-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, F3e09QedoBPPiPfaocKaikp5MjjmK+PDo5NgmCovtXOk+kvUUeF7KnWj3oAcS7Kg 4h4Lr4Zp9KrYLdfS3znq1Q== 0000893220-01-500601.txt : 20010816 0000893220-01-500601.hdr.sgml : 20010816 ACCESSION NUMBER: 0000893220-01-500601 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SAFEGUARD SCIENTIFICS INC ET AL CENTRAL INDEX KEY: 0000086115 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 231609753 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-05620 FILM NUMBER: 1714389 BUSINESS ADDRESS: STREET 1: 435 DEVON PARK DR STREET 2: 800 THE SAFEGUARD BLDG CITY: WAYNE STATE: PA ZIP: 19087 BUSINESS PHONE: 6102930600 FORMER COMPANY: FORMER CONFORMED NAME: SAFEGUARD CORP DATE OF NAME CHANGE: 19690521 FORMER COMPANY: FORMER CONFORMED NAME: SAFEGUARD INDUSTRIES INC DATE OF NAME CHANGE: 19810525 10-Q 1 w52490e10-q.txt QUARTERLY REPORT FOR THE PERIOD END JUNE 30, 2001 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For Quarter Ended June 30, 2001 Commission File Number 1-5620 ------------- ------ SAFEGUARD SCIENTIFICS, INC. - ------------------------------------------------------------------------------ (Exact name of registrant as specified in its charter) Pennsylvania 23-1609753 - ------------------------------------------------------------------------------ (state or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 800 The Safeguard Building, 435 Devon Park Drive Wayne, PA 19087 - ------------------------------------------------------------------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (610) 293-0600 -------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No -------- ---------- Number of shares outstanding as of August 14, 2001 Common Stock 117,578,573 2 SAFEGUARD SCIENTIFICS, INC. QUARTERLY REPORT FORM 10-Q INDEX
PART I - FINANCIAL INFORMATION - ------------------------------ Page ---- Item 1 - Financial Statements: Consolidated Balance Sheets - June 30, 2001 (unaudited) and December 31, 2000 3 Consolidated Statements of Operations (unaudited) - Three and Six Months Ended June 30, 2001 and 2000 4 Consolidated Statements of Cash Flows (unaudited) - Six Months Ended June 30, 2001 and 2000 5 Notes to Consolidated Financial Statements 6 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 19 Item 3 - Quantitative and Qualitative Disclosures About Market Risk 30 PART II - OTHER INFORMATION - --------------------------- Item 1 - Legal Proceedings 32 Item 4 - Submission of Matters to a Vote of Security Holders 32 Item 6 - Exhibits and Reports on Form 8-K 32 Signatures 34
2 3 SAFEGUARD SCIENTIFICS, INC. CONSOLIDATED BALANCE SHEETS (in thousands)
JUNE 30, DECEMBER 31, 2001 2000 - --------------------------------------------------------------------------------------------------------------- (unaudited) ASSETS Current Assets Cash and cash equivalents, restricted cash and short-term investments $ 248,470 $ 219,431 Trading securities 172,423 3,446 Accounts receivable, less allowances 182,134 246,949 Inventories 40,971 78,187 Prepaid expenses and other current assets 26,131 24,914 - --------------------------------------------------------------------------------------------------------------- Total current assets 670,129 572,927 Property and equipment, net 57,980 52,951 Ownership interests in and advances to affiliates 311,758 616,875 Available-for-sale securities 9,709 214,343 Intangibles, net 130,121 123,002 Deferred taxes 49,225 39,708 Related party note receivable 26,033 -- Other 26,072 28,453 - --------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $1,281,027 $1,648,259 - --------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Current maturities of long-term debt $ 5,766 $ 5,250 Accounts payable 122,791 123,130 Accrued expenses 105,353 130,722 - --------------------------------------------------------------------------------------------------------------- Total current liabilities 233,910 259,102 Long-term debt 16,287 13,493 Minority interest 109,617 106,462 Other long-term liabilities 168,353 164,765 Convertible subordinated notes 200,000 200,000 Commitments and contingencies SHAREHOLDERS' EQUITY Preferred stock -- -- Common stock 11,815 11,815 Additional paid-in capital 748,173 758,946 Retained earnings (deficit) (187,499) 172,716 Accumulated other comprehensive loss (920) (712) Unamortized deferred compensation (1,314) -- Treasury stock, at cost (17,395) (38,328) - --------------------------------------------------------------------------------------------------------------- Total shareholders' equity 552,860 904,437 - --------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,281,027 $1,648,259 - ---------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 3 4 SAFEGUARD SCIENTIFICS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands except per share data)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 2001 2000 2001 2000 - --------------------------------------------------------------------------------------------------------------- (UNAUDITED) REVENUE Product sales $ 426,671 $ 640,007 $ 912,134 $1,155,605 Service sales 81,549 68,324 166,125 136,467 Other 6,334 4,344 12,962 8,089 - -------------------------------------------------------------------------------------------------------------- Total revenue 514,554 712,675 1,091,221 1,300,161 Operating Expenses Cost of sales--product 382,628 589,280 824,789 1,065,943 Cost of sales--service 52,487 45,607 109,448 92,621 Selling and service 36,104 36,791 73,999 73,985 General and administrative 42,150 46,831 82,035 95,029 Depreciation and amortization 9,766 8,029 19,460 16,359 Restructuring -- -- -- 5,169 - -------------------------------------------------------------------------------------------------------------- Total operating expenses 523,135 726,538 1,109,731 1,349,106 - -------------------------------------------------------------------------------------------------------------- (8,581) (13,863) (18,510) (48,945) Other income (loss), net (28,300) 32,564 (37,575) 85,020 Interest income 2,988 7,453 6,974 8,647 Interest and financing expense (6,743) (10,052) (15,476) (20,750) - -------------------------------------------------------------------------------------------------------------- INCOME (LOSS) BEFORE INCOME TAXES, MINORITY INTEREST AND EQUITY INCOME (LOSS) (40,636) 16,102 (64,587) 23,972 Income taxes (3,071) (1,169) 6,186 (17,106) Minority interest (1,248) (1,730) (2,298) 6,869 Equity income (loss) (65,517) (11,033) (299,516) 18,033 - -------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) $(110,472) $ 2,170 $ (360,215) $ 31,768 - -------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) PER SHARE Basic $ (0.94) $ 0.02 $ (3.07) $ 0.29 Diluted $ (0.95) $ 0.02 $ (3.08) $ 0.26 WEIGHTED AVERAGE SHARES OUTSTANDING Basic 117,300 116,732 117,269 111,127 Diluted 117,300 119,333 117,269 114,254 - --------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 4 5 SAFEGUARD SCIENTIFICS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
SIX MONTHS ENDED JUNE 30, 2001 2000 - -------------------------------------------------------------------------------------------------------------- (unaudited) OPERATING ACTIVITIES Net income (loss) $(360,215) $ 31,768 Adjustments to reconcile to net cash provided by (used in) operating activities: Depreciation and amortization 19,460 16,359 Deferred income taxes (8,213) (855) Equity (income) loss 299,516 (22,718) Other (income) loss, net 37,575 (80,335) Stock-based compensation 376 5,889 Minority interest 1,379 (4,121) Changes in assets and liabilities, net of effect of acquisitions and dispositions: Accounts receivable, net 146,818 (20,157) Inventories 50,345 13,250 Accounts payable, accrued expenses and other (12,960) 5,467 - -------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities 174,081 (55,453) INVESTING ACTIVITIES Proceeds from sales of available-for-sale securities 11,029 57,756 Proceeds from sales of and distributions from affiliates 20,730 43,743 Advances to affiliates (12,582) (24,193) Repayment of advances to affiliates 30 10,050 Acquisitions of ownership interests in affiliates and subsidiaries, net of cash acquired (46,927) (336,288) Acquisitions by subsidiaries, net of cash acquired (79,309) (750) Advances to related party (26,499) -- Decrease in short-term investments and restricted cash 86,728 -- Capital expenditures (14,369) (4,928) Other, net (1,467) (21,553) - -------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (62,636) (276,163) FINANCING ACTIVITIES Borrowings on revolving credit facilities 19,549 603,163 Repayments on revolving credit facilities (17,996) (593,038) Borrowings on long-term debt 3,509 1,819 Repayments on long-term debt (1,752) (6,158) Repurchase of company common stock -- (19,074) Issuance of Company common stock, net 139 613,542 Issuance of subsidiary common stock 375 1,427 - -------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 3,824 601,681 - -------------------------------------------------------------------------------------------------------------- NET INCREASE IN CASH AND CASH EQUIVALENTS 115,269 270,065 Cash and cash equivalents at beginning of period 133,201 49,813 - -------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 248,470 $ 319,878 - --------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 5 6 SAFEGUARD SCIENTIFICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 1. GENERAL The accompanying unaudited interim consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. The 2000 Form 10-K should be read in conjunction with the accompanying statements. These statements include all adjustments (consisting only of normal recurring adjustments) which the Company believes are necessary for a fair presentation of the statements. The interim operating results are not necessarily indicative of the results for a full year. 2. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities", as amended. SFAS 133 establishes new standards of accounting and reporting for derivative instruments and hedging activities. SFAS 133 requires that all derivatives be recognized at fair value in the statement of financial position, and that the corresponding gains or losses be reported either in the statements of operations or as a component of comprehensive income, depending on the type of hedging relationship that exists. If the derivative is determined to be a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are offset against the change in fair value of the hedged assets, liabilities or firm commitments through the statements of operations or recognized in other comprehensive income until the hedged item is recognized in the statement of operations. The ineffective portion of a derivative's change in fair value is immediately recognized in earnings. The Company currently holds derivative instruments and engages in certain hedging activities, which have been accounted for as described in note 6. The Company adopted SFAS 133 on January 1, 2001. 3. COMPREHENSIVE INCOME (LOSS) Comprehensive income (loss) is the change in equity of a business enterprise from transactions and other events and circumstances from non-owner sources. Excluding net income (loss), the Company's source of comprehensive income (loss) is from net unrealized appreciation (depreciation) on its holdings classified as available-for-sale. Reclassification adjustments result from the recognition in net income of unrealized gains or losses that were included in comprehensive income in prior periods. The following summarizes the components of comprehensive income (loss), net of income taxes:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 2001 2000 2001 2000 - -------------------------------------------------------------------------------------- (in thousands) (unaudited) NET INCOME (LOSS) $(110,472) $ 2,170 $(360,215) $31,768 - -------------------------------------------------------------------------------------- OTHER COMPREHENSIVE INCOME (LOSS), BEFORE TAXES: Unrealized holding gains (losses) (2,809) 39,474 (4,891) 7,874 Reclassification adjustments (4,009) 1,148 4,571 (44,683) RELATED TAX (EXPENSE) BENEFIT: Unrealized holding (gains) losses 983 (13,816) 1,712 (2,756) Reclassification adjustments 1,403 (402) (1,600) 15,639 - -------------------------------------------------------------------------------------- OTHER COMPREHENSIVE INCOME (LOSS) (4,432) 26,404 (208) (23,926) - -------------------------------------------------------------------------------------- COMPREHENSIVE INCOME (LOSS) $(114,904) $ 28,574 $(360,423) $ 7,842 - --------------------------------------------------------------------------------------
6 7 4. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform to the current year presentation. 5. CASH AND CASH EQUIVALENTS, RESTRICTED CASH AND SHORT-TERM INVESTMENTS At June 30, 2001, cash and cash equivalents consist of commercial paper and other deposits that are readily convertible into cash. At December 31, 2000, restricted cash of $35 million was primarily invested in money market investments and was used as collateral under a guarantee arrangement (note 19). At December 31, 2000, short-term investments of $51 million represented commercial paper with maturities ranging from 92 to 208 days. At June 30, 2001, the restricted cash and short-term investment balances were zero. 6. FINANCIAL INSTRUMENTS In 1999, in order to mitigate the Company's market exposure and generate cash from holdings in Tellabs, the Company entered into two forward sale contracts related to 3.4 million shares of its holdings in Tellabs. The Company pledged these shares of Tellabs under contracts that expire in 2002 and, in return, received approximately $139 million of cash. At maturity, the Company is required to deliver cash or Tellabs stock with a value determined by the stock price of Tellabs at maturity. The number of Tellabs shares to be delivered at maturity will range between 2.7 million to 3.4 million depending on the price of Tellabs stock at that date. The forward sale contracts are considered derivative financial instruments that have been designated as fair value hedging instruments under SFAS 133. The Company's objective relative to the use of these hedging instruments is to limit the Company's exposure to and benefits from price fluctuations in the underlying equity securities. Pursuant to SFAS 133, the Company transferred its Tellabs holdings into the trading category from the available-for-sale category effective January 1, 2001. As of June 30, 2001, the fair value of our holdings in Tellabs and the value of the forward sale contracts are included in the caption trading securities on the consolidated balance sheets. The Company accounts for the forward sale arrangements as hedges and has determined that the hedges are highly effective. Changes in the value of the hedge instrument are substantially offset by changes in the value of the underlying securities. The hedging of the Tellabs common stock was part of the Company's overall risk management strategy, which includes the preservation of cash and the value of securities used to fund ongoing operations and future acquisition opportunities. The Company does not hold or issue any derivative financial instruments for trading purposes. The net loss recognized during the six months ended June 30, 2001 was $16.5 million. This amount reflects a $77.3 million gain on the change in the fair value of the hedging contract excluded from the assessment of the hedge effectiveness, and the ineffective portion of the hedge, reduced by a $93.8 million loss on the change in fair value of the Tellabs holdings. This loss is reflected in other income (loss), net in the consolidated statements of operations. The effect of the transition accounting at January 1, 2001, prescribed in SFAS 133 was not material. The Company's liability of $166 million in connection with these transactions is included in other long-term liabilities on the consolidated balance sheet at June 30, 2001. The initial cost of the transaction ($4.3 million) is being amortized over the life of the agreement through the statements of operations. The risk of loss to the Company in the event of nonperformance by the counterparty under the forward sale contracts is not considered to be significant. Although the forward sale contracts expose the Company to market risk, fluctuations in the fair value of these contracts are mitigated by expected offsetting fluctuations in the pledged securities. 7 8 7. OWNERSHIP INTERESTS IN AND ADVANCES TO AFFILIATES The following summarizes the Company's ownership interests in and advances to affiliates accounted for under the equity method or cost method of accounting. The ownership interests are classified according to applicable accounting methods at June 30, 2001 and December 31, 2000.
JUNE 30, DECEMBER 31, 2001 2000 ------------------------------ (in thousands) (unaudited) EQUITY METHOD Public companies $ 99,257 $267,062 Non-public companies 176,053 309,369 - --------------------------------------------------------------------- 275,310 576,431 COST METHOD Non-public companies 24,784 33,101 ADVANCES TO AFFILIATES 11,664 7,343 - --------------------------------------------------------------------- $311,758 $616,875 - ---------------------------------------------------------------------
The market value of the Company's public companies accounted for under the equity method was $266 million and $339 million at June 30, 2001 and December 31, 2000. At June 30, 2001, the Company's carrying value in its partner companies accounted for under the equity method exceeded its share of the underlying equity in the net assets of such companies by $86.5 million which is included in ownership interests in and advances to affiliates on the consolidated balance sheets. This excess relates to ownership interests acquired through June 30, 2001, and is being amortized generally over a three to ten-year period. Amortization expense of $14.5 million and $7.2 million for the six months ended and $6.8 million and $4.2 million for the three months ended June 30, 2001 and 2000, is included in equity loss in the consolidated statements of operations. As of June 30, 2001, the Company had advances to partner companies that mature on various dates through May 2004 and bear interest at fixed rates between 5.3% and 9.0% and variable rates consisting of the prime rate (6.75% at June 30, 2001) plus 1 - 2%. The Company also has short-term advances to partner companies of $0.9 million at June 30, 2001, which is included in accounts receivable, less allowances, on the consolidated balance sheets. During management's ongoing review of the recoverability of recorded carrying values versus their estimated fair value, it was determined that the carrying value of goodwill and certain other intangible assets were not fully recoverable. The Company recorded impairment charges for companies accounted for under the equity method totaling $20.6 million and $2.3 million for the three months ended June 30, 2001 and 2000 and $58.6 million and $4.7 million for the six months ended June 30, 2001 and 2000. The amount of the impairment charge was determined by comparing the carrying value of our interest in the affiliate to the estimated fair value. Impairment charges associated with equity method companies are reported as part of equity income (loss) on the consolidated statements of operations. Impairment charges related to cost method companies are reported in other income (loss), net (see note 12). 8 9 8. AVAILABLE-FOR-SALE SECURITIES Available-for-sale securities consisted of the following:
JUNE 30, 2001 DECEMBER 31, 2000 - ----------------------------------------------------------------------------------------- CARRYING MARKET CARRYING MARKET VALUE VALUE VALUE VALUE - ----------------------------------------------------------------------------------------- (in thousands) (unaudited) Tellabs (a) -- -- $212,731 $ 190,654 Pac-West Telecomm $ 9,891 $ 4,940 9,872 8,465 Brandywine Realty Trust(b) 39 762 8,561 10,619 Other public companies 2,030 4,007 2,086 4,605 Unrealized depreciation (2,251) (18,907) - ---------------------------------------------- ----------- $ 9,709 $214,343 - ---------------------------------------------- -----------
(a) As discussed in note 6, the Company entered into forward sale contracts on its Tellabs holdings in 1999. Also as discussed in note 6, these holdings were reclassified to trading securities on January 1, 2001. (b) The Company sold a majority of its holdings in Brandywine in June 2001. 9. DEBT The following is a summary of long-term debt:
JUNE 30, DECEMBER 31, 2001 2000 - ----------------------------------------------------------------------------- (in thousands) (unaudited) Parent company and other recourse debt $ 19,527 $ 18,240 Subsidiary debt (non-recourse to parent) 2,526 503 - ----------------------------------------------------------------------------- Total debt 22,053 18,743 Current maturities of long-term debt (5,766) (5,250) - ----------------------------------------------------------------------------- Long-term debt $ 16,287 $ 13,493 - -----------------------------------------------------------------------------
In May 2001, the Company executed a $100 million revolving credit facility which matures in May 2002, and is secured by certain equity securities the Company holds in its publicly traded partner companies. Availability under our bank credit facility is determined by the market value of these securities pledged as collateral. Based on the provisions of the borrowing base, availability under our bank credit facility at June 30, 2001 was $100 million (less outstanding letters of credit of $0.7 million) and there were no amounts outstanding. The credit facility is subject to the Company's compliance with selected financial covenants. Other long-term debt includes mortgage obligations and bank credit facilities of consolidated partner companies. These obligations bear interest rates ranging from 7.75% to 9.75%. At June 30, 2001, CompuCom has a $100 million working capital facility and a $150 million receivables securitization facility. The $100 million working capital facility bears interest at a rate of LIBOR plus an agreed upon spread and is secured by certain assets of CompuCom. Availability under the facility is subject to a borrowing base calculation. As of June 30, 2001, availability under the working capital facility was approximately $74 million, and there were no amounts outstanding as of June 30, 2001 and December 31, 2000. The working capital facility matures in May 2002. The securitization facility allows CompuCom to sell, without recourse, an interest in its accounts receivable on a revolving basis and is accounted for as a sale of accounts receivable. The effective rate on the $150 million receivables securitization is based on a designated short-term interest rate plus an agreed upon spread. Amounts outstanding as sold receivables at June 30, 2001 consisted of two certificates totaling $106 million, one certificate for $56 million with an April 2002 maturity date and one certificate for $50 9 10 million with an October 2003 maturity date. Both facilities require CompuCom to maintain compliance with selected financial covenants and ratios. 10. SHAREHOLDERS' EQUITY In June 2001, the Company granted 279,000 shares of its common stock to its employees, with a fair value on the date of grant of $1.3 million (or $4.785 per share). The value of the shares is being amortized over the vesting period of 2 years. During the three months ended June 30, 2001, the Company recorded $21,000 of expense related to this grant. As discussed in note 17, the Company issued shares of its common stock in connection with the acquisition of Palarco. 11. RESTRUCTURING In 2000, CompuCom effected a restructuring plan designed to reduce its cost structure by closing its distribution facility located in Houston, Texas, closing and consolidating three office sites and reducing its workforce. As a result, CompuCom recorded a restructuring charge of $5.2 million in the first quarter of 2000. During 1998, CompuCom recorded a $16.4 million restructuring charge, primarily consisting of costs associated with the closing of facilities and disposing of related fixed assets as well as employee severance related to a reduction in workforce. Restructuring activity during 2001 is summarized as follows:
ACCRUAL AT CASH ACCRUAL AT DEC. 31, 2000 PAYMENTS JUNE 30, 2001 - --------------------------------------------------------------------------- (in thousands) (unaudited) RESTRUCTURING - 2000 Lease termination costs $ 1,770 $ (197) $1,573 Employee severance and related benefits 10 (10) -- - --------------------------------------------------------------------------- $ 1,780 $ (207) $1,573 - --------------------------------------------------------------------------- RESTRUCTURING - 1998 Lease termination costs $ 710 $ (159) $ 551 - ---------------------------------------------------------------------------
The remaining accrual at June 30, 2001 is reflected in accrued liabilities on the consolidated balance sheet and is expected to be adequate to cover actual amounts to be paid. Differences, if any, between the estimated amounts accrued and actual amounts paid will be reflected in operating expenses in future periods. 10 11 12. OTHER INCOME (LOSS), NET Other income (loss), net, consists of the following:
THREE MONTHS ENDED, SIX MONTHS ENDED, JUNE 30 JUNE 30 2001 2000 2001 2000 - ----------------------------------------------------------------------------------------------- (in thousands) (unaudited) Gain on sale of public holdings, net $ 1,551 $ 9,424 $ 1,392 $61,831 Gain on sale of private partner companies,net 1,454 19,760 1,518 19,809 Unrealized loss on derivative financial instruments (12,196) -- (16,528) -- Unrealized loss on trading securities, net (272) (820) (1,126) (820) Other, primarily impairment charges (18,837) 4,200 (22,831) 4,200 - ----------------------------------------------------------------------------------------------- $(28,300) $ 32,564 $(37,575) $85,020 - -----------------------------------------------------------------------------------------------
For the three and six months ended June 30, 2001, the Company recorded impairment charges of $18.8 million and $22.8 million for the other than temporary decline in the carrying value of certain partner companies accounted for under the cost method (see note 7). 13. INCOME TAXES Income taxes are accounted for under the asset and liability method whereby deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis, using the tax rate expected to be in effect when the taxes are actually paid or recovered. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance. The Company's consolidated income tax expense recorded for the three months ended June 30, 2001, was $3.1 million, net of a recorded valuation allowance of $37.9 million. The Company's consolidated income tax benefit recorded for the six months ended June 30, 2001, was $6.2 million, net of a recorded valuation allowance of $115.7 million. The Company has recorded a valuation allowance to reduce its deferred tax asset to an amount that is more likely than not to be realized in future years. 11 12 14. NET INCOME PER SHARE The calculations of net income (loss) per share were:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 2001 2000 2001 2000 - --------------------------------------------------------------------------------------- (in thousands except per share amount) (unaudited) Basic: Net income (loss) $(110,472) $ 2,170 $(360,215) $31,768 - --------------------------------------------------------------------------------------- Average common shares outstanding 117,300 116,732 117,269 111,127 - --------------------------------------------------------------------------------------- Basic $ (0.94) $ 0.02 $ (3.07) $ 0.29 - --------------------------------------------------------------------------------------- Diluted: Net income (loss) $(110,472) $ 2,170 $(360,215) $31,768 Effect of: Public holdings (389) (123) (744) (1,736) - --------------------------------------------------------------------------------------- Adjusted net income (loss) $(110,861) $ 2,047 $(360,959) $30,032 - --------------------------------------------------------------------------------------- Average common shares outstanding 117,300 116,732 117,269 111,127 Effect of: Dilutive options -- 2,601 -- 3,127 - --------------------------------------------------------------------------------------- Average common shares assuming dilution 117,300 119,333 117,269 114,254 - --------------------------------------------------------------------------------------- Diluted $ (0.95) $ 0.02 $ (3.08) $ 0.26 - ---------------------------------------------------------------------------------------
If a consolidated or equity method company has dilutive options or securities outstanding, diluted net income (loss) per share is computed first by deducting from income (loss) the income attributable to the potential exercise of the dilutive options or securities of the company. This impact is shown as an adjustment to net income (loss) for purposes of calculating diluted net income (loss) per share. The computation of average common shares outstanding for the three and six months ended June 30, 2001, excludes 0.3 million shares of non-vested restricted stock granted in June 2001. Approximately 0.1 million and 0.5 million weighted average common stock equivalents related to stock options and approximately 8.3 million and 8.3 million shares representing the weighted average effect of assumed conversion of the convertible subordinated notes were excluded from the denominator in the calculation of diluted loss per share for the three and six months ended June 30, 2001, because their effect was anti-dilutive. 12 13 15. PARENT COMPANY FINANCIAL INFORMATION Parent Company financial information is provided to present the financial position and results of operations of the Company as if the consolidated companies were accounted for under the equity method of accounting for all periods presented during which the Company owned its interest in these companies. BALANCE SHEETS
JUNE 30, DECEMBER 31, 2001 2000 - ---------------------------------------------------------------------------- (in thousands) (unaudited) ASSETS Cash and cash equivalents, restricted cash and short-term investments $ 135,722 $ 204,004 Trading securities 172,423 3,446 Other current assets 41,046 30,022 Ownership interests in and advances to affiliates 447,949 759,914 Available-for-sale securities 9,709 214,233 Related party note receivable 26,033 -- Other 133,368 113,415 - ---------------------------------------------------------------------------- Total Assets $ 966,250 $ 1,325,034 - ---------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities $ 30,123 $ 42,899 Long-term debt 15,224 13,421 Other long-term liabilities 168,043 164,277 Convertible subordinated notes 200,000 200,000 Shareholders' equity 552,860 904,437 - ---------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $ 966,250 $ 1,325,034 - ----------------------------------------------------------------------------
The carrying values of the Company's less than wholly owned subsidiaries, primarily CompuCom, Tangram and SOTAS, are included in ownership interests in and advances to affiliates. STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------- (in thousands) (unaudited) Revenue $ 15,964 $ 6,861 $ 34,572 $ 13,382 Operating expenses 27,639 20,117 54,979 45,837 - ------------------------------------------------------------------------------------------- (11,675) (13,256) (20,407) (32,455) Other income (loss), net (28,300) 30,606 (37,575) 83,062 Interest and financing expense, net (3,229) 1,183 (5,977) (3,733) - ------------------------------------------------------------------------------------------- Income (loss) before income taxes and equity income (loss) (43,204) 18,533 (63,959) 46,874 Income taxes (2,193) (224) 7,826 (19,561) Equity income (loss) (65,075) (16,139) (304,082) 4,455 - ------------------------------------------------------------------------------------------- Net income (loss) $(110,472) $ 2,170 $ (360,215) $31,768 - -------------------------------------------------------------------------------------------
13 14 The Company's shares of the income or losses of its less than wholly owned subsidiaries, primarily CompuCom, Tangram and SOTAS for the three and six months ended June 30, 2001, and including Arista for the three and six months ended June 30, 2000, are reflected in equity income (loss). 16. OPERATING SEGMENTS Our reportable segments include General Safeguard Operations, Partner Company Operations and CompuCom Operations. General Safeguard Operations includes the expenses of providing strategic and operational support to the Company's partner companies and private equity funds, and also includes the effect of certain private equity funds which the Company accounts for under the equity method. General Safeguard Operations also includes the effect of transactions and other events incidental to the Company's ownership interests in its partner companies and its operations in general. Partner Company Operations reflects the operations of all of the Company's partner companies other than CompuCom (included in CompuCom Operations). The partner companies included under Partner Company Operations are accounted for under either the consolidation or the equity method. CompuCom Operations includes the results of our majority-owned subsidiary, CompuCom. The following table reflects consolidated operating data by reported segments (in thousands). All significant intersegment activity has been eliminated. Accordingly, segment results reported exclude the effect of transactions between the Company and its subsidiaries. 14 15 The following summarizes information related to the Company's segments (in thousands). All significant intersegment activity has been eliminated.
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------------------ (UNAUDITED) SUMMARY OF CONSOLIDATED NET INCOME (LOSS) General Safeguard Operations $ (41,803) $ 43,696 $ (59,409) $ 62,488 Partner Company Operations (69,651) (41,840) (302,671) (26,946) CompuCom Operations 982 314 1,865 (3,774) - ------------------------------------------------------------------------------------------------------------------------ $(110,472) $ 2,170 $ (360,215) $ 31,768 - ------------------------------------------------------------------------------------------------------------------------ GENERAL SAFEGUARD OPERATIONS Revenue $ 6,334 $ 4,344 $ 12,962 $ 8,089 Operating expenses General and administrative 16,737 16,654 31,174 39,148 Depreciation and amortization 696 440 1,443 855 - ------------------------------------------------------------------------------------------------------------------------ Total operating expenses 17,433 17,094 32,617 40,003 - ------------------------------------------------------------------------------------------------------------------------ (11,099) (12,750) (19,655) (31,914) Other income (loss), net (28,300) 30,606 (37,575) 83,062 Interest and financing, net (2,958) 1,102 (5,837) (3,937) - ------------------------------------------------------------------------------------------------------------------------ Income (loss) before income taxes and equity income (42,357) 18,958 (63,067) 47,211 Income taxes (820) (21,625) (64) (33,688) Equity income 1,374 46,363 3,722 48,965 - ------------------------------------------------------------------------------------------------------------------------ Net Income (Loss) from General Safeguard Operations $ (41,803) $ 43,696 $ (59,409) $ 62,488 - ------------------------------------------------------------------------------------------------------------------------ PARTNER COMPANY OPERATIONS Revenue $ 19,511 $ 6,720 $ 35,262 $ 14,750 Operating expenses Cost of sales 9,881 2,276 20,398 4,716 Selling and service 4,806 3,412 9,582 5,911 General and administrative 3,164 5,839 6,601 10,462 Depreciation and amortization 3,005 1,831 5,938 3,735 - ------------------------------------------------------------------------------------------------------------------------ Total operating expenses 20,856 13,358 42,519 24,824 - ------------------------------------------------------------------------------------------------------------------------ (1,345) (6,638) (7,257) (10,074) Interest and financing, net (49) (495) (188) (695) - ------------------------------------------------------------------------------------------------------------------------ Loss before income taxes and equity loss (1,394) (7,133) (7,445) (10,769) Income taxes (1,366) 22,460 8,012 14,526 Minority Interest - 229 - 229 Equity loss (66,891) (57,396) (303,238) (30,932) - ------------------------------------------------------------------------------------------------------------------------ Net Loss from Partner Company Operations $ (69,651) $ (41,840) $ (302,671) $ (26,946) - ------------------------------------------------------------------------------------------------------------------------ COMPUCOM OPERATIONS Revenue Product sales $ 419,718 $ 637,460 $ 902,079 $1,149,105 Service sales 68,991 64,151 140,918 128,217 - ------------------------------------------------------------------------------------------------------------------------ $ 488,709 $ 701,611 $1,042,997 $1,277,322 - ------------------------------------------------------------------------------------------------------------------------ Operating expenses Cost of sales - Product 381,824 588,838 822,095 1,064,965 Cost of sales - Service 43,410 43,773 91,744 88,883 Selling and service 31,298 33,379 64,417 68,074 General and administrative 22,249 24,338 44,260 45,419 Depreciation and amortization 6,065 5,758 12,079 11,769 Restructuring - - - 5,169 - ------------------------------------------------------------------------------------------------------------------------ Total operating expenses 484,846 696,086 1,034,595 1,284,279 - ------------------------------------------------------------------------------------------------------------------------ 3,863 5,525 8,402 (6,957) Other income, net - 1,958 - 1,958 Interest and financing, net (748) (3,206) (2,477) (7,471) - ------------------------------------------------------------------------------------------------------------------------ Income (loss) before income taxes and minority interest 3,115 4,277 5,925 (12,470) Income taxes (885) (2,004) (1,762) 2,056 Minority interest (1,248) (1,959) (2,298) 6,640 - ------------------------------------------------------------------------------------------------------------------------ Net Income (Loss) from CompuCom Operations $ 982 $ 314 $ 1,865 $ (3,774) - ------------------------------------------------------------------------------------------------------------------------
15 16 17. BUSINESS COMBINATIONS Acquisitions by the Company In January 2001, the Company acquired 100% of Palarco, Inc. for cash and stock, and an additional amount which is dependent upon the achievement of certain performance targets during the two years after the acquisition. Palarco is a provider of global information technology solutions, and provides a key services component to Safeguard's infrastructure strategy by augmenting the breadth and depth of Safeguard's consulting and implementation capabilities. In August 2000, aligne, the Company's wholly owned subsidiary, acquired 100% of K Consultants, Inc. for cash and an additional amount which is dependent upon achievement of certain performance targets of K Consultants during the first 12 months after the acquisition. K Consultants provides eBusiness infrastructure consulting services, including strategy, architecture, implementation and support. In February 2000, the Company acquired the remaining 20% voting ownership in aligne in exchange for shares of the Company's common stock. These transactions were accounted for as purchases and, accordingly, the consolidated financial statements reflect the operations of these companies since the acquisition date. In connection with its acquisitions, the Company has contingent consideration payable dependent upon the achievement of certain performance targets. The maximum amount of contingent consideration is approximately $16 million to be paid primarily in common stock (payable through 2003). Acquisitions by Subsidiaries In January 2001, CompuCom purchased certain assets of MicroAge Technology Services, L.L.C. The assets were purchased out of bankruptcy court and primarily consisted of trade accounts receivable as well as vendor accounts receivable and inventory. The purchase price of approximately $79 million (after post-closing adjustments) was financed using available cash. The purchased assets were used by MTS primarily in its business as a systems integrator of personal computer products. As part of the MTS acquisition, CompuCom also hired certain of MTS' national sales force, technical service personnel and administrative personnel. The business combination is being accounted for as a purchase and accordingly the consolidated financial statements reflect the operations of the acquired entity since the acquisition date. CompuCom has not completed the allocation of the purchase price for this acquisition. Therefore, the allocation of the purchase price could be adjusted once the valuation of the assets acquired and liabilities assumed is completed. The following unaudited pro forma financial information presents the combined results of operations of the Company as if the acquisitions had occurred as of January 1, 2000, after giving effect to certain adjustments, including amortization of goodwill, increased interest expense on debt related to the acquisitions, and related income tax effects. The pro forma results of operations are not indicative of the actual results that would have occurred had the acquisitions been consummated at the beginning of the period presented and is not intended to be a projection of future results.
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 2000 2000 --------------------- ------------------- (in thousands except per share amounts) Total revenues $1,014,504 $1,962,179 Net income (loss) $ (2,645) $ 22,987 Diluted income (loss) per share $ (0.02) $ 0.19
Unaudited pro forma consolidated results for the three and six months ended June 30, 2001, after giving effect to the 2001 acquisitions, would not have been materially different from the amounts reported. Subsequent Acquisition by Subsidiary On July 16, 2001, CompuCom purchased certain assets of Excell Data Corporation ("Excell") pursuant to the terms of the Asset Purchase Agreement dated as of July 11, 2001 entered into by and among CompuCom, Excell and Cambridge Technology Partners, Inc., the parent of Excell. Under the terms of the purchase agreement, CompuCom purchased certain assets of Excell for approximately 16 17 $27 million, subject to certain post-closing adjustments. The net assets acquired were used by Excell primarily in its business of high-end technical applications development, network infrastructure design and deployment and worldwide event technical planning and support. 18. COMMITMENTS AND CONTINGENCIES Litigation Arising Out Of The Initial Public Offering of Opus360 Corporation Beginning in April 2001, Safeguard, CompuCom Systems, Inc., a Safeguard affiliate, and an officer of Safeguard and Safeguard's designee as a Director of Opus360 Corporation, were named in putative class actions filed in federal court in New York. The plaintiffs allege material misrepresentations and/or omissions in connection with the initial public offering of Opus360 Corporation stock on April 7, 2000. The cases are brought against Opus360, its officers and directors (including the Safeguard designee), Safeguard, CompuCom, and Opus360's underwriters. In these cases, the plaintiffs allege, among other things, that the prospectus and registration statement for Opus360's initial public offering contained misrepresentations and/or omissions regarding: (1) Opus360's products, including Opus Xchange; (2) Opus360's cash flow and liquidity, including its "cash burn" rate; and (3) Opus360's relationships with its customers. Plaintiffs assert claims under Sections 11, 12 and 15 of the Securities Act of 1933. Plaintiffs seek damages in an amount in excess of $70 million. Safeguard expects that these cases will be consolidated into a single coordinated proceeding and that it will respond to the allegations following consolidation. While the outcome of this litigation is uncertain, the Company believes that it has valid defenses to plaintiffs' claims and intends to defend the lawsuits vigorously. Gilman v. Safeguard Scientifics, Inc. and Warren V. Musser On June 26, 2001, Safeguard and Warren V. Musser, Safeguard's Chairman, were named as defendants in a putative class action filed in federal court in Philadelphia. Plaintiffs allege that defendants failed to disclose that Mr. Musser had pledged some or all of his Safeguard stock as collateral to secure margin trading in his personal brokerage accounts. Plaintiffs allege that defendants' failure to disclose the pledge, along with their failure to disclose several margin calls and the consequences thereof on Safeguard's stock price, violated the federal securities laws. Plaintiffs allege claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Safeguard has not yet filed an answer to plaintiffs' Complaint. While the outcome of this litigation is uncertain, the Company believes that it has valid defenses to plaintiffs' claims and intends to defend the lawsuit vigorously. The Company and its subsidiaries are involved in various other 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. 19. RELATED PARTY TRANSACTIONS During October 2000, the Company extended a $10 million loan to the Company's Chairman and Chief Executive Officer, Mr. Musser, and guaranteed a $35 million loan to Musser, each in connection with his margin loan arrangements. Mr. Musser had incurred margin debt and obligations with respect to margin debt at several brokerage firms. The securities subject to the margin account included approximately 8,000,000 shares of Safeguard common stock. With the goal of maintaining an orderly trading market for Safeguard's stock, Safeguard extended the guarantee and advanced the loan. The $10 million loan bore interest at the prime rate and was payable in full on March 15, 2001. On December 3, 2000, Mr. Musser repaid in full the principal and accrued interest on the $10 million loan. Mr. Musser's obligations to the Company under the guarantee arrangements were secured by interests in securities and real estate. In May 2001, Safeguard consummated a definitive agreement with Mr. Musser under which the Company loaned Mr. Musser $26.5 million to repay in full Mr. Musser's margin loans which were guaranteed by the Company and to pay certain tax obligations and expenses. As a result of the repayment of these margin loans, the Company's $35 million guarantee was extinguished. The loan bears interest at an annual rate of 7% and is payable on demand at any 17 18 time after January 1, 2003. Mr. Musser granted the Company security interests in securities and real estate as collateral. Until April 30, 2006, the Company will have recourse only against the collateral. There can be no assurance that the proceeds realized by the Company in the future from dispositions of the collateral will be sufficient to repay the loan in full. After April 30, 2006, the Company will have recourse against Mr. Musser personally, except with respect to certain ongoing compensation to be received by Mr. Musser. The Company has the right to sell the collateral at any time and apply the net after-tax proceeds from the sales of collateral against amounts outstanding on the loan. The outstanding balance of the loan at June 30, 2001 was approximately $26 million. During June 2000, John Halvey, a senior officer of Safeguard, resigned from the Company. In connection with his separation, the Company agreed to forgive indebtedness of $0.5 million plus accrued interest in exchange for the transfer by the officer to the Company of shares of capital stock of certain Safeguard affiliates. In addition, Safeguard agreed to pay the officer approximately $0.1 million in respect of relocation and moving expenses. If the officer complies with various confidentiality and other obligations, in March 2002 the Company will forgive other loans to the officer aggregating $0.2 million and will make a $0.1 million severance payment to the employee. In 1999, the Company loaned an officer and a director of CompuCom $0.8 million to exercise CompuCom stock options. Interest on the note accrues at a rate of 4.3% per annum, and principal on the note is due on December 31, 2001. 18 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The statements contained in this report that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve certain risks, uncertainties and other factors that could cause actual results to be materially different than those contemplated by these statements. These risks and uncertainties include the factors described elsewhere in this report and in our filings with the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2000. We do not assume any obligation to update any forward-looking statements or other information contained in this report. Although we refer in this report to the companies in which we have acquired an equity ownership interest as our "partner companies" and that we indicate that we have a "partnership" with these companies, we are not a "partner" in a legal sense, and do not act as an agent or legal representative for any of our partner companies, we do not have the power or authority to legally bind any of our partner companies and we do not have the types of liabilities in relation to our partner companies that a general partner of a partnership would have. Certain amounts for prior periods in the consolidated financial statements, and in the discussion below, have been reclassified to conform with current period presentations. GENERAL We are a leader in identifying, developing and operating emerging technology companies through our extensive network of partner companies and private equity funds (collectively, affiliates). Our operations are classified into three operating segments: i) General Safeguard Operations; ii) Partner Company Operations; and iii) CompuCom Operations. We acquire interests in developing infrastructure technology companies, provide management support and operations services, and integrate these companies into our operating network. We focus on what we believe to be the most significant market sectors of the infrastructure technology industry: software, communications and e-Services. We believe our experience developing technology companies, our expertise in and focus on infrastructure technology and the reach of our network enable us to identify and attract companies with significant potential for success in the infrastructure technology market. Our principal mission is to create long-term shareholder value. We believe shareholder value is maximized by retaining and promoting the entrepreneurial culture of the partner companies that we operate. The entrepreneurs of our partner companies generally retain significant equity interests in their businesses, and their interests as shareholders remain aligned with ours. We provide a full range of operational and management services to each of our partner companies through dedicated teams of our professionals. Each team has expertise in the areas of business and technology strategy, sales and marketing, operations, finance and legal and transactional support, and provides hands-on assistance to the management of the partner company in support of its growth. The level of involvement varies and in some circumstances includes the provision of full-time interim personnel. Since we are a long-term partner, we pursue various alternatives to maximize the long-term value of our partner companies. These alternatives include preparing our partner companies for initial public offerings, assisting with mergers and acquisitions and facilitating additional capital raising activities. We participate in managing 11 private equity funds which are located on our corporate campus. In addition, we are a limited partner in 6 other private equity funds. Collectively, these 17 funds, which have over $3.6 billion of committed capital, augment our network by providing us with an expanded base through which we conduct our operations, including acquisition syndication opportunities. We believe our network of private equity funds creates opportunities for us and our partner companies to form strategic alliances and partnerships that may develop or enhance their businesses. Also, the personal relationships and expertise of the professionals employed by these funds are important resources for developing and evaluating acquisition opportunities. We frequently refer opportunities that may not fit our operating strategy or deal criteria to an appropriate fund. Because we acquire significant interests in technology-related developing companies, many of which generate net losses, we have experienced, and expect to continue to experience, significant volatility in our quarterly results. While some of our affiliates have consistently reported losses, we have recorded 19 20 net income in certain periods and experienced significant volatility from period to period due, in part, to one-time transactions and other events incidental to our ownership interests in and advances to affiliates. We do not know if we will report net income in any period. These transactions and events include dispositions of, and changes to, our affiliate ownership interests, dispositions of our holdings of affiliates and impairment charges. On a continuous basis, but no less frequently than at the end of each quarterly reporting period, we evaluate the carrying value of our ownership interests in and advances to each of our affiliates for possible impairment based on achievement of business plan objectives and milestones, the fair value of each ownership interest in and advances to each affiliate relative to its carrying value, the financial condition and prospects of the affiliate and other relevant factors. The business plan objectives and milestones we consider include, among others, those related to financial performance such as achievement of planned financial results or completion of capital raising activities, and those that are not primarily financial in nature, such as the hiring of key employees or the establishment of strategic relationships. We operate in an industry which is rapidly evolving and extremely competitive. It is reasonably possible that our accounting estimates with respect to the useful life and ultimate recoverability of the carrying value, including goodwill, could change in the near term and that the effect of such changes on our consolidated financial statements could be material. While we believe that the current recorded carrying values of our affiliates are not impaired, there can be no assurance that our future results will confirm this assessment or that a significant write-down or write-off of the carrying value will not be required in the future. EFFECT OF VARIOUS ACCOUNTING METHODS ON THE CONSOLIDATED FINANCIAL STATEMENTS The various interests that we acquire in our partner companies and private equity funds are accounted for under three broad methods: consolidation, equity and cost. The applicable accounting method is generally determined based on our voting interest in the entity. Consolidation. Partner companies in which we directly or indirectly own more than 50% of the outstanding voting securities are generally accounted for under the consolidation method of accounting. If this majority voting ownership is likely to be temporary, we account for the company under the equity method. Under the consolidation method, a partner company's results of operations are included within our consolidated statements of operations. Participation of other partner company shareholders in the income or losses of a consolidated partner company is reflected in minority interest in our consolidated statements of operations. The minority interest amount adjusts our consolidated net income (loss) to reflect only our share of the earnings or losses of the consolidated partner company. CompuCom Systems, Inc., Tangram Enterprise Solutions, Inc., SOTAS, Inc. and aligne, incorporated were consolidated in 2001 and 2000. In August 2000, aligne acquired 100% of K Consultants. In January 2001, we acquired 100% of Palarco, Inc. Each of these partner companies was consolidated from the date we acquired directly or indirectly more than 50% of the outstanding voting securities interest. Arista Knowledge Systems, Inc. was sold in July 2000 and is included in our consolidated operating results through its sale date. Equity Method. Partner companies and private equity funds whose results we do not consolidate, but over whom we exercise significant influence, or for whom majority voting ownership is likely to be temporary, are generally accounted for under the equity method of accounting. Whether or not we exercise significant influence with respect to a partner company depends on an evaluation of several factors including, among others, our representation on the partner company's board of directors and ownership level, which is generally a 20% to 50% interest in the voting securities of the partner company, including voting rights associated with our holdings in common, preferred and other convertible instruments in the partner company. Under the equity method of accounting, a partner company's results of operations are not reflected within our consolidated statement of operations; however, our share of the income or losses of the partner company is reflected in equity income (loss) in our consolidated statements of operations. The share of income or losses is generally based upon our voting ownership of the partner company's securities, which may be different from the percentage of the economic ownership 20 21 of the partner company held by us. We also account for our interests in some private equity funds under the equity method of accounting, based on our respective general and limited partner interests. The effect of an affiliate's net results of operations on our results of operations is the same under either the consolidation method of accounting or the equity method of accounting, because under each of these methods only our share of the income or losses of an affiliate is reflected in our net results of operations in the consolidated statements of operations. Our partner companies accounted for under the equity method of accounting at June 30, 2001 included:
PARTNER VOTING VOTING COMPANY OWNERSHIP OWNERSHIP SINCE 6/30/01 12/31/00 ----- ------- -------- PUBLICLY TRADED: Cambridge Technology Partners 1991 17% 17% ChromaVision Medical Systems 1996 30% 30% DocuCorp International 1995 18% 18% eMerge Interactive 1997 17% 17% Internet Capital Group 1996 14% 14% Lifef/x 1996 46% 12% OAO Technology Solutions 1996 31% 31% Sanchez Computer Associates 1986 25% 25% USDATA Corporation 1994 43% 40% PRIVATELY HELD: AgWeb.com 2000 43% 43% Atlas Commerce 2000 34% 35% Buystream 2000 25% 31% Data Center Direct 2000 76% 76% iMedium 1999 31% 31% Kanbay 1998 30% 30% Mantas 2001 30% n/a Mi8 2000 27% 27% NexTone Communications 2000 37% 38% Nextron Communications 1995 56% 54% Persona 1999 30% 30% QuestOne Decision Sciences 1997 31% 31% Redleaf Group 1999 31% 30% TechSpace 2000 45% 45% ThinAirApps 2000 34% 34% WebTelecom 2000 53% 53% Wireless OnLine 2000 43% 43%
21 22 We have representation on the boards of directors of these partner companies. Although we own less than 20% of the voting stock of some of these companies, we believe we have the ability to exercise significant influence based on our representation on each company's board of directors and other factors. We own greater than 50% of the voting stock of some of these companies; however, we believe majority voting ownership is temporary. In addition to our holdings in equity and debt securities, we also periodically make advances to our affiliates in the form of promissory notes. The carrying value of advances to affiliates totaled $12.5 million and $7.3 million at June 30, 2001 and December 31, 2000. Cost Method. Partner companies and private equity funds that we do not account for under either the consolidation or the equity method of accounting are accounted for under the cost method of accounting. Under this method, our share of the income or losses of these entities is not included in our consolidated statements of operations. However, the effect of the change in market value of cost method holdings classified as trading securities is reflected in our results of operations during each reporting period. EFFECT OF VARIOUS ACCOUNTING METHODS ON THE PRESENTATION OF OUR CONSOLIDATED FINANCIAL STATEMENTS The presentation of our financial statements may differ from period to period primarily due to the applicable accounting method used for recognizing our equity interests in the operating results of an affiliate. For example, the presentation of our financial statements are significantly influenced by the consolidated results of operations of CompuCom, which we consolidate based on our 59% voting interest. To understand our net results of operations and financial position without the effect of consolidating our consolidated partner companies, please refer to note 15 to our consolidated financial statements, which summarizes our parent company statements of operations and balance sheets and presents consolidated partner companies as if they were accounted for under the equity method of accounting. Our share of the income or losses of the consolidated partner companies is included in equity income (loss) in the parent company statements of operations. The carrying value of these companies is included in ownership interests in and advances to affiliates in the parent company balance sheets. Although the parent company statements of operations and balance sheets presented in note 15 reflect our historical results, they are not necessarily indicative of future parent company balance sheets and statements of operations. NET RESULTS OF OPERATIONS The following table reflects consolidated operating data by reported segments. All significant intersegment activity has been eliminated. Accordingly, segment results reported exclude the effect of transactions between us and our subsidiaries.
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, - ----------------------------------------------------------------------------------------------------- 2001 2000 2001 2000 - ----------------------------------------------------------------------------------------------------- (in thousands) (unaudited) SUMMARY OF CONSOLIDATED NET INCOME (LOSS) General Safeguard Operations $ (41,803) $ 43,696 $ (59,409) $ 62,488 Partner Company Operations (69,651) (41,840) (302,671) (26,946) CompuCom Operations 982 314 1,865 (3,774) - ----------------------------------------------------------------------------------------------------- $ (110,472) $ 2,170 $(360,215) $ 31,768 - -----------------------------------------------------------------------------------------------------
22 23 NET RESULTS OF OPERATIONS - GENERAL SAFEGUARD OPERATIONS General Safeguard Operations includes the expenses of providing strategic and operational support to our affiliates, and also includes the effect of certain private equity funds that we account for under the equity method. General Safeguard Operations also includes the effect of transactions and other events incidental to our ownership interests in our partner companies and our operations in general.
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 2001 2000 2001 2000 - --------------------------------------------------------------------------------------------------------------- (in thousands) (unaudited) Revenue $ 6,334 $ 4,344 $ 12,962 $ 8,089 Operating expenses General and administrative 16,737 16,654 31,174 39,148 Depreciation and amortization 696 440 1,443 855 - ---------------------------------------------------------------------------------------------------------------- Total operating expenses 17,433 17,094 32,617 40,003 - ---------------------------------------------------------------------------------------------------------------- (11,099) (12,750) (19,655) (31,914) Other income (loss), net (28,300) 30,606 (37,575) 83,062 Interest and financing, net (2,958) 1,102 (5,837) (3,937) - ---------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes and equity income (42,357) 18,958 (63,067) 47,211 Income taxes (820) (21,265) (64) (33,688) Equity income 1,374 46,363 3,722 48,965 - ---------------------------------------------------------------------------------------------------------------- Net Income (Loss) from General Safeguard Operations $ (41,803) $ 43,696 $ (59,409) $ 62,488 - ----------------------------------------------------------------------------------------------------------------
Revenue. Revenue consists of management fees charged to private equity funds for operational and management services. Revenue was $6.3 million and $4.3 million for the three months ended June 30, 2001 and 2000, and $13.0 million and $8.1 million for the six months ended June 30, 2001 and 2000. This increase was related to additional management fees charged to private equity funds as a result of the formation of additional private equity funds during 2000. General and Administrative. Our general and administrative expenses consist primarily of employee compensation, outside services such as legal, accounting and consulting, and travel-related costs. General and administrative were flat for the three months ended June 30, 2001 compared to 2000. Excluding general and administrative costs related to the private equity funds and $2.3 million of non-cash charges in 2000, general and administrative decreased $1.7 million for the three months ended June 30, 2001 compared to the prior year period. The reduction is the result of certain cost reduction efforts undertaken in the fourth quarter of 2000. General and administrative costs decreased $8.0 million for the six months ended June 30, 2001 compared to the same period in 2000. Excluding general and administrative costs related to the private equity funds and $8.0 million of non-cash charges in 2000, general and administrative costs decreased $5.0 million for the six months ended June 30, 2001 compared to the prior year period. The reduction is the result of certain cost reduction efforts undertaken in the fourth quarter of 2000. 23 24 Other Income (Loss), Net. Other income, net, for the General Safeguard Operations segment consisted of the following:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 2001 2000 2001 2000 - ---------------------------------------------------------------------------------------------- (in thousands) (unaudited) Gain on sale of public holdings, net $ 1,551 $ 7,466 $ 1,392 $ 59,873 Gain on sale of private partner companies, net 1,454 19,760 1,518 $ 19,809 Unrealized loss on derivative financial instrument (12,196) -- (16,528) -- Unrealized loss on trading securities, net (272) (820) (1,126) (820) Other, primarily impairment charges (18,837) 4,200 (22,831) 4,200 - ---------------------------------------------------------------------------------------------- $(28,300) $ 30,606 $(37,575) $ 83,062 - ----------------------------------------------------------------------------------------------
During the three months ended June 30, 2000, we sold shares of public holdings, including Diamond Technology Partners, for aggregate net proceeds of $25.2 million and recorded gains of $7.5 million. During the six months ended June 30, 2000, we sold shares of public holdings, including Diamond Technology Partners and eMerge Interactive (in its IPO), for aggregate net proceeds of $85.9 million and recorded gains of $59.9 million. We implemented SFAS 133 effective January 1, 2001. The net loss recognized during the three months ended June 30, 2001 on the Tellabs forward sale contracts was $12.2 million, including a $60.8 million gain on the change in fair value of the hedging contract excluded from the assessment of the hedge effectiveness, and the ineffective portion of the hedge, reduced by a $73.0 million loss on the change in fair value of the Tellabs holdings. The net loss recognized during the six months ended June 30, 2001 on these forward sale contracts was $16.5 million. This loss includes a $77.3 million gain on the change in the fair value of the hedging contract, reduced by a $93.8 million loss on the change in fair value of the Tellabs holdings. Included in other income, net, for the three and six months ended June 30, 2001 are impairment charges of approximately $18.8 million and $22.8 million for certain holdings accounted for under the cost method determined to have experienced an other than temporary decline in value. Interest and Financing Expense, Net. Interest expense was $3.0 million for the three months ended June 30, 2001 versus $1.1 million of income for the three months ended June 30, 2000. Interest expense was $5.8 million for the six months ended June 30, 2001 and $3.9 million for the six months ended June 30, 2000. The change is due to higher interest income earned in 2000 on funds raised in our April 2000 follow-on public offering and from strategic investors. Income Taxes. The Company's consolidated income tax expense recorded for the three months ended June 30, 2001, was $3.1 million net of a recorded valuation allowance of $37.9 million. The Company's consolidated income tax benefit recorded for the six months ended June 30, 2001, was $6.2 million net of a recorded valuation allowance of $115.7 million. The Company has recorded a valuation allowance to reduce its deferred tax asset to an amount that is more likely than not to be realized in future years. 24 25 NET RESULTS OF OPERATIONS - PARTNER COMPANY OPERATIONS Partner Company Operations reflects the operations of all of our partner companies other than CompuCom (included in CompuCom Operations). The partner companies included in Partner Company Operations are accounted for under either the consolidation or the equity method.
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, - ---------------------------------------------------------------------------------------------------- 2001 2000 2001 2000 - ---------------------------------------------------------------------------------------------------- (in thousands) (unaudited) Revenue $ 19,511 $ 6,720 $ 35,262 $ 14,750 Operating expenses Cost of sales 9,881 2,276 20,398 4,716 Selling and service 4,806 3,412 9,582 5,911 General and administrative 3,164 5,839 6,601 10,462 Depreciation and amortization 3,005 1,831 5,938 3,735 - ---------------------------------------------------------------------------------------------------- Total operating expenses 20,856 13,358 42,519 24,824 - ---------------------------------------------------------------------------------------------------- (1,345) (6,638) (7,257) (10,074) Interest and financing, net (49) (495) (188) (695) - ---------------------------------------------------------------------------------------------------- Loss before income taxes and equity loss (1,394) (7,133) (7,445) (10,769) Income taxes (1,366) 22,460 8,012 14,526 Minority Interest - 229 - 229 Equity loss (66,891) (57,396) (303,238) (30,932) - ---------------------------------------------------------------------------------------------------- Net Loss from Partner Company Operations $(69,651) $(41,840) $(302,671) $(26,946) - ----------------------------------------------------------------------------------------------------
Revenue. Revenue consists of charges for consulting services by our wholly owned subsidiary, aligne, K Consultants subsequent to its acquisition by aligne in August 2000, and Palarco subsequent to its acquisition in January 2001. Revenue also includes sales by Tangram and SOTAS. Revenue was $19.5 million and $6.7 million for the three months ended June 30, 2001 and 2000, and $35.3 million and $14.8 million for the six months ended June 30, 2001 and 2000. The increase in revenue in 2001 was the result of the acquisitions of K Consultants in August 2000 and Palarco in January 2001. Operating Expenses. Operating expenses were $20.9 million and $13.4 million for the three months ended June 30, 2001 and 2000 and $42.5 million and $24.8 million for the six months ended June 30, 2001 and 2000. The increase in expenses in 2001 was the result of the acquisitions of K Consultants and Palarco. Equity Loss. A significant portion of our net results of operations is derived from companies in which we hold a significant minority ownership interest. Under the equity method of accounting, if we exercise significant influence over a partner company, we record our share of the income or losses of that partner company in our consolidated statements of operations. The share of income or losses is generally based upon our voting ownership of the partner company's securities. Our carrying value for a partner company accounted for under the equity method includes the unamortized excess of the cost of our interest in the partner company over its equity in the underlying net assets determined at the date of acquisition. This excess is amortized on a straight-line basis generally over a 3 to 10 year period and is included in equity income (loss) in the consolidated statements of operations. Equity income (loss) fluctuates with the number of companies accounted for under the equity method, our voting ownership percentage in these companies, the amortization of goodwill related to newly acquired equity method companies and the net results of operations of these companies. Equity income (loss) also includes impairment charges when management determines there has been an other than temporary decline in the carrying value of its ownership interest relative to the fair value. Equity loss was $66.9 million and $57.4 million for the three months ended June 30, 2001 and 2000. During the three months ended June 30, 2001 and 2000, we accounted for 30 and 34 companies on the equity method. During the three months ended June 30, 2000, $25.1 million of our equity loss was attributable to Internet Capital Group. Goodwill amortization of $6.8 million and $4.2 million is included in equity loss for the three months ended June 30, 2001 and 2000. Write-downs for the other than temporary declines 25 26 in value of partner companies of $20.6 million and $2.3 million for the three months ended June 30, 2001 and 2000, are also included in equity loss. The remaining equity loss of $39.5 million and $25.8 million for the three months ended June 30, 2001 and 2000 relates to our share of 30 and 33 partner company operating results, a majority which have losses. Equity loss was $303.2 million and $30.9 million for the six months ended June 30, 2001 and 2000. During the six months ended June 30, 2001, we accounted for 33 companies on the equity method versus 37 in 2000. During the six months ended June 30, 2001, $136.5 million of loss was attributable to Internet Capital Group versus $24.8 million of income for the six months ended June 30, 2000. Goodwill amortization of $14.5 million and $7.2 million is included in equity loss for the six months ended June 30, 2001 and 2000. Write-downs for the other than temporary declines in value of partner companies of $58.5 million and $4.7 million for the six months ended June 30, 2001 and 2000, are also included in equity loss. The remaining equity loss of $93.7 million and $43.8 million for the six months ended June 30, 2001 and 2000 relates to our share of 32 and 36 partner company operating results, a majority which have losses. Certain amounts recorded to reflect our share of the income or losses of our partner companies accounted for under the equity method are based on estimates and on unaudited results of operations of those partner companies and may require adjustments in the future when audits of these entities are made final. Many of our privately held, equity method partner companies are technology-related companies with limited operating histories that have not generated significant revenues and incurred substantial losses in 2000. We expect these losses to continue in 2001. We expect to continue to acquire interests in more technology-related companies that may have operating losses and that we may account for under the equity method. Additionally, we expect certain of our existing partner companies to continue to invest in their products and services and to recognize operating losses. As a result, equity losses could continue to increase significantly. Additionally, we operate in an industry that is rapidly evolving and extremely competitive. It is reasonably possible that the impairment factors evaluated by management will change in subsequent periods, given that we operate in a volatile business environment. This could result in material impairment charges in future periods. NET RESULTS OF OPERATIONS - COMPUCOM OPERATIONS CompuCom Operations reflects the results of our majority-owned subsidiary, CompuCom.
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 2001 2000 2001 2000 - --------------------------------------------------------------------------------------------------------------- (in thousands) (unaudited) Revenue Product sales $ 419,718 $ 637,460 $ 902,079 $ 1,149,105 Service sales 68,991 64,151 140,918 128,217 - ---------------------------------------------------------------------------------------------------------------- 488,709 701,611 1,042,997 1,277,322 - ---------------------------------------------------------------------------------------------------------------- Operating expenses Cost of sales - Product 381,824 588,838 822,095 1,064,965 Cost of sales - Service 43,410 43,773 91,744 88,883 Selling and service 31,298 33,379 64,417 68,074 General and administrative 22,249 24,338 44,260 45,419 Depreciation and amortization 6,065 5,758 12,079 11,769 Restructuring - - - 5,169 - ---------------------------------------------------------------------------------------------------------------- Total operating expenses 484,846 696,086 1,034,595 1,284,279 - ---------------------------------------------------------------------------------------------------------------- 3,863 5,525 8,402 (6,957) Other income, net - 1,958 - 1,958 Interest and financing, net (748) (3,206) (2,477) (7,471) - ---------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes and minority interest 3,115 4,277 5,925 (12,470) Income taxes (885) (2,004) (1,762) 2,056 Minority interest (1,248) (1,959) (2,298) 6,640 - ---------------------------------------------------------------------------------------------------------------- Net Income (Loss) from CompuCom Operations $ 982 $ 314 $1,865 $ (3,774) - ----------------------------------------------------------------------------------------------------------------
26 27 On January 10, 2001, CompuCom purchased certain assets of MicroAge Technology Services, L.L.C. (MTS). The assets were purchased out of bankruptcy court and primarily consisted of trade accounts receivable as well as vendor accounts receivable and inventory. The purchase price of approximately $79 million (after post-closing adjustments) was financed using available cash. The purchased assets were used by MTS primarily in its business as a systems integrator of personal computer products. As part of the MTS acquisition, CompuCom also hired certain of MTS' national sales force, technical service personnel and administrative personnel. Revenue. Product revenue, which is primarily derived from the sale of desktop, networking, and mobile computing products, as well as peripherals and software-related products to corporate clients, decreased approximately 34.2% in the three months ended June 30, 2001 and decreased 21.5% for the six months ended June 30, 2001 compared to 2000. CompuCom believes the decline in product revenue can be attributed to general economic weakness reflected in lower demand for personal computer products as product purchases are being delayed, downsized or cancelled. In addition, CompuCom believes the decline in product revenue is due to the increased competitiveness and aggressiveness of certain manufacturers to sell or fulfill client's requirements in a more direct fashion. Service revenue is primarily derived from all aspects of desktop outsourcing, including field engineering, as well as help desk and LAN/WAN network outsourcing, configuration, asset tracking, software management, mobile computing services, IT consulting and services provided in support of certain manufacturers' direct fulfillment initiatives. Service revenue reflects revenue generated by the actual performance of specific services and does not include product sales associated with service projects. Service revenue increased approximately 7.5% in the three months ended June 30, 2001 compared to 2000 and increased 9.9% for the six months ended June 30, 2001 compared to 2000. The increase in service revenue was primarily due to increased revenue related to field engineering and help desk outsourcing. These increases were partially offset by declines in service revenue due to lower demand for CompuCom's consulting services and manufacturer warranty contracts. Gross Margin. Product gross margin as a percentage of product revenue was 9.0% and 7.6% for the three months ended June 30, 2001 and 2000 and 8.9% and 7.3% for the six months ended June 30, 2001 and 2000. This increase is the result of relatively less high volume, low margin activity with CompuCom's larger clients as well as the benefit realized from certain operational efficiencies, partially offset by the impact of the increase in lower margin software license revenue. Service gross margin as a percentage of service revenue was 37.1% and 31.8% for the three months ended June 30, 2001 and 2000 and 34.9% and 30.7% for the six months ended June 30, 2001 and 2000. The increase was due primarily to improvements in the management and utilization of service-related resources. Due to both the general economic environment and competitive conditions, CompuCom expects to continue to experience competitive pressure on both revenue and gross margin, the result of which may be to report lower revenue and related gross margin when compared to the comparable prior year period. Selling and Service. Selling and service expense decreased $2.1 million for the three months ended June 30, 2001 compared to 2000, and decreased $3.7 million for the six months ended June 30, 2001 compared to 2000. The decrease relates primarily to CompuCom's cost management efforts relative to personnel and infrastructure, partially offset by increased training costs and investments in the service infrastructure associated with supporting the service business. Selling and service expenses were 6.4% and 4.8% of revenue for the three months ended June 30, 2001 and 2000 and 6.2% and 5.3% for the six months ended June 30, 2001 and 2000. CompuCom attributes this percentage increase to the decline in product revenue for the comparable periods and to increased personnel, training costs and investments in the service infrastructure associated with supporting the service business. General and Administrative. General and administrative expenses decreased $2.1 million in the three months ended June 30, 2001 compared to the prior year period and decreased $1.2 million in the six months ended June 30, 2001 compared to the prior year period. The decrease in general and administrative expense is reflective of CompuCom's ongoing cost management efforts relative to personnel-related and infrastructure costs. CompuCom's operating expenses are reported net of reimbursements by certain manufacturers for specific training, promotional and marketing programs. These reimbursements offset the expenses incurred by CompuCom. Restructuring. In 2000, CompuCom implemented a restructuring plan designed to reduce its cost structure by closing and consolidating certain sites and reducing its workforce. As a result, CompuCom recorded a restructuring charge of $5.2 million in the first quarter of 2000. 27 28 Interest and Financing Expense, Net. Interest and financing expense, net was $0.7 million and $3.2 million for the three months ended June 30, 2001 and 2000 and $2.5 million and $7.5 million for the six months ended June 30, 2001 and 2000. The decrease in financing expense is primarily due to CompuCom's improved management of working capital, as well as less financing requirements given the decline in product revenue, resulting in lower financing levels in the three and six months ended June 30, 2001 as compared to the prior year periods. The decline in financing expense was also due to the effect of higher interest income generated from investing increased available cash as well as slightly lower effective interest rates in 2001 as compared to 2000. LIQUIDITY AND CAPITAL RESOURCES We have funded our operations with proceeds from the issuance of equity securities and convertible notes, proceeds from forward sale contracts, proceeds from sales of partner companies and distributions from private equity funds. If the stock markets decline significantly, availability under the credit facility could be reduced significantly and could have an adverse effect on our availability to borrow under the facility. Our ability to raise proceeds for sales of publicly traded partner companies could also be adversely affected by market declines. We have a revolving credit facility of up to $100 million depending on the market value of pledged securities. The facility matures in May 2002 and is secured by certain equity securities we hold of our publicly traded partner companies. Based on the provisions of the borrowing base, availability under the bank facility at June 30, 2001 was $100 million (less outstanding letters of credit of $0.7 million) and there were no amounts outstanding. Our cash and cash equivalents at June 30, 2001 and other internal sources of cash flow are expected to be sufficient to fund our cash requirements for at least the next twelve months, including commitments to our existing affiliates, our current operating plan to acquire interests in new affiliates and our general corporate requirements. In October 2000, we guaranteed a $35 million loan to our Chairman and CEO, Mr. Musser, in connection with margin loan arrangements. In May 2001, we consummated a definitive agreement with Mr. Musser under which we loaned Mr. Musser $26.5 million to repay in full Mr. Musser's margin loans which were guaranteed by us and to pay certain tax obligations and expenses. As a result of the repayment of these margin loans, our $35 million guarantee was extinguished. The loan bears interest at an annual rate of 7% and is payable on demand at any time after January 1, 2003. Mr. Musser granted us security interests in securities and real estate as collateral. Until April 30, 2006, we will have recourse only against the collateral. There can be no assurance that the proceeds realized by the Company in the future from dispositions of the collateral will be sufficient to repay the loan in full. After April 30, 2006, we will have recourse against Mr. Musser personally, except with respect to certain ongoing compensation to be received by Mr. Musser. We have the right to sell the collateral at any time and apply the net after-tax proceeds from the sales of collateral against amounts outstanding on the loan. The outstanding balance of the loan at June 30, 2001 was approximately $26 million. At June 30, 2001 we were contingently obligated for $14 million of guarantee commitments. Additionally, we have committed capital of approximately $127.8 million, including commitments made in prior years to various affiliates, to be funded over the next several years, including approximately $72.6 million which is expected to be funded in the next twelve months. If a consolidated partner company achieves agreed upon performance criteria over the next two years, we will be obligated to pay up to an aggregate amount of $16 million primarily in common stock as additional purchase price consideration to the former shareholders of the company. CompuCom maintains separate, independent financing arrangements, which are non-recourse to us and are secured by certain assets of CompuCom. CompuCom's working capital requirements are generally funded through financing arrangements and internally generated funds. At June 30, 2001, CompuCom has financing arrangements consisting of a $150 million receivables securitization facility and a $100 million working capital facility. The working capital facility matures in May 2002, and availability under the working capital facility is subject to a borrowing base calculation. Availability under the working capital facility was approximately $74 million at June 30, 2001, and no amounts were outstanding. Of the $106 million outstanding on the securitization facility at June 30, 2001, $56 million matures in April 2002 and $50 million in October 2003. Both the receivables securitization facility and the working capital facility are subject to CompuCom's compliance with selected financial covenants and ratios. CompuCom's liquidity continues to be negatively impacted by the dollar volume of certain manufacturers' rebate programs. Under these programs, CompuCom is required to pay a higher initial amount for product and claim a rebate from the manufacturer to reduce the final cost. The collection of these rebates can take an extended period of time. Due to these programs, CompuCom's initial cost for the product is often higher than the sales price CompuCom can obtain from its clients. These programs 28 29 are a material factor in CompuCom's financing needs. As of June 30, 2001, CompuCom was owed approximately $24 million under these vendor rebate programs. CompuCom's ability to make distributions to its shareholders is limited by restrictions in CompuCom's financing agreements and CompuCom's working capital needs. We do not consider CompuCom's liquidity to be a source of liquidity to us. Consolidated working capital increased to $436 million at June 30, 2001 compared to $314 million at December 31, 2000. This increase is due to the reclassification of the Tellabs holdings from available for sale to trading securities, based on the implementation of SFAS 133. Also affecting working capital was an increase in cash and cash equivalents offset by decreases in receivables and inventories. Cash provided by operating activities increased in 2001 compared to 2000 due to increased operating cash flow by CompuCom. This is primarily attributable to decreases in receivables and inventories. CompuCom's receivables have decreased primarily due to the decline in revenue relative to the fourth quarter of 2000. Partially offsetting the impact of CompuCom's lower revenue levels was a reduction in the amount of receivables utilized under their securitization facility. The decrease in CompuCom's inventories is primarily due to lower product demand and CompuCom's ongoing efforts to minimize risk associated with suppliers' price protection and returns programs by maintaining lower inventory levels, which resulted in higher inventory turns. Cash used in investing activities primarily reflects the acquisition of ownership interests in and advances to affiliates. Cash used in investing activities also reflects acquisitions by our subsidiaries. The decrease relates primarily to reduced acquisition activity in 2001 and the decrease in short-term investments and restricted cash, partially offset by reduced sales of securities and sales of and distribution from affiliates. During the first six months of 2001, we made net commitments of approximately $51.4 million to acquire interests in and make advances to partner companies, and we funded $62.6 million to partner companies and private equity funds. From July 1, 2001 through August 10, 2001, we funded $9.7 million of commitments made prior to June 30, 2001. In July 2001, Novell acquired all of the outstanding shares of Cambridge Technology Partners (Massachusetts), Inc. in exchange for Novell common stock. We received 6.9 million shares of Novell, which we subsequently sold for $34.4 million of proceeds. In addition, in August 2001, we completed the sale of our interests in a private equity fund, receiving proceeds of approximately $23 million. On July 16, 2001, CompuCom purchased certain assets and assumed certain liabilities of Excell Data Corporation ("Excell") pursuant to terms of the Assets Purchase Agreement dated as of July 11, 2001 entered into by and among CompuCom, Excell and Cambridge Technology Partners, Inc., the parent of Excell. Under the terms of the purchase agreement, CompuCom purchased certain assets of Excell for approximately $27 million, subject to certain post-closing adjustments. The net assets acquired were used by Excell primarily in its business of high-end technical applications development, network infrastructure design and deployment, and worldwide event technical planning and support. Our general operations are not capital asset intensive, and capital expenditures in any year normally will not be significant in relation to our overall financial position. There were no material capital asset purchase commitments at June 30, 2001. RECENT ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. SFAS No. 141 also specifies criteria that intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. SFAS No. 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". The Company is required to adopt the provisions of SFAS No. 141 immediately, except with regard to business combinations initiated prior to July 1, 2001, and SFAS No. 142 will become effective January 1, 2002. Because of the extensive effort needed to comply with adopting SFAS No's. 141 and 142, it is not practicable to reasonably estimate the impact of adopting these statements on the Company's financial statements at the date of this report, including whether any transitional impairment losses will be required to be recognized as the cumulative effect of a change in accounting principle. 29 30 FACTORS THAT MAY AFFECT FUTURE RESULTS We operate in a rapidly changing environment that involves a number of risks, some of which are beyond our control. Forward-looking statements in this report and those made from time to time by us through our senior management are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Factors that could cause actual results to differ materially from results anticipated in forward-looking statements are described in our SEC filings, including our Annual Report on Form 10-K for the year ended December 31, 2000. These factors include, but are not limited to, the following: - - Industry-specific conditions affecting the infrastructure technology business sector in which many of our affiliates operate, such as intense competition, rapid changes in technology and customer demands, frequent new product introductions and shifting distribution channels. - - Many of our affiliates are early-stage companies with limited operating histories, no historical profits and financing requirements that they may not be able to satisfy. These affiliates may not have operating income or net income in the future and their financial results may vary dramatically from quarter to quarter. - - We may have problems raising money we need in the future to fund the needs of our affiliates and to make acquisitions of affiliates. - - We may incur significant costs to avoid investment company status and may suffer adverse consequences if deemed to be an investment company. - - Our strategy of selling assets of our interests in some of the affiliates that we have acquired and developed is dependent on the strength of the public equity market and on the level of activity in the mergers and acquisitions market in the affiliate's industry, as well as on the requirements of the Federal securities laws regulating the sale of securities. - - Our financial results are likely to vary dramatically from quarter to quarter depending upon various events. These events include the financial results of our affiliates and the way that the partner companies are reflected in our consolidated financial statements, sales of partner companies or our interests in partner companies and distributions from private equity funds which we manage or in which we have an interest. - - Our stock price may be subject to significant fluctuation because the value of some of our partner companies fluctuates and because of market conditions generally. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to equity price risks on the marketable portion of our securities. These securities include equity positions in companies in the technology industry, many of which have experienced significant volatility in their stock prices. Historically, we have not attempted to reduce or eliminate our market exposure on securities (except the Tellabs transactions as described below). Based on closing market prices at June 30, 2001, the fair market value of our holdings in public securities was approximately $375 million (excluding our holdings in Tellabs). A 20% decrease in equity prices would result in an approximate $75 million decrease in the fair value of our publicly traded securities. In 1999, we entered into two forward sale contracts related to our remaining holdings in Tellabs. We pledged 3.4 million shares of Tellabs for three years and in return received approximately $139 million in cash. At the end of the term, we have the option to deliver cash or Tellabs shares with a value determined by the stock price of Tellabs at maturity. The number of Tellabs shares to be delivered at maturity ranges from 2.7 million to 3.4 million shares (or the cash value thereof). Availability under our bank credit facility is determined by the market value of the publicly traded securities pledged as collateral. As of June 30, 2001, $100 million was available under this facility. If the market value of these securities decreased 20%, the availability under the facility would be reduced to $87.2 million. We are also exposed to interest rate risk primarily through our bank credit facility. At June 30, 2001, there were no borrowings outstanding under the facility. CompuCom is exposed to interest rate risk primarily through its receivables securitization and working capital facilities. CompuCom utilizes borrowings on these facilities to meet its working capital and other financing needs. At June 30, 2001, the securitization facility had borrowings of approximately $106 million, and there were no borrowings on the working capital facility. If CompuCom's effective 30 31 interest rate were to increase by 100 basis points, or 1.00%, CompuCom's annual interest and financing expense would increase by $1.3 million based on CompuCom's average borrowings during the six months ended June 30, 2001. Our share of this increase would be approximately $0.8 million after deduction for minority interest but before income taxes. 31 32 PART II OTHER INFORMATION Item 1. Legal Proceedings Safeguard and various associated entities and persons have been named in two putative class action proceedings, one of which arises out of the initial public offering of Opus 360 Corporation. These proceedings are described in Note 18 of the Notes to Consolidated Financial Statements contained in Item 1 of Part I of this Form 10-Q, which note is incorporated by reference in its entirety into this Item 1. Item 4. Submission of Matters to a Vote of Security Holders The Company held its Annual Meeting of Shareholders on May 23, 2001. At the meeting the shareholders voted in favor of the following items listed in the Proxy Statement dated April 17, 2001: I Election of Directors
For Withheld --- -------- Warren V. Musser 95,726,499 4,578,136 Robert E. Keith, Jr. 98,597,200 1,707,435 Harry Wallaesa 98,495,611 1,809,024 Vincent G. Bell, Jr. 95,976,031 4,328,604 Walter W. Buckley, III 94,881,075 5,423,560 Michael J. Emmi 98,714,684 1,589,951 Robert A. Fox 98,508,684 1,795,951 Jack L. Messman 98,554,579 1,750,056 Russell E. Palmer 98,694,031 1,610,604 John W. Poduska, Sr. 98,656,056 1,648,579 Heinz C. Schimmelbusch 98,419,162 1,885,473 Hubert J.P. Schoemaker 98,759,318 1,545,317 Carl J. Yankowski 95,493,184 4,811,451
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits Number Description ------ ----------- 3.1*** Safeguard Scientifics, Inc. Amended Bylaws 10.1** Fourth Amendment to Inventory and Working Capital Financing Agreement dated as of January 10, 2001 by and between CompuCom Systems, Inc. and IBM Credit Corporation 10.2* Credit Agreement dated May 23, 2001, by and among Safeguard Scientifics, Inc., Safeguard Scientifics (Delaware), Inc., Safeguard Delaware, Inc., and PNC Bank, NA (exhibits omitted) 10.3* Consulting Agreement dated July 3, 2001 between Safeguard Scientifics, Inc. and Vincent G. Bell, Jr. 10.4* Amended and Restated Demand Note dated May 18, 2001 given by Warren V. Musser for advances by Bonfield Insurance, LTD
32 33 10.5* Agreement to Restructure by and among Warren V. Musser and Hillary Grinker Musser and Safeguard Scientifics, Inc. and Bonfield Insurance, LTD, dated as of April 16, 2001 10.6* Amendment to Agreement to Restructure by and among Warren V. Musser and Hillary Grinker Musser and Safeguard Scientifics, Inc. and Bonfield Insurance, LTD, dated May 18, 2001 10.7**** Amendment Number 1, dated as of May 17, 2001 to the Series 2000-1 Supplement, dated as of October 2, 2000, by and among CSI Funding, Inc., CompuCom Systems, Inc., Lloyds TSB Bank PLC and Wells Fargo Bank Minnesota, National Association (f/k/a Norwest Bank Minnesota, National Association). 10.8**** Amendment Number 2, dated as of May 17, 2001 to the Series 1999 -1 Supplement, dated as of May 7, 1999, as amended and restated as of August 20, 1999 and as amended by Amendment Number 1, dated as of October 2, 2000, by and among CSI Funding, Inc., CompuCom Systems, Inc., PNC Bank, National Association, Market Street Funding Corporation and Wells Fargo Bank Minnesota, National Association (f/k/a Norwest Bank Minnesota, National Association). * Filed herewith ** Filed on April 2, 2001 as Exhibit 10.28.5 to the Company's Annual Report on Form 10-K and incorporated herein by reference. *** Filed on May 15, 2001 as Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the three months ended March 31, 2001, and incorporated herein by reference. ****Filed on August 14, 2001 as Exhibits 10.1 and 10.2 to CompuCom Systems, Inc.'s Quarterly Report on Form 10-Q for the three months ended June 30, 2001, and incorporated herein by reference.
b) Reports on Form 8-K No reports on Form 8-K have been filed by the registrant during the three months ended June 30, 2001. 33 34 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SAFEGUARD SCIENTIFICS, INC. (Registrant) Date: August 14, 2001 /s/ Vincent G. Bell, Jr. ------------------------------------ Vincent G. Bell, Jr. Acting Chief Executive Officer Date: August 14, 2001 /s/ Gerald A. Blitstein ------------------------------------ Gerald A. Blitstein Executive Vice President and Chief Financial Officer (Principal Financial and Principal Accounting Officer)
34 EX-10.2 3 w52490ex10-2.txt CREDIT AGREEMENT BETWEEN SAFEGUARD SCI & PNC BANK 1 EXHIBIT 10.2 CREDIT AGREEMENT AMONG SAFEGUARD SCIENTIFICS, INC. SAFEGUARD SCIENTIFICS (DELAWARE) INC. SAFEGUARD DELAWARE, INC. AND PNC BANK, NATIONAL ASSOCIATION AND THE OTHER LENDERS NOW OR HEREAFTER A PARTY HERETO 2 TABLE OF CONTENTS
SECTION TITLE PAGE - ------- ----- ---- ARTICLE 1. DEFINITIONS........................................................................... 1 1.1 TERMS DEFINED......................................................................... 1 1.2 DIRECTLY OR INDIRECTLY................................................................ 8 1.3 ACCOUNTING TERMS; TEST GROUP.......................................................... 8 ARTICLE 2. AMOUNT AND TERMS OF REVOLVING LOAN; COLLATERAL........................................ 8 2.1.1 REVOLVING LOAN........................................................................ 8 2.2 CHANGES IN REVOLVING LOAN COMMITMENT.................................................. 11 2.3 NOTICES............................................................................... 11 2.4 FEES.................................................................................. 12 2.5 BORROWINGS............................................................................ 12 2.6 USE OF LOAN PROCEEDS.................................................................. 14 2.7 PAYMENT OF REVOLVING LOAN............................................................. 14 2.8 INTEREST.............................................................................. 15 2.9 NOTES................................................................................. 17 2.10 COMPUTATIONS; APPLICATION OF PAYMENTS................................................. 18 2.11 MINIMUM AMOUNT OF BORROWINGS.......................................................... 18 2.12 SET-OFF............................................................................... 18 2.13 PREPAYMENT............................................................................ 18 2.14 COLLATERAL............................................................................ 18 2.15 VALUATION OF COLLATERAL COVERAGE SECURITIES; SALE..................................... 19 ARTICLE 3. REPRESENTATIONS AND WARRANTIES........................................................ 19 3.1 ORGANIZATION.......................................................................... 19 3.2 POWER, AUTHORITY, CONSENTS............................................................ 19 3.3 NO VIOLATION OF LAW OR AGREEMENTS..................................................... 20 3.4 DUE EXECUTION, VALIDITY, ENFORCEABILITY............................................... 20 3.5 PROPERTIES, PRIORITY OF LIENS......................................................... 20 3.6 JUDGMENTS, ACTIONS, PROCEEDINGS....................................................... 20
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SECTION TITLE PAGE - ------- ----- ---- 3.7 NO DEFAULTS........................................................................... 20 3.8 BURDENSOME DOCUMENTS.................................................................. 21 3.9 FINANCIAL STATEMENTS.................................................................. 21 3.10 TAX RETURNS........................................................................... 21 3.11 INTANGIBLE ASSETS..................................................................... 21 3.12 NAME CHANGES.......................................................................... 22 3.13 FULL DISCLOSURE....................................................................... 22 3.14 ERISA................................................................................. 22 3.15 EMPLOYEE GRIEVANCES................................................................... 23 3.16 INDEBTEDNESS.......................................................................... 23 3.17 INVESTMENT COMPANY.................................................................... 23 ARTICLE 4. THE CLOSINGS; CONDITIONS TO THE LOANS................................................. 23 4.1 THE CLOSING........................................................................... 23 4.2 CONDITIONS TO INITIAL ADVANCE......................................................... 23 4.3 CONDITIONS TO SUBSEQUENT ADVANCES..................................................... 24 ARTICLE 5. DELIVERY OF FINANCIAL REPORTS, DOCUMENTS AND OTHER INFORMATION........................ 25 5.1 ANNUAL FINANCIAL STATEMENTS........................................................... 25 5.2 QUARTERLY FINANCIAL STATEMENTS........................................................ 25 5.3 ADDITIONAL INFORMATION................................................................ 26 5.4 NO DEFAULT CERTIFICATE................................................................ 26 5.5 COPIES OF OTHER REPORTS............................................................... 26 5.6 COPIES OF DOCUMENTS................................................................... 26 5.7 NOTICE OF DEFAULTS.................................................................... 27 5.8 ERISA NOTICES......................................................................... 27 5.9 PROJECTIONS........................................................................... 27 ARTICLE 6. COVENANTS............................................................................. 27 6.1 PAYMENT OF TAXES AND CLAIMS........................................................... 28
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SECTION TITLE PAGE - ------- ----- ---- 6.2 MAINTENANCE OF PROPERTIES, INSURANCE, RECORDS AND CORPORATE EXISTENCE; INSPECTIONS AND AUDITS; ETC. ..................................................................... 28 6.3 INDEBTEDNESS.......................................................................... 29 6.4 LIENS................................................................................. 30 6.5 GUARANTIES............................................................................ 30 6.6 EQUITY INTERESTS AND LOANS............................................................ 31 6.7 CONSOLIDATION AND MERGER.............................................................. 31 6.8 TANGIBLE NET WORTH; ADJUSTED TANGIBLE NET WORTH....................................... 31 6.9 LIQUIDITY............................................................................. 32 6.10 CHANGE OF BUSINESS; SALE OF ASSETS.................................................... 32 6.11 LEASES................................................................................ 32 6.12 ISSUANCE OF STOCK..................................................................... 32 6.13 FISCAL YEAR........................................................................... 32 6.14 DIVIDENDS............................................................................. 32 6.15 ERISA COMPLIANCE; OBLIGATIONS......................................................... 32 6.16 PREPAYMENTS........................................................................... 33 6.17 SECURITIES MONETIZATIONS.............................................................. 33 6.18 LETTERS OF CREDIT..................................................................... 33 6.19 DISPOSITIONS.......................................................................... 34 6.20 SUBORDINATED INDEBTEDNESS............................................................. 34 ARTICLE 7. EVENTS OF DEFAULT; REMEDIES........................................................... 34 7.1 PAYMENTS.............................................................................. 34 7.2 COVENANTS............................................................................. 34 7.3 OTHER COVENANTS....................................................................... 35 7.4 OTHER DEFAULTS........................................................................ 35 7.5 REPRESENTATIONS AND WARRANTIES........................................................ 35 7.6 BANKRUPTCY............................................................................ 35 7.7 JUDGMENTS............................................................................. 36
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SECTION TITLE PAGE - ------- ----- ---- 7.8 ERISA................................................................................. 36 7.9 LIENS................................................................................. 36 7.10 OWNERSHIP............................................................................. 36 ARTICLE 8. THE AGENT............................................................................. 37 8.1 APPOINTMENT AND AUTHORIZATION......................................................... 37 8.2 GENERAL IMMUNITY...................................................................... 37 8.3 CONSULTATION WITH COUNSEL............................................................. 38 8.4 DOCUMENTS............................................................................. 38 8.5 RIGHTS AS A LENDER.................................................................... 38 8.6 RESPONSIBILITY OF AGENT............................................................... 38 8.7 COLLECTIONS AND DISBURSEMENTS......................................................... 38 8.8 INDEMNIFICATION....................................................................... 39 8.9 EXPENSES.............................................................................. 39 8.10 NO RELIANCE........................................................................... 40 8.11 REPORTING............................................................................. 40 8.12 REMOVAL OF AGENT...................................................................... 40 8.13 ACTION ON INSTRUCTIONS OF LENDERS..................................................... 40 8.14 SEVERAL OBLIGATIONS................................................................... 40 8.15 CONSENT OF LENDERS.................................................................... 40 8.16 PARTICIPATION AND ASSIGNMENTS......................................................... 42 8.17 OTHER CREDIT FACILITIES OF PNC BANK, NATIONAL ASSOCIATION............................. 43 ARTICLE 9. MISCELLANEOUS PROVISIONS.............................................................. 43 9.1 FEES AND EXPENSES..................................................................... 43 9.2 TAXES................................................................................. 43 9.3 PAYMENTS.............................................................................. 44 9.4 SURVIVAL OF AGREEMENTS AND REPRESENTATIONS, WAIVER OF TRIAL BY JURY................... 44 9.5 LIEN ON AND SET-OFF OF DEPOSITS....................................................... 44
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SECTION TITLE PAGE - ------- ----- ---- 9.6 MODIFICATIONS, CONSENTS AND WAIVERS; ENTIRE AGREEMENT................................. 45 9.7 REMEDIES CUMULATIVE................................................................... 45 9.8 FURTHER ASSURANCES.................................................................... 45 9.9 NOTICES............................................................................... 46 9.10 COUNTERPARTS.......................................................................... 46 9.11 CONSTRUCTION; GOVERNING LAW; JURISDICTION............................................. 47 9.12 SEVERABILITY.......................................................................... 47 9.13 BINDING EFFECT; NO ASSIGNMENT OR DELEGATION........................................... 47 9.14 JOINT AND SEVERAL OBLIGATIONS......................................................... 47 9.15 THIRD PARTY........................................................................... 48 9.16 CONFIDENTIALITY OF INFORMATION........................................................ 48
7 CREDIT AGREEMENT AGREEMENT (the "Agreement") made as of this 23 day of May, 2001, by and among SAFEGUARD SCIENTIFICS, INC., a Pennsylvania corporation ("SSI" or a "Borrower"), SAFEGUARD SCIENTIFICS (DELAWARE) INC., a Delaware corporation ("SSD" or a "Borrower") and SAFEGUARD DELAWARE, INC., a Delaware corporation ("SDI" or a "Borrower" and, collectively with SSI and SSD, the "Borrowers"), PNC BANK, NATIONAL ASSOCIATION and the other lending institutions listed from time to time on Schedule A attached hereto and incorporated herein that are parties to this Agreement (collectively, "Lenders" and singly, a "Lender"), PNC BANK, NATIONAL ASSOCIATION, a national banking association, as issuer of letters of credit hereunder (in such capacity, "Issuer"), and PNC BANK, NATIONAL ASSOCIATION, as administrative and collateral agent for the Issuer and Lenders hereunder (in such capacity, "Agent"). The Borrowers have requested Lenders to establish certain credit facilities and Lenders are willing to do so under and subject to the terms hereof. NOW, THEREFORE, the parties hereto, intending to be legally bound hereby, agree as follows: Article 1. Definitions. 1.1 Terms Defined. As used in this Agreement, the following terms shall have the following respective meanings set forth below or set forth in the section referred to following such term: "Adjusted Earnings" - earnings as otherwise calculated in accordance with generally accepted accounting principles but eliminating therefrom all then past and present earnings attributable to ICG which Borrowers realize as a result of the application of the equity method of accounting for Borrowers' investment in ICG. "Adjusted Tangible Net Worth" - Tangible Net Worth, adjusted in order to (i) reflect the then ICG Stock Value as an asset in an amount not to exceed $100,000,000 and (ii) otherwise eliminate the then past and present impact on the "owner's equity" portion of Borrowers' balance sheet resulting from the application of the equity method of accounting for Borrowers' investment in ICG. "Advance" or "Advances" - Revolving Loan Advance(s). "Business Day" - any day other than Saturday, Sunday or any other day on which commercial banks in Pennsylvania and New York are authorized or required by law or executive order to close. "Capitalized Lease Obligations" - as to any Person, any obligations of such Person to pay rent or other amounts under a lease of (or other agreement conveying the right to use) real and/or personal property which obligations are required to be classified and accounted for as a capital lease on a balance sheet of such Person under generally accepted accounting principles. For purposes of this Agreement, the amount of such obligations shall be the capitalized amount thereof, determined in accordance with generally accepted accounting principles. "Certificate" - a certificate executed either by the president, the treasurer or controller or any vice president of any Borrower. "Closing" - the transactions provided for in Sections 4.1 and 4.2 hereof. 8 "Collateral" - the collateral provided for herein and in the Security Documents. "Collateral Coverage Base" - a dollar amount equal to the following percentages of the value of the Collateral Coverage Securities, in no event, however, to exceed the lesser of (i) as to Collateral Coverage Securities which constitute "margin stock" pursuant to Regulation U of the Board of Governors of the Federal Reserve System, 12 C.F.R. 221 et seq. ("Regulation U"), 50% (or the then maximum "loan value" for margin stock pursuant to Regulation U) of the value of such Collateral Coverage Securities, (ii) as to Collateral Coverage Securities of any one issuer, 50% of the then Revolving Loan Commitment, and (iii) the following dollar maximum specified for each type of Collateral Coverage Securities:
SECURITIES % MAXIMUM $ ---------- --- --------- ICG 25% $ 50 Million Compucom 33.33% $37.5 Million Cambridge 50% $ 50 Million Tangram 25% $ 5 Million USDATA 25% $12.5 Million Sanchez 50% $37.5 Million ChromaVision 25% $12.5 Million OAO 25% $12.5 Million eMerge 25% $12.5 Million Pac-West 25% $12.5 Million Life F/X 25% $12.5 Million New Public Companies 25% $ 25 Million
"Collateral Coverage Securities" - Pledged Securities consisting of common stock issued by one or more of the following corporations but only as long as (A) such securities are traded on the New York Stock Exchange or on the NASDAQ national market, (B) such securities are not Restricted Securities, and (C) the per share value of such securities has after the date hereof (including after the date of any re-inclusion as next set forth) not been $1.00 or less for ten (10) consecutive trading days; provided, however, that if the per share value of such securities shall thereafter be maintained at more than $1.00 for thirty (30) consecutive trading days, such securities shall be included in "Collateral Coverage Securities" from and after the next succeeding day, without notice or further action: (i) CompuCom Systems, Inc. ("CompuCom") (ii) Cambridge Technology Partners (Massachusetts), Inc. ("Cambridge") -2- 9 (iii) OAO Technology Solutions, Inc. ("OAO") (iv) eMerge Interactive, Inc. ("e-Merge") (v) Tangram Enterprise Solutions, Inc. ("Tangram") (vi) USDATA Corporation ("USDATA") (vii) ChromaVision Medical Systems, Inc. ("ChromaVision") (viii) Sanchez Computer Associates, Inc. ("Sanchez") (ix) Pac-West Telecomm, Inc. ("Pac-West") (x) Internet Capital Group ("ICG") (xi) LifeF/X, Inc. ("LifeF/X") (xii) New Public Companies "Commitment Termination Date" - May 21, 2002. "Compliance Certificate" - as defined in Section 4.2(g) hereof. "Cost of Prepayment" - with respect to prepayment of principal earning interest at the LIBOR Rate, an amount equal to the present value, if positive, of the product of (a) the difference between (i) the yield, on the beginning date of the applicable Rate Period, of a U.S. Treasury obligation with a maturity similar to the applicable Rate Period minus (ii) the yield on the prepayment date, of a U.S. Treasury obligation with a maturity similar to the remaining maturity of the applicable Rate Period, and (b) the principal amount to be prepaid, and (c) the number of years, including fractional years, from the prepayment date to the end of the applicable Rate Period. The yield on any U.S. Treasury obligation shall be determined by reference to Federal Reserve Statistical Release H.15(519) "Selected Interest Rates". For purposes of making present value calculations, the yield to maturity of a similar maturity U.S. Treasury obligation on the prepayment date shall be deemed the discount rate. The Cost of Prepayment shall also apply to any payments made after acceleration of the maturity. "Debt Instrument" - as defined in Section 7.4(a) hereof. "Default" - an event which with notice or the lapse of time or both would constitute an Event of Default. "Dollars" and "$" - lawful money of the United States of America. "Equity Interests" - any loans, advances or extensions of credit (other than guaranties) or any purchase of any debt or equity security, including without limitation, capital stock, bonds, debentures, notes, general partnership interests, limited partnership interests, warrants or other rights, all whether certificated or uncertificated. "ERISA" - as defined in Section 3.14 hereof "Event of Default" - as defined in Article 7 hereof. -3- 10 "Fed Funds Rate" - The daily rate of interest announced from time to time by the Board of Governors of the Federal Reserve System in publication H.15, or any successor publication, as the "Federal Funds Rate". "Financial Statements" - (a) The audited balance sheets of SSI and its Subsidiaries (including, without limitation, SSD and SDI) at December 31, 2000, and the related audited consolidated statements of operations, shareholder's equity and cash flows, and the notes thereto, of SSI and its Subsidiaries for the above mentioned year certified without qualification or explanatory paragraphs by independent certified public accountants satisfactory to the Agent; (b) The unaudited consolidating balance sheets of SSI and its Subsidiaries (including without limitation, SSD and SDI), as at December 31, 2000, and the unaudited internal consolidating statement of operations of SSI and its Subsidiaries (including, without limitation, SSD and SDI) for the twelve months then ended; and (c) The unaudited consolidated balance sheets of SSI and its Subsidiaries (including, without limitation, SSD and SDI) as at December 31, 2000, and the related unaudited consolidated statement of operations and cash flows, and the notes thereto, of SSI and its Subsidiaries (including without limitation SSD and SDI) for the twelve months then ended. "Funded Debt" - as of any date, without duplication, all Indebtedness for borrowed money, including without limitation outstanding Advances (including the face amount of outstanding Letters of Credit) and unreimbursed draws on Letters of Credit, but excluding Subordinated Indebtedness. "ICG" - Internet Capital Group "ICG Stock" - common stock of ICG now or hereafter owned by the Borrowers. "ICG Stock Value" - the market value of the ICG Stock, valued in the same manner as Collateral Coverage Securities as set forth in Section 2.15 hereof. If the ICG Stock ever ceases to be traded on the NASDAQ national market, the ICG Stock Value shall then and thereafter be deemed to be $0 for all purposes hereof. "Included Subsidiary" - the entities set forth in Schedule 1.1. hereto, together with each new partnership established by Borrowers after the date hereof the purpose of which is to hold acquisitions other than private equity fund interests. "Indebtedness" - with respect to any Person, without duplication, all (i) liabilities or obligations which in accordance with generally accepted accounting principles would be included in determining total liabilities as shown on the liability side of a balance sheet of such Person at the date as of which Indebtedness is to be determined, including, without limitation, Capitalized Lease Obligations of such Person but excluding in any event contingent funding or capitalization commitments; (ii) liabilities or obligations secured by Liens on any assets of such Person, whether or not such liabilities or obligations shall have been assumed by it; and (iii) liabilities in connection with interest rate and currency hedge agreements, including Permitted SWAPS. "IRS" - as defined in Section 3.14 hereof. "Leases" - leases and subleases (other than the leases or subleases the obligation to pay rent or other amounts under which is a Capitalized Lease Obligation), licenses, easements, -4- 11 grants, pole attachment and conduit or trench agreements and other attachment rights and similar instruments under which any Borrower has the right to use real or personal property or rights of way. "Lending Office" - 1600 Market Street, Philadelphia, Pennsylvania 19103 or such other office as the Agent may from time to time specify to the Borrowers as the office at which Advances are to be made. "Letters of Credit" - as defined in Section 2.1.1(b) hereof. "Liabilities" - for the purposes of calculating Tangible Net Worth and for the purposes of determining "Liabilities" of Borrowers, Liabilities shall not include minority shareholder interest which may appear on a balance sheet of SSI, prepared in accordance with generally accepted accounting principles, consistently applied. "Lien" - any interest in Property securing an obligation owed to, or a claim by, a Person other than the owner of the Property, whether such interest is based on the common law, statute or contract, and including but not limited to the security interest or lien arising from a mortgage, encumbrance, pledge, conditional sale or trust receipt or a lease, consignment or bailment for security purposes. The term "Lien" shall include reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases and other title exceptions and encumbrances affecting Property. For the purpose of this Agreement, any Borrower shall be deemed to be the owner of any Property which it has acquired or holds subject to a conditional sale agreement or other arrangement pursuant to which title to the Property has been retained by or vested in some other person for security purposes. "Liquidity" - (A) cash of Borrowers, including money market accounts and other like liquid deposit and investment accounts, not subject to a lien or right of set-off in favor of any Person other than in favor of Lenders as security for the Obligations, and which is not on deposit with or otherwise in the possession of any Person to which any Borrower has any obligations or has any indebtedness owing other than the Lenders with respect to the Obligations, minus the then outstanding principal balance (including the face amount of outstanding Letters of Credit and unreimbursed draws) of the Revolving Loan. "Loan Documents" - this Agreement, the Notes, the Security Documents and all other documents executed and delivered in connection herewith or therewith, including all amendments, modifications and supplements of or to all such documents. "Majority Lenders" - at any time, Lenders holding Pro Rata Percentages aggregating at least 66.67% at such time. "Material Adverse Effect" - any specified event, condition or occurrence as to any Borrower which individually or in the aggregate with any other such event, condition or occurrence and whether through the effect on such Borrower's business, property, prospects, profits or condition (financial or otherwise) or otherwise could reasonably be expected to result in, to the extent not fully covered by insurance, any liability, loss, forfeiture, penalty, costs, fine, expense, payment or other monetary obligation or loss of property in excess of $10,000,000.00 as to any Borrower or as to all Borrowers taken as a whole. "Monetization/Sub Debt Annual Limit" - $400,000,000. "New Public Companies" - corporations in which a Borrower hereafter acquires common stock. -5- 12 "Notes" - the Revolving Loan Notes. "Obligations" - the obligations of the Borrowers to pay the principal of and interest on the Notes and to satisfy and perform all of their other existing and future obligations, liabilities and indebtedness to Agent, Issuer and each Lender hereunder and under any of the other Loan Documents, including, without limitation, any extensions, modifications, restatements, renewals thereof and substitutions therefor. "Permitted SWAPS" - swap, cap, collar and other interest rate hedging products, provided that any such product is purchased from one or more of the Lenders and in order to hedge solely against the interest rates hereunder for Revolving Loan Advances. "Person" - an individual, partnership, corporation, trust or unincorporated organization, or a government or agency or political subdivision thereof. "Pledge Agreement" - The Pledge Agreement between Agent and Borrowers dated the date hereof, as the same may hereafter be amended from time to time. "Pledged Securities" - Securities owned by the Borrowers pledged as collateral from time to time for the performance of the Borrowers' Secured Obligations. "Post-Default Rate" - in respect of any amounts not paid when due (whether at stated maturity, by acceleration or otherwise), a rate per annum during the period commencing on the due date until such amounts are paid in full equal to 2% per annum above the rate(s) otherwise applicable to such amounts as provided for in Section 2.8 hereof. "Prime Rate" - the interest rate which Agent announces from time to time at its Principal Office as its prime rate. Each change in any interest rate provided for herein based upon the Prime Rate resulting from a change in the Prime Rate shall take effect at the time of such change in the Prime Rate. The Borrowers acknowledge that such Prime Rate is not tied to an external rate of interest or index and does not necessarily reflect the lowest rate of interest actually charged by the Agent to any particular class or category of customer. "Principal Office" - Agent's principal office presently located at 1600 Market Street, Philadelphia, Pennsylvania 19103. "Pro Rata Percentage" - The percentage set forth opposite each Lender's name on Schedule A. "Property" - any interest in any kind of property or asset, whether real, personal or mixed or tangible or intangible. "Quarterly Dates" - the last Business Day of each March, June, September and December. "Restricted Securities" - securities now or hereafter owned by a Borrower which such Borrower is, or Agent or any Lender as pledgor or if required from Borrowers would be, prohibited under applicable federal or state law or regulations, or pursuant to private contract (including so-called broker lock-up agreements), from publicly offering or selling in open market transactions throughout the United States. For this purpose securities which can lawfully be sold pursuant to Rule 144 of the Securities Act of 1933, as amended, subject only to volume limitations set forth in Rule 144(e), are not "Restricted Securities" solely by reason of such volume limitations. -6- 13 "Revolving Credit Period" - as defined in Section 2.1.1(a) hereof. "Revolving Loan" - as defined in Section 2.1.1(a) hereof. "Revolving Loan Commitment" - $100,000,000, as the same may be reduced pursuant to Section 2.2 hereof. "Revolving Loan Advance" - as defined in Section 2.1.1(a) hereof. "Revolving Loan Notes" - as defined in Section 2.9 hereof. "Secured Obligations" - all Obligations. "Securities Monetization" - the transfer by a Borrower of stock pursuant to a transaction substantially identical to that provided for in the Sails Mandatorily Exchangeable Securities Contract dated as of August 30, 1999 among SSD, Credit Suisse Financial Products and CSFP, Inc., and which is otherwise satisfactory to the Agent and the Majority Lenders in their reasonable business judgment, but excluding any modifications, extensions, refinancings or restructuring of any such transactions consummated prior to the date hereof to the extent such modifications, etc. do not increase Borrowers' monetary obligations. In the event of any disagreement between the parties as to whether a transaction proposed to be entered into by the Borrowers constitutes a "Securities Monetization" for purposes hereof, the good faith determination by the Agent shall be conclusive. "Security Documents" - as defined in Section 2.14 hereof. "Sub Debt Aggregate Sub Limit" - $500,000,000. "Subordinated Indebtedness" - unsecured Indebtedness of the Borrowers the holder of which has agreed with or for the benefit of the Lenders pursuant to a written agreement satisfactory to Agent and the Majority Lenders that the principal of and interest on such Indebtedness will not be repaid in any liquidation or dissolution of the Borrowers until all obligations and indebtedness of Borrowers to Lenders have been repaid in full and Lenders' lending commitment to Borrowers has terminated, and which is otherwise satisfactory to Agent in its reasonable business judgment. In the event of any disagreement between the parties as to whether a transaction proposed to be entered into by the Borrowers constitutes Subordinated Indebtedness for purposes hereof, the good faith determination by the Agent shall be conclusive. "Subsidiary" - any corporation controlled directly, or indirectly through one or more intermediaries, of any Borrower. "Tangible Net Worth" - the excess of total assets over the sum of total liabilities (excluding Subordinated Indebtedness) and minority shareholder interests, to be determined in accordance with generally accepted accounting principles consistent with those applied in the preparation of the Financial Statements, excluding, however, from the determination of total assets (without duplication) (a) all assets which would be classified as intangible assets under generally accepted accounting principles, including, without limitation, goodwill (whether representing the excess of cost over book value of assets acquired or otherwise), patents, trademarks, trade names, copyrights, franchises, and deferred charges (including, without limitation, unamortized debt discount and expense, organization costs and research and development costs); (b) treasury stock; (c) cash set apart and held in sinking or other analogous funds established for the purpose of redemption or other retirement of capital stock; (d) to the extent not already deducted from total assets, reserves for depreciation, depletion, obsolescence and/or amortization of properties and all other reserves or appropriations of retained earnings which, in accordance with generally accepted accounting principles, should be established in -7- 14 connection with the businesses conducted by the Borrowers; (e) to the extent not provided for in clause (a) or (d) above, the amount, if any, by which the value of any assets or business hereafter acquired at the time of the acquisition thereof unreasonably exceeds the book value thereof on the books of the Person from whom such assets or business were so acquired (before any write-up of such book value by such Person in contemplation of such acquisition if such write-up shall have occurred within nine (9) months prior to the date of signing of any contract relating to such acquisition); and (f) loans to employees, whether for purchasing stock of the Borrowers or any Subsidiaries or otherwise; provided that the loans made or to be made in the approximate amount of $35,000,000 owing from Warren V. Musser shall not be deemed to be loan(s) to employees for purposes hereof. 1.2 Directly or Indirectly. Where any provision in this Agreement refers to action to be taken by any Person, or which such Person is prohibited from taking, such provisions shall be applicable whether such action is taken directly or indirectly by such Person. 1.3 Accounting Terms; Test Group. (a) Any accounting terms used in this Agreement which are not specifically defined shall have the meanings customarily given thereto in accordance with generally accepted accounting principles; provided, however, that notwithstanding any contrary definition provided herein, with respect to the use of the term "Subsidiary" in connection with financial reporting required hereunder, such term shall have the meaning customarily given thereto in accordance with generally accepted accounting principles. If the generally accepted accounting principles in effect on the date hereof shall change, the terms calculated herein under such principles shall be changed accordingly. (b) The financial covenants set forth in Sections 6.8 and 6.9 hereof shall be computed on a separate basis for the Borrowers, without combination or consolidation with any other Person, including any Subsidiary of any Borrower unless such Subsidiary is another Borrower. Article 2. Amount and Terms of Revolving Loan; Collateral. 2.1.1 Revolving Loan. (a) (i) Subject to the terms and conditions of this Agreement, each Lender hereby establishes for Borrowers a revolving credit facility (collectively, the "Revolving Loan") pursuant to which Lenders will make cash loans and Issuer will issue Letters of Credit hereinafter provided for in this Section 2.1.1 (individually, a "Revolving Loan Advance" and, collectively, the "Revolving Loan Advances") to or for the account of the Borrowers, at any time and from time to time during the period (the "Revolving Credit Period") from the date hereof to and including the Commitment Termination Date, in an aggregate principal amount at any one time outstanding (including, without duplication, the face amount of all outstanding Letters of Credit and unreimbursed draws on Letters of Credit) up to but not exceeding the lesser of the Revolving Loan Commitment as then in effect or the Collateral Coverage Base. Subject to the terms of this Agreement, during the Revolving Credit Period the Borrowers may borrow, repay and reborrow (all as provided herein). (ii) On Friday (or, if not a Business day, the immediately preceding Business Day of each such week) of each week, Borrowers shall execute a Borrowing Base Certificate ("Borrowing Base Certificate") prepared by Borrowers and certified by their corporate controller or chief financial officer setting forth the values of the Collateral and the -8- 15 Borrowers' compliance with the Collateral Coverage Base as of the immediately preceding Business Day. (iii) Each Lender agrees severally to make cash Revolving Loan Advances to Borrowers, as a part of the Revolving Loan, subject to the terms of this Agreement, up to such Lender's Pro Rata Percentage of the Revolving Loan, as more fully set forth in Section 2.5 hereof. (b) (i) During the Revolving Credit Period, Borrowers may obtain letters of credit (each a "Letter of Credit" and, collectively, "Letters of Credit") from the Issuer, on behalf of all Lenders, in an aggregate amount not to exceed $10,000,000 (measured by the face amount thereof) at any time outstanding, upon prior approval of the Issuer, on such terms (including without limitation the expiry date, which Borrowers agree will in no event be twelve months beyond the Commitment Termination Date) as the Issuer may require and with such documentation, including Issuer's then standard Letter of Credit Application and Security Agreement, as shall be satisfactory in form and substance to the Issuer. Borrowers will pay to Agent, for the account of each Lender in accordance with their Pro Rata Percentages, a letter of credit fee for each Letter of Credit issued hereunder in the amount of 2.5% per annum of the face amount of such Letter of Credit, payable quarterly in arrears (measured from the date of issuance) (the "L/C Fee"). Borrowers will pay to Issuer, for its own account, all issuance, negotiation, draw and other administrative fees from time to time assessed by Issuer in accordance with Issuer's then standard fee schedule for the issuance and administration of letters of credit. (ii) (A) Immediately upon the issuance of any Letter of Credit, Issuer is deemed to have granted to each other Lender, and each other Lender is hereby deemed to have acquired, an undivided participating interest (without recourse to or warranty by Issuer), in accordance with each such other Lender's respective Pro Rata Percentage, in all of Issuer's rights and liabilities with respect to such Letter of Credit. Each Lender shall be directly and unconditionally obligated to Issuer, according to its Pro Rata Percentage, to reimburse Issuer for any draws not reimbursed by Borrowers in accordance with the terms hereof, made at any time without regard to the occurrence of a Default or Event of Default (including, without limitation, any draw made following the commencement of any bankruptcy, reorganization, receivership, liquidation or dissolution proceeding with respect to any Borrower) under any Letter of Credit outstanding under the Revolving Loan. (B) Each Letter of Credit issued from time to time under the Revolving Loan which remains undrawn (and the amounts of draws on Letters of Credit prior to payment as hereinafter set forth) shall reduce dollar for dollar the amount available to be borrowed by Borrowers under the Revolving Loan. (C) In the event of any request for drawing under any Letter of Credit by the beneficiary thereof, Issuer shall promptly notify Borrowers and Borrowers shall immediately reimburse Issuer on the day when such drawing is honored, including by way of a cash Revolving Loan Advance under the Revolving Loan if otherwise available pursuant to this Agreement. Borrowers' reimbursement obligation for draws under Letters of Credit shall herein be referred to collectively as Borrowers' "Reimbursement Obligations". All of Borrowers' Reimbursement Obligations hereunder with respect to Letters of Credit shall apply unconditionally and absolutely to, and shall be joint and several with respect to, Letters of Credit issued hereunder on behalf of Borrowers. (D) (1) In the event that Borrowers shall fail to reimburse Issuer as provided in subpart (C) above in an amount equal to the amount of the drawing honored by Issuer under a Letter of Credit, Issuer shall promptly notify each Lender of the unreimbursed -9- 16 amount of such drawing and of such Lender's participation therein based on such Lender's Pro Rata Percentage. Each Lender shall make available to Issuer an amount equal to its respective participation in same day funds, at the office of Issuer specified in such notice, not later than 1:00 p.m. (Philadelphia time) on the Business Day after the date notified by Issuer. In the event that any Lender fails to make available to such Issuer the amount of such Lender's participation based on such Lender's Pro Rata Percentage in such Letter of Credit, as provided in this Section 2.1.1(b), Issuer shall be entitled to recover such amount on demand from such Lender together with interest at the Fed Funds Rate for one (1) Business Day and thereafter at two (2) percentage points above the Agent's Prime Rate. Nothing in this Section shall be deemed to relieve any Lender from its obligation to pay all amounts payable by it under this Section with respect to any Letter of Credit issued by Issuer or to prejudice any rights that Issuer may have against a Lender as a result of any default by such Lender hereunder and no Lender shall be responsible for the failure of any other Lender to pay its respective participation, based on its Pro Rata Percentage, payable under this Section. (2) In connection with the failure of any Lender to make available to Issuer the amount of such Lender's participation in any Letter of Credit, such Lender hereby agrees to indemnify Issuer from and against any and all costs and expenses (including, without limitation, reasonable attorneys' fees, allocated costs of internal counsel and the costs in connection with any related litigation) which Issuer may incur or be subject to as a consequence, direct or indirect, of the failure of such Lender to make available its participation in such Letter of Credit. Notwithstanding anything to the contrary contained in this Section, no Lender failing to provide its participation in any Letter of Credit shall have any obligation to indemnify Issuer in respect of any liability incurred by Issuer arising solely out of the gross negligence or willful misconduct of Issuer. (E) The obligation of Borrowers to reimburse Issuer for drawings made (or Lenders for cash Revolving Loan Advances made to cover drawings made) under the Letters of Credit and the obligations of Lenders to Issuer under Section 2.1.1(b)(ii)(D) shall be unconditional and irrevocable and shall be paid strictly in accordance with the terms of this Agreement under all circumstances including, without limitation, the following circumstances: (1) any lack of validity or enforceability of any Letter of Credit; (2) the existence of any claim, setoff, defense or other right that Borrowers or any other Person may have at any time against a beneficiary or any transferee of any Letter of Credit (or any Person for whom any such beneficiary or transferee may be acting), Issuer, Agent, any Lender or any other Person, whether in connection with this Agreement, the transactions contemplated herein or any unrelated transaction; (3) any draft, demand, certificate or any other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (4) payment by Issuer under any Letter of Credit against presentation of a demand, draft or certificate, or other document that does not comply with the terms of such Letter of Credit unless Issuer shall have acted with willful misconduct or gross negligence in issuing such payment; or (5) the fact that a Default or Event of Default shall have occurred and be continuing. -10- 17 (F) (1) In addition to amounts payable as elsewhere provided in this Section, without duplication, Borrowers hereby agree to protect, indemnify, pay and save Issuer, Agent and Lenders harmless from and against any and all claims, demands, liabilities, damages, losses, costs, charges and expenses (including reasonable attorneys' fees) which Issuer may incur or be subject to as a consequence, direct or indirect, of (A) the issuance of the Letters of Credit or (B) the failure of Issuer to honor a drawing under any Letter of Credit as a result of any act or omission, whether rightful or wrongful, of any present or future de jure or de facto government or governmental authority (all such acts or omissions herein called "Government Acts"). (2) As between Borrowers and Issuer, Agent, and Lenders, Borrowers assume all risks of the acts and omissions of, or misuse of the Letters of Credit issued by Issuer by, the respective beneficiaries of such Letters of Credit. In furtherance and not in limitation of the foregoing, Issuer shall not be responsible: (a) for the form, validity, sufficiency, accuracy, genuineness or legal effects of any document submitted by any party in connection with the application for and issuance of such Letters of Credit, even if it should in fact prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged; (b) for the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign any such Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, that may prove to be invalid or ineffective for any reason; (c) for failure of the beneficiary of any such Letter of Credit to comply fully with conditions required in order to draw upon such Letter of Credit so long as Issuer acts in good faith and without gross negligence or willful misconduct; (d) for errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex or otherwise, whether or not they are in cipher, unless any of the foregoing are caused by Issuer's gross negligence or willful misconduct; (e) for errors in interpretation of technical terms; (f) for any loss or delay in the transmission of any document required in order to make a drawing under any such Letter of Credit or of the proceeds thereof, unless caused by Issuer's gross negligence or willful misconduct; (g) for the misapplication by the beneficiary of any such Letter of Credit of the proceeds of any drawing under such Letter of Credit; and (h) for any consequences arising from causes beyond the control of Issuer, including, without limitation, any Government Acts. None of the above shall affect, impair, or prevent the vesting of any of Issuer's rights or powers hereunder. (3) In furtherance and extension and not in limitation of the specific provisions hereinabove set forth, any action taken or omitted by Issuer in connection with the Letters of Credit issued by it or the related certificates, if taken or omitted in good faith, shall not create any liability on the part of Issuer to Borrowers. (4) The term "Lender" shall, unless the context otherwise indicates, include the Issuer in its individual capacity as a Lender. 2.2 Changes in Revolving Loan Commitment. The Borrowers shall be entitled to terminate or reduce the Revolving Loan Commitment, provided that the Borrowers shall give notice of each such termination or reduction to the Agent as provided in Section 2.3 hereof and that any partial reduction of the Revolving Loan Commitment shall be in an aggregate amount equal to $100,000 or an integral multiple thereof. Any such termination or reduction shall be permanent and irrevocable. 2.3 Notices. SSI, as agent hereunder for the Borrowers, shall give the Agent telephonic and written notice of each termination or reduction of the Revolving Loan Commitment, each borrowing, and repayment of the Revolving Loan. All requests for borrowings shall be made, subject to the -11- 18 terms and conditions of this Agreement and subject further to the terms of Section 2.5(c) hereof, by telephonic or facsimile request of any Borrower. Agent may rely upon any and all telephonic, facsimile and written requests purported to be made by any Borrower through any of its officers. Each such written notice shall be irrevocable and shall be effective only if received by the Agent not later than 1:00 p.m., Philadelphia time, on the date which is: (a) in the case of each notice of termination one Business Day prior to the date of the related termination, and (b) in the case of a notice of borrowing or reduction, the Business Day on which the requested borrowing or reduction is to be made, subject, as to borrowings for which the LIBOR Rate is being selected, to the provisions of Section 2.8(c) hereof. 2.4 Fees (a) The Borrowers shall pay to the Agent, for the account of each Lender in accordance with their Pro Rata Percentages, a commitment fee at the rate of four-tenths of one percent (4/10%) per annum on the daily average unused amount of the Revolving Loan Commitment (which shall be calculated as the Revolving Loan Commitment minus all cash advances outstanding under the Revolving Loan on the date of such calculation) during each calendar quarter for the period from the date hereof to and including the earlier of the date on which the Revolving Loan Commitment is terminated or the Commitment Termination Date. The commitment fee shall be payable quarterly in arrears on the Quarterly Dates and on the earlier of the date the Revolving Loan Commitment is terminated or the Commitment Termination Date. (b) The Borrowers shall pay to Agent, for its own account, a non-refundable Agent Fee (the "Agent Fee") in such amount as to which Agent and Borrowers may from time to time agree. 2.5 Borrowings. (a) Except as otherwise provided in subparts (b), (c) and (e) below, upon receiving a request for a cash Advance in accordance with Section 2.3 hereof, Agent shall prior to 2:00 p.m. or as soon as reasonably practical thereafter notify all Lenders of the request. Each Lender shall advance its applicable Pro Rata Percentage of the requested Advance to Agent by remitting federal funds, immediately available, to Agent pursuant to Agent's instructions prior to 3:00 p.m. Philadelphia time or as soon as is reasonably practicable thereafter on the date of such notice. Subject to the satisfaction of the terms and conditions hereof, and receipt by the Agent of all required funds from the other Lenders, Agent shall make the requested Advance available to the Borrowers by crediting such amount to SSI's operating account with Agent, or to such other account as SSI may from time to time designate to Agent, as soon as is reasonably practicable thereafter on the day on which such Advance was requested. (b) In lieu of the foregoing, Agent may, in its discretion (and without any obligation to do so or continue to do so), fund the Pro Rata Percentage of an Advance (including any cash Revolving Loan Advance to reimburse Issuer for unreimbursed draws under a Letter of Credit) on behalf of any one or more Lenders (unconditionally and absolutely obliging such affected Lender to reimburse Agent in full without deduction or setoffs for its portion of such Advance) with a settlement among Lenders on the following Business Day or under such other settlement procedures as Agent and Lenders may mutually agree upon from time to time. (c) In addition to the funding procedure set forth in subparts (a) and (b) above, Agent hereby establishes for the Borrowers an interim line of credit (herein, the "Swing Line") under which Agent will at Borrowers' request, for Agent's own account except as otherwise set forth in this Section 2.5(c), fund cash Revolving Loan Advances under the Revolving Loan, subject to the following terms and conditions: -12- 19 (i) Revolving Loan Advances made from the Swing Line shall not exceed $15,000,000 in the aggregate at any time outstanding; (ii) principal outstanding under the Swing Line will accrue interest at the Agent's Prime Rate as otherwise set forth in Section 2.8 (a) hereof, which interest shall, except as provided in subpart (vii) below, be entirely for Agent's own account; (iii) all principal payments made by Borrower on account of the Revolving Loan shall be applied first to principal outstanding under the Swing Line prior to application thereof to the principal of the Revolving Loan not advanced under the Swing Line; (iv) if there is neither any Advance under nor repayment of principal on account of the Swing Line for seven (7) consecutive Business Days, the unpaid principal of the Swing Line as of the expiration of such seven (7) Business Day period shall be funded by Banks under the Revolving Loan in accordance with subpart (a) or (b) above, as the case may be; (v) the Swing Line will be advanced pursuant to the procedures set forth in and will otherwise be subject to the terms of the Working Cash Agreements referred to in Section 4.2 hereof; (vi) except as otherwise specifically set forth in this subpart (c), Advances under the Swing Loan are subject to the same terms and conditions of this Agreement which are applicable to the Revolving Loan and shall be deemed to be "Obligations" and "Secured Obligations" of the Borrowers for all purposes of this Agreement, and in no event will the outstanding principal of the Swing Line, when taken together with the outstanding principal of the Revolving Loan (including the face amount of Letters of Credit and outstanding Reimbursement Obligations), exceed the Revolving Loan Commitment; and (vii) immediately upon the making by Agent of each cash Advance under the Swing Line (each such advance being herein called a "Swing Loan"), Agent is deemed to have granted to each Lender, and each Lender is hereby deemed to have acquired, an undivided participating interest (without recourse to or warranty by Agent), in accordance with each such Lender's respective Pro Rata Percentage, in all of Agent's rights and liabilities with respect to such Swing Loan. In the event that the Obligations are accelerated incident to an Event of Default, Agent shall promptly notify each Lender of the unpaid principal balance of all Swing Loans and all of such Lender's participation therein based on such Lender's Pro Rata Percentage. Each Lender shall make available to Agent an amount equal to its respective participation in same day funds, at the office of Agent specified in such notice, not later than 1:00 p.m. (Philadelphia time) on the Business Day after the date notified by Agent. In the event that any Lender fails to make available to Agent the amount of such Lender's participation based on such Lender's Pro Rata Percentage in such Swing Loans, Agent -13- 20 shall be entitled to recover such amount on demand from such Lender together with interest at the Fed Funds Rate for one (1) Business Day and thereafter at two (2) percentage points above the Agent's Prime Rate. Agent shall distribute to each other Lender which has paid all amounts payable by it under this subpart (c) with respect to any Swing Loans, such other Lender's share, based on such Lender's Pro Rata Percentage, of all payments received by Agent from Borrowers in payment of such Swing Loans, when such payments are received. (d) Neither Agent nor any other Lender shall be obligated, for any reason whatsoever, to advance the share of any other Lender. If such corresponding amount is not made available to Agent by such Lender on the date the Advance is to be made and Agent elects (at its discretion, without any obligation to do so) to make such Lender's share of the Advance (including any cash Revolving Loan Advance to reimburse Issuer for unreimbursed draws under a Letter of Credit), Agent shall be entitled to recover such amount on demand from such Lender, together with interest in respect of each day during the period commencing on the date such amount was made available to the Borrowers (or on that date Agent required such funds to be advanced pursuant to the settlement procedures established by Agent) and ending on (but excluding) the date Agent recovers such amount, at a per annum rate equal to the Fed Funds Rate for the first Business Day and thereafter at two (2) percentage points above the Agent's Prime Rate. Agent shall also be entitled to recover any and all losses and damages (including without limitation, attorneys' fees) from any Lender failing to so advance upon demand of Agent. Agent may set off the obligations of a Lender under this paragraph against any distributions or payments of the Obligations which Agent would otherwise make available to such Lender. To the extent any Lender fails to provide or delays providing its respective Pro Rata Percentage of any requested Advance, such Lender's Pro Rata Percentage of all payments of the Obligations (but not its Pro Rata Percentage of Advances required to be funded by such Lender) shall decrease to reflect the actual percentage which its actual outstanding Advances bears to the total outstanding Advances of all Lenders. If a Lender fails to make its share of any Advance available to the Agent within three (3) Business Days after the date such Lender was obligated to do so under the terms hereof, the Borrowers agree that the Agent, if the Agent at its election advanced such share on such Lender's behalf, shall be entitled to recover such amount with interest therein at the Agent's Prime Rate, on demand, from the Borrower. 2.6 Use of Loan Proceeds. Advances under the Revolving Loan shall be used solely for general corporate purposes, including for acquisition of Equity Interests subject to the limitations set forth in Section 6.6 hereof. 2.7 Payment of Revolving Loan. (a) Unless sooner accelerated pursuant to the terms hereof, the applicable Revolving Loan shall be due and payable on the Commitment Termination Date. Borrowers will, on the Commitment Termination Date, provide Agent with cash collateral in an amount equal to 105% of the face amount of all issued and then outstanding Letters of Credit issued under this Agreement. (b) Except to the extent otherwise set forth in this Agreement, all payments of principal and of interest on the Revolving Loan, and all other fees and charges and any other Obligations of Borrowers hereunder, shall be made to Agent at its Principal Office, in United States dollars, in immediately available funds, and without set-off, counterclaim or deduction of any kind, not later than 1:00 p.m. Philadelphia time on the date on which such payment is due. -14- 21 Agent and each Lender, on behalf of all Lenders, shall have the unconditional right and discretion to charge any Borrower's operating account with any such respective institution for all of Borrowers' Obligations as they become due from time to time under this Agreement including without limitation, interest, principal, fees and reimbursement of reasonable out-of-pocket expenses. Alternatively, Agent may in its discretion (and Borrowers hereby authorize Agent to) direct the Lenders to make a cash Advance under the Revolving Loan (subject to the terms and provisions of this Agreement) in a sum sufficient to pay all interest accrued and payable on the Obligations during the immediately preceding month and to pay all costs, fees and reasonable out-of-pocket expenses owing hereunder. 2.8 Interest. (a) Subject to the provisions of subsection (c) hereof and subject further to the provisions of Section 2.5(c)(ii), the Borrowers shall pay interest on the unpaid principal amount of each Advance for the period commencing on the date of such Advance until such Advance shall be paid in full, at a rate per annum equal to Agent's Prime Rate. Notwithstanding the foregoing, the Borrowers shall pay interest on any Advance, and on any other amount payable by the Borrowers hereunder (including, to the extent permitted by law, interest) which shall not be paid in full when due (whether at stated maturity, by acceleration or otherwise, and including all reimbursement obligations on Letters of Credit which are not immediately repaid from an Advance or otherwise) for the period commencing on the due date thereof until the payment in full at the Post-Default Rate. Except as provided in the next sentence, accrued interest on the Revolving Loan shall be payable (i) monthly in arrears within 10 days of Borrowers' receipt of a bill therefor, and (ii) on the earlier of the date the Revolving Loan Commitment is terminated or the Commitment Termination Date. Interest payable at the Post-Default Rate shall be payable from time to time on demand of the Agent. Interest shall continue to accrue and be paid at the applicable rate provided herein even after Default, an Event of Default, entry of judgment against any or all of the Borrowers or the commencement of any bankruptcy, reorganization or insolvency proceeding, and any such judgment entered in connection with the enforcement hereof or the collection of the Obligations shall earn interest at the Post-Default Rate. (b) Notwithstanding any provision herein or in the Notes, the total liability for payments of interest, or in the nature of interest, shall not exceed the limits imposed by any applicable laws. If the terms of this Agreement or the Security Documents, the Notes, or any other agreement or instrument entered into in connection herewith require or shall require Borrowers to pay interest in excess of amounts allowed by law, the rate of interest payable shall be reduced immediately, without action by Lenders or Agent, to the applicable maximum rate, and any excess payment made by Borrowers at any time shall be immediately and automatically applied to the unpaid balance of the outstanding principal due hereunder and not to the payment of interest. In the event of acceleration of sums due hereunder, the total charges for interest and in the nature of interest shall not exceed the maximum allowed by law, and any excess portions of such charges which may have been prepaid and cannot be applied to repayment of principal shall be refunded to Borrowers. Borrowers agree that in determining whether or not any interest payable under this Agreement, the Notes or the Security Documents exceeds the highest applicable rate permitted by law, any non-principal payment including, without limitation, fees, costs, Post-Default Rate and late charges, shall be deemed to the extent permitted by law to be an expense, fee or penalty not deemed interest by law. (c) (i) As used in this Section 2.8(c), the following terms shall have the following meanings: (A) "Good Business Day" means any day when both Agent and banks in London, England are open for business. -15- 22 (B) "LIBOR Rate" means for any day during each Rate Period (a) the per annum rate of interest (computed on a basis of a year of 360 days and actual days elapsed) determined by Agent as being the composite rate available to Agent at approximately 11:00 a.m., London time in the London Interbank Market, as referenced by Telerate (page 3750), in accordance with the usual practice in such market, for the Rate Period elected by Borrowers, in effect two (2) Good Business Days prior to the funding date for a requested LIBOR Rate advance for deposits of dollars in amounts equal (as nearly as may be estimated) to the amount of the LIBOR Rate advance which shall then be loaned by the Lenders to Borrowers as of the time of such determination, as such rate (the "Base Rate") may be adjusted by the reserve percentage applicable during the Rate Period in effect (or if more than one such percentage shall be applicable, the daily average of such percentages for those days in such Rate Period during which any such percentage shall be so applicable) under regulations issued from time to time by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement (including, without limitation, any emergency, supplemental or other marginal reserve requirement) for the Agent with respect to liabilities or assets consisting of or including "Eurocurrency Liabilities" as such term is defined in Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time, having a term equal to such Rate Period ("Eurocurrency Reserve Requirement"), plus (b) 2.50 percentage points. Such reserve adjustment shall be effectuated by calculating, and the LIBOR Rate shall be equal to, (a) the quotient of (i) the Base Rate divided by (ii) one minus the Eurocurrency Reserve Requirement, plus (b) 2.50 percentage points. (C) "Notification" means telephonic notice (which shall be irrevocable) by Borrowers to Agent that Borrowers have requested that the LIBOR Rate, as quoted by Agent from time to time upon Borrower's request for quotation made not less than one (1) Business Day prior to the requested date of quotation, shall apply to some portion of the principal amount of the Revolving Loan in accordance with the provisions of this Section 2.8(c), which notice shall be given no later than 11:00 a.m. Philadelphia time, on the day which is at least 2 Business Days prior to the Business Day on which such election is to become effective, which notice shall specify (i) that the LIBOR Rate option is being selected; (ii) the principal amount of cash Advances under the Revolving Loan to be subject to such rate; (iii) whether such amount is a new advance, a renewal of a previous request of such rate, a conversion from one interest rate to another, or a combination thereof; (iv) the Rate Period(s) selected; and (y) the date on which such request is to become effective (which date shall be a date selected in accordance with Section 2.8(c) (ii) hereof). (D) "Rate Period" means for any portion of principal under the Loans for which Borrowers elect the LIBOR Rate the period of time for which such rate shall apply to such principal portion. Rate Periods for principal earning interest at the LIBOR Rate shall be for periods of 30 days only until such time as PNC Bank, National Association, in its capacity as a "Lender" hereunder, has a Pro Rata Percentage of 26.660% or less, and thereafter for periods of 30, 60, 90 or 180 days and for no other length of time, provided, that, no Rate Period may end on other than a Business Day or after the Commitment Termination Date. (ii) (A) Subject to the terms of this Section 2.8 (c) (ii), by giving Notification, Borrowers may request to have all or a portion of the outstanding principal of cash Advances under the Revolving Loans, (other than Swing Loans) as hereinafter permitted earn interest at the LIBOR Rate as follows: (1) with respect to the principal amount of any cash Advance under the Revolving Loan, from the date of such Advance until the end of the Rate Period specified in the Notification; and/or (2) with respect to the principal amount of any portion of cash Advances under the Revolving Loan outstanding and earning interest at the LIBOR Rate at the time of the Notification related to such principal amount, from the expiration of the then current Rate Period related to such principal amount until the end of the Rate Period specified in the Notification; and/or (3) with respect to all or any portion of the principal amount -16- 23 of cash Advances under the Revolving Loan outstanding and earning interest at the Prime Rate at the time of Notification, from the date set forth in the Notification until the end of the Rate Period specified in the Notification. (B) Borrowers understand and agree: (1) that subject to the provisions of this Agreement, the Prime Rate and the LIBOR Rate may apply simultaneously to different parts of the outstanding principal of cash Advances under the Revolving Loan, (2) that the LIBOR Rate applicable to any portion of outstanding principal may be different from the LIBOR Rate applicable to any other portion of outstanding principal, (3) that no more than 8 portions of principal of cash Advances under the Revolving Loan bearing interest at the LIBOR Rate may be outstanding at any one time, (4) that the minimum amount of principal for which any LIBOR Rate election may be made shall be $5,000,000, and (5) that Agent shall have the right to terminate any Rate Period, and the interest rate applicable thereto, prior to maturity of such Rate Period, if Agent determines in good faith (which determination shall be conclusive) that continuance of such interest rate has been made unlawful by any Law to which any Lender may be subject, in which event the principal to which such terminated Rate Period relates thereafter shall earn interest at the Prime Rate. (C) After expiration of any Rate Period, any principal portion corresponding to such Rate Period which has not been converted or renewed in accordance with this Section 2.8(c) (ii) shall earn interest automatically at the Prime Rate from the date of expiration of such Rate Period until paid in full, unless and until the Borrowers request and Agent approves a conversion to the LIBOR Rate in accordance with this Section 2.8. With respect to any cash Advances (whether an advance of new funds or an already outstanding amount), if Borrowers fail to request the LIBOR Rate option by giving Bank a Notification, or if Agent fails to approve such request when made, such principal amount shall earn interest at the Prime Rate. (D) Borrowers shall indemnify Lenders against any and all loss or expense (including loss of margin) which any Lender actually has sustained or incurred as a consequence of (a) any payment of any principal amount earning interest at the LIBOR Rate on a day other than the last day of the corresponding Rate Period (whether or not any such payment is made pursuant to acceleration upon or after an Event of Default, demand by Agent otherwise made under this Agreement, by reason of an application of proceeds incident to an insured loss or condemnation of property, or for any other reason, and whether or not any such payment is consented to by Agent, unless Agent shall have expressly waived such indemnity in writing); (2) any attempt by a Borrower to revoke in whole or part any Notification given pursuant to this Agreement; (3) any conversion or renewal of any principal amount earning interest at the LIBOR Rate on a day other than the last day of the corresponding Rate Period (whether or not such conversion or renewal is consented to by Agent, unless Agent shall have expressly waived such indemnity in writing); or (4) any breach of or default by any Borrower. 2.9 Notes. Contemporaneously herewith, Borrowers shall execute and deliver to each Lender their Notes in the principal amount of such Lender's Pro Rata Share of the Revolving Loan (each a "Revolving Loan Note"), evidencing Borrowers' unconditional joint and several obligations to repay such Lender's Pro Rata Percentage of the Revolving Loan. 2.10 Computations; Application of Payments. (a) Interest on the Revolving Loan and commitment fees shall be computed on the basis of a year of 360 days and actual days elapsed (including the first day but excluding the last) in the period for which payable; -17- 24 (b) Each payment of principal and interest made by any Borrower hereunder shall be applied first on account of due and unpaid interest and the balance, if any, toward reduction of the unpaid principal balance of the Revolving Loans. 2.11 Minimum Amount of Borrowings. Except for borrowings which exhaust the full remaining amount of the Revolving Loan Commitment, each cash Advance under the Revolving Loan shall be in the amount of $100,000 or an integral multiple thereof. 2.12 Set-Off. Each of the Borrowers hereby agrees that, in addition to (and without limitation of) any right of set-off, banker's lien or counterclaim any Lender may otherwise have, each Lender and any affiliate of any Lender or any such participant shall be entitled, at its option, and for the ratable benefit of all Lenders, to offset balances held by it at any of its offices against any principal of or interest on the Revolving Loan which is not paid when due (regardless of whether such balances are then due to such Borrower), in which case it shall promptly notify such Borrower thereof, provided that its failure to give such notice shall not affect the validity of any such offset. 2.13 Prepayment. The outstanding principal balance of the Revolving Loan may be prepaid in whole or in part and from time to time, provided that Borrowers shall provide Agent with at least one (1) Business Day notice prior to prepayment prior to the last day of the applicable Rate Period of principal earning interest at the LIBOR Rate, and provided further, that in the event that such of the principal of the Revolving Loan earning interest at the LIBOR Rate at the time of repayment is repaid prior to the last day of the applicable Rate Period (whether or not any such repayment is made pursuant to acceleration upon or after an Event of Default, demand by Agent otherwise made under this Agreement, by reason of an application of proceeds incident to an insured loss or condemnation of property, or for any other reason), Borrowers shall, together with such repayment, pay to Agent, for the account of Lenders, any indemnity amount due under Section 2.8(c)(ii)(D) hereof, including the Cost of Prepayment. 2.14 Collateral. (a) Borrowers hereby agree that their grant of a security interest in the Collateral contained in the Pledge Agreement, in other security and collateral agreements of Borrowers and all other agreements executed in connection herewith and all collateral, liens, security interests and pledges created by Borrowers described therein cover and secure all of the Secured Obligations. (b) The Pledge Agreement, and the aforesaid agreements, instruments and documents, are sometimes hereinafter referred to collectively as the "Security Documents." 2.15 Valuation of Collateral Coverage Securities; Sale The value of the Collateral Coverage Securities shall be based on market value as determined on a recognized national securities exchange or by the NASDAQ national market, all as of the close of the last previous trading day. Any determination of the value of the Collateral Coverage Securities by the Agent through its brokerage services shall be conclusive and binding on Borrowers absent manifest error. Borrowers may sell Collateral Coverage Securities in accordance with the terms of the Pledge Agreement so long as after giving effect to any such -18- 25 sale, Borrowers are not in violation of the Collateral Coverage Base and the proceeds thereof shall be paid over to Agent as provided in the Pledge Agreement. Article 3. Representations and Warranties. The Borrowers hereby represent and warrant to each Lender that: 3.1 Organization. (a) Each Borrower is a corporation duly organized, validly existing and in good standing under the laws of its respective state of incorporation, as set forth in Exhibit 3.1 hereto; each Borrower has the power to own its assets and to transact the business in which it is presently engaged and in which it proposes to be engaged. The authorized and outstanding shares of capital stock of each Borrower is accurately and completely listed in Exhibit 3.1. All such shares which are issued and outstanding have been duly and validly issued and are fully paid and nonassessable, are, as to SSD and SDI, owned by the Persons referred to on Exhibit 3.1 and, as to SSI, are publicly traded, in each case free and clear of any mortgage, pledge, lien or encumbrance. Except as set forth in Exhibit 3.1, there are no outstanding warrants, options, contracts or commitments of any kind entitling any person to purchase or otherwise acquire any shares of capital stock of any Borrower, nor are there outstanding any securities which are convertible into or exchangeable for any shares of capital stock of any Borrower. Except as set forth on Exhibit 3.1, no Borrower has any Subsidiary (other than another Borrower). (b) There are no jurisdictions other than as set forth on Exhibit 3.1 hereto in which the character of the properties owned or proposed to be owned by the Borrowers or in which the transaction of the business of any of the Borrowers as now conducted or as proposed to be conducted requires or will require any Borrower to qualify to do business in any such other jurisdiction where the failure to do so would have a Material Adverse Effect on such Borrower. 3.2 Power, Authority, Consents. Each Borrower has the power to execute, deliver and perform this Agreement, the Notes and the Security Documents to be executed by it, and to borrow hereunder. Each Borrower has taken all necessary action to authorize (i) the borrowing hereunder on the terms and conditions of this Agreement, (ii) the execution, delivery and performance of this Agreement, the Notes, the Security Documents to be executed by it and all other agreements, instruments and documents provided for herein or therein. No consent or approval of any person (including, without limitation, any stockholder of the Borrowers), no consent or approval of any landlord or mortgagee, no waiver of any lien or right of distraint or other similar right and no consent, license, approval, authorization or declaration of any governmental authority, bureau or agency, is or will be required in connection with the execution, delivery or performance by any Borrower, as the case may be, or the validity, enforcement or priority of, this Agreement, the Notes, the Security Documents (or any Lien created and granted thereunder) or any other agreements, instruments or documents to be executed or delivered pursuant hereto or thereto, except as set forth on Exhibit 3.2 annexed hereto, each of which either will have been duly and validly obtained on or prior to the date hereof and will then be in full force and effect, or is designated on Exhibit 3.2 as waived by the Agent. 3.3 No Violation of Law or Agreements. The execution and delivery by each Borrower of this Agreement, the Notes and the Security Documents executed by it and any other agreements, instruments or documents to be executed and delivered by it hereunder, and performance by it hereunder and thereunder will not, -19- 26 if the same would have a Material Adverse Effect, violate any provision of law or conflict with or result in a breach of any order, writ, injunction, ordinance, resolution, decree of any court or governmental authority, bureau or agency, domestic or foreign, or certificate of incorporation or bylaws of any Borrower or create (with or without the giving of notice or lapse of time, or both) a default under or breach of any agreement, bond, note or indenture to which any Borrower is a party, or by which it is bound or any of its properties or assets is affected, or result in the imposition of any Lien of any nature whatsoever upon any of the properties or assets owned by or used in connection with the business of such Borrower, except for the liens and security interests created and granted pursuant to the Security Documents. 3.4 Due Execution, Validity, Enforceability. This Agreement has been duly executed and delivered by each Borrower and constitutes, and the Notes and each of the Security Documents to be executed by a Borrower, upon execution and delivery by such Borrower in accordance with the terms hereof, will constitute, the valid and legally binding obligation and agreement of such Borrower, as the case may be, enforceable in accordance with its terms. 3.5 Properties, Priority of Liens. All of the Collateral is owned by Borrowers, free and clear of any Lien of any nature whatsoever, except as provided for in the Security Documents to be executed and delivered pursuant hereto. The Liens which will be created and granted by the Security Documents upon their execution and delivery by the parties thereto, will thereupon and thereafter constitute valid first Liens on the properties and assets covered by the Security Documents as security for the Secured Obligations, subject to no Lien other than in favor of the Lenders. 3.6 Judgments, Actions, Proceedings. There are no outstanding judgments, and no actions, suits or proceedings pending or threatened before any court, governmental authority, bureau, commission, board, instrumentality or agency, with respect to or affecting any Borrower or any of their Properties, which would have a Material Adverse Effect, nor is there any reasonable basis for the institution of any such action, suit or proceeding, whether or not covered by insurance, nor are there any such actions or proceedings in which any Borrower is a plaintiff or complainant where the amount demanded or sued for exceeds $10,000,000, except as set forth on Exhibit 3.6 annexed hereto. 3.7 No Defaults. None of the Borrowers is in default under any agreement, ordinance, resolution, decree, bond, note, indenture, order or judgment to which it is a party or by which it is bound, or any other agreement or other instrument by which any of the properties or assets owned by it or used in the conduct of its business is affected, and each Borrower has complied and is in compliance with all applicable laws, ordinances and regulations applicable to them, where any of the foregoing would have a Material Adverse Effect. 3.8 Burdensome Documents. Except as set forth on Exhibit 3.8 annexed hereto, none of the Borrowers is a party to or bound by, nor are any of the properties or assets owned by any of the Borrowers or used in the conduct of their respective businesses affected by, any agreement, ordinance, resolution, decree, bond, note, indenture, order or judgment, or subject to any restriction, which would have a Material Adverse Effect. -20- 27 3.9 Financial Statements. The Borrowers have delivered to each Lender the Financial Statements. Each of the Financial Statements is true and complete and presents fairly in all material respects the consolidated financial position of SSI and its Subsidiaries, including, without limitation, SSD, and the results of their respective operations and, if applicable, changes in cash flows, as at the dates and for the period referred to therein; and has been prepared in accordance with generally accepted accounting principles applied on a basis consistent with that of the prior period (except as disclosed therein or in the notes thereto, and with respect to the unaudited financial statements as of December 31, 2000 and for the period then ended, subject to normal year-end audit adjustments). There has been no material adverse change in the financial position or operations of any Borrower, any wholly-owned Subsidiary or, to Borrowers' knowledge, any other Subsidiary since December 31, 2000 except as set forth in Exhibit 3.9 hereto. No Borrower, wholly-owned Subsidiary or, to Borrowers' knowledge, any other Subsidiary of a Borrower has any material obligation, liability or commitment, direct or contingent, which is not reflected in the Financial Statements. 3.10 Tax Returns. Each of the Borrowers has filed all federal, state and local tax returns required to be filed by it and has not failed to pay any taxes, or interest and penalties relating thereto, on or before the due dates thereof. There are no waivers or agreements by any Borrower for the extension of time for the assessment of any tax. Except for tax liabilities not in excess of $1,000,000 in the aggregate with respect to the Borrowers and except to the extent that reserves therefor are reflected in the Financial Statements, (a) there are no material federal, state or local tax liabilities of any Borrower due or to become due for any tax year ended on or prior to December 31, 2000 whether incurred in respect of or measured by the income of such Borrower which are not properly reflected in the Financial Statements, and (b) there are no material claims pending or, to the knowledge of any Borrower, proposed or threatened against any Borrower for past federal, state or local taxes, except those, if any, as to which proper reserves are reflected in the Financial Statements. 3.11 Intangible Assets. Except as set forth in Exhibit 3.11 hereto, to each Borrower's knowledge, each of the Borrowers possesses all necessary franchises, patents, licenses, trademarks, trademark rights, trade names, trade name rights and copyrights to conduct its business as now conducted and as proposed to be conducted, without any conflict with the franchises, patents, licenses, trademark rights, trade names, trade name rights and copyrights of others. 3.12 Name Changes. Except as described in Exhibit 3.12 hereto, none of the Borrowers has within the six-year period immediately preceding the date of this Agreement, changed its name, been the surviving entity of a merger or consolidation, or acquired all or substantially all of the assets of any Person. 3.13 Full Disclosure. None of the Financial Statements, nor any certificate, opinion, or any other statement made or furnished in writing to any Lender by or on behalf of any of the Borrowers in connection with this Agreement or the transactions contemplated herein, contains any untrue statement of a material fact, or omits to state a material fact necessary in order to make the statements contained therein or herein not misleading, as of the date such statement was made. There is no fact known to any Borrower which has, or would in the now foreseeable future have, -21- 28 a Material Adverse Effect, which fact has not been set forth herein, in any of the Financial Statements or any certificate, opinion, or other written statement so made or furnished to any Lender. 3.14 ERISA. (a) The Borrowers have no pension or other employee benefit plans which are subject to the provisions of Title IV of ERISA (any such plans which have been or may hereafter be adopted or assumed by the Borrowers are hereinafter referred to individually as a "Plan" and, collectively, as the "Plans"), the application of which is reasonably likely to give rise to direct or contingent liabilities of the Borrowers to the Pension Benefit Guaranty Corporation ("PBGC"), the Department of Labor or the Internal Revenue Service ("IRS"). None of the Borrowers is a participating employer in any Plan under which more than one employer makes contributions as described in Sections 4063 and 4064 of ERISA. The Borrowers have no withdrawal liability to any multiemployer plan and no withdrawal from any multiemployer plan is contemplated or pending by any of the Borrowers. (b) Except as described in Exhibit 3.14 hereto, the Borrowers are and have at all times been in full compliance with all applicable provisions of ERISA. (c) With respect to any of the Plans, Borrowers have no knowledge of any Reportable Event, as described in Section 4043 of ERISA, except that there has or may have occurred (1) a reduction in the number of active participants as described in Section 4043(b) (3) of ERISA; (2) a termination or partial termination; or (3) a merger or consolidation with, or transfer of assets to, another plan. The Borrowers have no outstanding liability to the PBGC for reason of any such Reportable Event, and the Borrowers have not received any notice from the PBGC that any of the Plans should be terminated or from the Secretary of the Treasury that any partial or full termination of any of the Plans has occurred. (d) No termination proceedings with respect to any of the Plans have been commenced and have not yet been concluded. (e) With respect to any of the Plans, there has not occurred any prohibited transaction (as defined in Section 406 of ERISA or Section 4975 of the Internal Revenue Code) for which a prohibited transaction exemption has not been provided by statute or regulation, ruling or opinion issued by the Department of Labor or Internal Revenue Service and which may result in the imposition upon the Borrowers of any prohibited transaction excise tax or civil liability under Section 502(i) of ERISA. (f) The Borrowers have made all required contributions under the Plans for all periods through and including the date hereof or adequate accruals therefor have been provided for as shown in the Financial Statements. No "accumulated funding deficiency" (as defined in section 302 of ERISA) has occurred with respect to any of the Plans. For purposes of this Agreement, all references to "ERISA" shall be deemed to refer to the Employee Retirement Income Security Act of 1974 (including any sections of the Internal Revenue Code of 1986 amended by it), as heretofore amended and as it may hereafter be amended or modified, and all regulations promulgated thereunder, and all references to the Borrowers in this Section 3.14, or in any other Section of this Agreement relating to ERISA, shall be deemed to refer to the Borrowers and all other entities which are part of a controlled or affiliated group or under common control with the Borrowers within the meaning of Sections 414(b), 414(c) and 415(h) of the Internal Revenue Code of 1986, as amended, and Section 4001 (a) (2) of ERISA. -22- 29 3.15 Employee Grievances. There are no actions or proceedings pending or, to the best of any Borrower's knowledge, threatened against any Borrower, by or on behalf of or with respect to its employees, which would have a Material Adverse Effect. 3.16 Indebtedness. There is set forth on Exhibit 3.16 hereto a true and complete schedule of all Indebtedness for borrowed money (including guaranties of borrowed money) and Capitalized Lease Obligations of the Borrowers in existence as of the date of this Agreement, setting forth with respect to all such Indebtedness, the holders, the payment schedules and the interest or other charges payable. 3.17 Investment Company. No Borrower is an "investment company" registered or required to be registered under the Investment Company Act of 1940, as amended, nor is any Borrower controlled by such a company. Article 4. The Closings; Conditions to the Loans. 4.1 The Closing. Subject to the satisfaction of the conditions precedent set forth in Section 4.2 hereof, the Closing shall take place at the offices of Reed Smith, LLP, counsel to the Agent, simultaneously with the execution and delivery of this Agreement. 4.2 Conditions to Initial Advance. The obligation of Lenders to lend the initial Advance shall be subject to the fulfillment to the satisfaction of the Agent (but, as between the Lenders and the Agent, subject to Section 8.15 hereof) of the following conditions precedent: (a) Each Borrower shall have executed and delivered to Agent the Notes. (b) Each Borrower shall have executed and delivered to Agent the Pledge Agreement as required by Section 2.14 hereof. (c) Borrowers shall, in connection with the Swing Line, have executed and delivered to Agent a Working Cash Line of Credit, Investment Swap Rider (the "Working Cash Agreements"). (d) Counsel to the Borrowers shall have delivered to Agent its opinion, in form and substance satisfactory to Agent. (e) Agent shall have received copies of the following: (i) All of the consents, approvals and waivers referred to on Exhibit 3.2 hereto, except only those which, as stated on Exhibit 3.2, shall not be delivered and each such consent, waiver and approval so delivered shall be in form and substance satisfactory to Lenders; (ii) Copies of all corporate action (including, without limitation, directors' resolutions and stockholders' consents) taken by each Borrower to authorize the -23- 30 execution, delivery and performance of any agreement, instruments and documents to which it is a party pursuant hereto or in connection herewith, and an incumbency certificate with respect to each such corporation in each case certified by its respective secretary; (iii) Such other documents, including UCC-1 Financing Statements and UCC-3 Amendment Statements (or other document necessary to grant or perfect a lien on personal property or real estate under the applicable law of a particular jurisdiction) as any Lender may require; (f) (i) The Borrowers shall have complied and shall then be in compliance with all of the terms, covenants and conditions of this Agreement; (ii) There shall exist no Event of Default or Default; and (iii) The representations and warranties contained in Article 3 hereof shall be true in all material respects; (g) Agent shall have received a Certificate (a "Compliance Certificate") of the president, a vice president, the treasurer or the corporate controller of each Borrower dated the date of the Closing certifying that the conditions set forth in Subsection 4.2(f) hereof are satisfied on such date; (h) The Borrowers shall have delivered to Agent, initialed by the Borrowers for identification, copies of the Financial Statements (prior receipt of which Agent acknowledges); and (i) Agent shall have received an initial Borrowing Base Certificate and initial Liquidity Reports (including account statements) per Section 5.10 hereof; and (j) All legal matters incident to the transactions contemplated hereby shall be satisfactory to counsel to Agent. 4.3 Conditions to Subsequent Advances. The obligation of Lenders to make each Advance subsequent to the initial Advance shall be subject to the fulfillment to the satisfaction of Agent (but, as between the Lenders and the Agent, subject to Section 8.15 hereof) of the following conditions precedent: (a) Except with respect to borrowings under the Swing Line, Agent shall have received a request for a borrowing as provided for in subsection 2.3 hereof. (b) Agent shall have received a Borrowing Base Certificate and Liquidity Report as required by Section 2.1.1(a)(ii) hereof (c) The matters contained in Section 4.2(f) hereof shall be true as of such date. (d) All legal matters incident to such advance shall be satisfactory to counsel to Agent. Article 5. Delivery of Financial Reports, Documents and Other Information. -24- 31 While the Revolving Loan Commitment or any Advance remains outstanding, so long as any Borrower is indebted to the Lenders and until payment in full of the Notes and full and complete performance of all of their other obligations arising hereunder, the Borrowers shall deliver to Agent and to each Lender: 5.1 Annual Financial Statements. (a) Annually, as soon as available, but in any event within 100 days after the last day of each of its fiscal years, a consolidated and consolidating Balance Sheet and statement of operations of SSI and its Subsidiaries as at such last day of the fiscal year, and consolidated shareholders' equity and cash flows of SSI and its Subsidiaries for such fiscal year, each prepared in accordance with generally accepted accounting principles consistently applied, each to be in reasonable detail and, with respect to such consolidated financial statements, audited without qualification or explanatory paragraphs by KPMG Peat Marwick or another firm of independent certified public accountants satisfactory to Agent. (b) Annually, as soon as available, but in any event within 100 days after the last day of each of its fiscal years, the unaudited Balance Sheet of SSI as at such last day of the fiscal year, and the unaudited statement of operations of SSI for such fiscal year, in each case prepared on both a consolidated basis for SSI and its Subsidiaries and on a consolidated basis for SSI excluding all Subsidiaries other than if another Borrower and prepared in accordance with generally accepted accounting principles consistently applied, each to be in reasonable detail and certified by SSI's chief financial officer or corporate controller and in each case showing the calculation of the covenants in Sections 6.8 and 6.9 hereof, and accompanied by a reconciliation between the financial statements for SSI and it Subsidiaries and those proposed for the Borrowers only. 5.2 Quarterly Financial Statements. (a) As soon as available, but in any event within 45 days after the end of the first three fiscal quarterly periods of each fiscal year, an unaudited consolidated Balance Sheet of SSI and its Subsidiaries, as at such last day of the fiscal quarter, and an unaudited consolidated statement of operations of SSI and its Subsidiaries for such fiscal quarter, and with respect to the second and third fiscal quarters such statements shall also include statements of operations and cash flows for the period from the commencement of the then current fiscal year to the end of such quarter, each to be in reasonable detail and certified by the chief financial officer or corporate controller of the Borrowers as having been prepared in accordance with generally accepted accounting principles consistently applied, subject to year-end audit adjustments. (b) As soon as available, but in any event within 45 days after the end of each of the first three fiscal quarterly periods of each fiscal year, unaudited consolidating Balance Sheets and statement of operations of SSI and its Subsidiaries as at such last day of such fiscal quarter, and with respect to the second and third fiscal quarters, such statements shall also include consolidating statements of operations for the period from the commencement of the current fiscal year to the end of such quarter, each to be in reasonable detail. (c) As soon as available, but in any event within 45 days after the end of the first three fiscal quarterly periods of each fiscal year, an unaudited Balance Sheet of SSI as at such last day of the fiscal quarter, and an unaudited statement of operations of SSI for such fiscal quarter, and with respect to the second and third fiscal quarters such statements shall also include statements of operations for the period from the commencement of the then current fiscal year to the end of such quarter, in each case prepared on a consolidated basis for SSI excluding all Subsidiaries other than if another Borrower and to be in reasonable detail and certified by the chief financial officer or corporate controller of the Borrowers as having been prepared in -25- 32 accordance with generally accepted accounting principles consistently applied, subject to year-end audit adjustments, and in each case showing the calculation of the covenants in Sections 6.8 and 6.9 hereof, and accompanied by a reconciliation between such "Borrower only" financial statements and the consolidated financial statements required by subpart (a) above. 5.3 Additional Information. Promptly after a written request therefor, such other financial data or information evidencing compliance with the requirements of this Agreement, the Notes and the Security Documents, as Agent or any Lender may reasonably request from time to time. 5.4 No Default Certificate. At the same time as it delivers the financial statements required under the provisions of Sections 5.1 and 5.2, a Certificate of the president, treasurer, corporate controller or any vice president of SSI, to the effect that no Event of Default hereunder, or Default, has occurred and is continuing, or, if such cannot be so certified, specifying in reasonable detail the exceptions, if any, to such statement. Such certificate shall be accompanied by a detailed calculation indicating compliance with the covenants contained in Sections 6.8 and 6.9. 5.5 Copies of Other Reports. Promptly upon receipt thereof, copies of all other final reports submitted to the Borrowers by its independent accountants in connection with any annual or interim audit of the books of the Borrowers made by such accountants. 5.6 Copies of Documents. Promptly upon their becoming available, copies of any (a) financial statements, notices (other than routine correspondence), requests for waivers and proxy statements delivered by any Borrower to any other lending institution or to its stockholders (as such); (b) material non-routine correspondence or material official notices received by any Borrower from any federal, state or local governmental authority which regulates the operations of such Borrower; (c) registration statements and any amendments and supplements thereto, and any regular and periodic reports, if any, filed by any Borrower with any securities exchange or with the Securities and Exchange Commission or any governmental authority succeeding to any or all of the functions of the said Commission (including without limitation form 10-K not later than 90 days after the last day of each fiscal year of SSI and form 10-Q not later than 45 days after the last day of each fiscal quarter of SSI); (d) all form 8-Ks not later than 15 days after filing; and (e) letters of comment or material non-routine correspondence sent to any Borrower by any such securities exchange or such Commission in relation to such corporation and its affairs. 5.7 Notice of Defaults. Promptly, notice of the occurrence of an Event of Default hereunder, or Default which would have a Material Adverse Effect. 5.8 ERISA Notices. (a) Concurrently with such filing, a copy of each annual report which is filed with respect to each Plan with the Secretary of Labor or the PBGC; and (b) promptly, upon their becoming available, copies of (i) all non-routine correspondence with the PBGC, the Secretary of Labor or any representative of the IRS with -26- 33 respect to any Plan; (ii) copies of all reports received by any Borrower from its actuary with respect to any Plan; and (iii) copies of any notices of Plan termination filed by any Plan Administrator (as those terms are used in ERISA) with the PBGC and of any notices from the PBGC to any Borrower with respect to the intent of the PBGC to institute involuntary termination proceedings; and (iv) copies of all non-routine correspondence with the plan sponsor with respect to any multiemployer plan. 5.9 Projections. Quarterly within forty-five (45) days after each fiscal quarter, cash flow projections for SSI and its consolidated Subsidiaries for the four fiscal quarters following such fiscal quarter. 5.10 Liquidity Reports. (a) Weekly on the last Business Day of each week for the Friday through Thursday period most recently ending, a Liquidity certificate, certified by the chief financial officer or corporate controller of Borrowers, detailing Borrowers' Liquidity. (b) Monthly within fifteen (15) days after each calendar month, copies of account statements from each depositary or other financial intermediary reflecting cash and cash equivalents included within the Liquidity convenant. Article 6. Covenants. While the Revolving Loan Commitment or any Advance remains outstanding, so long as any Borrower is indebted to the Lenders and until payment in full of the Notes and full and complete performance of all of its other obligations arising hereunder: 6.1 Payment of Taxes and Claims. The Borrowers will, and will cause the Included Subsidiaries to, pay and discharge before they become delinquent: (a) all taxes, assessments, and governmental charges or levies imposed upon each such Person, its income or its Property; (b) all claims or demands of materialmen, mechanics, carriers, warehousemen, landlords and other like persons which, if unpaid, might result in the creation of a Lien upon any Borrower's or any Included Subsidiary's Property; (c) all claims, assessments, or levies required to be paid by any such entity pursuant to any agreement, contract, law, ordinance, or governmental rule or regulation governing any pension, retirement, profit-sharing or any similar plan of any Borrower or Included Subsidiary; and (d) all other obligations and liabilities of each Borrower and Included Subsidiary; where in any such case the failure to pay or discharge would have a Material Adverse Effect; provided, that items of the foregoing description need not be paid while being contested in good faith and by appropriate proceedings and provided further that a bond is filed in cases where the filing of a bond is necessary to avoid the creation of a Lien against the Collateral. -27- 34 6.2 Maintenance of Properties, Insurance, Records and Corporate Existence; Inspections and Audits; etc. The Borrowers will: (a) Property. Maintain their respective Properties in good condition, working order and repair, subject to normal wear and tear. (b) Insurance. (i) Maintain, with financially sound and reputable insurers, insurance with respect to their respective Properties and businesses against such casualties and contingencies of such types and in such amounts as is customary in the case of corporations of established reputations engaged in the same or a similar business and file with Agent upon its request a detailed list of the insurance then in effect, stating the names of the insurance companies, the amounts and rates of insurance, dates of the expiration thereof and the properties and risks covered thereby. (ii) Pay all premiums to the PBGC as may be required for the plan termination and insolvency insurance provided by the PBGC. (c) Financial Records. Keep proper books of record and account in a manner satisfactory to Agent in which full, true and correct entries in accordance with generally accepted accounting principles shall be made of all dealings or transactions in relation to its business activities. (d) Maintenance of Existence. Subject to the terms of Section 6.7 hereof, do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence and all franchises, rights and privileges necessary for the proper conduct of businesses and continue to engage in the same type of business as it is presently engaged. (e) Delivery of Amendments. Promptly deliver to Agent copies of any amendments or modifications to its certificate of incorporation or by-laws, certified, with respect to the certificate of incorporation, by the Secretary of State of its jurisdiction of incorporation and, with respect to the by-laws, by the Secretary of the corporation. (f) Notice of Disputes. Promptly notify Agent in writing of any litigation, legal proceeding or dispute which is reasonably likely to result in liability in excess of $10,000,000 whether or not fully covered by insurance. (g) Compliance with Law. Comply with all laws, ordinances, governmental rules and regulations to which such entity is subject (including, without limitation, ERISA and environmental laws) and obtain any licenses, permits, franchises, or other governmental authorizations necessary to the ownership of their respective Properties or to the conduct of their respective businesses, where in any such event the failure to do so would have a Material Adverse Effect. (h) Inspections and Audits. Permit each Lender to make or cause to be made, at the Borrowers' expense (which expense shall be limited to a reasonable amount prior to any Default), inspections and audits of any books, records and papers of each Borrower and to make extracts therefrom, or to make inspections and examinations of any properties and facilities of any Borrower on reasonable notice, at all such reasonable times and as often as any Lender may reasonably require. -28- 35 6.3 Indebtedness. The Borrowers shall not, nor suffer or permit the Included Subsidiaries to, create, incur, permit to exist or have outstanding any Indebtedness (for this purpose not including Subordinated Indebtedness, which is addressed in Section 6.20 hereof), except: (a) Indebtedness of the Borrowers to the Lenders under this Agreement and the Notes; (b) Taxes, assessments and governmental charges, current trade accounts payable, accrued expenses, customer payments received in advance and deferred liabilities other than for borrowed money (e.g., deferred compensation and deferred taxes), in each case incurred and continuing in the ordinary course of business; (c) Existing Indebtedness for borrowed money set forth on Exhibit 3.16 annexed hereto; (d) Purchase money Indebtedness (including Capitalized Lease Obligations) hereafter incurred for equipment or real estate in an amount not to exceed $7,500,000 at any time outstanding in the aggregate for the Borrowers and the Included Subsidiaries; (e) Indebtedness of Borrowers owing to Persons in which Equity Interests have been or hereafter are acquired (as permitted in Section 6.6 hereof) in an aggregate amount not to exceed $40,000,000 at any time outstanding and, in each case, modifications, extensions, refinancings or restructurings of any such transactions to the extent such modifications, etc. do not increase Borrowers' monetary obligations with respect to the indebtedness so modified, etc; and (f) Permitted SWAPS. 6.4 Liens. No Borrower will, nor suffer or permit any Included Subsidiary to, cause or permit in the future (upon the happening of a contingency or otherwise) any of their respective Properties, whether now owned or hereafter acquired, to be subject to a Lien except: (a) Liens created by the Security Documents; (b) Liens for taxes or other governmental charges which are not delinquent or which are being contested in good faith and for which a reserve shall have been established as required in accordance with generally accepted accounting principles; (c) Pledges or deposits to secure obligations under workmen's compensation laws or similar legislation; pledges or deposits to secure performance in connection with bids, tenders, contracts (other than contracts for the payment of money) or leases to which any of the Borrowers is a party; deposits to secure public or statutory obligations; materialmen's, mechanics', carriers', workmen's, repairmen's or other like liens, or deposits to obtain the release of such liens, in an aggregate amount with respect to the Borrowers and the Included Subsidiaries not exceeding $1,500,000 at any one time outstanding; and deposits to secure surety, appeal or customs bonds on which any of the Borrowers or Included Subsidiaries is the principal; as to all of the foregoing, however, only to the extent arising and continuing in the ordinary course of business; (d) Existing Liens set forth on Exhibit 3.16 annexed hereto; and -29- 36 (e) Purchase Money Liens on equipment and real estate to secure purchase money Indebtedness permitted by Section 6.3 (d) hereof. Further, no Borrower will enter into or permit to exist any agreement with any Person which by its terms prohibits any Borrower from granting Agent or any Lender a lien on or security interest or pledge of the Collateral or any of Borrowers' Equity Interests. 6.5 Guaranties. The Borrowers shall not, nor suffer or permit any Included Subsidiary to, assume, endorse, be or become liable for, or guarantee, the obligation of any Person, except: (a) by the endorsement of negotiable instruments for deposit or collection in the ordinary course of business; (b) guaranties existing on the date hereof as set forth on Exhibit 3.16 hereof; (c) future guaranties to the extent that, after giving effect to such future guaranties, the aggregate amount of all guaranties by the Borrowers and the Included Subsidiaries (including those referred to in Paragraph (b) hereof and excluding those referred to in Paragraph (a) hereof) would not exceed Fifty Million Dollars ($50,000,000.00) at any time outstanding, provided that in no event will any such guaranty(ies) heretofore or hereafter issued for the indebtedness or obligations of any one Person exceed $20,000,000 in the aggregate at any time outstanding. For the purposes hereof, the term "guaranties" shall mean any obligation to pay money on behalf of or in regard to another Person (other than (i) a Borrower or an Included Subsidiary, as to which such Borrower's or Included Subsidiary's obligation is permitted pursuant to Section 6.3 hereof, and (ii) a partnership or LTIP as to which such Borrower's guaranteed obligations arise solely as a result of such Borrowers' status as a general partner of such entity), including without limitation any obligation as guarantor, surety, purchaser, indemnitor, lessee, repurchaser, investor, contributor, subscriber, lender or otherwise. It is intended that the term "guaranties" be interpreted in the broadest sense possible and the examples in the foregoing sentence are illustrations and not limitations. Furthermore, reimbursement obligations with respect to Letters of Credit shall not be "guaranties" for purposes of this Section 6.5. 6.6 Equity Interests and Loans. The Borrowers may acquire Equity Interests in other Persons, in addition to Equity Interests existing on the date of Closing and disclosed in Exhibit "6.6" hereto, subject to the following limitations: (a) (i) Borrowers may only invest in any fiscal year, whether as further Equity Interests in a Person in which an Equity Interest has previously been acquired or as a new Equity Interest in a new Person, $100,000,000 per Equity Interest for up to two such Equity Interests and $50,000,000 per Equity Interest for other Equity Interests. (ii) Notwithstanding subpart (a) (i) above, the term "Equity Interest" as used therein shall not include a transaction which would otherwise constitute an Equity Interest but for which the consideration given by Borrowers in connection therewith consists entirely of capital stock issued by SSI (herein, "Non Cash Investments"), provided that should any such -30- 37 stock thereafter be redeemed in whole or in part for cash, the cash so paid will be deemed an "Equity Interest" in the fiscal year so paid. (b) Borrowers shall notify Agent of any Equity Interest in any Person in which no previous Equity Interest has been acquired by any Borrower, within a reasonable period after acquiring such Equity Interest, and shall provide Agent with full information on the Equity Interest, including without limitation, balance sheets, statements of income, statements of stockholders equity and such other information that Agent may request. For purposes of measuring the amount of Equity Interests, an Equity Interest shall be deemed acquired in the year in which a Borrower becomes contractually obligated to make a payment notwithstanding that the payment is acquired in a later year. 6.7 Consolidation and Merger. No Borrower will consolidate with or merge into any other Person other than another Borrower or permit any other Person to consolidate with or merge into any Borrower other than such consolidations and mergers as to which a Borrower is the surviving entity. 6.8 Tangible Net Worth; Adjusted Tangible Net Worth. The Borrowers shall have and maintain: (a) Tangible Net Worth of not less than $675,000,000 as of December 31, 2000, increasing by the sum of (i) 75% of after tax earnings plus (ii) 100% of additional equity (including Subordinated Indebtedness) net of transaction expenses, for all periods after December 31, 2000 (determined on a cumulative basis), and (b) Adjusted Tangible Net Worth of not less than $750,000,000 as of December 31, 2000, increasing by the sum of (i) 75% of after tax Adjusted Earnings plus (ii) 100% of additional equity (including Subordinated Indebtedness) net of transaction expenses, for all periods after December 31, 2000 (determined on a cumulative basis); in each case tested as of the last day of each fiscal quarter and as set forth in Section 1.3 hereof. 6.9 Liquidity. The Borrowers shall maintain Liquidity of $42,000,000 or more, to be tested as provided in Section 5.10 hereof. 6.10 Change of Business; Sale of Assets. The Borrowers shall not make any material change in its business or in the nature of its operations or liquidate or dissolve itself (or suffer any liquidation or dissolution) or convey, sell, lease, or otherwise dispose of any of its Properties (other than Equity Interests and Pledged Securities), assets or business, except in the ordinary course of business for a fair consideration, or, except as provided below, dispose of any Equity Interests on Pledged Securities whether now owned or hereafter acquired; provided, however, that nothing contained in this Section 6.10 shall prohibit (i) the sale of any Equity Interest, the stock of which Equity Interest is not a part of the Pledged Securities, or (ii) the acquiring of any Equity Interest permitted under Section 6.6 hereof, or (iii) sales of Pledged Securities in the ordinary course of any Borrower's business provided that Borrowers are at all times in compliance with the Collateral Coverage Base and subject to the terms of Section 4(c) of the Pledge Agreement. 6.11 Leases. The Borrowers shall not enter into any leases (other than leases giving rise to Capitalized Lease Obligations) to the extent that, after giving effect to any such lease, the aggregate amount -31- 38 of rental payments and all other payments by the Borrowers under such leases in any fiscal year of SSI would exceed $10,000,000. 6.12 Issuance of Stock. The Borrowers will not permit SSD or SDI to issue, sell or dispose of any shares of stock of any class, excluding stock hereafter issued pursuant to outstanding warrants, options, option plans, contracts or commitments listed in Exhibit 3.1. 6.13 Fiscal Year. The Borrowers shall not change their fiscal year. 6.14 Dividends. The Borrowers shall not pay or declare any cash dividends other than to another Borrower. 6.15 ERISA Compliance; Obligations. (a) The Borrowers shall: (i) comply in all material respects with all applicable provisions of ERISA now or hereafter in effect; (ii) promptly notify the Agent in writing of the occurrence of any Reportable Event, as defined in ERISA, together with a description of such Reportable Event and a statement of the action that any such Borrower intends to take with respect thereto, together with a copy of the notice (if any) thereof given to the PBGC; and (iii) promptly notify Agent in writing of any proposed withdrawal from a multiemployer plan. (b) The Borrowers will not: (i) be or become obligated to the PBGC or any multiemployer plan in excess of $500,000; or (ii) be or become obligated to the IRS with respect to excise or other penalty taxes provided for in those provisions of the Internal Revenue Code which were enacted pursuant to ERISA, as now in effect or hereafter amended or supplemented, in excess of $500,000. 6.16 Prepayments. None of the Borrowers will make any voluntary or optional prepayment of any Indebtedness for borrowed money incurred or permitted to exist under the terms of this Agreement, other than Indebtedness evidenced by the Notes, subject to the prepayment terms hereof, and other than with respect to the Subordinated Indebtedness. 6.17 Securities Monetizations. Securities Monetizations will not be subject to any of the other covenants set forth in this Section 6, including without limitation Section 6.3 (Indebtedness), 6.4 (Liens) and 6.10 (Sale of Assets) hereof, but instead will be subject to the following limitations: -32- 39 (a) the entire net proceeds from such Securities Monetization will concurrently with Borrowers' receipt thereof be paid against the principal of the Revolving Loan (subject to Borrowers' right to re-borrow if otherwise permitted under the terms of this Agreement); (b) no Default or Event of Default shall be outstanding as of the date on which such transaction is to be closed or would result therefrom, including an Event of Default by reason of non-compliance with the Collateral Coverage Base as a result of such Securities Monetization; and (c) the combined aggregate amount of all Securities Monetizations (measured by the consideration received by the Borrowers in exchange for the "transferred" stock) and all Subordinated Indebtedness (as defined and as otherwise permitted by Section 6.20 and measured by principal amount) incurred on or after the date hereof through and including May 21, 2002 will not exceed the Monetization/Sub Debt Annual Limit. 6.18 Letters of Credit. The Borrowers shall not obtain any letters of credit or enter into any agreements or execute any obligations with respect to letters of credit except with respect to Letters of Credit issued by Issuer pursuant hereto. 6.19 Dispositions. The Borrowers shall notify Agent of the disposition of the capital stock or other ownership interest in any Person by telephone at the latest contemporaneously therewith followed promptly by written notice. In the event of the disposition of Pledged Securities written notice shall not be later than twenty-four (24) hours after the time when Agent is to deliver such Pledged Securities. The proceeds of the sale of any Collateral shall be applied as set forth in Section 4(c) of the Pledge Agreement. 6.20 Subordinated Indebtedness. (a) Subordinated Indebtedness will not be subject to the prohibition contained in Section 6.3 (Indebtedness) hereof but instead will be subject to the limitations that (A) the combined aggregate amount of principal of all Subordinated Indebtedness and all Securities Monetizations (as permitted and measured in Section 6.17 hereof) incurred on and after January 1, 2000 shall not exceed the Monetization/Sub Debt Annual Limit and (B) the aggregate amount of all Subordinated Indebtedness incurred on and after the date hereof through and including May 21, 2002 will not exceed the Sub Debt Aggregate Sub Limit. (b) In the event that any Subordinated Indebtedness is by its terms convertible to stock of SSI, or in the event that Borrowers have the option to redeem Subordinated Indebtedness prior to maturity, Borrowers may issue stock of SSI in connection with any such conversion or redemption, subject to the change of ownership limitation set forth in Section 7.10 hereof, provided that Borrowers will exercise such optional redemption right only when it reasonably and in good faith appears to Borrowers that the holder will accept SSI stock in full payment thereof, such as by reason of the then price per share being in excess of the then conversion price, although Borrowers may, subject to the other terms hereof, make a cash payment for such redemption if nevertheless required by the holder. Article 7. Events of Default; Remedies. -33- 40 Any one or more of the following events shall constitute an Event of Default: 7.1 Payments. (a) Failure to make any payment of interest upon any of the Notes, or to make any payment of the commitment fees, within seven (7) days after the date upon which any such payment is due; or (b) Failure to make any payment of principal required hereunder when due; or (c) Should the principal balance (including the face amount of outstanding Letters of Credit and unreimbursed draws under Letters of Credit) outstanding under the Revolving Loan at any time exceed the Collateral Coverage Base; or 7.2 Covenants. Failure by any Borrower to perform or observe any of their respective agreements contained in Article 6 hereof (except Sections 6.1, 6.2, 6.8, 6.9, or 6.15(a) of Article 6); or 7.3 Other Covenants. Failure by any Borrower to perform or observe any other term, condition or covenant of this Agreement not described in Section 7.2 above, the Notes, the Security Documents, or any other agreement or document delivered pursuant hereto or thereto which shall remain unremedied for a period of thirty (30) days after notice thereof shall have been given by Agent to SSI; or 7.4 Other Defaults. (a) Failure by any Borrower to perform or observe any term, condition or covenant of any bond, note, debenture, loan agreement, indenture, guaranty, trust agreement, mortgage or similar instrument (including, without limitation, any debt which is subordinated to the obligations created pursuant to this Agreement) to which any Borrower is a party or by which it is bound, or by which any of its Properties or assets may be affected (a "Debt Instrument"), and, as a result thereof (assuming the giving of appropriate notice thereof, if required), Indebtedness in excess of $9,000,000 which is included therein or secured or covered thereby shall have been declared due and payable prior to the date on which such Indebtedness would otherwise become due and payable; or (b) Any event or condition referred to in any Debt Instrument shall have occurred or failed to occur, and, as a result thereof, Indebtedness in excess of $9,000,000 which is included therein or secured or covered thereby shall have been declared due and payable prior to the date on which such Indebtedness would otherwise become due and payable; or (c) Failure to pay any Indebtedness for borrowed money in excess of $9,000,000 due at final maturity or pursuant to demand under any Debt Instrument. -34- 41 7.5 Representations and Warranties. Any representation or warranty made in writing to Agent or any Lender in any of the Loan Documents or in connection with the making of the Loans, or any certificate, statement or report made or delivered in compliance with this Agreement, shall have been false or misleading in any material respect when made or delivered; or 7.6 Bankruptcy. (a) Any Borrower shall make an assignment for the benefit of creditors, file a petition in bankruptcy, be adjudicated insolvent or bankrupt, suffer an order for relief under any federal bankruptcy law, petition or apply to any tribunal for the appointment of a receiver, custodian, or any trustee for it or a substantial part of its assets, or shall commence any proceeding under any bankruptcy, reorganization, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, whether now or hereafter in effect; or there shall have been filed any such petition or application, or any such proceeding shall have been commenced against it, which remains undismissed for a period of sixty (60) days or more; or any order for relief shall be entered in any such proceeding; or any Borrower by any act or omission shall indicate its consent to, approval of or acquiesced in any such petition, application or proceeding or the appointment of a custodian, receiver or any trustee for it or any substantial part of any of its properties, or shall suffer any custodianship, receivership or trusteeship to continue undischarged for a period of sixty (60) days or more; or (b) Any Borrower shall generally not pay its debts as such debts become due; or (c) Any Borrower shall have concealed, removed, or permitted to be concealed or removed, any part of its property, with intent to hinder, delay or defraud its creditors or any of them, or made or suffered a transfer of any of its property which may be fraudulent under any bankruptcy, fraudulent conveyance or similar law; or shall have made any transfer of its property to or for the benefit of a creditor at a time when other creditors similarly situated have not been paid; or shall have suffered or permitted, while insolvent, any creditor to obtain a Lien upon any of its property through legal proceedings or distraint which is not vacated within sixty (60) days from the date thereof; or 7.7 Judgments. Any judgment against any Borrower or any attachment, levy of execution against any of their respective properties for any amount in excess of $9,000,000 shall remain unpaid, unstayed on appeal, undischarged, unbonded or undismissed for a period of sixty (60) days or more; or 7.8 ERISA. (a) The termination of any Plan or the institution by the PBGC of proceedings for the involuntary termination of any Plan, in either case, with a vested unfunded liability in excess of $9,000,000; or (b) Failure by any Borrower to fund, in accordance with the applicable provisions of ERISA, each of the Plans hereafter established or assumed by it provided, that such failure to fund shall not constitute an Event of Default hereunder unless such failure shall continue for 5 days after the date on which such funding was required; or (c) The withdrawal by any Borrower from any multiemployer plan giving rise to a withdrawal liability in excess of $9,000,000; or -35- 42 7.9 Liens. Any of the Liens created and granted to the Lenders under the Security Documents shall at any time fail to be valid, first, perfected Liens, subject to no other Lien; or 7.10 Ownership. Any Person shall acquire more than 30 percent of the issued and outstanding capital stock of SSI. 7.11 Remedies. (a) In addition to all other rights, options and remedies granted or available to Agent or Lenders under this Agreement or the other Loan Documents or otherwise available at law or in equity, upon or at any time after the occurrence and during the continuance of a Default or an Event of Default, all obligations of Lenders to make further Advances shall, at Agent's discretion (but, as between Agent and Lenders, subject to Section 8.15 hereof), cease. (b) In addition to all other rights, options and remedies granted or available to Agent under this Agreement or the other Loan Documents, Agent may, in its discretion (but, as between Agent and Lenders, subject to Section 8.15 hereof), upon or at any time after the occurrence and during the continuance of an Event of Default, terminate the Loans and declare the Obligations immediately due and payable, all without demand, notice, presentment or protest or further action of any kind (it also being understood that the occurrence of any of the events or conditions set forth in Section 7.6 shall automatically cause a termination of the Lenders' commitment to make Advances hereunder and an acceleration of the Obligations). (c) In addition to all other rights, options and remedies granted or available to Agent, under this Agreement or the other Loan Documents, upon or at any time after the occurrence and during the continuance of an Event of Default, Borrowers shall be obligated to deliver and pledge to Agent, on behalf of all Lenders, cash collateral in the amount of all outstanding Letters of Credit. (d) In addition to all other rights, options and remedies granted or available to Agent under this Agreement or the other Loan Documents, Agent may in its discretion (but, as between Agent and Lenders, subject to Section 8.15 hereof), upon or at any time after the acceleration of the Obligations following occurrence of an Event of Default, exercise all rights under the UCC and any other applicable law or in equity, and under all Loan Documents permitted to be exercised after the occurrence of an Event of Default. (e) All rights and remedies granted Agent and the Lenders hereunder and under the other Loan Documents, or otherwise available at law or in equity, shall be deemed concurrent and cumulative, and not alternative remedies, and Agent and the Lenders (subject, as between the Agent and the Lenders, to the provisions of Section 8.15 hereof) may proceed with any number of remedies at the same time until all Obligations are satisfied in full. The exercise of any one right or remedy shall not be deemed a waiver or release of any other right or remedy, and Agent, upon or at any time after the occurrence of an Event of Default, may proceed against any Borrower, at any time, under any agreement, with any available remedy and in any order. Article 8. The Agent. As between Agent, on one hand, and Lenders, on the other hand, Agent and each Lender, who are now or shall become parties to this Agreement, agree as follows: -36- 43 8.1 Appointment and Authorization. Each Lender, and each subsequent holder of any of the Notes by its acceptance thereof, hereby irrevocably appoints and authorizes Agent to take such action on its behalf and to exercise such powers under this Agreement as are delegated to Agent by the terms hereof, together with such powers as are reasonably incidental thereto. Subject to the provisions of this Agreement, Agent will handle all transactions relating to the Loans and all other Obligations, including, without limitation, all transactions with respect to Letters of Credit, this Agreement, the Loan Documents and all related documents, in accordance with its usual banking practices. Except as otherwise expressly provided herein, Borrowers are hereby authorized by Lenders to deal solely with Agent in all transactions which affect Lenders under this Agreement and the Loan Documents. The rights, privileges and remedies accorded to Agent hereunder shall be exercised by Agent on behalf of all of the Lenders. 8.2 General Immunity. In performing its duties as Agent hereunder, Agent will take the same care as it takes in connection with loans in which it alone is interested. Subject to Section 8.6 of this Agreement, neither Agent nor any of its directors, officers, agents or employees shall be liable for any action taken or omitted to be taken by it or them hereunder or in connection herewith except such action or omission to the extent caused from its or their own gross negligence or willful misconduct unless such action was taken or omitted to be taken by Agent at the direction of Majority Lenders. 8.3 Consultation with Counsel. Agent may consult with legal counsel and any other professional advisors or consultants deemed necessary or appropriate and selected by Agent and shall not be liable for any action taken or suffered in good faith by it in accordance with the advice of such counsel. 8.4 Documents. Agent shall not be under a duty to examine into or pass upon the effectiveness, genuineness or validity of this Agreement or any of the Notes or any other instrument or document furnished pursuant hereto or in connection herewith, and Agent shall be entitled to assume that the same are valid, effective and genuine and what they purport to be. In addition Agent shall not be liable for failing to make any inquiry concerning the accuracy, performance or observance of any of the terms, provisions or conditions of such instrument or document. Agent shall furnish to Lenders copies of all notices and financial statements received from Borrowers hereunder. 8.5 Rights as a Lender. With respect to its applicable Pro Rata Percentage of the Loans, PNC Bank National Association shall have the same rights and powers hereunder as any other Lender and may exercise the same as though it were not Agent, and the term "Lender" or "Lenders" shall, unless the context otherwise indicates, include Agent in its individual capacity as a "Lender". Subject to the provisions of this Agreement, Agent may accept deposits from, lend money to and generally engage in any kind of banking or trust business with Borrowers and their affiliates and Subsidiaries as if it were not Agent. 8.6 Responsibility of Agent. It is expressly understood and agreed that the obligations of Agent hereunder are only those expressly set forth in this Agreement and that Agent shall be entitled to assume that no Default or Event of Default has occurred and is continuing, unless Agent has actual knowledge of such fact. Except to the extent Agent is required by Lenders pursuant to the express terms hereof to take a specific action, Agent shall be entitled to use its discretion with respect to exercising or refraining from exercising any rights which may be vested in it by, or with respect to taking or refraining from taking any action or actions that it may be able to take under or in respect of, this Agreement and the Loan Documents. Agent shall incur no liability under or in respect of this Agreement and the Loan Documents by acting upon any notice, consent, certificate, warranty or other paper or instrument believed by it to be genuine or authentic or to be signed by the proper party or parties, or with -37- 44 respect to anything that it may do or refrain from doing in the reasonable exercise of its judgment, or that may seem to it to be necessary or desirable under the circumstances. It is agreed among Agent and Lenders that Agent shall have no responsibility to carry out audits or otherwise examine the books and records or properties of Borrowers, except as Agent in its sole discretion deems appropriate or as otherwise expressly required hereunder. The relationship between Agent and each Lender is and shall be that of agent and principal only and nothing herein shall be construed to constitute Agent a joint venturer with any Lender, a trustee or fiduciary for any of Lenders or for the holder of a participation therein nor impose on Agent duties and obligations other than those set forth herein. 8.7 Collections and Disbursements. (a) Agent will have the right to collect and receive all payments of the Obligations, and to collect and receive all reimbursements for draws made under the Letters of Credit, together with all fees, charges or other amounts due under this Agreement and the Loan Documents, and Agent will remit to each Lender, according to its applicable Pro Rata Percentage, all such payments actually received by Agent (subject to any required clearance procedures) in accordance with the settlement procedures established by Agent from time to time, provided that each Lender acknowledges that the Agent Fee and issuance and other administrative fees for Letters of Credit and interest on the Swing Line may be retained by Agent for its own account. (b) If any such payment, other than the Agent Fee, received by Agent is rescinded or otherwise required to be returned for any reason at any time, whether before or after termination of this Agreement and the Loan Documents, each Lender will, upon written notice from Agent, promptly pay over to Agent its Pro Rata Percentage of the amount so rescinded or returned, together with interest and other fees thereon if also required to be rescinded or returned. (c) All payments by Agent and Lenders to each other hereunder shall be in immediately available funds. Agent will at all times maintain proper books of account and records reflecting the interest of each Lender in the Revolving Loan, in a manner customary to Agent's keeping of such records, which books and records shall be available for inspection by each Lender at reasonable times during normal business hours, at such Lender's sole expense. Agent may treat the payees of any Revolving Loan Note as the holder thereof until written notice of the transfer thereof shall have been received by Agent. In the event that any Lender shall receive any payments in reduction of the Revolving Loan in an amount greater than its applicable Pro Rata Percentage in respect of indebtedness to Lenders evidenced hereby (including, without limitation amounts obtained by reason of setoffs), such Lender shall hold such excess in trust for Agent (on behalf of all other Lenders) and shall promptly remit to Agent such excess amount so that the amounts received by each Lender hereunder shall at all times be in accordance with its applicable Pro Rata Percentage. To the extent necessary for each Lender's actual percentage of all outstanding Advances to equal its applicable Pro Rata Percentage, any Lender having a greater share of any payment(s) than its applicable Pro Rata Percentage shall acquire a participation in the applicable Pro Rata Percentage of the other Lenders as determined by Agent. 8.8 Indemnification. Lenders hereby each indemnify Agent (and Issuer with respect to Letters of Credit) ratably according to each Lender's Pro Rata Percentage, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever that may be imposed on, incurred by or asserted against Agent (or Issuer, as the case may be) in any way relating to or arising out of this Agreement or any other Loan Document or any action taken or omitted by Agent (or Issuer, as the case may be) under or related to this Agreement, and as to which the Agent (or Issuer) has not been reimbursed by the Borrowers, provided that no Lender shall be liable for any portion of -38- 45 such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements to the extent resulting from Agent's (or Issuer's, as the case may be) gross negligence or willful misconduct unless such action was taken or omitted by Agent (or Issuer, as the case may be) at the direction of the Majority Lenders. Agent shall have the right to deduct, from any amounts to be paid by Agent to any Lender hereunder, any amounts owing to Agent by such Lender by virtue of this paragraph. 8.9 Expenses. (a) All out-of-pocket costs and out-of-pocket expenses incurred by Agent and not reimbursed on demand by Borrowers, in connection with the amendment, administration, termination, work-out, forbearance and enforcement of the Revolving Loan (including, without limitation, audit expenses, counsel fees and expenditures to protect, preserve and defend Agent's and each Lender's rights and interest under the Loan Documents) shall be shared and paid on demand by Lenders pro rata based on their applicable Pro Rata Percentage. (b) Agent may deduct from payments or distributions to be made to Lenders such funds as may be necessary to pay or reimburse Agent for such costs or expenses. 8.10 No Reliance. By execution of or joining in this Agreement, each Lender acknowledges that it has entered into this Agreement and the Loan Documents solely upon its own independent investigation and is not relying upon any information supplied by or any representations made by Agent. Each Lender shall continue to make its own analysis and evaluation of Borrowers. Agent makes no representation or warranty and assumes no responsibility with respect to the financial condition of any Borrower, any obligor or any account debtor of any Borrower; the accuracy, sufficiency or currency of any information concerning the financial condition, prospects or results of operations of any Borrower; or for sufficiency, authenticity, legal effect, validity or enforceability of the Loan Documents. Agent assumes no responsibility or liability with respect to the collectibility of the Obligations or the performance by Borrowers of any obligation under the Loan Documents. 8.11 Reporting. During the term of this Agreement, Agent will, to the extent not required to be delivered by Borrowers to each Lender pursuant to the other terms of this Agreement, promptly furnish each Lender with copies of all financial statements and Borrowing Base Certificates of Borrowers to be delivered to or obtained by Agent hereunder. Agent will immediately notify Lenders when it receives actual knowledge of any Event of Default under the Loan Documents. 8.12 Removal of Agent. Agent may resign at any time upon giving thirty (30) days prior written notice thereof to Lenders and Borrowers. Agent may be removed as Agent hereunder upon the written direction of such of the other Lenders having 66.67% of the Pro Rata Percentage of all Lenders other than Agent. Upon any resignation or removal of Agent, the Lenders (exclusive of Agent) shall have the right to appoint a successor Agent by majority vote of the other Lenders (based upon the Pro Rata Percentages of the other Lenders). Upon the acceptance of the appointment as a successor Agent hereunder by such successor Agent, such successor Agent shall thereupon succeed to and become vested with all rights, powers, obligations and duties of the retiring Agent and the retiring Agent shall be discharged from its duties and obligations hereunder. Until such successor Agent shall be appointed and shall have accepted such appointment, Agent shall continue to discharge all of its duties as Agent hereunder, including without limitation, to make Swing Line Loans and issue Letters of Credit. 8.13 Action on Instructions of Lenders. With respect to any provision of this Agreement, or any issue arising thereunder, concerning which Agent is authorized to act or withhold action by direction of Lenders (including the Majority Lenders), Agent shall in all cases -39- 46 be fully protected in so acting, or in so refraining from acting, hereunder in accordance with written instructions signed by such Lenders. Such instructions and any action taken or failure to act pursuant thereto shall be binding on all Lenders and on all holders of the Revolving Loan Notes. 8.14 Several Obligations. The obligation of each Lender is several, and neither Agent nor any other Lender shall be responsible for the obligation and commitment of any other Lender. 8.15 Consent of Lenders. (a) Except as expressly provided herein, Agent shall have the sole and exclusive right and obligation to service, administer and monitor the Revolving Loan and the Loan Documents, including without limitation, exercising or refraining from exercising all rights, remedies, privileges and options under the Loan Documents, the determination as to the basis on which and extent to which Advances may be made and the determination as to whether draws should be honored for Letters of Credit, and the right to modify, waive or alter the terms of the Loan Documents and grant such indulgences, forbearances and other waivers as it shall determine. (b) Notwithstanding anything to the contrary contained in subparagraph (a) above, Agent shall not, without the prior written consent of all Lenders: (i) extend any payment date for any obligation owing to the Lenders under the Loan Documents or the Commitment Termination Date, (ii) reduce any interest rate (other than the interest rate on the Swing Line) applicable to the Revolving Loan or any fee (other than the Agent Fee and issuance and other administrative fees for Letters of Credit) or other amount payable to the Lenders hereunder, (iii) increase the Revolving Loan Commitment or change the definition of the Collateral Coverage Base, (iv) release any obligor from the Obligations except in connection with termination of the Revolving Loan and full payment and satisfaction of all Obligations, (v) amend the definition of Majority Lenders, (vi) amend this Section 8.15, (vii) knowingly waive for a period in excess of three (3) Business Days the requirement that Borrower deliver a Borrowing Base Certificate in accordance with Section 2.1.1 (a) (ii) hereof, (viii) release any of the Collateral except upon a sale thereof by Borrowers to the extent permitted by and subject to the terms of the Pledge Agreement, or (ix) knowingly waive or fail to enforce any remedy available under the Loan Documents upon an Event of Default under Sections 7.1 or 7.6(a) hereof, or fail to terminate all obligations of Lenders or the Issuer to make any further loans or other credit extensions (including Letters of Credit) under the Revolving Loan at any time after Agent has actual knowledge (including by reason of its receipt of written notice thereof from a Lender or the Borrowers) of the occurrence of any Event of Default under Sections 7.1 or 7.6(a) hereof or of any Default which with the lapse of time referred to in Section 7.6(a) hereof would constitute an Event of Default under Section 7.6(a). (c) Notwithstanding anything to the contrary contained in subparagraph (a) above, Agent shall not, without the prior written consent of the Majority Lenders: (i) modify, knowingly and intentionally waive or amend the covenants or Events of Default ("Controlled Covenants") set forth in Sections 5.1, 5.2, 5.4, 5.7, 6.1, 6.2(d), 6.3, 6.4, 6.5, 6.6, 6.7, 6.8, 6.9, 6.10, 6.11, 6.13, 6.14, 6.15, 6.17, 6.19, 6.20, 7.4, 7.5, 7.7, 7.8, 7.9 and 7.10 hereof, (ii) fail to provide Borrowers, within 20 days after Agent's obtaining actual knowledge thereof, with notice of noncompliance by Borrowers with any of the Controlled Covenants, (iii) knowingly waive or fail to declare the Obligations due and payable and enforce any Event of Default incident to noncompliance by Borrowers with the Controlled Covenants, or (iv) fail to terminate all obligations of Lenders and Issuer to make any further loans or other credit extensions (including Letters of Credit) under the Revolving Loan at any time after the declaration by Agent of an Event of Default incident to noncompliance by Borrowers with any of the Controlled Covenants. -40- 47 With respect to any Controlled Covenant compliance or noncompliance with which is contingent on a Material Adverse Effect, the reasonable good faith determination of the Agent shall control. (d) Subject in all events to subparts (b) and (c) above, in the course of the enforcement by Agent of Borrowers' Obligations after an acceleration of the Obligations, Agent shall have the sole and exclusive right and obligation, after consultation (to the extent reasonably practicable under the circumstances) with all Lenders, to exercise or refrain from exercising any particular right, remedy, privilege or option under the Loan Documents in a manner which in its reasonable judgment it reasonably deems prudent under the circumstances to the end of collecting the Obligations, including realization of Collateral, and may incur all such expenses it reasonably and in good faith deems necessary under the circumstances. (e) To the extent Agent is required to obtain or otherwise elects to seek the consent of Lenders to an action Agent desires to take or omit to take, if any Lender fails to notify Agent, in writing, of its consent or dissent to any request of Agent hereunder within ten (10) days of such Lender's receipt of such request, such Lender shall be deemed to have given its consent thereto. 8.16 Participation and Assignments. No Lender shall voluntarily (other than to a successor in interest by operation of law or pursuant to a transfer of assets in connection with a business combination or to a Federal Reserve Bank) or involuntarily transfer, assign, participate or otherwise set over all or any part of its share in the Revolving Loan other than to an affiliate, without the prior written consent of Agent, which consent shall not be unreasonably withheld, provided, that notwithstanding the foregoing: (a) each Lender may sell participations to one or more banks or other entities in all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of the Note held by it); provided that: (i) each such participation shall be in a amount not less than $5,000,000; (ii) such Lender's obligations under this Agreement (including, without limitation, its commitment to lend) shall remain unchanged; (iii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations; (iv) such Lender shall remain the holder of the Note held by it for all purposes of this Agreement; (v) the Borrowers, the Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement; (vi) such Lender shall not permit such participant the right to approve any waivers, amendments or other modifications to this Agreement or any other Loan Document other than waivers, amendments or modifications which would reduce the principal of or the interest rate on any Advance or Reimbursement Obligation, extend the term or increase the amount of the Revolving Loan Commitment, reduce the amount of any fees to which such participant is entitled, extend any scheduled payment date for principal of any Advance or release of any Collateral except as permitted by this Agreement, provided that any such approval needed from a participant shall be solely with respect to the applicable Lender's rights and -41- 48 obligations between such Lender and its participant and shall not alter, affect or delay the obligations of such Lender to the other parties hereto; and (vii) any such disposition shall not, without the consent of the Borrowers, require the Borrowers to file a registration statement with the Securities and Exchange Commission to apply to qualify the Revolving Loan or the applicable Note under the blue sky law of any state; and (b) PNC Bank, National Association, in its capacity as a Lender hereunder ("PNC"), shall have the right, but not the obligation, to assign its rights and delegate its duties with respect to such of its Pro Rata Percentage of the Revolving Loan Commitment as well, after giving effect to such assignment(s), reduce PNC's Pro Rata Percentage to not less than 25%; after any such assignment, the assignee shall, provided that such assignee has joined in this Agreement and assumed all obligations of a "Lender" hereunder to the extent of such assignee's Pro Rata Percentage, all in a manner satisfactory to the Agent, be deemed a "Lender" for all purposes hereof and PNC shall no longer have any rights or obligations with respect to such assignee's Pro Rata Percentage of the Revolving Loan Commitment. 8.17 Other Credit Facilities of PNC Bank, National Association. Each Lender acknowledges that PNC Bank, National Association ("PNC") has heretofore established for various entities various credit facilities ("Other Credit Facilities") secured by, inter alia, the guaranties of SSI, SSD and SDI. The parties further acknowledge that Borrowers may now have or hereafter establish with PNC or an affiliate of PNC one or more deposit or custodian accounts. PNC agrees with each other Lender that any amounts at any time realized by PNC, or an affiliate thereof, on behalf of PNC, by virtue of any set-off exercised at any time against or in the enforcement of any lien at any time obtained on said deposit or custodian accounts shall, notwithstanding in what capacity as against the Borrowers any such set-off is exercised or lien obtained, be first applied against the Revolving Loan and all other Obligations of Borrowers hereunder until paid in full before any thereof shall be applied against the principal balance of the Other Credit Facilities. Article 9. Miscellaneous Provisions. 9.1 Fees and Expenses. The Borrowers, jointly and severally, will promptly (and in any event within 30 days after receipt of an invoice or statement therefor) pay all reasonable costs of preparing and complying with this Agreement and of the performance by all of the Borrowers of and compliance by all of them with all agreements and conditions contained herein and in the other Loan Documents on their part to be performed or complied with (including, without limitation, all costs of filing or recording any assignment, financing statements and other documents), and the reasonable fees and expenses and disbursements of: (i) counsel to the Agent in connection with the preparation, execution and delivery, administration, interpretation, work-out and enforcement of this Agreement, the Notes, the Security Documents, the other Loan Documents and all other agreements, obligations, instruments and documents relating to this transaction and (ii) counsel to each Lender (excluding PNC Bank, National Association in its capacity as Agent) but only to the extent incurred after a declaration of an Event of Default in connection with the work-out and enforcement of this Agreement, the Notes and the Security Documents and limited as to each such Lender to $25,000. The Borrowers, jointly and severally, shall at all times protect, indemnify, defend and save harmless the Agent and each Lender from and against any and all claims, actions, suits and other legal proceedings (commenced or asserted by or against them), and liabilities, damages, costs, interest, charges, counsel fees and other expenses and penalties which any of them may, at any time, sustain or incur by reason of or in consequence of -42- 49 or arising out of the execution and delivery of this Agreement, the consummation of the transactions contemplated hereby, the breach by Borrowers of any of their covenants contained herein and/or the enforcement by Agent of its rights and remedies herein and/or in the other Loan Documents, except and to the extent that Borrowers prove that such claim, action, suit, liability, etc. was caused by the gross negligence or willful misconduct or manifest bad faith of the Lender or Agent in question. The provisions of this Section 9.1 shall survive the payment of the Notes or any disposition thereof by any Lender and the termination of this Agreement. 9.2 Taxes. If, under any law in effect on the date of the closing of the Loans hereunder, or under any retroactive provision of any law subsequently enacted, it shall be determined that any Federal, state or local tax is payable in respect of the issuance of the Notes, or in connection with the filing or recording of any assignment, financing statements, or other documents (whether measured by the amount of indebtedness secured or otherwise) as contemplated by this Agreement, then the Borrowers will pay any such tax and all interest and penalties, if any, and will indemnify each Lender against and save it harmless from any loss or damage resulting from or arising out of the nonpayment or delay in payment of any such tax. If any such tax or taxes shall be assessed or levied against any Lender, such Lender may notify the Borrowers and make immediate payment thereof, together with interest or penalties in connection therewith, and shall thereupon be entitled to and shall receive immediate reimbursement therefor from the Borrowers. Notwithstanding any other provision contained in this Agreement, the covenants and agreements of the Borrowers in this Section 9.2 shall survive payment of the Notes and the termination of this Agreement. 9.3 Payments. All payments by the Borrowers on account of principal, interest and other charges (including any indemnities) shall be made to Agent at its Principal Office, in lawful money of the United States of America in immediately available funds, by wire transfer or otherwise, not later than 1:00 p.m. Philadelphia time on the date such payment is due. Any such payment made on such date but after such time shall, if the amount paid bears interest, be deemed to have been made on and interest shall continue to accrue and be payable thereon until the next succeeding Business Day. If any payment of principal or interest becomes due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day and such extension shall be included in computing interest in connection with such payment. All payments hereunder and under the Notes shall be made without set-off or counterclaim and in such amounts as may be necessary in order that all such payments shall not be less than the amounts otherwise specified to be paid under this Agreement and the Notes (after withholding for or on account of (i) any present or future taxes, levies, imposts, duties or other similar charges of whatever nature imposed by any government or any political subdivision or taxing authority thereof, other than any tax (except those referred to in clause (ii) below) on or measured by the net income of the Lenders pursuant to applicable federal, state and local income tax laws, and (ii) deduction of an amount equal to the taxes on or measured by the net income of any Lender payable by such Lender with respect to the amount by which the payments required to be made under this sentence exceed the amounts otherwise specified to be paid in this Agreement and the Notes. 9.4 Survival of Agreements and Representations, Waiver of Trial by Jury. All agreements, representations and warranties made herein shall survive the delivery of this Agreement and the Notes. EACH BORROWER AND LENDER IRREVOCABLY WAIVES TRIAL BY JURY AND THE RIGHT THERETO IN ANY LITIGATION IN ANY COURT WITH RESPECT TO, IN CONNECTION WITH, OR ARISING OUT OF, THIS AGREEMENT, THE NOTES, THE SECURITY DOCUMENTS, ANY OF THE OTHER -43- 50 LOAN DOCUMENTS, OR ANY INSTRUMENT OR DOCUMENT DELIVERED PURSUANT TO THIS AGREEMENT, OR THE VALIDITY, PROTECTION, INTERPRETATION, COLLECTION OR ENFORCEMENT THEREOF. 9.5 Lien on and Set-off of Deposits. As security for the due payment and performance of all the Obligations, each Borrower hereby grants to each Lender a lien on and security interest in any and all deposits or other sums at any time credited by or due from such Lender to such Borrower, whether in regular or special depository accounts or otherwise, and any and all monies, securities and other property of such Borrower, and the proceeds thereof, now or hereafter held or received by or in transit to such Lender from or for such Borrower, whether for safekeeping, custody, pledge, transmission, collection or otherwise, and any such deposits, sums, monies, securities and other property may at any time be set-off, appropriated and applied by Lenders against any of the obligations, indebtedness or liabilities hereunder, under the Notes and under the Security Documents, in each case for the ratable benefit of all Lenders, whether or not any such obligation is then due or is secured by any collateral, or, if it is so secured, whether or not the collateral is considered to be adequate. 9.6 Modifications, Consents and Waivers; Entire Agreement. No modification, amendment or waiver of or with respect to any provision of this Agreement, the Notes, the Security Documents, or any of the other Loan Documents and all other agreements, instruments and documents delivered pursuant hereto or thereto, nor consent to any departure by any Borrower from any of the terms or conditions thereof, shall in any event be effective unless it shall be in writing and signed by the Agent (subject, as between Lenders and Agent, to the provisions of Section 8.15 hereof) and then any such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No consent to or demand on any Borrower in any case shall, of itself, entitle it to any other or further notice or demand in similar or other circumstances. This Agreement embodies the entire agreement and understanding among the parties hereto and supersedes all prior agreements and understandings relating to the subject matter hereof. 9.7 Remedies Cumulative. Each and every right granted to the Agent hereunder or under any other document delivered hereunder or in connection herewith, or allowed it by law or equity, shall be cumulative and may be exercised from time to time. No failure on the part of the Agent to exercise, and no delay in exercising, any right shall operate as a waiver thereof, nor shall any single or partial exercise of any right preclude any other or future exercise thereof or the exercise of any other right. The due payment and performance of any Borrower's indebtedness, liabilities and obligations under the Notes and this Agreement shall be without regard to any counterclaim, right of offset or any other claim whatsoever which such Borrower may have against any Lender and without regard to any other obligation of any nature whatsoever which any Lender may have to such Borrower and no such counterclaim or offset shall be asserted by such Borrower in any action, suit or proceeding instituted by Agent for payment or performance of such Borrower's indebtedness, liabilities or obligation under the Notes, this Agreement, the Security Documents or otherwise. 9.8 Further Assurances. At any time and from time to time, upon the request of the Agent or the Majority Lenders, the Borrowers shall execute, deliver and acknowledge or cause to be executed, delivered and acknowledged, such further documents and instruments and do such other acts and -44- 51 things as the Agent or the Majority Lenders may reasonably request in order to fully effect the purposes of this Agreement, the Notes, the Security Documents, the other Loan Documents and any other agreements, instruments and documents delivered pursuant hereto or in connection with the Loans. 9.9 Notices. (a) Any notice, request, demand, direction or other communication (for purposes of this Section 9.9 only, a "Notice") to be given to or made upon any party hereto under any provision of this Agreement shall be given or made by telephone or in writing (which includes by means of electronic transmission (i.e., "e-mail")) or facsimile transmission or by setting forth such Notice on a site on the World Wide Web (a "Website Posting") if Notice of such Website Posting (including the information necessary to access such site) has previously been delivered to the applicable parties hereto by another means set forth in this Section 9.9 in accordance with this Section 9.9; provided, however, that no requests or notices with respect to funding or utilization of the facilities, no payment notices, no notices of Events of Default, and no requests for waivers or consents shall be effective if transmitted by e-mail or Website Posting. Any such Notice must be delivered to the applicable parties hereto at the addresses and numbers set forth under their respective names on the signature pages hereto or in accordance with any subsequent unrevoked Notice from any such party that is given in accordance with this Section 9.9. Any Notice shall be effective: (i) In the case of hand-delivery, when delivered; (ii) If given by mail, four days after such Notice is deposited with the United States Postal Service, with first-class postage prepaid, return receipt requested; (iii) In the case of a telephonic Notice, when a party is contacted by telephone, if delivery of such telephonic Notice is confirmed no later that the next Business Day by hand-delivery, a facsimile or electronic transmission, a Website Posting or an overnight courier delivery of a confirmatory Notice (received at or before noon on such next Business Day); (iv) In the case of facsimile transmission, when sent to the applicable party's facsimile machine's telephone number, if the party sending such Notice receives confirmation of the delivery thereof from its own facsimile machine; (v) In the case of electronic transmission, when actually received; (vi) In the case of a Website Posting, upon delivery of a Notice of such posting (including the information necessary to access such site) by another means set forth in this Section 9.9; and (vii) If given by any other means (including by overnight courier), when actually received. Any Lender giving a Notice to another Lender or to a Borrower shall concurrently send a copy thereof to the Agent, and the Agent shall promptly notify the other Lenders of its receipt of such Notice. (b) Each of the Borrowers hereby revocably appoints SSI as its agent to give and receive any notice, request, report and other communication pursuant to this Agreement, and for such other purposes as are provided for herein. Each of the Borrowers agrees that the Agent may rely and act upon, without any investigation or inquiry as to the authority or power to give, -45- 52 or accuracy or reasonableness of, and each of the Borrowers will be unconditionally and irrevocably bound and obligated by any instructions, notice, request, report or other communication given by SSI to the Bank. 9.10 Counterparts. This Agreement may be signed in any number of counterparts with the same effect as if the signatures thereto and hereto were upon the same instrument. 9.11 Construction; Governing Law; Jurisdiction. The headings used in this Agreement are for convenience only and shall not be deemed to constitute a part hereof. All uses herein of the masculine gender or of the feminine or neuter gender or plural or singular terms includes the other as the context may require. This Agreement, the Notes, the Security Documents, the other Loan Documents and all other documents and instruments executed and delivered in connection herewith and therewith, shall be governed by, and construed and interpreted in accordance with, the laws of the Commonwealth of Pennsylvania applicable to contracts executed and to be performed therein. The Borrowers and each Lender hereby irrevocably consent to the jurisdiction of the Courts of Common Pleas of the Commonwealth of Pennsylvania and of the United States District Court for the Eastern District of Pennsylvania in any and all actions and proceedings in connection with this Agreement, the Notes or the Security Documents and irrevocably consent, in addition to any method of service of process permissible under applicable law, to service of process by certified mail, return receipt requested to the addresses of Borrowers as set forth herein and the address of Lenders set forth on the signature page hereto. The Borrowers and Lenders agree that in any action or proceeding brought by them in connection with this Agreement or the transactions contemplated hereby, exclusive jurisdiction shall be in the courts of the Courts of Common Pleas of the Commonwealth of Pennsylvania, and the United States District Court for the Eastern District of Pennsylvania. 9.12 Severability. The provisions of this Agreement are severable, and if any clause or provision shall be held invalid or unenforceable in whole or in part in any jurisdiction, then such invalidity or unenforceability shall affect only such clause or provision, or part thereof, in such jurisdiction and shall not in any manner affect such clause or provision in any other jurisdiction, or any other clause or provision in this Agreement in any jurisdiction. Each of the covenants, agreements and conditions contained in this Agreement is independent and compliance by any Borrower with any of them shall not excuse noncompliance by any Borrower with any other. 9.13 Binding Effect; No Assignment or Delegation. This Agreement shall be binding upon and inure to the benefit of each Borrower, Agent and each Lender, and its successors and permitted assignees. The rights and obligations of each Borrower under this Agreement shall not be assigned or delegated without the prior written consent of all Lenders, and any purported assignment or delegation without such consent shall be void. 9.14 Joint and Several Obligations. (a) All of the indebtedness, liabilities and obligations of the Borrowers under this Agreement and the Loan Documents shall be the joint and several obligations of the Borrowers. -46- 53 (b) Each Borrower agrees that the Agent may, in its discretion, without affecting or modifying the joint and several obligations of each Borrower for all of the Indebtedness, liabilities and obligations under this Agreement and the Loan Documents including, without limitation, the Obligations, (i) release, discharge, compromise or settle with, or grant indulgences to, refuse to proceed or take action against, any one or more of the Borrowers with respect to their respective obligations under this Agreement, including, without limitation, the Obligations, (ii) release, surrender, modify, impair, exchange, substitute or extend the period or duration of time for the performance, discharge or payment of, refuse to enforce, compromise or settle its Lien against, any and all deposits and other property or assets on which the Agent or any Lender may have a Lien or which secures any of the Indebtedness, liabilities and obligations, including without limitation, the Obligations of any Borrower under this Agreement, (iii) amend, modify, alter or restate, in accordance with their respective terms, this Agreement or any of the Loan Documents or otherwise, accept deposits or other property from, or enter into transactions of any kind or nature with, any one or more of the Borrowers, and (iv) disburse all or part of the proceeds of the Loans as instructed by SSI as agent for all of the Borrowers, without inquiry or investigation of any kind by the Agent as to the use of such proceeds (each Borrower confirms that it will be directly or indirectly benefited by each and every Advance and any and all other advances under this Agreement or any of the Loan Documents). 9.15 Third Party. No rights are intended to be created hereunder for the benefit of any third party donee, creditor or incidental beneficiary. 9.16 Confidentiality of Information. Unless otherwise consented to by the Borrowers in writing, each of the Lenders and the Agent agrees (on behalf of itself and each of its affiliates, directors, officers, employees and representatives) to use its customary precautions to keep confidential, in accordance with its customary procedures for handling confidential information of the same nature and in accordance with safe and sound banking practices, any non-public information supplied to it by the Borrowers pursuant to this Agreement, it being agreed and understood that each of Agent, Lenders and Borrowers would be in possible violation of securities laws of the United States and various states if non-public information is provided by Borrowers to the Agent or Lenders prior to filing with the Securities and Exchange Commission and the information is not kept confidential and its use restricted exclusively for purposes of information on and administration of the Loans; provided that, subject to the aforesaid, nothing herein shall limit the disclosure of any such information (a) to the extent required by statute, rule, regulation or judicial process, (b) to counsel for any Lender or the Agent, (c) to bank examiners, auditors or accountants, (d) to the Agent or any of the Lenders, (e) in connection with any litigation to which any one or more of the Lenders or the Agent is a party, and (f) to any other bank or financial institution which hereafter becomes or which reasonably appears to any Lender or Agent to be interested in becoming a Lender hereunder or a participant or assignee of any Lender so long as such prospective bank agrees to comply with the requirements of this section. -47- 54 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. SAFEGUARD SCIENTIFICS, INC. By: ____________________________________________ Address: 800 The Safeguard Building 435 Devon Park Drive Wayne, PA 19087 Attn: Gerald Blitstein, Executive Vice President/ Chief Financial Officer Facsimile: E-mail: SAFEGUARD SCIENTIFICS (DELAWARE) INC. By: ____________________________________________ Address: 800 The Safeguard Building 435 Devon Park Drive Wayne, PA 19087 Attn: Gerald Blitstein, Executive Vice President/ Chief Financial Officer Facsimile: E-mail: SAFEGUARD DELAWARE, INC. By: ____________________________________________ Address: 800 The Safeguard Building 435 Devon Park Drive Wayne, PA 19087 Attn: Gerald Blitstein, Executive Vice President/ Chief Financial Officer Facsimile: E-mail: PNC BANK, NATIONAL ASSOCIATION, as Agent, Lender and Issuer By: ____________________________________________ Address: Joseph Meterchick, Vice President 1600 Market Street, 22nd Floor Philadelphia, PA 19103 Facsimile: 215-585-6987 E-mail: joseph.meterchick@pncbank.com cc: One PNC Plaza, 22nd Floor PNC Agency Services 249 5th Avenue Pittsburgh, PA 15222 Attn: Arlene Ohler Facsimile: E-mail: arlene.ohler@pncbank.com -48- 55 COMERICA BANK By: ____________________________________________ Address: Robert Shutt Vice President 55 Almaden Blvd., 2nd Floor San Jose, CA 95113 Facsimile: 408-556-5889 E-mail: robert_r_shutt@comerica.com FIRST UNION NATIONAL BANK By: ____________________________________________ Address: Richard A. Wolbach Vice President 190 River Road Summit, NJ 07901 Facsimile: 908-598-3690 E-mail: richard.wolbach@funb.com NATIONAL CITY BANK OF PENNSYLVANIA By: ____________________________________________ Address: Charles P. Bugajski Vice President 20 Stanwix Street Pittsburgh, PA 15222-4802 Facsimile: 412-644-6224 E-mail: -49- EX-10.3 4 w52490ex10-3.txt CONSULTING AGREEMENT DATED JULY 3, 2001 1 EXHIBIT 10.3 CONSULTING AGREEMENT CONSULTING AGREEMENT dated July 3, 2001 between Safeguard Scientifics, Inc. ("Company"), and Vincent G. Bell, Jr. ("Consultant"). WHEREAS, it is the mutual desire of the Company and Consultant that Consultant provide consulting services to the Company on the terms and conditions set forth below: 1. Services. Company retains Consultant to serve as Acting Chief Executive Officer of the Company upon the terms and conditions set forth below. Consultant shall report to the Board of Directors of the Company. The Consultant will devote such time to the consulting activities covered hereby as is needed on a day-to-day basis, not to exceed in any event 30 hours per week. 7. Term. This Agreement shall commence on April 11, 2001 and shall continue until terminated by either party on 30 days prior notice. 3. Compensation. For all duties rendered by Consultant hereunder, Company shall pay Consultant a consulting fee of $5,000 per week, payable semi-monthly on the Company's normal payroll dates. In addition, to the extent the Company achieves the performance milestones established by and as determined by the Compensation Committee of the Board of Directors of the Company in its sole discretion, Consultant will receive a performance bonus equal to $130,000 payable in one lump sum no later than March 15, 2002. For so long as Consultant remains a member of the Board of Directors of the Company, Consultant shall continue to receive any and all Board of Director fees, option grants and Board of Director expenses. 4. Options. Consultant shall be granted an option (the "Option") to purchase 100,000 shares of common stock of the Company pursuant to the Company's 1999 Equity Compensation Plan. The Option shall have an exercise price equal to the average of the high and low sales price on June 19, 2001, being the date the Option grant was approved by the Compensation Committee of the Board of Directors of the Company, and shall be immediately exercisable and remain exercisable throughout the term of this Agreement and for a period of four years after termination of this Agreement, but in no event shall the Option be exercisable after June 19, 2005. 5. Expense Reimbursement. During the term hereof, the Company shall reimburse Consultant for all ordinary and necessary travel, lodging and related expenses incurred by him with the prior approval of the Company in connection with the performance of his services hereunder. Such payments shall be made by the Company upon submission by Consultant of vouchers itemizing such expenses in a form reasonably satisfactory to the Company. 2 6. No Additional Benefits. Consultant shall not be entitled to participate in any of the benefit, welfare, bonus or incentive plans maintained by the Company for its employees. 7. Nondisclosure of Confidential Information Concerning Business. In his capacity as Consultant, Consultant may acquire from the Company and/or develop for the Company information respecting inventions, products, designs, methods, know-how, techniques, systems, processes, software programs, other technical information, works of authorship, customer lists, financial information, operation, costs, business plans, projects, plans and proposals) which is considered proprietary and confidential in nature ("Confidential Information"), and Consultant will use all reasonable precautions to maintain the confidentiality of such Confidential Information and will not use for his personal benefit or the benefit of any other person, or publish or disclose to third parties, any such Confidential Information during the term of this Agreement or thereafter except in performing his duties under this Agreement. Consultant acknowledges that the Confidential Information is a special, valuable and unique asset of the Company. 8. Notices. Any notice pursuant to this Agreement shall be in writing and shall be deemed given if delivered personally or sent by guaranteed overnight delivery service or registered or certified mail to the following addresses: If to Consultant: Vincent G. Bell, Jr. 626 Huston Road Radnor, PA 19087 If to the Company: Safeguard Scientifics, Inc. 800 The Safeguard Building 435 Devon Park Drive Wayne, PA 19087 Attn: General Counsel or to such other addresses as either party may designate to the other in writing. 9. Assignments. Consultant shall not assign this agreement or subcontract any of the work, labor or services to be performed by Consultant hereunder without the Company's prior written consent. 10. Independent Contractor. In connection with this engagement, Consultant is acting as an independent contractor and not in any other capacity. 11. Company Property. All files, records, documents, and other materials relating to the business of the Company, whether prepared by Consultant or otherwise coming into his possession, shall remain the property of the Company during the term of this Agreement 2 3 and thereafter. Upon termination of this Agreement for any reason, Consultant shall promptly return to the Company all such materials and all copies thereof to the Company. 12. Waiver. The waiver by either party of a breach or violation of any provision of this Agreement shall not constitute or be construed as a waiver of any subsequent breach or violation of that provision or as a waiver of any breach or violation of any other provision. 13. Integration and Amendment. This Agreement contains the entire understanding of the parties hereto with respect to the subject matter hereof and supersedes all prior communications and agreements. This Agreement and the provisions hereof may not be changed, waived or extended orally but only by an agreement in writing signed by the party against whom enforcement of any waiver, change, extension is sought. 14. Governing Law. This Agreement and all rights and obligations of the parties hereunder shall be governed by and be construed and enforced in accordance with the laws of the Commonwealth of Pennsylvania. Consultant hereby consents to the jurisdiction of the courts of such commonwealth in any action or proceeding which may be brought against it under or in connection with this Agreement, and in the event any such action or proceeding shall be brought against it, Consultant agrees not to raise any objection to such jurisdiction or to the laying of the venue thereof in such state. IN WITNESS WHEREOF, the parties have duly executed this Agreement on the date first written above. /s/ VINCENT G. BELL, JR. Vincent G. Bell, Jr. Safeguard Scientifics, Inc. By: /s/ HARRY W. WALLAESA Name: Harry W. Wallaesa Title: President 3 EX-10.4 5 w52490ex10-4.txt AMENDED AND RESTATED DEMAND NOTE DATED MAY 18,2001 1 EXHIBIT 10.4 AMENDED AND RESTATED DEMAND NOTE $26,588,734.07 May 18, 2001 FOR VALUE RECEIVED, WARREN V. MUSSER ("Borrower"), does hereby unconditionally promise to pay to the order of BONFIELD INSURANCE, LTD., a British Virgin Islands corporation, its successors and assigns ("Lender"), at Lender's office c/o Safeguard Delaware, Inc., 2711 Centerville Road, Suite 400, Wilmington, DE 19808, or at such other place as Lender may from time to time designate in writing, the principal sum of TWENTY SIX MILLION FIVE HUNDRED EIGHTY-EIGHT THOUSAND SEVEN HUNDRED THIRTY-FOUR and 07/100 DOLLARS ($26,588,734.07), or such lesser or other sum as has been advanced to Borrower from time to time hereunder by Lender or any of its affiliates in accordance with the Restructuring Agreement (as defined below) and is outstanding, ON DEMAND, together with interest on the unpaid principal balance under this note (the "Note"), payable as set forth below. 1. Amended and Restated Demand Note. This Note is the "Amended and Restated Note" as defined in the Agreement to Restructure, dated as of April 16, 2001, by and among Borrower, Hilary Grinker Musser, Safeguard Scientifics, Inc. ("Safeguard") and Lender (the "Restructuring Agreement") and, as such shall be construed in accordance with all terms and conditions thereof. Capitalized terms not defined herein shall have such meaning as provided in the Restructuring Agreement. This Note is entitled to all of the rights and remedies provided in the Restructuring Agreement, and the collateral documents relating thereto, and is secured by all Collateral as described therein. 2. Continuing Indebtedness. This Note evidences and constitutes the renewal, modification and consolidation of (i) the Demand Note executed by Borrower in favor of Lender, dated as of April 16, 2001, in the original principal amount of $4,113,279.00, (ii) the Letter Agreement, dated as of October 4, 2001, as amended on November 8, 2001, by Borrower in favor of Safeguard, as assigned to Lender pursuant to an Assignment dated as of November 13, 2000 (the "Letter Agreement") and (iii) certain additional advances made or which may be made pursuant to an in accordance with the Restructuring Agreement. The execution and delivery of this Note shall not in any circumstances be deemed to have terminated, extinguished, released or discharged Borrower's indebtedness under the Demand Note or obligations under the Letter Agreement, which indebtedness and obligations shall continue under and be governed by this Note and shall continue to be secured by the collateral security for the Demand Note and Letter Agreement, as provided under the Restructuring Agreement. 3. Rate of Interest. Interest on the principal amount outstanding from time to time hereunder shall accrue at an annual rate equal to seven percent (7.0%) (the "Interest Rate") and shall be capitalized annually, on each anniversary of the date hereof. Interest payable on all advances made hereunder shall be calculated for actual days elapsed on the basis of a 360-day year. Notwithstanding anything herein, the Interest Rate charged hereon shall not exceed the 2 maximum rate allowable by applicable law. If any stated interest rate herein exceeds the maximum allowable rate, then the interest rate shall be reduced to the maximum allowable rate, and any excess payment of interest made by Borrower at any time shall be applied to the unpaid balance of any outstanding principal hereunder. 4. Payment of Principal and Interest; Prepayments; Offset. Principal and interest on the principal amount outstanding hereunder shall be due and payable in full by Borrower upon the demand of Lender; provided, however, that Lender shall not demand any payment prior to January 1, 2003. Borrower may, from time to time, prepay all or any portion of the principal balance and other amounts outstanding hereunder without premium or penalty. Notwithstanding the foregoing, this Note shall be subject to mandatory prepayment and offset as required pursuant to Section 4.1(c) of the Restructuring Agreement. 5. Method and Application of Payments. All amounts payable hereunder shall be paid by Borrower in lawful money of the United States of America and in immediately available and freely transferable funds at the place designated by Lender to Borrower for such payment. All payments made hereon (including, without limitation, prepayments) shall be applied to fees and expenses (including attorneys' fees), accrued interest and principal in any order Lender may choose, in its sole discretion. 6. Events of Default. Each of the following events shall constitute an event of default (an "Event of Default") hereunder: a. If Borrower shall fail to pay when due any interest or principal or any other sum payable to Lender hereunder. b. If (1) Borrower or (2) his spouse, with respect to 2000 tax obligations or for any subsequent year with respect to which she participates in a joint filing, shall fail to return to Lender, within three (3) business days after receipt thereof any tax overpayment refund required to be so returned pursuant to Section 4.1(a)(2) (incorporating the provisions of Sections 3.1(a)(1)(A)(i) and 3.1(a)(1)(B)(iv) of the Restructuring Agreement). c. If there shall occur any of the following events by Borrower, his spouse or the WVM Entities: i. Any payments are made or Collateral or other property subject to the Existing Documents (if any such document then remains operative) or Related Documents, are sold, mortgaged or otherwise transferred and/or accepted in violation of the existing obligations of Borrower, his spouse or the WVM Entities, whether under the Existing Documents (if any such document then remains operative) or the Related Documents; ii. Any default or event of default, or event which, with the passage of time, the giving of notice or both, would be a default or event of default (whether or not such term is used with initial capital letters), shall have occurred under any of the Existing Documents (if any such document then remains operative) or any Related Document, so long as same is in effect; -2- 3 iii. Any representation or warranty made in the Restructuring Agreement or in any document, agreement, or instrument required to be delivered thereunder or in connection therewith shall be false or misleading in any material respect when made; iv. Any of Borrower, his spouse or any WVM Entity shall seek to rescind, terminate or contest or otherwise declare ineffective any document executed and delivered in connection with the Restructuring Agreement; v. Failure to perform any obligations under the Restructuring Agreement or, except as provided therein, any default in the performance of any obligation or covenant contained in any document, agreement or instrument referenced therein. d. If any representation or warranty made by Borrower to Lender in any statement, certificate or other document, including, without limitation, the Restructuring Agreement, or any financial statement provide to Lender, is false, erroneous or misleading in any material respect. e. If Borrower shall become insolvent or bankrupt; or if Borrower shall admit in writing his inability to pay his debts; or if Borrower shall suffer the appointment of a receiver or trustee for substantially all of his property; or if Borrower makes an assignment for the benefit of creditors; or if proceedings under any law related to bankruptcy or insolvency or the reorganization or the release of debtors are instituted against Borrower and are not dismissed or stayed within sixty (60) days; or if a receiver or trustee for Borrower or a significant portion of his property shall be appointed without Borrower's consent and such receiver or trustee shall not be discharged within sixty (60) days; or if proceedings relating to Borrower under any law related to bankruptcy or insolvency or the reorganization or the release of debtors are instituted or commenced by Borrower. 7. Remedies. a. General Rights of Lender. Upon the occurrence of any Event of Default, (i) interest shall automatically and without notice begin to accrue on the outstanding balance of this Note at the rate of nine percent (9.0%) per annum, (ii) the entire unpaid principal amount of this Note and all unpaid interest accrued thereon shall, at the sole option of Lender upon notice to Borrower, become immediately due and payable, (iii) Lender shall have the right to offset all amounts owed by Borrower hereunder against any amounts owed by Lender or any of its Affiliates, in any capacity to Borrower, whether or not due, and (iv) Lender shall thereupon have the immediate right to exercise from time to time all rights and remedies now or hereafter available at law or in equity, all of which shall be cumulative in nature including the right to exercise its remedies with respect to any collateral securing this Note under the Security Agreement (as defined below) or otherwise. b. Recourse. Until May 18, 2006, this Note shall be a non-recourse obligation of Borrower, and Lender's rights and remedies are solely to proceed against the Collateral, as defined in the Security Agreement, and not to proceed against the Borrower, individually, or to seek recovery from any of Borrower's other assets or property. The taking of possession of Collateral by the Lender or the sale of the Collateral to provide funds with which -3- 4 to satisfy amounts owed to Lender hereunder shall be Lender's sole remedy and shall discharge all obligations evidenced by this Note. From and after May 18, 2006, this Note shall constitute a general and direct obligation of Borrower, with full recourse to all of his assets, except as specifically limited in the Restructuring Agreement. 8. Security. Borrower's obligations under this Note are secured by a security interest in certain of the assets of Borrower and certain of his affiliates, as provided in the Security Agreement, dated as of even date herewith, by and between Borrower and Lender (the "Security Agreement") and related documents and instruments set forth in detail in the Restructuring Agreement. 9. Miscellaneous. Except as expressly set forth herein, Borrower hereby waives presentment, demand, protest and notice of dishonor and protest, and also waives all other exemptions; and agrees that extensions of the time of payment of this Note or any installment or part thereof may be made before, at or after maturity by agreement by Lender. Borrower shall pay to Lender, upon demand, all costs and expenses that may be incurred by Lender in connection with the enforcement of this Note including, without limitation, fees and expenses of Lender's counsel. Any failure by Lender to exercise any right hereunder shall not be construed as a waiver of the right to exercise the same or any other right at any time. No amendment to or modification of this Note shall be binding upon Lender unless in writing and signed by it. Any provision hereof found to be illegal, invalid or unenforceable for any reason whatsoever shall not affect the legality, validity or enforceability of the remainder hereof. This Note shall apply to and bind Borrower, his heirs, administrators, executors, successors and assigns and shall inure to the benefit of Lender, its successors and assigns; provided, however, that Borrower may not assign his rights and obligations under this Note without the express prior written consent of Lender. No course of dealing on the part of the Lender, nor any delay or failure on the part of the Lender to exercise any right, shall operate as a waiver of such right or otherwise prejudice the Lender's rights, powers and remedies. The rights, powers and remedies of Lender, permitted by law or contract or as stated herein, shall be cumulative and concurrent and may be exercised or otherwise pursued by Lender singly, successively or together against Borrower at the sole discretion of Lender; and the failure to exercise any such right, power or remedy shall in no event be construed as a waiver or release of the same. Lender shall not by any act of omission or commission be deemed to waive any of its rights, powers or remedies hereunder unless such waiver be in writing and signed by Lender, and then only to the extent specifically set forth therein, and a waiver of one event shall not be construed as continuing or as a bar to or waiver of such right, power or remedy on a subsequent event. This Note shall be governed by and interpreted in accordance with the laws of the Commonwealth of Pennsylvania. Borrower hereby consents to the jurisdiction of the courts of Pennsylvania in any action or proceeding which may be brought against Borrower under or in connection with this Note, and in the event any such action or proceeding shall be brought against Borrower, Borrower agrees not to raise -4- 5 any objection to such jurisdiction or the laying of the venue thereof in Philadelphia, Pennsylvania. IN WITNESS WHEREOF, Borrower, intending to be legally bound hereby, has duly executed this Note as of the date first written above. ___________________________________ /S/ WARREN V. MUSSER Witness Borrower: Warren V. Musser -5- EX-10.5 6 w52490ex10-5.txt AGREEMENT TO RESTRUCTURE DATED APRIL 16, 2001 1 EXHIBIT 10.5 EXECUTION COPY AGREEMENT TO RESTRUCTURE BY AND AMONG WARREN V. MUSSER ("WVM"), AND HILARY GRINKER MUSSER ("HGM"), AND SAFEGUARD SCIENTIFICS, INC AND BONFIELD INSURANCE, LTD. DATED AS OF APRIL 16, 2001 2 TABLE OF CONTENTS
Page ---- ARTICLE I. DEFINITIONS; RULES OF CONSTRUCTION...................................................................3 Section 1.1 Defined Terms.................................................................................3 Section 1.2 Rules of Construction.........................................................................7 ARTICLE II. ACKNOWLEDGEMENTS....................................................................................7 Section 2.1 Confirmation of Indebtedness..................................................................7 Section 2.2 Validity and Enforceability of Letter Agreement, Security Agreement, Mortgages.....................................................................................7 Section 2.3 Tax Returns for 2000..........................................................................8 ARTICLE III. RESTRUCTURING PLAN - PHASE I.......................................................................8 Section 3.1 Components of Phase I.........................................................................8 Section 3.2 Conditions Precedent to Effectiveness of Phase I.............................................12 Section 3.3 Phase I Effective Date.......................................................................14 ARTICLE IV. RESTRUCTURING PLAN - PHASE II......................................................................14 Section 4.1 Restructure of Legg Mason Debt...............................................................14 Section 4.2 SFE Option...................................................................................16 Section 4.3 Release of Escrow Items......................................................................17 Section 4.4 Lake Naomi Option............................................................................17 Section 4.5 Conditions Precedent to Effectiveness of Phase II of this Agreement..........................17 Section 4.6 Phase II Effective Date......................................................................19 ARTICLE V. TERMINATION.........................................................................................19 Section 5.1 Events of Termination........................................................................19 Section 5.2 Remedies.....................................................................................19 ARTICLE VI. REPRESENTATIONS, WARRANTIES AND AGREEMENTS.........................................................20 Section 6.1 By WVM.......................................................................................20 Section 6.2 By HGM.......................................................................................21 Section 6.3 By Safeguard.................................................................................23 ARTICLE VII. MISCELLANEOUS.....................................................................................24 Section 7.1 Cooperation; Other Documents.................................................................24 Section 7.2 Confidentiality; Announcements...............................................................24 Section 7.3 Non-Disparagement............................................................................24 Section 7.4 Indemnity....................................................................................25 Section 7.5 No Waivers...................................................................................25 Section 7.6 Modification.................................................................................25 Section 7.7 Notices......................................................................................25 Section 7.8 Binding and Governing Law....................................................................27 Section 7.9 Counterparts.................................................................................27 Section 7.10 Submission to Jurisdiction...................................................................27
3 AGREEMENT TO RESTRUCTURE This AGREEMENT TO RESTRUCTURE (the "Agreement") is made as of the 16th day of April, 2001, by and among Warren V. Musser ("WVM"), an individual residing at 710 Sproul Road, Bryn Mawr, PA 19010, Hilary Grinker Musser ("HGM"), an individual residing at 710 Sproul Road, Bryn Mawr, PA 19010, Safeguard Scientifics, Inc. ("SFE"), a Pennsylvania corporation with offices at 435 Devon Park Drive, 800 Building, Wayne, PA 19087, and Bonfield Insurance, Ltd. ("Bonfield," and together with SFE, "Safeguard"), a British Virgin Islands corporation with offices c/o Safeguard Delaware, Inc., 2711 Centerville Road, Suite, 400, Wilmington, DE 19808. BACKGROUND A. SFE entered into a Guaranty dated as of October 4, 2000, in favor of Legg Mason Wood Walker, Incorporated ("Legg Mason") (the "Legg Mason Guaranty"), relating to certain obligations of WVM to Legg Mason arising under the Warren V. Musser Foundation, Inc. Legg Mason Account (No. [Intentionally Omitted]) and the Warren V. Musser Legg Mason Account (No. [Intentionally Omitted]) (collectively, the "Legg Mason Accounts"). B. Pursuant to a Letter Agreement dated October 4, 2000, and amended as of November 8, 2000 (the "Letter Agreement"), WVM has agreed to reimburse SFE for any amounts paid pursuant to the Guaranty. C. Pursuant to a Security Agreement dated as of November 8, 2000, by WVM in favor of SFE (the "11/2000 Security Agreement"), WVM granted to SFE a security interest in the property described therein as "Collateral" to secure WVM's Liabilities (as defined in the Security Agreement), including his obligations to SFE under the Letter Agreement. D. Pursuant to an Assumption of Guaranty of Account dated November 13, 2000, between SFE and Bonfield, and accepted by Legg Mason (the "Assumption"), SFE assigned to Bonfield, and Bonfield assumed from SFE, all of SFE's obligations and interests in connection with the Guaranty. E. Pursuant to an Assignment dated as of November 13, 2000 (the "Bonfield Assignment"), SFE assigned to Bonfield, and Bonfield accepted from SFE a transfer to Bonfield of SFE's rights, title and interest in and to the 11/2000 Security Agreement and the Letter Agreement in further consideration for Bonfield's assumption of the Guaranty. F. Pursuant to a Guaranty dated December 1, 2000 by WVM in favor of SFE and its assignees (the "WVM Guaranty"), WVM guaranteed the performance of his obligations under, inter alia, the Letter Agreement. G. HGM has executed and delivered a document entitled "Guaranty" dated December 1, 2000 (the "HGM Guaranty"), pursuant to which, Safeguard contends, HGM guaranteed WVM's obligations under, inter alia, the Letter Agreement, on a non-recourse basis, and which HGM contends, is not binding upon or enforceable against her. H. Pursuant to the Existing Mortgages (defined below), WVM has secured his obligations under the Letter Agreement and the WVM Guaranty, and, Safeguard contends although HGM disputes, HGM has secured her obligations, if any, under the HGM Guaranty. S-2 4 I. WVM requested that Safeguard agree to: (i) make certain advances or release certain assets to enable him to meet his obligations in respect of certain income tax liability; (ii) restructure certain agreements relating to the Legg Mason Accounts and modify the collateral security thereof; and (iii) forbear from its exercise of certain rights under the Existing Documents (defined below); and Safeguard has agreed to the foregoing on the terms and subject to the conditions hereinafter set forth. NOW, THEREFORE, incorporating the foregoing background recitals by reference, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the parties hereto agree as follows: ARTICLE I. DEFINITIONS; RULES OF CONSTRUCTION Section 1.1 Defined Terms. All terms used in this Agreement and not otherwise defined herein, shall have the respective meanings ascribed to such terms in the Existing Documents unless the context of this Agreement otherwise requires. The following terms, as used in this Agreement and the other Transaction Documents, shall have the following meanings: "Affiliate" means (i) SFE, (ii) Bonfield, (iii) any person or entity directly or indirectly owning, controlling or holding ten percent (10%) or more of the outstanding beneficial interest in SFE or Bonfield, (iv) any person or entity ten percent (10%) or more of the outstanding beneficial interest of which is directly or indirectly owned, controlled or held by SFE or Bonfield, or any subsidiary of either, (v) any person or entity directly or indirectly controlling, controlled by, or under common control with SFE or Bonfield, (vi) any officer, director, employee, agent, representative of the foregoing, and (vii) any related Partner Company or Fund; provided that, for purposes of this Agreement, the term "Affiliate" shall not include WVM, HGM, their respective heirs, administrators, executors, successors, assigns, or any person or entity claiming by or through them or on their or his or her behalf. "Ancillary Assets" means all Collateral other than the SFE Options and the Vassar Street Property. "Amended and Restated Note" means that certain promissory note in the form attached hereto as Exhibit A-1 to be delivered, pursuant to Section 4.5(a)(1) hereof, by WVM in favor of Bonfield in a principal amount equal to the Outstanding Obligations on the Phase II Effective Date. "Bonfield Account" means that certain account no. [Intentionally Omitted] at PNC Bank, Delaware, ABA #[Intentionally Omitted]. "Bonfield Assignment" has the meaning set forth in Background paragraph E. "Collateral" means the assets listed on Schedule 1.1 attached hereto, and any and all proceeds thereof, accretions thereto, permitted substitutions therefor, and such additional assets and property as the parties may from time to time agree, as more particularly described in the Security Agreement. "Conditional Exercise" has the meaning set forth in Section 4.2(a) hereof. "DBR" means Drinker, Biddle & Reath LLP, counsel to WVM and the WVM Entities. "Exercise Shares" has the meaning set forth in Section 4.2(a) hereof. "Existing Documents" means the Letter Agreement, the Existing Security Agreement, the Existing Mortgages, the WVM Guaranty and the HGM Guaranty. S-3 5 "Existing Mortgages" means the mortgages listed on Schedule 1.2 attached hereto, which are to be released as of the Phase II Effective Date. "Existing Security Agreement" means the 11/2000 Security Agreement, as assigned to Bonfield pursuant to the Bonfield Assignment. "FROF" means Fox, Rothschild, O'Brien & Frankel, LLP, counsel to HGM. "FROF Escrow Agreement" means that certain escrow agreement by and among FROF, as escrow agent, WVM, HGM, SFE and Bonfield, relating to the release of the Existing Mortgages. "Fund" means those private equity funds in which SFE has direct or indirect equity ownership interests and their related management companies, including, without limitation, those identified on Schedule 1.4 attached hereto, and any successors thereto. "Governmental Body" means any court, government (federal, state, local or foreign), department, commission, board, agency, bureau, official or other regulatory, administrative or governmental or quasi-governmental authority. "HGM Guaranty" has the meaning set forth in Background paragraph G. "Income Year" has the meaning set forth in Section 3.1(a)(1)(B). "Legal Requirements" means any law, statute, rule, regulation, franchise, governmental permit, judgment, decree, Order, ordinance, variance, directive, code or requirement of any Governmental Body; whether now or hereafter in effect. "Legg Mason" has the meaning set forth in Background paragraph A. "Legg Mason Accounts" has the meaning set forth in Background paragraph A. "Letter Agreement" has the meaning set forth in Background paragraph B. "Legg Mason Guaranty" has the meaning set forth in Background paragraph A. "Lubert Asset Purchase" means that certain arrangement between WVM and Ira Lubert, for the purchase by Mr. Lubert of WVM's interest in the following entities: UPH Lakeside, LP (Charlotte Hilton), SBN Partners, LP (Baltimore Sheraton), Valley Forge Colonial, LP, Valley Forge Convention Center, and RIC Partners, LP (Richmond Hilton), for an aggregate purchase price of $1,000,000, payable in increments of $100,000 for each of the ten months following the acquisition, commencing on February 1, 2001. "MIT" means the Massachusetts Institute of Technology, a Massachusetts educational corporation. "MIT Existing Mortgage" means that certain mortgage on the Vassar Street Property securing a loan made as of October 11, 1994 by MIT to the owners of the Vassar Street Property in the original principal amount of $5,800,000, which extends to MIT, inter alia, an option to purchase the Vassar Street Property, which option is secured by a second mortgage on the Vassar Street Property; the proceeds of which shall be Collateral hereunder. S-4 6 "MIT Financing" means that certain proposed new loan to be made by MIT to the owner of the Vassar Street Property, in the original principal amount of $12,500,000, which includes, inter alia, an agreement between said owner and MIT for MIT's purchase of the Vassar Street Property on December 1, 2005. "New Mortgages" means those certain mortgages substantially in the forms attached hereto as Exhibits B-1 (Pennsylvania), B-2 (Pennsylvania Condominium) and B-3 (Massachusetts) attached hereto, to be delivered by WVM or the WVM Entity or Entities with title to same, covering the properties listed on Schedule 1.3 hereto. "Non-Recourse Compensation" means any retirement benefits, director or employee compensation and benefits, consulting compensation, or other compensation as director, officer, chairman, chairman emeritus, employee or consultant of or for SFE or any Partner Company or Fund identified on Schedule 1.4 attached hereto or any successor thereto (collectively, the "Safeguard Entities") which are granted to WVM or agreed by SFE or any Safeguard Entity to be paid, provided or otherwise made available to WVM in connection with or after the approval or execution of this Agreement or the approval or consummation of the transactions provided for therein, if and only to the extent such benefits or compensation are paid in cash and are not related to or based on the value of SFE or of its securities or of any of the Safeguard Entities or of their securities. "Non-Recourse Compensation" expressly shall not include any and all increases in the value of, earnings on and proceeds of any and all investments made utilizing Non-Recourse Compensation. "Non-Transferable Asset" has the meaning set forth in Section 3.1(c)(2) hereof. "Notes" means, collectively, and "Note" means, individually, as the context may require, the Amended and Restated Note, the Tax Note and the Option Note. "Option Loan" has the meaning set forth in Section 4.2(a) hereof. "Option Loan Consents" has the meaning set forth in Section 4.2(a) hereof. "Option Note" means that certain promissory note in the form attached hereto as Exhibit A-2, to be delivered, pursuant to Section 4.2(a) hereof, by WVM in favor of Bonfield in a principal amount not to exceed $5,281,300. "Option Price" has the meaning set forth in Section 4.2(a) hereof. "Order" means any order, writ, injunction, ruling, judgment, stipulation or decree by or with any Governmental Body. "Outstanding Obligations" means, as of the date of determination, the amount of the obligations of WVM to any of the following (without duplication): (i) Legg Mason, in connection with the Legg Mason Accounts; (ii) Bonfield, under the Letter Agreement; (iii) Bonfield, under the Existing Mortgages; and (iv) Bonfield, under the Tax Note. "Partner Company" means a company in which SFE has acquired an equity ownership or debt interest and which SFE refers to from time to time as its "Partner Companies" in its annual report to shareholders or its reports filed with the Securities and Exchange Commission under Section 13 of the Securities Exchange Act of 1934, as amended. S-5 7 "Permitted Encumbrances" shall mean (i) liens, encumbrances, mortgages, deeds of trust and restrictions of public record in the relevant jurisdictions, (ii) liens, encumbrances, mortgages, deeds of trust and restrictions arising under the Existing Documents, (iii) with respect to WVM's interests in any partnership, restrictions set forth in the Partnership Agreements relating thereto and restrictions arising under applicable securities laws, (iv) with respect to the Vassar Street Property, the MIT Existing Mortgage and any lien, encumbrance, mortgage or deed of trust required in connection with the MIT Financing, (v) with respect to WVM's interest in any equity securities, restrictions arising under the Legg Mason Guaranty and WVM's agreements with Legg Mason and applicable securities laws, (vi) with respect to any condominium owned by WVM or the WVM Entities, liens, restrictions and encumbrances arising under the applicable condominium agreements, if any, and the bylaws or other governing documents of the condominium association or similar governing body, (vii) with respect to the Lake Naomi Property (as defined in Section 4.4), the Lake Naomi option as described in Section 4.4, (viii) with respect to the SFE Option, restrictions arising under the applicable option agreement and related stock option plan, to the extent not waived, and applicable securities laws and (ix) with respect to real property, liens for taxes, assessments, governmental charges and levies not yet due or which are being contested in good faith by appropriate proceedings and are not material in amount or value in relation to the associated property, and such utility or municipal easements and restrictions, if any, as do not detract in any material respect from the value or marketability of the property subject thereto and do not interfere with the current use of such property in any material respect. "Phase I Conditions" has the meaning set forth in Section 3.2 hereof. "Phase II Conditions" has the meaning set forth in Section 4.5 hereof. "Phase I Effective Date" has the meaning set forth in Section 3.3 hereof. "Phase II Effective Date" has the meaning set forth in Section 4.6 hereof. "Pre-Nuptial Agreement" means that certain Pre-Nuptial Agreement dated November 23, 2000, by and between WVM and HGM, together with any predecessor or successor agreements and documents, any and all amendments or modifications thereto from time to time in effect, and instruments, or agreements required or contemplated thereby or in connection therewith, whether or not in writing. "Related Document" means any document, instrument, agreement or other writing required to be executed and delivered pursuant to or in connection with this Agreement "Representatives" has the meaning set forth in Section 7.2(a) hereof. "Retention Bonus" means the bonus payment of $500,000 payable by SFE to WVM during January, 2002, pursuant to a resolution adopted at the November 28, 2000 meeting of the Compensation Committee of the Board of Directors of SFE. "Security Agreement" means the Amended and Restated Security Agreement required to be delivered by WVM and each WVM Entity in favor of Bonfield pursuant to Section 3.2(a)(5) hereof. "SFE Option" means that certain option of WVM to purchase one million (1,000,000) shares of common stock (the "Shares") of SFE at an exercise price per share of $5.2813 pursuant to that certain Option granted by SFE to WVM on December 21, 2000 (the "Option"), together with all property now or hereafter received in conjunction therewith, including, without limitation, the Shares, dividends payable in cash or stock, and shares or other proceeds of conversion or splits of any such securities, together with all additions thereto, substitutions or exchanges therefor, proceeds thereof or distributions thereon. S-6 8 "Tax Loan" has the meaning set forth in Section 3.1(a) hereof. "Tax Note" means the promissory note in the form attached hereto as Exhibit A-3, required, pursuant to Section 3.2(a)(2) hereof, to be executed and delivered by WVM in favor of Bonfield on or before April 16, 2001, evidencing his obligations in connection with the Tax Loan. "Vassar Street Property" means that certain real property and improvements thereon located at 304 Vassar Street, Cambridge, Massachusetts. "WVM Entities" means those entities listed on Schedule 1.5 attached hereto. "WVM Guaranty" has the meaning set forth in Background paragraph F. "11/2000 Security Agreement" has the meaning set forth in Background paragraph C. Section 1.2 Rules of Construction. (a) References to Bonfield. References to Safeguard or Bonfield shall include, as the context requires, any successors and permitted assignees of Safeguard or Bonfield, as applicable. ARTICLE II. ACKNOWLEDGEMENTS Section 2.1 Confirmation of Indebtedness. WVM and HGM each confirms and acknowledges that, as of the date hereof: (a)(i) The principal amount of WVM's obligations to Legg Mason is approximately $32,100,000; and (ii) interest has been accruing thereon at a rate of prime minus one and one quarter percent and approximately $150,000 in interest has accrued on such principal amount as of the date hereof; (b) The principal amount of Bonfield's liability under the Legg Mason Guaranty as of the date hereof is equal to the lesser of the principal and accrued interest set forth in Section 2.1(a) hereof, and $35,000,000; and (c) WVM's obligations to Safeguard under the Letter Agreement include the amount Bonfield is required to pay to Legg Mason under the Legg Mason Guaranty. Section 2.2 Validity and Enforceability of Letter Agreement, Security Agreement, Mortgages. Each of WVM and HGM, to the extent each is a party thereto or obligated thereunder, confirms and acknowledges, except to the extent expressly modified hereby or pursuant to any Related Document, as of the effective date of the applicable provision hereof, or of such document, as the case may be: (i) the continued existence, validity and enforceability of the Existing Documents and all the terms and conditions of each of the Existing Documents; (ii) that the collateral security granted to secure WVM's and HGM's respective obligations under the Letter Agreement and other Existing Documents and the terms of the Existing Documents, shall not be impaired by anything contained herein; (iii) that such Existing Security Agreement and the Existing Mortgages secure and shall continue to secure WVM's obligations under the Letter Agreement and the WVM Guaranty; (iv) that WVM is liable, pursuant to the Letter Agreement and the WVM Guaranty and the Existing Mortgages, for any and all indebtedness, obligations and liabilities of any type or nature, to Safeguard under the Letter Agreement including, without limitation, amounts advanced by Bonfield under the Legg Mason Guaranty, and any new loans, guaranties or other extensions of credit made by Safeguard to WVM, including without S-7 9 limitation, the Tax Loan to be made pursuant to Section 3.1 hereof and (v) that the execution of the documents and consummation of the transactions contemplated under Article III of this Restructuring Agreement do not affect in any manner the obligations of HGM, if any, under the HGM Guaranty and the mortgage and security interest, if any, created by the Existing Mortgages. Section 2.3 Tax Returns for 2000. WVM and HGM each hereby agrees and acknowledges that, they will file their 2000 tax returns on a "married, filing jointly" basis. ARTICLE III. RESTRUCTURING PLAN - PHASE I Section 3.1 Components of Phase I. Upon the satisfaction of the Phase I Conditions, as set forth in Section 3.2 hereof, the following will occur: (a) Tax Loan. Bonfield will advance to WVM the principal amount of $4,113,279.00 (the "Tax Loan"), the proceeds of which will be used to fund the payment of estimated 2000 tax payments due April 16, 2001. The Tax Loan shall be evidenced by the Tax Note, which shall constitute a general and direct obligation of WVM, with full recourse to all of his personal assets. (1) Advances. (A) The Initial Advance. The initial advance of the Tax Loan shall be made in the form of a check drawn for the benefit of the Department of Treasury for federal income taxes, and the appropriate state tax authority for state income taxes following WVM's delivery to, and review by Bonfield and an accountant or an accounting firm reasonably acceptable to Bonfield, of a copy of the form 4868 (and the similar state extension form), for an extension of time within which to file federal and state income tax returns, which WVM and HGM intend to file, jointly, with respect to the 2000 calendar year, prepared and/or reviewed by an accountant or accounting firm reasonably acceptable to Bonfield, showing the estimated income taxes due for 2000 calendar year, after application of all credits and withholdings. (i) Refunds of the Initial Advance. WVM shall provide Bonfield with executed final copies of the 2000 form 1040 and comparable state form (the "Final 2000 Forms") within 10 days of their filing. If a Final 2000 Form shows an overpayment of taxes, such overpayment shall be claimed as a refund, and not claimed as an estimated payment for the year 2001. WVM and HGM hereby agree to deliver to Bonfield, immediately upon the receipt thereof, such refund as a payment on the Tax Note. Failure to so return within three (3) business days after receipt thereof shall constitute an Event of Default under the Tax Note and an Event of Termination under this Agreement. (B) Subsequent Advances for Tax Payments. For calendar years 2001 and following (each an "Income Year"), so long as the Tax Loan is outstanding, and no Event of Default under the Tax Note, or Event of Termination hereunder (whether or not declared) has occurred, WVM may request that Bonfield advance to him additional funds to pay federal and state income taxes, under the terms of this Section 3.1(a)(1)(B)(i). (i) If WVM intends to request an advance from Bonfield under this Section 3.1(a)(1)(B), then no later than March 15 of the year after the Income Year (the "Payment Year"), WVM shall provide to Bonfield (x) a copy of the draft form 1040 (or comparable state form), for federal and state income taxes, that he intends to file with respect to the Income Year, prepared by an accountant or accounting firm reasonably acceptable to Bonfield (the "Tax Accountant"), showing the income taxes due for the Income Year, after application of all credits and withholdings (the "Actual S-8 10 Tax") and (y) a pro forma calculation of federal and state income taxes, prepared by the Tax Accountant, that would have been payable with respect to the relevant Income Year, if the recognized gain or loss related to the sale or other disposition of the Collateral (which shall not include the exercise of any Options), were excluded (the "ProForma Tax"). Solely for the purposes of this section 3.1(a)(1)(B)(i), for the 2001 Income Year, gain or loss related to the sale or other disposition of the Collateral shall include the gain or loss on the disposition of the assets listed on Schedule 3.1 attached hereto. Bonfield, through its employees and representatives, shall be entitled to review such returns and calculations and discuss the propriety of such calculations with the Tax Accountant. (ii) If WVM has requested an advance under this section 3.1(a)(1)(B), Bonfield shall, no later than April 15 of the Payment Year, advance to WVM the amount by which the Actual Tax exceeds the Pro Forma Tax for the Income Year, as an advance under the Tax Note; provided, however, that advances to WVM in any Payment Year shall not be more than the amount by which the proceeds from the sale of Collateral received by Bonfield during the relevant Income Year reduced the principal on the Tax Note. (iii) Advances under this section shall be made in the form of a check drawn for the benefit of the Department of Treasury for federal income taxes, or the appropriate state tax authority for state income taxes. (iv) If the final form 1040 (or comparable state forms) are not completed by April 15 of the relevant Payment Year, the amount of advances under section 3.1(a)(1)(B)(ii) shall be determined based on good faith estimates prepared by the Tax Accountant, evidenced on form 4868 (and the similar state extension form), and the calculation shall be finalized when final tax returns for the Income Year are prepared, and if necessary additional funds advanced to WVM under the terms of this section. Any refunds available to WVM (or his spouse, to the extent they have filed jointly with respect to any subsequent Income Year) because of overpayment based on the estimates shall be promptly be returned to Bonfield. Failure to so return within three (3) business days after receipt thereof shall constitute an Event of Default under the Tax Note and an Event of Termination under this Agreement. (2) Maturity Date. The Tax Note shall be payable (subject to mandatory prepayments, as required pursuant to Section 3.1(a)(3)(B) below), on demand, at any time after April 30, 2001 against WVM. Notwithstanding the foregoing, on the Phase II Effective Date, obligations outstanding under the Tax Note shall be consolidated into the Amended and Restated Note. (3) Payments. (A) Voluntary Payments. WVM may, at his option, prepay the Tax Note in whole or in part, at any time, without any premium or penalty. (B) Mandatory Prepayments. The Tax Note shall be mandatorily repaid from the following funding sources subject to the provisions of the Option Note and Section 4.2(c) hereof.: (i) SFE shall offset the amount of $300,000 against SFE's obligation to pay the Retention Bonus, and such proceeds shall be applied to reduce the obligations outstanding under the Tax Note and other Outstanding Obligations; (ii) all proceeds, as and when received with respect to all payments made after the date hereof, in connection with the Lubert Asset Purchase; and S-9 11 (iii) all proceeds received from the sale, financing or other disposition of any of the Collateral and the exercise of rights and remedies under the Existing Documents. (C) Application of Payments. Each such prepayment, including any voluntary and mandatory prepayments, shall be applied first to outstanding accrued interest and then to the remaining outstanding principal balance of the Tax Note. (4) Interest. Interest on the outstanding principal balance of the Tax Note shall accrue at a rate of seven percent (7%) per annum and shall accrue and be capitalized annually, on each anniversary of the date of such Tax Note. (b) Collateral; Credit Enhancements. The Tax Note and the other Outstanding Obligations shall be secured by a first priority lien (with respect to the Vassar Street Property, subject to the MIT Existing Mortgage and, if the MIT Financing is consummated, a mortgage securing the MIT Financing) on all of the Collateral; provided, however, that until the later of the Phase II Effective Date or the date on which WVM's obligations to Legg Mason have been satisfied, Bonfield's security interest in WVM Legg Mason Account shall be subordinate to the security interest in favor of Legg Mason. The Tax Note shall also be secured by the Existing Mortgages and, if and to the extent but only if and to the extent secured prior to execution of this Agreement, the HGM Guaranty, on a non-recourse basis, pursuant to the terms of such HGM Guaranty. (c) Transfers; Asset Liquidation. In addition to, and not in substitution for Bonfield's rights as a secured party in accordance with Section 3.1(b) hereof and as provided in the Security Agreement, the Control Agreements, the New Mortgages and the Existing Documents, Bonfield may elect, on an item by item basis, to transfer title to, or mortgage, refinance, or otherwise monetize any or all of WVM's interests in (or those of any WVM Entity), the Collateral and the property subject to the Existing Agreements to Bonfield or a designee of Bonfield, in reduction of the outstanding balance under the Tax Note, subject, in any event, to the provisions of Section 3.1(f) hereof, and in accordance with the provisions of this Section 3.1(c). (1) Bonfield or a designee, may, at any time prior to repayment in full of all of the obligations under the Tax Note, and from time to time, purchase from WVM or the applicable WVM Entity, free and clear of all liens, claims and encumbrances of any nature other than Permitted Encumbrances, one or more of the assets included in the Collateral. The purchase price for each such asset shall be the value ascribed thereto on Exhibit 1.1 and shall be payable by crediting the amount thereof against the Tax Note or other Outstanding Obligations, in such order and amounts as Safeguard shall determine, in its sole discretion. With respect to all Collateral other than real property (for which the applicable notice period shall be thirty (30) days), Bonfield shall provide WVM or the applicable WVM Entity with ten (10) days' prior written notice of its intent to effect a conveyance of the asset, including in such notice a description of the asset, the purchase price, the intended date of conveyance and the identity of the party acquiring title, if not Bonfield. WVM or the applicable WVM Entity shall forward to Bonfield, not less than three (3) days prior to the intended date of conveyance, such documents and evidence of the conveyance as Bonfield shall reasonably request, based on the nature of the asset to be conveyed. Upon Bonfield's or the applicable designee's receipt of all required documents and instruments, including, without limitation, title documents, consents, confirmation of required notices, certificates or other similar documents, it shall credit the purchase price as provided hereinabove. (2) To the extent that any asset which would otherwise be conveyed to Bonfield or a designee is not capable of being sold, assigned, transferred, conveyed or delivered because a necessary consent or release can not be obtained by the intended transfer date (a "Non-Transferable S-10 12 Asset"), WVM and each WVM Entity shall use its respective reasonable best efforts to obtain such consent or release. (3) Notwithstanding anything to the contrary herein, Bonfield shall not be obligated to purchase any Non-Transferable Asset without WVM or the applicable WVM Entity first having obtained all necessary consents, removed or eliminated any such potential defaults under any agreements affecting any such asset without adversely modifying, amending or burdening such Non-Transferable Asset; provided however, that WVM's or the applicable WVM Entity's failure to effect the conveyance within the period set forth in the initial notice required pursuant to Section 3.1(c)(1) hereof, shall, at Bonfield's election, constitute an Event of Default under the Tax Note, an Event of Termination under this Agreement. (d) Application of Proceeds. The proceeds of any exercise by Bonfield of its remedies with respect to the Collateral, whether as a secured party, pursuant to Section 3.1(b) hereof, or as a purchaser, pursuant to Section 3.1(c) hereof, will be applied as a mandatory prepayment of the Tax Note. Bonfield may exercise such remedies before, on or after January 1, 2003, whether or not demand has been made in respect of the Tax Note or any other Outstanding Obligation. (e) Excess Proceeds From Collateral. In the event Phase II is not consummated, and in the event Safeguard realizes proceeds (net of any and all taxes, tax advances and expenses of sales payable in connection therewith and reasonable counsel fees incurred in connection therewith) from the Collateral in excess of the amounts owing under the Notes and any other Outstanding Obligations, such excess shall be returned to WVM (or, if WVM is then not living, to HGM) upon the expiration of all periods during which any such proceeds could be subject to avoidance under any applicable preference or fraudulent conveyance laws or Legal Requirements of similar import then in effect. (f) Forbearance. Safeguard will forbear from (i) demanding immediate payment of all amounts due under the Letter Agreement or the Tax Note, including without limitation, interest, fees, costs, charges, expenses, indemnities or other sums chargeable to WVM under the Existing Documents; (ii) exercising any of its rights and remedies under the Existing Documents as a result of WVM's failure to comply with the terms of the Letter Agreement and the Existing Security Agreement prior to the date hereof; and (iii) exercising its rights and remedies with respect to the collateral security granted pursuant to Section 3.1(b) hereof; provided, however, that such forbearance shall continue only until the earliest of (i) the Phase II Effective Date, (ii) April 30, 2001 or (iii) the declaration of an Event of Termination (as defined in Article V of this Agreement). The declaration of an Event of Termination shall immediately operate to terminate Safeguard's agreement to forbear hereunder. Upon such termination, Safeguard shall have no further obligations to forbear hereunder. (g) Agreement as to Treatment of Existing Mortgages. Safeguard shall deposit into escrow, pursuant to the FROF Escrow Agreement, releases with respect to the Existing Mortgages, with such release to be effective as of the Phase II Effective Date. (h) HGM Actions. HGM shall resign, effective immediately upon receipt of $50,000 in prepaid fees payable under a Letter dated the date hereof to MegaSystems, Inc. relating to the provision by HGM of consulting services, as director and officer of MegaSystems, Inc., and from any and all positions she holds with MegaSystems, Inc. and in connection therewith shall cause her office to be relocated to a premises other than 435 Devon Park Drive, Wayne, Pennsylvania, on or before April 25, 2001. (i) Consent of Third Parties. WVM will seek and obtain the consent of each third party necessary to effect or complete the transactions contemplated by Phase I and Phase II of this S-11 13 Agreement, including, without limitation, the persons and entities identified in Sections 3.2(a)(9) and(10) hereof. Section 3.2 Conditions Precedent to Effectiveness of Phase I. The parties to this Agreement hereby agree that the following are the "Phase I Conditions": (a) Documents to be Delivered. The respective parties shall have delivered or caused to have been delivered to each other, on or before the Phase I Effective Date, the following documents or agreements, each duly executed by the respective parties thereto and each to be effective as of the Phase I Effective Date, except as specifically provided herein: (1) Restructuring Agreement. This Agreement. (2) Tax Note. The Tax Note, in the form attached hereto as Exhibit A-3. (3) Control Agreement. A Control Agreement by and among WVM, Bonfield and Legg Mason and, if requested by Safeguard, H. D. Brous and Associates, with respect to the WVM Legg Mason Account and, if requested by Safeguard, WVM's account at H.D. Brous and Associates, in the form attached hereto as Exhibit C. (4) Stock Certificates; Related Documents. Stock Certificates representing the certificated securities listed on Schedule 3.2; together with Stock Powers executed in blank for each of the Securities listed on Schedule 3.2; together with Forms 144, if required by Safeguard. (5) Security Agreement. The Amended and Restated Security Agreement, in the form attached hereto as Exhibit D, together with such UCC-1 and UCC-3 Financing Statements as may be requested by Safeguard. (6) SFE Option Documents. A Notice to Issuer pursuant to Uniform Commercial Code ("UCC") Section 8106 with respect to the SFE Option, together with the delivery to Bonfield of the Option and such UCC-1 financing statements as may be requested by Safeguard. (7) New Mortgages. The New Mortgages in form and substance satisfactory to Safeguard, and substantially in the forms attached hereto as Exhibits B-1 and B-2, respectively, for each of the properties listed on Schedule 1.3, other than the Vassar Street Property. (8) Releases. A Release by: (A) HGM, in the form attached hereto as Exhibit E-1; (B) HGM, in the form attached hereto as Exhibit E-2, to be delivered into escrow pursuant to the FROF Escrow Agreement, and to be effective as of the Phase II Effective Date; (C) WVM, in the form attached hereto as Exhibit E-3; (D) Each WVM Entity, in the form attached hereto as Exhibit E-4; and (E) SFE and Bonfield, in the form attached hereto as Exhibit E-5. S-12 14 (F) A release of claims by HGM, in the form of Exhibit G attached hereto, to be delivered into escrow pursuant to the FROF Escrow Agreement, and to be effective as of the Phase II Effective Date. (9) Third Party Consents. Consents to the transactions contemplated hereby, in form and substance satisfactory to Safeguard, by each of: (A) Ira Lubert, with respect to the assignment of the proceeds of the Lubert Asset Purchase; and (B) [Reserved]; (10) Investment Property and Acknowledgments. A Notice and Acknowledgment from each of the following entities (or the appropriate general partner, representative or agent thereof) with respect to the pledge and assignment by WVM to Bonfield of all of his right, title and interest in and to such entity: (i) Wheatley Partners, II, LP; (ii) RRE GIGA Investors, LP; (iii) Technology Leaders, LP; (iv) Technology Leaders, II Management, LP; (v) Eastern Technology Fund, LP; (vi) Plum Holdings, LP; and (vii) NEPA Venture Fund II, LP. (11) Resignation of HGM; Consulting Agreement. The resignation by HGM required pursuant to Section 3.1(h) hereof, in the form attached hereto as Exhibit F-1; and the delivery of a duly executed Letter by HGM to MegaSystems, Inc., in the form attached hereto as Exhibit F-2, relating to the provision by HGM of consulting services to MegaSystems, Inc.. (12) Additional Documentation Relating to Owned Assets. Documentation Evidencing WVM's interest in each of the following: (A) MDK Real Estate Corporation; (B) WDK Associates I, L.P.; (C) WDK Associates II, L.P.; (D) Wheatley Partners II, L.P.; (E) RRE GIGA Investors, L.P.; (F) Technology Leaders, L.P.; (G) Technology Leaders II, L.P.; (H) Eastern Technology Fund, LP; (I) Plum Holdings, L.P.; (J) NEPA Venture Fund II, L.P.; and (K) The Emerald HomeState PA Growth Fund- A of The Emerald Funds held in account number [Intentionally Omitted]. S-13 15 (13) Authorizing Resolutions. Authorizing resolutions from each of the following entities or other evidence of their authority to pledge assets, assign cash flow, or grant mortgages with respect thereto: (a) 304 Vassar Street, LP; and (b) 304 Vassar Street, Inc. (14) Existing Mortgage Releases. Releases with respect to the Existing Mortgages, to be delivered into escrow pursuant to the FROF Escrow Agreement, and to be effective as of the Phase II Effective Date. (15) Escrow Agreement. The FROF Escrow Agreement. (16) Opinions of Counsel. All legal opinions reasonably requested by Safeguard in connection with this Agreement, including without limitation the opinions of DBR, counsel for WVM and the WVM Entities and FROF, counsel for HGM, each in form and substance satisfactory to Safeguard and its counsel. (b) Representations and Warranties. Each of the representations and warranties made by each party hereto shall be true and correct as of the Phase I Effective Date. (c) Additional Escrowed Delivery. Bonfield shall deliver to FROF the HGM Guaranty, to be held in escrow pursuant to the FROF Escrow Agreement. Section 3.3 Phase I Effective Date. This Agreement and the obligations of the Parties hereto to perform hereunder shall become effective only upon the occurrence of all of the Phase I Conditions, or upon the waiver, in writing, by (a) either SFE or Bonfield, of any unfulfilled Phase I Condition specified in Sections 3.2(a)(2) - (7), 8(A)-(D) and (F), 9(A) and (B), (10)-(16) and 3.2(b), to the extent that WVM's, HGM's or any WVM Entity's actions gave rise to such event; or (b) WVM and HGM, jointly, of any unfulfilled Phase I Conditions specified in Sections 3.2(a)(8)(E), (14) and (15), and 3.2(b) and (c), to the extent that Safeguard's actions gave rise to such event (the "Phase I Effective Date"). ARTICLE IV. RESTRUCTURING PLAN - PHASE II Upon the satisfaction of the Phase II Conditions as set forth in Section 4.5 hereof, the following will occur: Section 4.1 Restructure of Legg Mason Debt. As of the Phase II Effective Date, Safeguard will restructure the Outstanding Obligations, to be evidenced by a new Amended and Restated Note which shall amend, restate and consolidate (i) the Tax Note; and (ii) the Outstanding Obligations arising under the Legg Mason Guaranty and the Letter Agreement. (a) Advances. (1) The Initial Advance. The initial advance of the Amended and Restated Loan shall be made in the form of payment by Bonfield, via wire or electronic transfer, to Legg Mason of funds sufficient to satisfy WVM's then remaining obligations to Legg Mason in connection with the Legg Mason Accounts. (2) Subsequent Advances for Tax Payments. For calendar years 2001 and following (each an "Income Year"), so long as the Amended and Restated Loan is outstanding, and no Event of Default under the Amended and Restated Note, or Event of Termination hereunder (whether or not declared) has occurred, WVM may request that Bonfield advance to him additional funds to pay S-14 16 federal and state income taxes, under the Amended and Restated Note. The terms and conditions of such additional advances shall be as set forth in Section 3.1(a)(1)(B) hereof; provided that all references therein to the "Tax Note" shall be deemed to be references to the "Amended and Restated Note" for purposes of this Section. (3) Advances for Transaction fees. Contemporaneously with the initial advance under the Amended and Restated Loan, Bonfield shall make an additional advance, in an aggregate amount not to exceed $250,000, for the reasonable legal and accounting fees incurred in connection with this Agreement and the transactions contemplated hereby. (b) Maturity Date. The Amended and Restated Note shall be payable (subject to mandatory prepayments, as required pursuant to Section 4.1(c)(2) below), on demand, commencing on January 1, 2003. Until April 30, 2006, recourse under the Amended and Restated Note shall be limited to the Collateral securing WVM's obligations thereunder. From and after April 30, 2006, the Amended and Restated Note shall constitute a general and direct obligation of WVM, with full recourse to all of his personal assets, except to the extent of the Non-Recourse Compensation. (c) Payments. (1) Voluntary Payments. WVM may, at his option, prepay the Amended and Restated Note in whole or in part, at any time, without any premium or penalty. (2) Mandatory Prepayments. The Amended and Restated Note shall be mandatorily repaid from the following funding sources: (A) To the extent the same had not been used to reduce obligations outstanding under the Tax Note, SFE shall offset the amount of $300,000 against SFE's obligations to pay the Retention Bonus and such proceeds shall be applied to reduce the obligations outstanding under the Amended and Restated Note and any other Notes then outstanding; (B) all proceeds, as and when received with respect to all payments made after the date hereof, in connection with the Lubert Asset Purchase; and (C) all proceeds received from the sale, financing or other disposition of any of the Collateral and the exercise of rights and remedies under any then surviving Existing Documents. (3) Application of Payments. Each such prepayment, including any voluntary and mandatory prepayments, shall be applied first to outstanding accrued interest and then to the remaining outstanding principal balance of the Amended and Restated Note. (4) Interest. Interest on the outstanding principal balance of the Amended and Restated Note shall accrue at a rate of seven percent (7%) per annum and shall accrue and be capitalized annually, on each anniversary of the date of such Amended and Restated Note. (d) Collateral. The Amended and Restated Note shall be secured by a first priority lien (with respect to the Vassar Street Property, subject to the MIT Existing Mortgage and, if the MIT Financing is consummated, a mortgage securing same the MIT Financing) on all of the Collateral. (e) Transfers; Asset Liquidation. In addition to, and not in substitution for Bonfield's rights as a secured party in accordance with Section 4.1(d) hereof and as provided in the S-15 17 Security Agreement, the Control Agreement, the New Mortgages and such of the Existing Documents as will continue, but only to the extent they continue, in effect following the Phase II Effective Date, Bonfield may elect, on an item by item basis, to cause WVM to transfer title to, any or all of his interests (or those of any WVM Entity) in the Collateral and the property subject to the Existing Agreements to Bonfield, or a designee of Bonfield, in reduction of the outstanding balance under the Notes. Any such conveyances shall be made in accordance with the provisions of Section 3.1(c) hereof. (f) Excess Proceeds from Collateral. In the event Safeguard realizes proceeds (net of any and all taxes, tax advances and expenses of sales payable in connection therewith and reasonable counsel fees incurred in connection therewith) from the Collateral in excess of the amounts owing under the Notes, such excess shall be returned to WVM (or, if WVM is then not living, to HGM) upon the expiration of all periods during which any such proceeds could be subject to avoidance under any applicable preference or fraudulent conveyance laws or Legal Requirements of similar import then in effect. Section 4.2 SFE Option. (a) At any time at which the Market Price (as defined below) of a share of SFE Common Stock is equal to or greater than the per share exercise price under the SFE Option and WVM is not in default hereunder or under any of the Related Documents, WVM shall have the right to give notice to SFE of his intent, subject to Bonfield's making the loan described below, to exercise all but not less than all of the SFE Option (a "Conditional Exercise," and the shares issuable on exercise being called the "Exercise Shares"), which notice shall specify the amount not to exceed the aggregate exercise price of the Exercise Shares (the "Option Price"), which WVM wishes to borrow from Bonfield pursuant to the Option Note to pay such Option Price for such Conditional Exercise. On receipt of a notice of Conditional Exercise, Safeguard shall use its commercially reasonable efforts to obtain all consents and waivers, if any, which are required under any loan agreements, other financing arrangements, contracts or otherwise to permit Bonfield to make loans under the Option Note without committing a default or event which, with the passage of time or giving of notice or both would constitute a default under any such agreement, arrangement, contract or otherwise (collectively, the "Option Loan Consents"). Subject to and upon receipt of the Option Loan Consents, Bonfield shall loan to WVM an amount equal to the Option Price (the "Option Loan"), pursuant to, and to be evidenced by, the Option Note, which Note shall be in the maximum aggregate principal amount of the Option Price, shall be secured by all of the Collateral, and shall be in the form of Exhibit A-2 hereto. In the event the Option Loan Consents cannot be obtained within thirty (30) days of SFE's receipt of the Notice of Conditional Exercise, the Conditional Notice shall be deemed null and void and neither SFE nor Bonfield shall have further obligation in respect of such Conditional Exercise. The Option Loan shall be paid by Bonfield directly to SFE (with WVM paying simultaneously in cash any portion of the Exercise Price he elects to pay in cash) in consideration of the payment of the Option Price for the Exercise Shares under the applicable Conditional Exercise and the certificates respecting the Exercise Shares, shall be issued in the name of WVM, and shall be delivered directly to Bonfield to be held pursuant to the Amended and Restated Security Agreement. WVM hereby expressly authorizes such payment and delivery. WVM further expressly acknowledges and agrees that SFE shall not have any liability to him or anyone claiming on behalf or through him (i) for any delay in obtaining or inability or failure to obtain the Option Loan Consents or (ii) for any delay in making or inability or failure to make the Option Loan except Bonfield's willful refusal to fund after receipt of the Option Loan Consents and fulfillment of all other notices, procedures, conditions and requirements set forth in this Section 4.2, including, without limitation, in either event any additional tax payable or decline in market value occasioned by any changes in the Market Price. In the event at any time between SFE's receipt of notice of a Conditional Exercise and the making of the Option Loan, the Market Price shall be less than the Option Price, such Conditional Exercise shall be deemed withdrawn and null and void without further action by either WVM or SFE. For purposes of this Section, the term S-16 18 "Market Price" shall mean, on any day, the closing price of SFE Common Stock for the preceding day as reported on the New York Stock Exchange. (b) SFE acknowledges that the first two sentences of Paragraph 9 of the Stock Option Grant Certificate evidencing the SFE Option will not apply to the transactions contemplated by this Agreement. Each of WVM and HGM agrees with this acknowledgement and agrees that SFE may amend or otherwise modify the SFE Option in any respect, without his or her consent, to the extent necessary to perfect or improve Bonfield's security interest in the SFE Option, the shares underlying the SFE Option or any proceeds from the sale of those shares. (c) The Option Note shall be a partial-recourse obligation of WVM, in accordance with its terms until April 30, 2006, after which it shall constitute a general and direct obligation of WVM, with full recourse to all of his personal assets, except to the extent of the Non-Recourse Compensation. So long as any portion of the Option Note the comprises a recourse obligation of WVM shall remain outstanding, Bonfield acknowledges that all payments or offsets made pursuant to or in accordance with the terms of this Agreement shall be applied or allocated to reduce interest on and the principal balance of such recourse obligations under the Option Note before same shall be applied or allocated to any other obligations. Section 4.3 Release of Escrow Items. Upon the satisfaction or waiver of each of the Phase II Conditions, each of Bonfield, through its counsel, WVM and HGM shall notify FROF, in accordance with the terms of the FROF Escrow Agreement, that the Phase II Effective Date has occurred. Upon receipt of all such required notices, FROF shall release the documents held in escrow strictly in accordance with the terms of the FROF Escrow Agreement. Section 4.4 Lake Naomi Option. HGM shall have an option to purchase the real property and improvements thereon located at 138 Woodland Avenue, Pocono Pines (Lake Naomi), Pennsylvania (the "Lake Naomi Property") for a purchase price of the lower of (a) $500,000 or (b) the fair market value of the property, as determined by an appraiser satisfactory to Safeguard (the "Option Price") which option shall be exercised and the purchase price paid to Bonfield on or before the Phase II Effective Date and, if not so exercised, the option shall be deemed cancelled and shall thereafter be null and void. Section 4.5 Conditions Precedent to Effectiveness of Phase II of this Agreement. The parties to this Agreement hereby agree that the following are the "Phase II Conditions": (a) Documents to be Delivered. The respective parties shall have delivered or caused to be delivered to each other, on or before the Phase II Effective Date, the following agreements, instruments and other documents, each duly executed by the respective parties thereto and each to be effective as of the Phase II Effective Date: (1) Amended and Restated Note. The Amended and Restated Note, in the form attached hereto as Exhibit A-1. (2) New Mortgage. The New Mortgage with respect to the Vassar Street Property, in form and substance satisfactory to Safeguard. (3) Vassar Street Lock Box. A Lock Box Agreement in form and substance satisfactory to Safeguard regarding the rents and other amounts payable with respect to the Vassar Street Property. S-17 19 (4) Third Party Consents. Consents to the transactions contemplated hereby, in form and substance satisfactory to Safeguard, by each of: (A) MIT and, if required, Cambridge Technology Partners (Massachusetts), Inc. with respect to the New Mortgage in favor of Bonfield on the Vassar Street Property. (B) [Reserved] (5) [Reserved] (6) Phase I Documents. Any document required to have been delivered pursuant to Article III hereof, the delivery of which was waived as of the Phase I Effective Date by the requisite party or parties. (7) Additional Safeguard Release. A Release by SFE and Bonfield, in the form attached hereto as Exhibit E-6. (8) Opinions of Counsel. The additional legal opinions reasonably requested by Safeguard in connection with this Agreement, including without limitation the opinions of DBR, counsel for WVM and the WVM Entities and FROF, each in form and substance satisfactory to Safeguard and its counsel. (9) Legg Mason Documents. If Safeguard elects to pay off in full WVM's Outstanding Obligations to Legg Mason, the Legg Mason Guaranty, marked "cancelled," and any remaining cash collateral held by Legg Mason shall have been returned to Safeguard. (b) Representations and Warranties. Each of the representations and warranties made by each party hereto shall be true and correct as of the Phase II Effective Date in all material respects. (c) Non-Revocation of Release. At least seven (7) days have passed since the Phase I Effective Date and WVM has not revoked the WVM Release pursuant to the provisions of Section 10 thereof. (d) Termination of Brous Account. Evidence satisfactory to Safeguard that WVM's trading account with H.D. Brous and Associates has either been terminated, or a control agreement with respect thereto has been delivered to Bonfield. Section 4.6 Phase II Effective Date. The obligations of the parties hereto to perform under this Article IV shall become effective only upon the occurrence of all of the Phase II Conditions, or upon the waiver, in writing, by (a) either SFE or Bonfield, of any unfulfilled Phase II condition specified in Section 4.5(a)(1)-(6), (8) and (9), or 4.5(b), (c) or (d), to the extent that WVM's, HGM's or any WVM Entity's actions gave rise to such event, or (b) WVM and HGM, of any unfulfilled Phase II Condition, specified in Section 4.5(a)(7) or 4.5(b), to the extent Safeguard's actions gave rise to such event (the "Phase II Effective Date"). ARTICLE V. TERMINATION Section 5.1 Events of Termination. Each of the following events, at the election of, and upon notification by, Safeguard to the other parties hereto, to the extent any such other party's actions gave rise S-18 20 to such event, and each of the events set forth in Sections 5.1(e), (f) or (g) hereof, to the extent Safeguard's actions give rise to such event, at the election of, and upon notification by WVM and HGM, jointly, to Safeguard, shall be an Event of Termination hereunder: (a) The Phase I Effective Date shall not have occurred on or before April 16, 2001; (b) The Phase II Effective Date shall not have occurred on or before April 30, 2001; (c) Any payments are made or Collateral or other property subject to the Existing Documents or Related Documents, are sold, mortgaged or otherwise transferred and/or accepted in violation of the existing obligations of WVM, HGM or the WVM Entities, whether under the Existing Documents or the Related Documents; (d) Subject to Section 3.1(f) herein, any default or event of default, or event which, with the passage of time, the giving of notice or both, would be a default or event of default (whether or not such term is used with initial capital letters), shall have occurred under any of the Existing Documents, so long as same is in effect; (e) Any representation or warranty, made herein or in any document, agreement, or instrument required to be delivered hereunder shall be false or misleading in any material respect when made; (f) At any time after the Phase I Effective Date, any party shall seek to rescind, terminate or contest or otherwise declare ineffective any document executed and delivered in connection with the transactions contemplated in Article III hereof, (g) Any party hereto shall fail to perform any of its obligations hereunder or, except as provided herein, shall default in the performance of any obligation or covenant contained in any document, agreement or instrument referenced herein. Section 5.2 Remedies. Upon the declaration by the applicable party of an Event of Termination hereunder: (a) if the Phase II Effective Date has not yet occurred, the obligations of each of the parties hereto to complete the transactions contemplated pursuant to Article IV shall terminate and become null and void; (b) if the Phase II Effective Date has already occurred, Bonfield shall have no further obligation to make any loans or advances, whether under the Amended and Restated Note, the Option Note, or otherwise; and (c) each party shall have all of those rights, powers, privileges and remedies available to each such party under this Agreement, each Related Document then in effect, and each Existing Document then remaining in effect, and for this purpose, each party hereto hereby reserves all of such party's respective rights, powers, privileges and remedies. ARTICLE VI. REPRESENTATIONS, WARRANTIES AND AGREEMENTS Section 6.1 By WVM. WVM and each WVM Entity, as applicable, hereby represents, warrants and agrees that, as of the date hereof and as of each of the Phase I Effective Date and the Phase S-19 21 II Effective Date and, with respect to all agreements and understanding herein and in any Related Document, from and at all times after the date hereof: (a) Corporate Organization, etc. Each WVM Entity is a corporation or limited partnership duly organized, validly existing and in good standing under the laws of the state of its organization, and has full power and authority to own or lease and operate and use its properties and assets and to carry on its business as now conducted. WVM is a resident of the Commonwealth of Pennsylvania, is sui juris, and of full legal capacity. (b) Authority; No Violation. (1) The execution and delivery of this Agreement and all Related Documents required hereunder to be executed and delivered by WVM or any WVM Entity, respectively, and the performance hereof and thereof, including the consummation of the transactions contemplated hereby and thereby, have been duly and validly authorized by the Board of Directors or other governing body, of each such entity and no other corporate proceedings on the part of such entity are necessary to authorize such execution, delivery and performance. WVM has the capacity, and each of WVM and each WVM Entity has full right, power and authority to execute, deliver and perform this Agreement and the Related Documents to which it is a party. This Agreement has been duly executed and delivered by WVM and constitutes his legal, valid and binding obligation, enforceable against him in accordance with its terms. Each Related Document to which WVM or any WVM Entity, respectively, is a party, when executed and delivered, will be the valid and binding agreement of such entity party thereto, enforceable against such entity party thereto in accordance with its terms. (2) Neither the execution, delivery and performance of this Agreement and the Related Documents to which WVM or any WVM Entity, respectively is a party, nor the consummation of the transactions provided for hereby and thereby, and compliance with or fulfillment of the terms, conditions and provisions hereof or thereof, (i) will violate or conflict with any provision of the Certificate of Incorporation or By-Laws, or other applicable charter or organizational documents, of any WVM Entity, respectively, (ii) conflict with or violate any Legal Requirement to which WVM or any WVM Entity, respectively, is, or his or its assets are, subject or bound, (iii) will result in any violation or breach of or default under (or an event that with notice or the passage of time or both would constitute a default), will create any rights of acceleration, termination or cancellation or cause any loss of rights under, or will result in the creation or imposition of any encumbrance on any of the properties or assets of WVM or any WVM Entity under, (A) any agreement, franchise, permit, or other authorization, right, restriction or obligation of any kind to which either WVM or any WVM Entity is a party, beneficiary or designee or by which either WVM or any WVM Entity is bound or to which any of his or its properties or assets are subject, including, without limitation, the Pre-Nuptial Agreement; or (B) any Legal Requirement affecting WVM or any WVM Entity, or any of his or its respective properties or assets, or (iv) requires WVM or any WVM Entity to obtain any consent, permit, license, authorization or approval from, or make any registration or filing with, any person or entity, except as contemplated by Sections 3.2 and 4.5 of this Agreement. In the event and to the extent that the transactions contemplated hereby, including, without limitation, the grant of security interests in, and assignments and asset transfers of the Collateral to or for the benefit of Safeguard, conflict with the terms, provisions or requirements of any agreement, including, without limitation, the Pre-Nuptial Agreement, or right, restriction, Legal Requirement or other right or privilege, whether contractual, legal or equitable in nature, each of WVM and each WVM Entity hereby waives, to the extent same may be waived, or otherwise hereby agrees to subordinate such provision, right or privilege to the terms, provisions and conditions of this Agreement and WVM expressly consents to any and all action by Bonfield with respect to the Collateral, including without limitation, the sale, lease, mortgage, refinancing or other similar actions regarding all or any portion of the Collateral or any interest therein, all without further notice to or consent by WVM with S-20 22 respect thereto, all of which are expressly waived. WVM hereby waives any rights he has at equity or in law to require Bonfield to apply any rights of marshalling or other equitable doctrines in the circumstances. (c) Litigation. There is no action, suit, proceeding or investigation pending, or to the best of WVM's knowledge threatened, against WVM or any WVM Entity, which questions the legality or propriety of the transactions contemplated by this Agreement or which seeks to prevent or delay the transactions contemplated by this Agreement. (d) Title to Collateral. WVM, or the applicable WVM Entity, as the case may be, is the legal and beneficial owner of all of the Collateral, free and clear of any lien, security interest, pledge, restriction, option, or other charge or encumbrance, except for the Permitted Encumbrances. All of the Collateral, consisting of shares of stock, has been duly and validly issued, is fully paid and nonassessable, and there are no pending or contingent restrictions on transferability. All of the Collateral, consisting of certificated shares, is listed on Schedule 3.2. To the best of WVM's knowledge, all of the Collateral, consisting of debt obligations, has been duly and validly authorized, authenticated, issued and delivered, is the legal, valid and binding obligation of the issuer thereof and is not in default. Schedule 3.2 includes a true and complete list of all other investment property owned by WVM and his percentage ownership therein. (e) Lubert Asset Purchase Payments. The amount of all cash payments required to be paid prior to the date hereof in connection with the Lubert Asset Purchase is $300,000 and there remains as of the date hereof $700,000 to be paid in connection therewith. Section 6.2 By HGM. HGM hereby represents, warrants and agrees that, as of the date hereof and as of each of the Phase I Effective Date and the Phase II Effective Date and with respect to all agreements and undertakings herein and in any Related Document, from and at all times after the date hereof: (a) Capacity, etc. HGM is a resident of the Commonwealth of Pennsylvania, is sui juris, and of full legal capacity. (b) Authority; No Violation. (1) HGM has the capacity and full right, power and authority to execute, deliver and perform this Agreement and the Related Documents to which she it is a party. This Agreement has been duly executed and delivered by HGM and constitutes her legal, valid and binding obligation, enforceable against him in accordance with its terms. Each Related Document to which HGM is a party, when executed and delivered, will be the valid and binding agreement of such entity party thereto, enforceable against HGM in accordance with its terms. (2) Neither the execution, delivery and performance of this Agreement and the Related Documents to which HGM is a party, nor the consummation of the transactions provided for hereby and thereby, and compliance with or fulfillment of the terms, conditions and provisions hereof or thereof, (i) conflict with or violate any Legal Requirement to which HGM is, or her assets are, subject or bound, (ii) will result in any violation or breach of or default by HGM under (or an event that with notice or the passage of time or both would constitute a default), will create any rights of acceleration, termination or cancellation or cause any loss of rights under, or will result in the creation or imposition of any encumbrance on any of the properties or assets of HGM under, (A) any agreement, franchise, permit, or other authorization, right, restriction or obligation of any kind to which HGM is a party, beneficiary or designee or by which HGM is bound or to which any of her properties or assets are subject, including, S-21 23 without limitation, the Pre-Nuptial Agreement, or (B) any Legal Requirement affecting HGM, or any of her respective properties or assets, or (iii) requires HGM to obtain any consent, permit, license, authorization or approval from, or make any registration or filing with, any person or entity. In the event and to the extent that the transactions contemplated hereby, including, without limitation, the grant of security interests in, and assignments and asset transfers of the Collateral to or for the benefit of Safeguard, conflict with the terms, provisions or requirements or any agreement, including, without limitation, the Pre-Nuptial Agreement, or any right, restriction, Legal Requirement or other right or privilege, whether contractual, legal or equitable in nature, HGM hereby waives, to the extent the same may be waived, or otherwise hereby agrees to subordinate such provision, right or privilege to the terms, provisions and conditions of this Agreement. In addition to and not in limitation of the foregoing, HGM hereby expressly subordinates any and all rights, title and interest she has or may have in and to the Collateral and the proceeds thereof, however arising, whether contractual, legal or equitable in nature, and including, without limitation, all marital rights under any Legal Requirement or under applicable law, to the fullest extent permitted by law, to the interests of Safeguard in the Collateral provided to Safeguard in and pursuant to this Agreement and to the repayment in full of the Notes and any other Outstanding Obligations and HGM expressly consents to any and all action by Bonfield with respect to the Collateral, including without limitation, the sale, lease, mortgage, refinancing or other similar actions regarding all or any portion of the Collateral or any interest therein all without further notice to or consent by HGM with respect thereto, all of which are expressly waived. HGM hereby waives any rights, whether contractual, legal or equitable in nature, she has, or may have, to require Bonfield to apply any rights of marshalling or other equitable doctrines in the circumstances. The agreements of HGM in this Section 6.2(b)(2) shall expressly survive the death of WVM. (c) Litigation. There is no action, suit, proceeding or investigation pending, or to the best of HGM's knowledge threatened, against HGM or by HGM, which questions the legality or propriety of the transactions contemplated by this Agreement or which seeks to prevent or delay the transactions contemplated by this Agreement. (d) Rights In Collateral. Each agreement, whether written or oral, pursuant to which HGM has, may have or may claim any rights in the Collateral is identified on Schedule 6.2 hereto. Section 6.3 By Safeguard. Each of SFE and Bonfield, as applicable, hereby represent and warrants that, as of the date hereof and as of each of the Phase I Effective Date and the Phase II Effective Date and with respect to all agreements and undertakings herein and in any Related Document, from and at all times after the date hereof: (a) Corporate Organization. Each of SFE and Bonfield is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation, and has full corporate power and authority to own or lease and operate and use its properties and assets and to carry on its business as now conducted. (b) Authority; No Violation. (1) The execution and delivery of this Agreement and all Related Documents required hereunder to be executed and delivered by the SFE or Bonfield, respectively, and the performance hereof and thereof, including the consummation of the transactions contemplated hereby and thereby, have been duly and validly authorized by the Board of Directors of each such entity and no other corporate proceedings on the part of such entity are necessary to authorize such execution, delivery and performance. Each of SFE and Bonfield has full right, power and authority to execute, deliver and perform this Agreement and the Related Documents to which it is a party. This Agreement has been duly executed and delivered by each of SFE and Bonfield and constitutes its legal, valid and binding S-22 24 obligation, enforceable against such entity in accordance with its terms. Each Related Document to which SFE or Bonfield, respectively, is a party, when executed and delivered, will be the valid and binding agreement of such entity party thereto, enforceable against such entity party thereto in accordance with its terms. (2) Neither the execution, delivery and performance of this Agreement and the Related Documents to which SFE or Bonfield, respectively is a party, nor the consummation of the transactions provided for hereby and thereby, and compliance with or fulfillment of the terms, conditions and provisions hereof or thereof, (i) will violate or conflict with any provision of the Certificate of Incorporation or By-Laws, or other applicable charter or organizational documents, of SFE or Bonfield, respectively, (ii) conflict with or violate any Legal Requirement to which SFE or Bonfield, respectively, is, or its assets are, subject or bound, (iii) will result in any violation or breach of or default under (or an event that with notice or the passage of time or both would constitute a default), will create any rights of acceleration, termination or cancellation or cause any loss of rights under, or will result in the creation or imposition of any encumbrance on any of the properties or assets of SFE or Bonfield under, (A) any agreement, franchise, permit, or other authorization, right, restriction or obligation of any kind to which either SFE or Bonfield is a party, beneficiary or designee or by which either SFE or Bonfield is bound or to which any of its properties or assets are subject or (B) any Legal Requirement affecting SFE or Bonfield or any of its properties or assets, or (iv) requires SFE or Bonfield to obtain any consent, permit, license, authorization or approval from, or make any registration or filing with, any person or entity. (c) Litigation. There is no action, suit, proceeding or investigation pending, or to the best of SFE's or Bonfield's knowledge threatened, against SFE or Bonfield, which questions the legality or propriety of the transactions contemplated by this Agreement or which seeks to prevent or delay the transactions contemplated by this Agreement ARTICLE VII. MISCELLANEOUS Section 7.1 Cooperation; Other Documents. At all times following the execution of this Agreement, the parties hereto shall execute and deliver to the respective affected parties or shall cause to be executed and delivered to the respective affected parties, all such other documents, instruments or agreements or other writings, and shall do or cause to be done, all such other acts and things as may reasonably be necessary or desirable to ensure the parties hereto the benefit of this Agreement and the transactions contemplated hereby. Each party hereto shall use his, her or its reasonable best efforts to cause each of the conditions precedent to the Phase I Effective Date and the Phase II Effective Date to be satisfied on or before the dates contemplated in this Agreement. HGM agrees to use her best efforts to cause her father to support any and all efforts by Bonfield to sell, mortgage or otherwise refinance the Vassar Street Property on terms no less favorable as those previously contemplated under the MIT Financing. Section 7.2 Confidentiality; Announcements. Except for disclosure required by Safeguard either pursuant to applicable securities laws or agreements to which it is a party: (a) each of Safeguard, WVM and HGM shall, and shall use their best efforts to cause their respective affiliates and its and their respective partners, officers, directors, shareholders, employees, family members, agents, consultants, advisors, legal counsel, accountants, financing sources and other representatives (collectively, as to a party, its "Representatives") to: (i) not disclose any information, including without limitation, through press releases or other public announcements, relating to this Agreement, the transactions contemplated hereby, the parties hereto and the activities undertaken in connection herewith, directly or indirectly, without the consent of the other parties hereto; and (ii) keep confidential all such information and not disclose or release to any person or entity the existence or nature S-23 25 of the transactions, discussions, or negotiations, other than to those Representatives of such party working on or otherwise having a need to know about any of the foregoing in connection with consummating the transactions contemplated hereby; (b) if any party hereto is legally compelled by any court, governmental agency or otherwise to disclose any of the foregoing information, such person or entity shall give the other parties hereto prompt notice thereof to permit such other party reasonable opportunity to seek a protective order or to take other appropriate action; and (c) if any such party is, in the reasonable opinion of its counsel, compelled to disclose such information pursuant to such request, it may disclose that portion of the information which such counsel has advised that it is compelled to disclose. Section 7.3 Non-Disparagement. (a) Neither WVM nor HGM shall either during the term of this Agreement or at any time thereafter, make any public statement reflecting adversely on Safeguard's or its Affiliates' business, operations, prospects, or other activities, except for such statements which WVM or HGM may legally be required to make, whether during the term of this Agreement or at any time thereafter. (b) Neither SFE nor Bonfield shall either during the term of this Agreement or at any time thereafter, make any public statement reflecting adversely on WVM's or HGM's businesses, operations, prospects, character or other activities, except for such statements which SFE or Bonfield may legally be required to make, whether during the term of this Agreement or at any time thereafter. Section 7.4 Indemnity of WVM. Until the six year anniversary of the later of the termination of WVM's service as a director and officer of SFE or any entity affiliated or formerly affiliated with SFE, including any Affiliate, Partner Company or Fund (the "Effective Date"), SFE shall indemnify, defend and hold harmless WVM against all claims, losses, damages, expenses or liabilities arising out of actions or omissions or alleged actions or omissions occurring during WVM's service at SFE or any such corporation or other entity affiliated or formerly affiliated with SFE as a promoter, officer, shareholder or director or in a similar capacity with respect to a limited liability company, partnership or other entity, including as a promoter, member, manager or partner of a limited liability company or partnership or other entity, to the same extent and on the same terms and conditions (including with respect to advancement of expenses) provided for in Article VIII of SFE's bylaws as in effect on the date of this Agreement. If and to the extent SFE shall obtain and maintain in effect a directors' and officers' liability insurance policy(ies), SFE will cause said policy(ies) to provide coverage for WVM to the same extent as it covers then current directors and officers of SFE for a period of six years after the Effective Date. Nothing in this Agreement or any Related Document shall affect or modify (i) WVM's rights under any officers' and directors' liability insurance policies purchased by any other corporation or other entity referred to in the first sentence of this paragraph and in effect during WVM's service with such corporation or other entity, (ii) WVM's rights to indemnification under the articles of incorporation, bylaws, partnership agreement or other similar governing instrument or agreement of any corporation or other entity referred to in the first sentence of this paragraph, or (iii) WVM's rights under any indemnification agreement or arrangement. Section 7.5 No Waivers. Except as otherwise provided in this Agreement, including pursuant to Section 3.1(f) hereof, nothing herein shall constitute a waiver or impairment of either Safeguard's rights to declare any Events of Default under the Existing Documents and to exercise any and all rights, powers and privileges accorded to it, and until the Phase II Effective Date, of Safeguard S-24 26 expressly reserve and preserve all rights, powers, privileges and remedies available to each, respectively, under the Existing Documents, and otherwise, whether at law or in equity. Section 7.6 Modification. Except as otherwise provided herein, no modification or amendment hereof shall be effective unless set forth in writing, signed by duly authorized representatives of the parties hereto. Section 7.7 Notices. Any request, consent, notice or other communication required hereunder or in connection herewith shall be given to each party hereto and shall be deemed satisfactorily given if in writing and delivered personally or by registered or certified mail, postage pre-paid, by reliable overnight courier or by telecopier to the parties at their respective addresses set forth below, or if not listed below, listed at the beginning of this Agreement, or at such other address as may be given by any party to the others in writing, in accordance with this Section 7.7: If to WVM: 710 Sproul Road Bryn Mawr, PA 19010 Telecopier No.: ______________ with a copy to: Robert C. Juelke Drinker Biddle & Reath LLP One Logan Square 18th & Cherry Street Philadelphia, PA 19103 Telecopier No.: 215.988.2757 If to HGM: 710 Sproul Road Bryn Mawr, PA 19010 Telecopier No.: _______________ with a copy to: Scott L. Vernick, Esquire Fox, Rothschild, O'Brien & Frankel LLP 2000 Market Street 10th Floor Philadelphia, PA 19103-3291 Telecopier No.: 215.299.2150 S-25 27 If to SFE: 435 Devon Park Drive 800 Building Wayne, PA 19087 Attention: N. Jeffrey Klauder, Esquire Telecopier No.: 610.254.4301 with a copy to: Barry M. Abelson, Esquire Pepper Hamilton LLP 3000 Two Logan Square 18th & Arch Streets Philadelphia, PA 19103-2799 Telecopier No.: 215.981.4750 If to Bonfield: c/o Safeguard Delaware, Inc. 2711 Centerville Road, Suite 400 Wilmington, DE 19808 Attention: N. Jeffrey Klauder, Esquire Telecopier No.: 610.254.4301 with a copy to Barry M. Abelson, Esquire Pepper Hamilton LLP 3000 Two Logan Square 18th & Arch Streets Philadelphia, PA 19103-2799 Telecopier No.: 215.981.4750 Section 7.8 Binding and Governing Law. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns and, as to any natural person, his or her respective heirs, executors and administrators, and shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania. The rights and obligations of the parties hereto cannot be assigned, delegated or otherwise transferred without the prior written consent of the other parties hereto, except either or both of Safeguard and Bonfield may assign or delegate their rights hereunder to one another and/or another Safeguard Affiliate. Section 7.9 Counterparts. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument. Section 7.10 Submission to Jurisdiction. Each of the parties hereto hereby consents to the jurisdiction state or federal court located within the Commonwealth of Pennsylvania, and irrevocably agrees that all actions or proceedings relating to this Agreement, the Existing Agreements or any Related Document or the transactions contemplated hereunder shall be litigated in such courts, and each such party hereby waives any objection which he, she or it may have based on lack of personal jurisdiction, S-26 28 improper venue or forum non conveniens to the conduct of any proceeding, in any such court and waive personal service of any and all process upon them, and consent that all such service of process be made by mail or messenger directed to them at the address set forth in Section 7.7 hereof. IN WITNESS WHEREOF, and intending to be legally bound hereby, the parties hereto, by their respective duly authorized representatives, have executed this Agreement the day and year first above written. SAFEGUARD SCIENTIFICS, INC. By: /S/ GERALD BLITSTEIN Name: Gerald Blitstein Title: Executive Vice President and Chief Financial Officer BONFIELD INSURANCE, LTD. By: /S/ GERALD BLITSTEIN Name: Gerald Blitstein Title: President and Treasurer Witness: By:_____________________ /S/ WARREN V. MUSSER Warren V. Musser Witness: By:_____________________ /S/ HILARY GRINKER MUSSER Hilary Grinker Musser S-27 EX-10.6 7 w52490ex10-6.txt AMENDMENT TO AGREEMENT TO RESTRUCTURE MAY 18, 2001 1 EXHIBIT 10.6 AMENDMENT TO AGREEMENT TO RESTRUCTURE This AMENDMENT TO AGREEMENT TO RESTRUCTURE (this "Amendment") is made as of the 18th day of May, 2001 by and among Warren V. Musser ("WVM"), an individual residing at 710 Sproul Road, Bryn Mawr, PA 19010, Hilary Grinker Musser ("HGM"), an individual residing at 710 Sproul Road, Bryn Mawr, PA 19010, Safeguard Scientifics, Inc. ("SFE"), a Pennsylvania corporation with offices at 435 Devon Park Drive, 800 Building, Wayne, PA 19087, and Bonfield Insurance, Ltd. ("Bonfield," and together with SFE, "Safeguard"), a British Virgin Islands corporation with offices c/o Safeguard Delaware, Inc., 2711 Centerville Road, Suite, 400, Wilmington, DE 19808. BACKGROUND A. WVM, HGM, SFE and Bonfield entered into that certain Agreement to Restructure dated as of April 16, 2001 (the "Agreement"), pursuant to which certain of the indebtedness of WVM was restructured and certain loans were made and agreed to be made by Bonfield, subject to certain conditions set forth in the Agreement. B. The parties hereto desire to amend certain of the Phase II Conditions set forth in the Agreement and certain schedules to the Agreement to more accurately reflect the transactions described in the Agreement as currently contemplated. In consideration of the foregoing and the premises and the agreements hereinafter set forth, and intending to be legally bound hereby, the parties hereto agree as follows: 1. Amendment to Section 4.5 of the Agreement. Section 4.5 of the Agreement is hereby amended by deleting Section 4.5 in its entirety and substituting in lieu thereof the following Section 4.5: Section 4.5 Conditions Precedent to Effectiveness of Phase II of this Agreement. The parties to this Agreement hereby agree that the following are the "Phase II Conditions": (a) Documents to be Delivered. The respective parties shall have delivered or caused to be delivered to each other, on or before the Phase II Effective Date, the following agreements, instruments and other documents, each duly executed by the respective parties thereto and each to be effective as of the Phase II Effective Date: (1) Amended and Restated Note. The Amended and Restated Note, in the form attached hereto as Exhibit A-1. (2) New Mortgage. The New Mortgage with respect to the Vassar Street Property together with a non-recourse Guaranty in favor of Bonfield from 304 Vassar Street, L.P. and 304 Vassar Street, Inc., each in form and substance satisfactory to Safeguard. (3) Vassar Street Lock Box. A Lock Box Agreement regarding the rents and other amounts payable with respect to the Vassar Street Property among Safeguard, 304 Vassar Street, L.P., MIT, Cambridge Technology Partners (Massachusetts), Inc. ("CTP") and Boston Private Bank, together with an 2 Intercreditor Agreement between MIT and Bonfield, each in form and substance satisfactory to Safeguard. (4) Third Party Consents. Consents to the transactions contemplated hereby, in form and substance satisfactory to Safeguard, by each of MIT and, if required, CTP with respect to the New Mortgage in favor of Bonfield on the Vassar Street Property. (5) Lake Naomi Option Waiver. A letter to Safeguard waiving HGM's option to purchase the Lake Naomi property, in form and substance satisfactory to Safeguard, or receipt by Bonfield of funds in payment of the exercise price. (6) Phase I Documents. Any document required to have been delivered pursuant to Article III hereof, the delivery of which was waived as of the Phase I Effective Date by the requisite party or parties, being: (i) Control Agreement. Control Agreement by and among WVM, Bonfield and Legg Mason with respect to the WVM Legg Mason Account; (ii) Stock Powers; Forms 144. Undated Stock Powers executed in blank for each of the Securities listed on Schedule 3.2 of the Agreement (other than Nobel Education Dynamics, Inc.) together with Forms 144 executed in blank for each applicable entity; (iii) Financing Statements. UCC-1 Financing Statements for WVM in Wisconsin and 304 Vassar Street, Inc. in Delaware. (iv) SFE Option Documents. A Notice to Issuer pursuant to Uniform Commercial Code ("UCC") Section 8106 with respect to the SFE Option (must be signed by Pledgor and Transfer Agent), together with the delivery to Bonfield of the Option. (v) Lubert Consent. Consent to the transactions contemplated hereby by Ira Lubert, with respect to the assignment of the proceeds of the Lubert Asset Purchase, together with documentation evidencing the terms of such assignment in form and substance satisfactory to Safeguard; (vi) Additional Documentation Relating to Owned Assets. Documentation evidencing WVM's interest in each of the following (including Notices to Issuers pursuant to UCC Section 8106 with respect to such interests): (A) 304 Vassar Street, L.P.; (B) 304 Vassar Street, Inc.; (C) WDK Associates I, L.P.; (D) WDK Associates II, L.P.; (E) Wheatley Partners II, L.P.; (F) RRE GIGA Investors, L.P.; (G) Technology Leaders, L.P.; (H) Technology Leaders II Management, L.P.; (I) Eastern Technology Fund, LP; (J) Plum Holdings, L.P.; (K) NEPA Venture Fund II, L.P.; (L) The Emerald HomeState PA Growth Fund- A of The Emerald Funds held in account number [INTENTIONALLY OMITTED]. -2- 3 (7) Additional Safeguard Release. A Release by SFE and Bonfield, in the form attached hereto as Exhibit E-6. (8) Opinions of Counsel. The additional legal opinions reasonably requested by Safeguard in connection with this Agreement, including without limitation the opinions of DBR, counsel for WVM and the WVM Entities and FROF, each in form and substance satisfactory to Safeguard and its counsel. (9) Legg Mason Documents. If Safeguard elects to pay off in full WVM's Outstanding Obligations to Legg Mason, the Legg Mason Guaranty, marked "cancelled," and any remaining cash collateral held by Legg Mason shall have been returned to Safeguard. (b) Representations and Warranties. Each of the representations and warranties made by each party hereto shall be true and correct as of the Phase II Effective Date in all material respects. (c) Non-Revocation of Release. At least seven (7) days have passed since the Phase I Effective Date and WVM has not revoked the WVM Release pursuant to the provisions of Section 10 thereof. (d) Termination of Brous Account. Evidence satisfactory to Safeguard that WVM's trading account with H.D. Brous and Associates has been terminated. 2. Exhibit 1.1. Exhibit 1.1 hereto is hereby incorporated into the Agreement as Exhibit 1.1 thereto. 3. Schedule 1.1. Schedule 1.1 of the Agreement is hereby amended by deleting Schedule 1.1 in its entirety and substituting in lieu thereof the Schedule 1.1 attached hereto. 4. Schedule 3.2. Schedule 1.1 of the Agreement is hereby amended by deleting Schedule 1.1 in its entirety and substituting in lieu thereof the Schedule 1.1 attached hereto. 5. Representations and Warranties. Each of the parties hereto represents and warrants to every other party hereto as follows: a. Representations. The representations and warranties made in the Agreement by such party are true and correct as of the date hereof and such party is not aware of and has not taken any actions which have or would result in any default or Event of Termination under the Agreement (other than any defaults which are no longer continuing). b. Power and Authority. Such party has the legal right, power and authority to enter into and perform this Amendment and all actions necessary or appropriate for the execution and performance of this Amendment by such party have been taken; and the Amendment and the Agreement, as amended, each constitute the valid and binding obligations of such party, enforceable in accordance with their respective terms. c. No Violations of Law or Agreements. The making and performance of the Amendment by such party will not (i) violate any provisions of any law or regulation, federal, state or -3- 4 local or (ii) result in any breach or violation of, or constitute a default or require the obtaining of any consent under, any agreement or instrument by which such party or its property may be bound. 6. Conditions to Effectiveness of Amendment. This Amendment shall be effective upon Safeguard's receipt of this Amendment duly executed by each of WVM, HGM, SFE and Bonfield and acknowledged by 304 Vassar Street, L.P. 7. Affirmations. Each party hereto hereby: (i) affirms all the provisions of the Agreement, as amended by this Amendment, and (ii) agrees that the terms and conditions of the Agreement. 8. Miscellaneous. a. Governing Law This Amendment shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania, without regard to conflicts of law principles. b. Successors and Assigns. All terms and provisions of this Amendment shall be for the benefit of and be binding upon and enforceable by the respective successors and assigns of the parties hereto. c. Counterparts. This Amendment may be executed in any number of counterparts with the same effect as if all the signatures on such counterparts appeared on one document and each such counterpart shall be deemed an original. d. No Waiver. Except as expressly set forth herein, the execution, delivery and performance of this Amendment shall not operate as a waiver of any right, power or remedy of any party under the Agreement and the agreements and documents executed in connection therewith or constitute a waiver of any provision thereof. -4- 5 IN WITNESS WHEREOF, and intending to be legally bound hereby, the parties hereto, by their respective duly authorized representatives, have executed this Amendment to Agreement to Restructure the day and year first above written. SAFEGUARD SCIENTIFICS, INC. By: /S/ N. JEFFREY KLAUDER Name: N. Jeffrey Klauder BONFIELD INSURANCE, LTD. By: /S/ N. JEFFREY KLAUDER Name: N. Jeffrey Klauder Witness: By:_______________________________ /S/ WARREN V. MUSSER Warren V. Musser Witness: By:_______________________________ /S/ HILARY GRINKER MUSSER Hilary Grinker Musser Acknowledged and Agreed this ____ day of May, 2001: 304 VASSAR STREET, L.P., By: 304 VASSAR STREET, INC, its general partner By:_______________________________ Name: Title: -5- -----END PRIVACY-ENHANCED MESSAGE-----