the outstanding capital stock of Intellisource, and warrants which
could increase its ownership to up to 69%.
17
Internet Capital Group, LLC was established by Safeguard in 1996 to identify,
invest in, and develop early to mid-stage Internet- related companies in the
target areas of enabling tools and technology businesses, software application
developers, content providers, and ongoing enterprises whose business model is
enhanced by the Internet. Internet Capital Group has $40 million of capital, of
which Safeguard has funded 33%.
MultiGen, Inc. develops and markets the leading real-time 3D authoring software
that is used to create, edit, and view interactive scenes for visual simulation,
entertainment, CAD visualization, and virtual reality applications. MultiGen has
also created the Solutions Center to provide customers with customized services,
including integration and content development. MultiGen's 1997 revenues were
$11.2 million. At February 28, 1998, Safeguard owns common and convertible
preferred stock representing 31% of MultiGen's outstanding capital stock.
Nextron Communications, Inc. provides competitively priced quality web site
hosting and technical support services that enable businesses of every size to
maintain a presence on the World Wide Web. Nextron has strategic relationships
with GTE, Southern New England Telephone, and others to provide fast web site
development and hosting for their telephone book advertisers. At February 28,
1998, Safeguard has the right to acquire up to 67% of Nextron's outstanding
capital stock.
Pacific Title/Mirage, Inc. was formed in October 1997 by Safeguard and Mirage
Technologies. The company acquired certain divisions of Pacific Title and
Arts Studio, one of Hollywood's most established post-production facilities,
providing optical and digital effects and titles for motion pictures. Mirage
Technologies also contributed to the company its proprietary LifeF/x(TM)
technology, which generates 3-D digital characters with a level of subtlety
and details beyond that of other commercially available technologies. Pacific
Title/Mirage is continuing to develop LifeF/x, and is negotiating with a
major Hollywood studio to feature a LifeF/x generated character in an
upcoming motion picture. At February 28, 1998, Safeguard owns common stock
and convertible preferred stock representing 48% of Pacific Title/Mirage's
outstanding capital stock.
RMS Information Systems provides design, development, integration, and operation
of telecommunications and network systems, principally to governmental agencies.
RMS' strategy is to continue to grow its government business and establish a
strong commercial business. RMS had 1997 revenues of $90.5 million. At February
28, 1998, Safeguard owns 19% of RMS' outstanding common stock, and convertible
preferred stock and warrants which could increase its ownership to 34%.
The Sentry Group resulted from a 1996 merger between Value Sourcing Group and
Sentry Technology Group. The company provides information technology market
research and management consulting services for IT buyers and sellers. Sentry
had 1997 revenues of $17.9 million. At February 28, 1998, Safeguard owns 48% of
Sentry's outstanding common stock, and warrants which could increase its
ownership to 49%.
Technology Systems Corporation became a Safeguard partnership company in 1997.
TSC is an engineering consulting services and software development company
18
which provides enterprise decision support capabilities using advanced
methodologies for modeling and evaluating enterprise costs, resource
capacity, and organizational restraints. Areas of application include product
development, product management, and capital investments. To date TSC's
client base consists primarily of Fortune 500 companies. At February 28,
1998, Safeguard owns 30% of TSC's outstanding capital stock, and has a
contingent obligation to acquire additional shares which would give it up to
35% of the oustanding capital stock.
Whisper Communications, Inc. was formed as a spin-out from Diablo Research
Company. Whisper has developed a 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 signed a large supply contract as a
subcontractor to Schlumberger to provide automatic meter readers to Illinois
Power. Whisper is continuing to develop and improve its product. At February
28, 1998, Safeguard owns convertible preferred stock representing 16% of
Whisper's outstanding capital stock, and warrants which could increase its
ownership to 22%.
Who?Vision Systems, Inc. is a developer of highly reliable fingerprint
authentication products at breakthrough cost levels which should permit their
introduction and adoption for mass market use in computers and other consumer
and retail devices. Who?Vision has entered into manufacturing and distribution
agreements with a major Taiwanese manufacturer, and is negotiating other similar
agreements. The ability to efficiently mass produce the product and the
development of a mass market and infrastructure for fingerprint authentication
devices will be critical to the future success of Who?Vision. At February 28,
1998, Safeguard owns non-voting convertible preferred stock which, if converted,
would give it ownership of up to 62% of Who?Vision's outstanding common stock.
XL Vision, Inc. specializes in developing application-specific electronic
imaging solutions to meet specific customer needs and identifiable market needs.
XL Vision has refined its business model as an incubator which can spin out a
series of independent companies to commercialize XL Vision's various
technologies. XL Vision's first spin out company, ChromaVision Medical Systems,
completed its initial public offering as a Safeguard rights offering in 1997. XL
Vision has also spun out eMerge Vision Systems, to develop customized thermal
imaging systems for a variety of specialized applications, and Who?Vision
Systems, to develop highly reliable, cost effective fingerprint authentication
products. XL Vision provides engineering services, product and market
development, business development, management services, and financing to its
spin out companies in their early stages as they build their own stand-alone
capabilities. XL Vision is continuing to develop promising businesses based on
its imaging technology expertise. At February 28, 1998, Safeguard owns 33% of XL
Vision's outstanding common stock and non-voting convertible preferred stock
which could increase its ownership to up to 74%.
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.
19
In addition to the above companies, Safeguard has less significant ownership
interests in the following public partnership companies.
Diamond completed its rights offering in March 1997. Diamond is a management
consulting firm that devises business strategies enabled by information
technology and manages the implementation of those strategies. The
distinguishing qualities of Diamond's consulting process are its ability to
synthesize strategy with technology and deliver solutions with measurable
results, which generally include the design, deployment, and integration of
information technology solutions together with modification of business
processes and organizational structures. Diamond delivers its strategic
consulting and information technology solutions through a single, integrated
multi-disciplinary team. At February 28, 1998, Safeguard owns approximately 7%
of Diamond's outstanding common stock and warrants which could increase its
ownership to 9%.
DocuCorp was created by a merger in May 1997 between FormMaker Software, a
previous Safeguard partnership company, and Image Sciences, Inc. DocuCorp
develops, markets and supports a portfolio of open-architecture, enterprise-wide
document automation software products that enable its customers to produce
complex, high volume, customized documents. In addition, DocuCorp provides
document automation consulting and applications integration services, and
document processing and printing services. DocuCorp currently has an installed
base of more than 700 customers in the insurance industry, the utility industry,
and other industries. A majority of DocuCorp's revenues are for professional
services, including consulting, implementation, outsourcing, and contract
programming. The balance of its revenues are for software license fees and
maintenance fees. DocuCorp commenced a rights offering on February 24, 1998.
Prior to completion of the rights offering, Safeguard accounted for DocuCorp on
the equity method. Assuming that the rights offering is completed (assuming the
underwriters' overallotment option is exercised), Safeguard will own 7% of
DocuCorp's outstanding common stock and warrants which could increase its
ownership to 12%, and Safeguard and will discontinue the equity method of
accounting for its investment.
ISCG provides consulting services that address its clients' information
processing needs through technologically advanced solutions, including
client-server architecture, graphical user interface based applications,
relational and object-oriented databases and cross-platform applications
integration. ISCG delivers consulting services principally in software
applications development, but also in systems and network management. ISCG
focuses its marketing efforts on the pharmaceutical industry. ISCG has extensive
experience in the development, implementation, integration and management of
information systems used in the drug development process. It uses this
experience and expertise to help pharmaceutical companies shorten the time
required for developing, clinical testing, and submission of FDA applications
for new drugs. At February 28, 1998, Safeguard owns approximately 7% of ISCG's
outstanding common stock and warrants which could increase its ownership to 9%.
Safeguard also participates in managing eight 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 the Company's partnership
companies. The following table lists these funds. While
20
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. Radnor Venture Partners, Technology
Leaders I, and Technology Leaders II are fully invested (including reserves set
aside for follow-on investments).
Venture Capital and Private Equity Funds
Capital % Owned by Year
Name of Fund Commitments Safeguard(1) Established
Radnor Venture Partners $ 33,000,000 14% 1988
Technology Leaders I 61,000,000 3% 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 203,000,000 12%(2) 1996
SCP Private Equity Partners 265,000,000 8% 1996
Pennsylvania Early Stage 50,000,000 20% 1998
Partners
- ------------------------
(1) Represents the percentage of the outstanding limited partnership
interests in each fund owned by Safeguard. In addition, Safeguard owns
interests in the general partners of these funds which have carried
interests in the funds' profits.
(2) Estimated pending final fund closing.
EMPLOYEES
At December 31, 1997, Safeguard and its consolidated subsidiaries have
approximately 4,400 employees, of which approximately 94% are employed by
CompuCom. The Company believes relations with employees are good.
IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this report describing the plans, goals, strategies,
intentions, and expectations of the Company 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 among investors to invest in or acquire successful emerging
information technology companies is substantial, particularly in the larger
companies that the Company is currently targeting. The information technology
industry is highly competitive, characterized by rapid product development
cycles, frequent price reductions, and early product obsolescence, and is
generally dominated by companies with greater resources than the Company and its
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.
21
Certain of the Company'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 the Company's private
partnership companies encounter more delays and obstacles than anticipated,
the Company's ability to complete rights offerings when planned could be
delayed.
The Company 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, the
Company's ability to complete rights offerings when planned, and the
Company's ability to generate gains from sales of securities, could be
materially adversely affected.
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 the Company'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 the Company's partnership companies. In addition,
the Company'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 the Company or its
partnership companies rely. See also Item 8--"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, which could have a material
adverse impact on the Company's and its partnership companies' operations and
financial conditions.
ITEM 1(d). FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND
EXPORT SALES
The Company 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, 1997. Where appropriate, information
concerning the Company's export sales is discussed in Item 1(c) "Narrative
Description of Business."
ITEM 1(e). EXECUTIVE OFFICERS
Information about the Company's executive officers can be found in Part III of
this report under "Item 10. Directors and Executive Officers of Registrant."
None of the officers have fixed term employment agreements.
ITEM 2. PROPERTIES
The Company owns its corporate headquarters and administrative offices 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. In 1998,
22
the Company purchased the office park in which its headquarters is located. The
principal properties of the Company consisted of the following as of March 10,
1998:
INDUSTRY SEGMENT/LOCATION TYPE OF FACILITY LEASE EXPIRES
INFORMATION TECHNOLOGY
MICROCOMPUTER SYSTEMS AND SERVICES (COMPUCOM)
Dallas, TX Corporate/Operations *
Paulsboro, NJ Distribution Center 2001(1)
Stockton, CA Distribution Center 1999(2)
INFORMATION SOLUTIONS (Tangram)
Cary, NC Office/Distribution 2004
---------
(*) Owned facility.
(1) CompuCom has a cancellation option exercisable at any time after August
1999.
(2) CompuCom has a cancellation option exercisable in May of each year.
CompuCom's new corporate and operations campus has been funded on an interim
basis through its bank credit facility pending permanent mortgage financing.
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 new Dallas property contains 250,000 square feet of office space in
two buildings on 20 acres. CompuCom has completed renovations and has moved into
this space as its new corporate and operations campus. The other existing
facilities of the Company generally are capable of supporting increased activity
without any significant capital expenditures.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are involved in various claims and legal
actions arising in the ordinary course of business. In the opinion of
management, the ultimate disposition of these
matters will not have a material adverse effect on the Company's consolidated
financial position or results of operations.
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 1997.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
23
The Company incorporates by reference the information contained under the
caption "Common Stock Data" on page 46 of its Annual Report to Shareholders for
the year ended December 31, 1997 which page is filed as part of Exhibit 13
hereto.
ITEM 6. SELECTED FINANCIAL DATA
The Company incorporates by reference the information contained under this
caption on page 27 of its Annual Report to Shareholders for the year ended
December 31, 1997 which page is filed as part of Exhibit 13 hereto.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company incorporates by reference the information contained under this
caption on pages 27 through 32 of its Annual Report to Shareholders for the year
ended December 31, 1997 which pages are filed as part of Exhibit 13 hereto.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company incorporates by reference the information on pages 33 through 46 of
its Annual Report to Shareholders for the year ended December 31, 1997 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 20,
1998:
HAS BEEN AN
OFFICER
NAME AGE SINCE POSITION
Warren V. Musser 71 1953 Chairman of the Board and
Chief Executive Officer
Donald R. Caldwell (1) 51 1993 President and Chief
Operating Officer
Edward R. Anderson (2) 51 1994 President and Chief Executive
Officer, CompuCom Systems, Inc.
24
Jerry L. Johnson (3) 50 1995 Senior Vice President--
Operations
Thomas C. Lynch (4) 55 1995 Senior Vice President
Michael W. Miles (5) 40 1992 Senior Vice President and Chief
Financial Officer
James A. Ounsworth(6) 55 1991 Senior Vice President, General
Counsel and Secretary
Glenn T. Rieger (7) 39 1994 Senior Vice President
(1) Mr. Caldwell has served as President of the Company since
February 1996 and as Executive Vice President from November
1993 to February 1996. Prior to joining the Company, from
1991 through 1993, Mr. Caldwell was President of Valley
Forge Capital Group, Ltd., a business mergers and
acquisition advisory firm that he founded.
(2) Mr. Anderson has served as President and Chief Executive Officer of
CompuCom Systems, Inc., a subsidiary of the Company, 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 served at US West, a Regional Bell Operating Company,
from 1985 through 1995, most recently as Vice President of Network
Technology Services.
(4) 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, Navy Roles and Missions
from 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 the Company since 1984 in various
financial positions, most recently as 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 the Company,
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) Mr. Rieger was promoted to Senior Vice President in January 1998. He
has served as a Vice President of the Company since January 1994.
Prior to joining the Company, from 1991 through 1993, Mr. Rieger was
a Managing Director of Valley Forge Capital Group, Ltd., a business
mergers and acquisition advisory firm.
DIRECTORS:
The Company incorporates by reference the information contained under the
caption "ELECTION OF DIRECTORS" in its definitive Proxy Statement relative to
its May 7, 1998 annual meeting of shareholders, 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:
25
The Company 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 7, 1998 annual meeting of
shareholders, 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
The Company incorporates by reference the information contained under the
captions "Directors' Compensation" and "EXECUTIVE COMPENSATION" in its
definitive Proxy Statement relative to its May 7, 1998 annual meeting of
shareholders, 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
The Company incorporates by reference the information contained under the
caption "SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" in
its definitive Proxy Statement relative to its May 7, 1998 annual meeting of
shareholders, 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
The Company incorporates by reference the information contained under the
captions "Compensation Committee Interlocks and Insider Participation" and
"CERTAIN TRANSACTIONS" in its definitive Proxy Statement relative to its May 7,
1998 annual meeting of shareholders, 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.
26
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules
CONSOLIDATED FINANCIAL STATEMENTS
INDUSTRY SEGMENTS
BALANCE SHEETS - December 31, 1997 and 1996
OPERATIONS - years ended December 31, 1997, 1996, and 1995
CASH FLOWS - years ended December 31, 1997, 1996, and 1995
SHAREHOLDERS' EQUITY - years ended December 31, 1997, 1996,
and 1995
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
27
(b) Reports on Form 8-K
During the fourth quarter of 1997, the Company filed a report on Form 8-K dated
October 1, 1997 disclosing under Item 5 the sale of its Pioneer Metal Finishing
Division to the management group at Pioneer.
(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 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 the Company
(20)(Exhibit 3.1)
3.2 By-laws of the Company, as amended (6)(Exhibit 3.2)
4.1** 1979 Stock Option Plan (1)(Exhibit 10)
4.2** 1980 Stock Option Plan (1)(Exhibit 10)(5)(Exhibit 10.5)
4.3** 1990 Stock Option Plan, as amended (20)(Exhibit 4.3)
4.4** Stock Option Plan for Non-Employee Directors (11) (Exhibit 4.8)
4.5** Safeguard Scientifics, Inc. Amended and Restated Stock Savings
Plan (14) (Exhibit 4.9)
4.6** First Amendment to Safeguard Scientifics, Inc. Stock Savings
Plan (20)(Exhibit 4.6)
4.7** Safeguard Scientifics, Inc. Stock Savings Plan Trust Agreement
(5)(Exhibit 4.2)
4.8 Trust Indenture Agreement dated February 1, 1996 (17) (Exhibit
10.34)
4.9 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 Pension Plan
(17) (Exhibit 10.4)
28
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 Omitted
10.9 Omitted
10.10 Omitted
10.11** Form of Promissory Notes dated February 12, 1997 given by
certain executives for advances by the Company of income tax
withholdings on restricted stock grants (20) (Exhibit 10.11)
10.12** Safeguard Scientifics, Inc. Deferred Compensation Plan
(2)(Exhibit 10.12)
10.13 Credit Agreement, dated as of September 13, 1996, between
Safeguard Scientifics, Inc., Safeguard Scientifics (Delaware),
Inc. and PNC Bank, N.A. (exhibits omitted) (19) (Exhibit 10.1)
10.14 First amendment to Credit Agreement, dated June 19, 1997,
between Safeguard Scientifics, Inc., Safeguard Scientifics
(Delaware), Inc. and PNC Bank, N.A. (exhibits omitted)
(22)(Exhibit 10.4)
10.15 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)
10.16 Credit Agreement, dated as of September 26, 1996, between
NationsBank of Texas, N.A. and CompuCom Systems, Inc. (exhibits
and schedules omitted) (19) (Exhibit 10.2)
10.17 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)
10.18 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*
10.19 Receivables Purchase Agreement dated April 1, 1996 between
CompuCom Systems, Inc. and CSI Funding, Inc. (exhibits omitted)
(18) (Exhibit 10.6)
29
10.20 First Amendment to Receivables Purchase Agreement, dated as of
September 25, 1996, between CompuCom Systems, Inc. and CSI
Funding, Inc. (exhibits omitted) (19) (Exhibit 10.4)
10.21 Amendment No. 2 to Receivables Purchase Agreement, dated as of
April 1, 1997, among CSI Funding, Inc., CompuCom Systems, Inc.,
Enterprise Funding Corporation and NationsBank, N.A. (exhibits
omitted) (22)(Exhibit 10.6)
10.22 Transfer and Administration Agreement, dated as of April 1,
1996, among CSI Funding, Inc., CompuCom Systems, Inc., Enterprise
Funding Corporation and NationsBank, N.A. (exhibits omitted) (18)
(Exhibit 10.7)
10.23 First Amendment to Transfer and Administration Agreement, dated
as of September 25, 1996, among CSI Funding, Inc., CompuCom
Systems, Inc., Enterprise Funding Corporation and NationsBank,
N.A. (exhibits omitted) (19) (Exhibit 10.5)
10.24 Amendment No. 2 dated December 5, 1996 to Transfer and
Administration Agreement among CSI Funding, Inc., CompuCom
Systems, Inc., Enterprise Funding Corporation and NationsBank,
N.A. (20)(Exhibit 10.21)
10.25 Amendment No. 3 to Transfer and Administration Agreement, dated
as of February 1, 1997, among CSI Funding, Inc., CompuCom
Systems, Inc., Enterprise Funding Corporation and NationsBank
N.A. (21)(Exhibit 10.3)
10.26 Amendment No. 4 to Transfer and Administration Agreement, dated
as of April 1, 1997, among CSI Funding, Inc., CompuCom Systems,
Inc., Enterprise Funding Corporation and NationsBank, N.A.
(exhibits omitted) (22)(Exhibit 10.5)
10.27 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) *
10.28 Amended and Restated Receivables Purchase Agreement, dated as of
November 3, 1997, between CompuCom Systems, Inc. and CSI Funding,
Inc. (exhibits omitted) *
10.29 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) *
10.30** Promissory Note dated February 12, 1997 from Edward Anderson
to CompuCom Systems, Inc. (20)(Exhibit 10.22)
10.31** Pledge Agreement dated August 31, 1994 between Edward Anderson
and CompuCom Systems, Inc. (14) (Exhibit 10.27)
30
10.32** Executive Employment Agreement dated October 24, 1997 between
Edward Anderson and CompuCom Systems, Inc. *
11 Computation of Per Share Earnings * (included in Note 7 to the
Consolidated Financial Statements on page 42 of the Company's
Annual Report to Shareholders for year ended December 31, 1997,
which page is filed as part of Exhibit 13 hereto)
13 Pages 27 to 46 of Annual Report to Shareholders for year ended
December 31, 1997 *
21 List of Subsidiaries*
23.1 Consent of KPMG Peat Marwick LLP, independent auditors*
23.2 Consent and Report of Coopers & Lybrands LLP, independent
auditors*
23.3 Consent and Report of Coopers & Lybrands LLP, independent
auditors*
23.4 Consent and Report of Coopers & Lybrands LLP, independent
auditors*
23.5 Consent and Report of Price Waterhouse LLP, independent
auditors*
23.6 Consent and Report of Price Waterhouse LLP, independent
auditors*
23.7 Consent and Report of Deloitte & Touche LLP, independent
auditors*
27.1 Financial Data Schedule for the year ended December 31, 1997*
27.2 Financial Data Schedule for the years ended December 31, 1996 and
December 31, 1995*
27.3 Financial Data Schedule for the three, six and nine month
periods ended March 31, 1997, June 30, 1997, and September 30,
1997*
27.4 Financial Data Schedule for the three, six and nine month
periods ended March 31, 1996, June 30, 1996, and September 30,
1996*
- --------------------------------
* 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.
31
(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.
32
(d) Financial Statement Schedules
Independent Auditors' Report
The Board of Directors and Shareholders
Safeguard Scientifics, Inc.:
Under date of February 7, 1998, we reported on the consolidated balance sheets
of Safeguard Scientifics, Inc. and subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of operations, cash flows and
shareholders' equity for each of the years in the three-year period ended
December 31, 1997, as contained in the 1997 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 1997. 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 Peat Marwick LLP
Philadelphia, Pennsylvania
February 7, 1998
33
Safeguard Scientifics, Inc.
Schedule I
Condensed Consolidated Balance Sheets
December 31, 1997 and 1996
(in thousands)
ASSETS
1997 1996
--------- ---------
Current Assets
Cash and cash equivalents ............. $ 680 $ 8,019
Receivables less allowances ($0 - 1997;
$25 - 1996).......................... 4,140
Notes and other receivables ........... 6,157 9,403
Other current assets .................. 4,873 9,119
--------- ---------
Total current assets ............... 11,710 30,681
Property, Plant and Equipment, Net ...... 13,142 20,707
Other Assets
Investments in unconsolidated
subsidiaries and affiliates ......... 310,877 241,490
Notes and other receivables ........... 21,669 14,989
Other ................................. 2,756 9,846
--------- ---------
Total other assets ................. 335,302 266,325
--------- ---------
Total Assets.................... $ 360,154 $ 317,713
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
1997 1996
--------- ---------
Current Liabilities
Current debt obligations .............. $ 333 $ 3,560
Accounts payable ...................... 888 1,730
Accrued expenses ...................... 17,304 16,702
--------- ---------
Total current liabilities .......... 18,525 21,992
Long-Term Debt .......................... 29,689 12,591
Deferred Taxes .......................... 12,846 10,860
Other Liabilities ....................... 1,143 1,128
Convertible Subordinated Notes .......... 90,881 102,131
Shareholders' Equity
Common stock .......................... 3,280 3,280
Additional paid-in capital ............ 49,952 35,566
Retained earnings ..................... 151,471 129,970
Treasury stock, at cost ............... (13,339) (7,165)
Net unrealized appreciation on
investments .......................... 15,706 7,360
--------- ---------
Total shareholders' equity.......... 207,070 169,011
--------- ---------
Total Liabilities and
Shareholders' Equity........... $ 360,154 $ 317,713
--------- ---------
--------- ---------
See notes to condensed consolidated financial statements.
34
Safeguard Scientifics, Inc.
Schedule I
Condensed Consolidated Statements of Operations
Years Ended December 31, 1997, 1996 and 1995
(in thousands except per share amounts)
1997 1996 1995
-------- -------- --------
REVENUES
Net sales........................ $ 15,982 $ 30,286 $ 35,628
Securities and other gains, net.. 24,025 26,011 17,464
Other income..................... 14,223 10,273 9,210
-------- -------- --------
Total revenues.................. 54,230 66,570 62,302
COSTS AND EXPENSES
Cost of sales.................... 10,908 19,223 23,899
Selling, general, and
administrative.................. 25,162 22,712 19,061
Depreciation and amortization.... 2,169 3,818 4,536
Interest......................... 7,150 8,623 6,643
Equity in income of
unconsolidated subsidiaries
and affiliates, net of taxes.... (14,873) (12,345) (12,655)
-------- -------- --------
Total costs and expenses........ 30,516 42,031 41,484
-------- -------- --------
EARNINGS BEFORE TAXES ON INCOME 23,714 24,539 20,818
Provision for taxes on income.... 2,213 4,612 2,555
-------- -------- --------
NET EARNINGS....................... $ 21,501 $ 19,927 $ 18,263
-------- -------- --------
-------- -------- --------
EARNINGS PER SHARE
Basic............................ $ .69 $ .67 $ .63
Diluted.......................... $ .66 $ .61 $ .53
AVERAGE COMMON SHARES OUTSTANDING
Basic............................ 31,249 29,900 29,052
Diluted.......................... 31,996 31,348 30,734
See notes to condensed consolidated financial statements.
35
Safeguard Scientifics, Inc.
Schedule I
Condensed Consolidated Statements of Cash Flows
Years Ended December 31, 1997, 1996 and 1995
(in thousands)
1997 1996 1995
--------- --------- ---------
OPERATING ACTIVITIES
Net earnings...................... $ 21,501 $ 19,927 $ 18,263
Adjustments to reconcile net
earnings to cash provided
(used) by operating activities
Depreciation and amortization... 2,169 3,818 4,536
Deferred income taxes........... (2,313) 109 1,891
Equity in income of
unconsolidated subsidiaries
and affiliates, net of taxes... (14,873) (12,345) (12,655)
Securities and other gains,
net........................... (24,025) (26,011) (17,464)
Cash provided (used) by changes in
working capital items
Receivables..................... 3,349 (5,746) 422
Accounts payable, accrued
expenses and other............. 2,638 5,624 (7,558)
--------- --------- ---------
Cash (used) by operating
activities....................... (11,554) (14,624) (12,565)
Proceeds from securities and other
gains, net....................... 67,294 41,982 24,952
--------- --------- ---------
Cash provided by operating
activities and securities and
other gains, net................. 55,740 27,358 12,387
OTHER INVESTING ACTIVITIES
Investments and notes acquired,
net.............................. (80,518) (64,110) (28,638)
Capital expenditures.............. (7,871) (5,985) (3,068)
Other, net........................ 3,408 (5,592)
--------- --------- ---------
Cash (used) by other investing
activities....................... (84,981) (75,687) (31,706)
FINANCING ACTIVITIES
Net borrowings (repayments) on
revolving credit facilities...... 22,200 (63,425) 16,351
Net borrowings (repayments) on
term debt........................ 3,371 455 (1,035)
Issuance of convertible
subordinated notes, net.......... 112,109
Repurchase of common stock........ (9,488) (33)
Issuance of common stock.......... 5,819 5,210 3,771
--------- --------- ---------
Cash provided by financing
activities....................... 21,902 54,349 19,054
--------- --------- ---------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS.................. (7,339) 6,020 (265)
Cash and cash equivalents -
beginning of year................ 8,019 1,999 2,264
--------- --------- ---------
CASH AND CASH EQUIVALENTS -
END OF YEAR...................... $ 680 $ 8,019 $ 1,999
--------- --------- ---------
--------- --------- ---------
See notes to condensed consolidated financial statements.
36
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
1997 1996
-------- --------
(in thousands)
Revolving credit facilities.................. $ 22,200
Mortgage note, 9.75%, payable
monthly through 2002........................ 3,456 $ 3,487
Mortgage notes, 6.1% to 7.6%,
payable monthly through 2017................ 4,045
Pioneer Metal Finishing...................... 11,870
Other........................................ 321 794
-------- --------
Total debt................................... 30,022 16,151
Current debt obligations..................... (333) (3,560)
-------- --------
Long-term debt............................... $ 29,689 $ 12,591
-------- --------
-------- --------
Aggregate maturities of long-term debt during future years are as
follows (in millions): $.3 - 1998; $.4 - 1999; $.3 - 2000; $22.5 -
2001; $.5 - 2002 and $6.0 - thereafter.
Interest paid in 1997, 1996, and 1995 was $6.9 million, $6.3 million and $6.6
million, respectively, of which $5.8 million and $3.4 million in 1997 and 1996,
respectively, related to the Company's Convertible Subordinated Notes and $1.1
million and $2.0 million in 1996 and 1995, respectively, related to commercial
real estate debt.
NOTE 3 - RECLASSIFICATIONS
Certain amounts previously reported in the Condensed Consolidated Financial
Statements have been reclassified to conform to the current year presentation.
37
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, 1995 $ 6,466 $ 1,277 $ 968 $(4,131)(2) $ 2,644
Year ended December 31, 1996 $ 2,644 $ 1,472 $ 995 $ (33)(3) $ 3,088
Year ended December 31, 1997 $ 3,088 $ 2,183 $ 1,829 $ (570)(4) $ 2,872
Inventory reserves
Year ended December 31, 1995 $ 10,674 $ 13,333 $ 13,581 $ (902)(2) $ 9,524
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
(1) Net write-offs.
(2) Deconsolidation of Center Core.
(3) Sale of the Phoenix location of Pioneer Metal Finishing and the Commercial
Real Estate operations.
(4) Sale of Pioneer Metal Finishing and Premier Solutions Ltd.
38
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 19, 1998 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 19, 1998 /s/ Warren V. Musser
-- ---------------------
Warren V. Musser, Chairman and Chief
Executive Officer (Principal Executive
Officer)
Dated: March 19, 1998 /s/ Michael W. Miles
-- ---------------------
Michael W. Miles, Senior Vice
President and Chief Financial Officer
(Principal Financial and Accounting
Officer)
Dated: March 19, 1998 /s/ Judith Areen
-- -----------------
Judith Areen, Director
Dated: March 19, 1998 /s/ Donald R. Caldwell
-- -----------------------
Donald R. Caldwell, Director
Dated: March 19, 1998 /s/ Robert A. Fox
-- ------------------
Robert A. Fox, Director
Dated: March 19, 1998 /s/ Delbert W. Johnson
-- -----------------------
Delbert W. Johnson, Director
Dated: March 27, 1998 /s/ Robert E. Keith, Jr.
-- -------------------------
Robert E. Keith, Jr., Director
Dated: March 19, 1998 /s/ Peter Likins
-- -----------------
Peter Likins, Director
39
Dated: March 19, 1998 /s/ Jack L. Messman
-- --------------------
Jack L. Messman, Director
Dated: March 19_, 1998 /s/ Russell E. Palmer
-- ----------------------
Russell E. Palmer, Director
Dated: March 19, 1998 /s/ John W. Poduska, Sr.
-- -------------------------
John W. Poduska Sr., Director
Dated: March 19, 1998 /s/ Heinz Schimmelbusch
-- ------------------------
Heinz Schimmelbusch, Director
Dated: March 19, 1998 /s/ Hubert J.P. Schoemaker
-- ---------------------------
Hubert J. P. Schoemaker, Director
40
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 the Company
(20)(Exhibit 3.1)
3.2 By-laws of the Company, as amended (6)(Exhibit 3.2)
4.1** 1979 Stock Option Plan (1)(Exhibit 10)
4.2** 1980 Stock Option Plan (1)(Exhibit 10)(5)(Exhibit 10.5)
4.3** 1990 Stock Option Plan, as amended (20)(Exhibit 4.3)
4.4** Stock Option Plan for Non-Employee Directors (11) (Exhibit 4.8)
4.5** Safeguard Scientifics, Inc. Amended and Restated Stock Savings
Plan (14) (Exhibit 4.9)
4.6** First Amendment to Safeguard Scientifics, Inc. Stock Savings
Plan (20)(Exhibit 4.6)
4.7** Safeguard Scientifics, Inc. Stock Savings Plan Trust Agreement
(5)(Exhibit 4.2)
4.8 Trust Indenture Agreement dated February 1, 1996 (17) (Exhibit
10.34)
4.9 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 Pension Plan
(17) (Exhibit 10.4)
41
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 Omitted
10.9 Omitted
10.10 Omitted
10.11** Form of Promissory Notes dated February 12, 1997 given by
certain executives for advances by the Company of income tax
withholdings on restricted stock grants (20) (Exhibit 10.11)
10.12** Safeguard Scientifics, Inc. Deferred Compensation Plan
(2)(Exhibit 10.12)
10.13 Credit Agreement, dated as of September 13, 1996, between
Safeguard Scientifics, Inc., Safeguard Scientifics (Delaware),
Inc. and PNC Bank, N.A. (exhibits omitted) (19) (Exhibit 10.1)
10.14 First amendment to Credit Agreement, dated June 19, 1997,
between Safeguard Scientifics, Inc., Safeguard Scientifics
(Delaware), Inc. and PNC Bank, N.A. (exhibits omitted)
(22)(Exhibit 10.4)
10.15 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)
10.16 Credit Agreement, dated as of September 26, 1996, between
NationsBank of Texas, N.A. and CompuCom Systems, Inc. (exhibits
and schedules omitted) (19) (Exhibit 10.2)
10.17 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)
10.18 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*
10.19 Receivables Purchase Agreement dated April 1, 1996 between
CompuCom Systems, Inc. and CSI Funding, Inc. (exhibits omitted)
(18) (Exhibit 10.6)
42
10.20 First Amendment to Receivables Purchase Agreement, dated as of
September 25, 1996, between CompuCom Systems, Inc. and CSI
Funding, Inc. (exhibits omitted) (19) (Exhibit 10.4)
10.21 Amendment No. 2 to Receivables Purchase Agreement, dated as of
April 1, 1997, among CSI Funding, Inc., CompuCom Systems, Inc.,
Enterprise Funding Corporation and NationsBank, N.A. (exhibits
omitted) (22)(Exhibit 10.6)
10.22 Transfer and Administration Agreement, dated as of April 1,
1996, among CSI Funding, Inc., CompuCom Systems, Inc., Enterprise
Funding Corporation and NationsBank, N.A. (exhibits omitted) (18)
(Exhibit 10.7)
10.23 First Amendment to Transfer and Administration Agreement, dated
as of September 25, 1996, among CSI Funding, Inc., CompuCom
Systems, Inc., Enterprise Funding Corporation and NationsBank,
N.A. (exhibits omitted) (19) (Exhibit 10.5)
10.24 Amendment No. 2 dated December 5, 1996 to Transfer and
Administration Agreement among CSI Funding, Inc., CompuCom
Systems, Inc., Enterprise Funding Corporation and NationsBank,
N.A. (20)(Exhibit 10.21)
10.25 Amendment No. 3 to Transfer and Administration Agreement, dated
as of February 1, 1997, among CSI Funding, Inc., CompuCom
Systems, Inc., Enterprise Funding Corporation and NationsBank
N.A. (21)(Exhibit 10.3)
10.26 Amendment No. 4 to Transfer and Administration Agreement, dated
as of April 1, 1997, among CSI Funding, Inc., CompuCom Systems,
Inc., Enterprise Funding Corporation and NationsBank, N.A.
(exhibits omitted) (22)(Exhibit 10.5)
10.27 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) *
10.28 Amended and Restated Receivables Purchase Agreement, dated as of
November 3, 1997, between CompuCom Systems, Inc. and CSI Funding,
Inc. (exhibits omitted) *
10.29 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) *
10.30** Promissory Note dated February 12, 1997 from Edward Anderson
to CompuCom Systems, Inc. (20)(Exhibit 10.22)
10.31** Pledge Agreement dated August 31, 1994 between Edward Anderson
and CompuCom Systems, Inc. (14) (Exhibit 10.27)
43
10.32** Executive Employment Agreement dated October 24, 1997 between
Edward Anderson and CompuCom Systems, Inc. *
11 Computation of Per Share Earnings * (included in Note 7 to the
Consolidated Financial Statements on page 42 of the Company's
Annual Report to Shareholders for year ended December 31, 1997,
which page is filed as part of Exhibit 13 hereto)
13 Pages 27 to 46 of Annual Report to Shareholders for year ended
December 31, 1997 *
21 List of Subsidiaries*
23.1 Consent of KPMG Peat Marwick LLP, independent auditors*
23.2 Consent and Report of Coopers & Lybrands LLP, independent
auditors*
23.3 Consent and Report of Coopers & Lybrands LLP, independent
auditors*
23.4 Consent and Report of Coopers & Lybrands LLP, independent
auditors*
23.5 Consent and Report of Price Waterhouse LLP, independent
auditors*
23.6 Consent and Report of Price Waterhouse LLP, independent
auditors*
23.7 Consent and Report of Deloitte & Touche LLP, independent
auditors*
27.1 Financial Data Schedule for the year ended December 31, 1997*
27.2 Financial Data Schedule for the years ended December 31, 1996 and
December 31, 1995*
27.3 Financial Data Schedule for the three, six and nine months
period ended March 31, 1997, June 30, 1997, and September 30,
1997*
27.4 Financial Data Schedule for the three, six and nine months
periods ended March 31, 1996, June 30, 1996, and September 30,
1996*
- --------------------------------
* 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.
44
(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.
45