safeguard scientifics inc

SAFEGUARD SCIENTIFICS INC

FORM 10-Q(Quarterly Report)

Filed 08/14/02 for the Period Ending 06/30/02

Address 435 DEVON PARK DRBLDG 800WAYNE, PA 19087

Telephone 6102930600CIK 0000086115

Symbol SFESIC Code 6799 - Investors, Not Elsewhere Classified

Industry Misc. Financial ServicesSector Financial

Fiscal Year 12/31

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FORM 10-Q

SAFEGUARD SCIENTIFICS INC

(Quarterly Report)

Filed 8/14/2002 For Period Ending 6/30/2002

Address 435 DEVON PARK DR 800 THE SAFEGUARD BLDG

WAYNE, Pennsylvania 19087

Telephone 610-293-0600

CIK 0000086115

Industry Computer Peripherals

Sector Technology

Fiscal Year 12/31

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SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For Quarter Ended June 30, 2002

Commission File Number 1-5620

SAFEGUARD SCIENTIFICS, INC. (Exact name of registrant as specified in its charter)

(610) 293-0600 Registrant’s telephone number, including area code

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 No

Number of shares outstanding as of August 14, 2002 Common Stock 119,426,972

Pennsylvania

(State or other jurisdiction of incorporation or organization)

23-1609753 (I.R.S. Employer

Identification Number)

800 The Safeguard Building, 435 Devon Park Drive Wayne, PA

(Address of principal executive offices)

19087 (Zip Code)

TABLE OF CONTENTS

CONSOLIDATED BALANCE SHEETS CONSOLIDATED STATEMENTS OF OPERATIONS CONSOLIDATED STATEMENTS OF CASH FLOWS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk

PART II OTHER INFORMATION Item 1. Legal Proceedings Item 4. Submission of Matters to a Vote of Security Holders Item 6. Exhibits and Reports on Form 8-K

SIGNATURES LOAN AGREEMENT DATED MAY 10, 2002 CERTIFICATION OF CHIEF EXECUTIVE OFFICER CERTIFICATION OF CHIEF FINANCIAL OFFICER

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SAFEGUARD SCIENTIFICS, INC. QUARTERLY REPORT FORM 10-Q

INDEX

2

Page

PART I — FINANCIAL INFORMATION

Item 1 - Financial Statements:

Consolidated Balance Sheets – June 30, 2002 (unaudited) and December 31, 2001 3

Consolidated Statements of Operations (unaudited) — Three and Six Months Ended June 30, 2002 and 2001 4

Consolidated Statements of Cash Flows (unaudited) — Six Months Ended June 30, 2002 and 2001 5

Notes to Consolidated Financial Statements 6

Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations 30

Item 3 - Quantitative and Qualitative Disclosures About Market Risk 46

PART II — OTHER INFORMATION

Item 1 - Legal Proceedings 47

Item 4 – Submission of Matters to a Vote of Security Holders 47

Item 6 - Exhibits and Reports on Form 8-K 47

Signatures 48

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SAFEGUARD SCIENTIFICS, INC.

CONSOLIDATED BALANCE SHEETS June 30, December 31, 2002 2001

(in thousands except per share data) (unaudited)

ASSETS

Current Assets

Cash and cash equivalents $ 332,811 $ 298,095

Restricted cash 3,612 8,033

Trading securities 88,269 205,553

Accounts receivable, less allowances ($3,093-2002; $3,266-2001) 182,129 157,661

Inventories 38,154 32,084

Income tax receivable — 62,346

Prepaid expenses and other current assets 13,638 14,796 Total current assets 658,613 778,568

Property and equipment, net 57,882 59,320

Ownership interests in and advances to affiliates 87,250 132,940

Available-for-sale securities 4,406 4,822

Intangible assets, net 9,848 11,670

Goodwill, net 174,180 159,540

Deferred taxes 3,179 3,240

Note receivable — related party 24,983 25,046

Other 21,576 17,117 Total Assets $ 1,041,917 $ 1,192,263 LIABILITIES AND SHAREHOLDERS ’ EQUITY

Current Liabilities

Current maturities of long-term debt $ 7,194 $ 7,761

Accounts payable 160,903 125,121

Accrued expenses and deferred revenue 103,210 124,438

Other current liabilities 85,670 171,804 Total current liabilities 356,977 429,124

Long-term debt 17,854 20,138

Minority interest 129,764 112,746

Other long-term liabilities 12,457 11,579

Convertible subordinated notes 200,000 200,000

Commitments and contingencies

Shareholders’ Equity

Preferred stock, $10.00 par value; 1,000 shares authorized — —

Common stock, $0.10 par value; 500,000 shares authorized; 119,450 and 118,154 shares

issued and outstanding in 2002 and 2001, respectively 11,945 11,815

Additional paid-in capital 738,282 743,885

Accumulated deficit (422,421 ) (326,384 )

Accumulated other comprehensive income 2,153 1,968

Treasury stock, at cost (23 shares-2002; 381 shares-2001) (90 ) (11,528 )

Unamortized deferred compensation (5,004 ) (1,080 ) Total shareholders’ equity 324,865 418,676

See Notes to Consolidated Financial Statements.

3

Total Liabilities and Shareholders’ Equity $ 1,041,917 $ 1,192,263

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CONSOLIDATED STATEMENTS OF OPERATIONS


4

Three Months Ended June 30, Six Months Ended June 30,

2002 2001 2002 2001

(in thousands except per share data) (unaudited) Revenue

Product sales $ 353,730 $ 426,751 $ 616,497 $ 912,214

Service sales 93,097 81,939 175,560 166,823

Other 6,025 6,334 11,599 12,962 Total revenue 452,852 515,024 803,656 1,091,999

Operating Expenses

Cost of sales-product 324,759 382,628 558,017 824,789

Cost of sales-service 58,377 52,495 113,297 109,456

Selling and service 33,536 36,104 63,023 73,999

General and administrative 36,140 42,612 70,774 82,805

Depreciation and amortization 7,110 9,766 14,511 19,460 Total operating expenses 459,922 523,605 819,622 1,110,509 (7,070 ) (8,581 ) (15,966 ) (18,510 )

Other loss, net (3,397 ) (28,300 ) (8,928 ) (37,575 )

Interest income 1,828 2,988 3,281 6,974

Interest and financing expense (5,079 ) (6,743 ) (11,977 ) (15,476 ) Loss before income taxes, minority interest, equity loss and change in

accounting principle (13,718 ) (40,636 ) (33,590 ) (64,587 )

Income taxes (expense) benefit (1,944 ) (3,071 ) (3,062 ) 6,186

Minority interest (608 ) (1,248 ) (1,449 ) (2,298 )

Equity loss (17,639 ) (65,517 ) (36,546 ) (299,516 ) Net loss before change in accounting principle (33,909 ) (110,472 ) (74,647 ) (360,215 )

Cumulative effect of change in accounting principle (Note 3) — — (21,390 ) — Net Loss $ (33,909 ) $ (110,472 ) $ (96,037 ) $ (360,215 ) Basic Loss Per Share:

Prior to cumulative effect of change in accounting principle $ (0.29 ) $ (0.94 ) $ (0.64 ) $ (3.07 )

Cumulative effect of change in accounting principle — — (0.18 ) — $ (0.29 ) $ (0.94 ) $ (0.82 ) $ (3.07 ) Diluted Loss Per Share:

Prior to cumulative effect of change in accounting principle $ (0.29 ) $ (0.95 ) $ (0.65 ) $ (3.08 )

Cumulative effect of change in accounting principle — — (0.18 ) — $ (0.29 ) $ (0.95 ) $ (0.83 ) $ (3.08 ) Weighted Average Shares Outstanding — Basic and Diluted 117,572 117,300 117,548 117,269

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CONSOLIDATED STATEMENTS OF CASH FLOWS


5

Six Months Ended June 30,

2002 2001

(in thousands) (unaudited)

Net cash provided by operating activities $ 29,687 $ 174,081

Investing Activities

Proceeds from sales of available-for-sale and trading securities 13,269 11,029

Proceeds from sales of and distributions from affiliates 16,649 20,730

Advances to affiliates (4,397 ) (12,582 )

Repayment of advances to affiliates — 30

Acquisitions of ownership interests in affiliates and subsidiaries, net of cash acquired (17,004 ) (46,927 )

Acquisitions by subsidiaries, net of cash acquired — (79,309 )

Advances to related party, net (588 ) (26,499 )

Repayments of advances to related party, net 1,459 —

Decrease in restricted cash and short-term investments 4,421 86,728

Capital expenditures (5,394 ) (14,369 )

Other, net (1,638 ) (1,467 ) Net cash provided by (used in) investing activities 6,777 (62,636 )

Financing Activities

Borrowing on revolving credit facilities 7,829 19,549

Repayments on revolving credit facilities (9,311 ) (17,996 )

Borrowings on long-term debt 569 3,509

Repayments on long-term debt (1,786 ) (1,752 )

Issuance of Company common stock, net — 139

Issuance of subsidiary common stock 951 375 Net cash (used in) provided by financing activities (1,748 ) 3,824 Net Increase in Cash and Cash Equivalents 34,716 115,269

Cash and Cash Equivalents at beginning of period 298,095 133,201 Cash and Cash Equivalents at end of period $ 332,811 $ 248,470

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002

The accompanying unaudited interim Consolidated Financial Statements were prepared in accordance with accounting principles generally accepted in the United States of America and the interim financial statements rules and regulations of the SEC. In the opinion of management, these statements include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the Consolidated Financial Statements. The interim operating results are not necessarily indicative of the results for a full year or for any interim period. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations relating to interim financial statements. The Consolidated Financial Statements included in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Company’s Consolidated Financial Statements and Notes thereto included in the Company’s 2001 Annual Report on Form 10-K.

The Consolidated Financial Statements include the accounts of the Company and all subsidiaries in which it directly or indirectly owns more than 50% of the outstanding voting securities. The Company’s wholly owned subsidiaries include aligne and Lever8 Solutions (formerly K Consultants and Palarco). The Company’s Consolidated Statements of Operations and Cash Flows also include the following majority-owned subsidiaries:

6

1. GENERAL

2. BASIS OF PRESENTATION

For the three months ended June 30,

2002 2001

Agari Mediaware CompuCom Systems

ChromaVision Medical Systems SOTAS

(Since June 13, 2002) Tangram Enterprise Solutions

CompuCom Systems

Mantas (Since April 2002)

Pacific Title and Arts Studio

Protura (since January 2002)

SOTAS

Tangram Enterprise Solutions

For the six months ended June 30,

2002 2001

Agari Mediaware CompuCom Systems

Aptas SOTAS

ChromaVision Medical Systems Tangram Enterprise Solutions

(Since June 13, 2002)

CompuCom Systems

Mantas (Since April 2002)

Pacific Title and Arts Studio

Protura (since January 2002)

SOTAS


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continu ed) JUNE 30, 2002

The Company’s Consolidated Balance Sheets also include the following majority-owned subsidiaries:

In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets”. SFAS 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized but instead tested for impairment at least annually. SFAS 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values. These provisions of SFAS 142 were adopted by the Company as of January 1, 2002.

Under SFAS No. 142, the Company was required to test all existing goodwill and intangible assets with indefinite useful lives for impairment as of January 1, 2002, on a “reporting unit” basis. A reporting unit is generally the same as an operating segment, unless discrete financial information is prepared and regularly reviewed by management at a “component” level, generally one level below the operating segment level. In this case, the component is the reporting unit. A fair value approach was used to test goodwill for impairment. Under the fair value approach, an impairment charge would be recognized for the amount, if any, by which the carrying amount of goodwill exceeds its fair value. Fair values were determined primarily using discounted cash flows and when available, comparative market multiples. The Company completed the required testing during the second quarter 2002.

In accordance with SFAS 142, approximately $1.3 million of negative goodwill associated with a CompuCom acquisition was written off as of January 1, 2002. The Company’s share of this adjustment, net of income taxes, was $0.4 million and was recognized in the Consolidated Statements of Operations as a cumulative effect of a change in accounting principle in the first quarter of 2002 as well as the six months ended June 30, 2002.

Additionally, in connection with the transitional impairment tests performed upon the adoption of SFAS 142, the Company reported a $21.8 million goodwill impairment loss in the Business and IT services reporting unit (a component of the Company’s Strategic Private Companies segment). The fair value of that reporting unit was determined by estimating the present value of future cash flows and by reviewing the valuations of comparable public companies. In accordance with SFAS 142, this loss is presented as a cumulative effect of a change in accounting principle in the Consolidated Statements of Operations as of January 1, 2002.

7

June 30, 2002 December 31, 2001

Agari Mediaware Agari Mediaware

ChromaVision Medical Systems Aptas

CompuCom Systems CompuCom Systems

Mantas Pacific Title and Arts Studio

Pacific Title and Arts Studio SOTAS

Protura Tangram Enterprise Solutions

SOTAS


3. GOODWILL AND OTHER INTANGIBLE ASSETS

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The following table provides comparative earnings and earnings per share had the non-amortization provisions of SFAS 142 been adopted for all periods presented:

The following is a summary of changes in the carrying amount of goodwill by segment:


2002 2001 2002 2001

(in thousands except per share data) (unaudited) Impact on Statements of Operations:

Net loss before change in accounting principle $ (33,909 ) $ (110,472 ) $ (74,647 ) $ (360,215 )

Add back goodwill amortization

— consolidated companies — 3,014 — 6,019

— equity method companies — 6,764 — 14,495 Adjusted net loss before change in accounting principle (33,909 ) (100,694 ) (74,647 ) (339,701 )

Cumulative effect of change in accounting principle — — (21,390 ) — Adjusted net loss $ (33,909 ) $ (100,694 ) $ (96,037 ) $ (339,701 ) Impact on Basic Earnings Per Share: Net loss before change in accounting principle $ (0.29 ) $ (0.94 ) $ (0.64 ) $ (3.07 )


— consolidated companies — 0.02 — 0.05

— equity method companies — 0.06 — 0.12 Adjusted net loss before change in accounting principle (0.29 ) (0.86 ) (0.64 ) (2.90 )

Cumulative effect of change in accounting principle — — (0.18 ) — Adjusted net loss $ (0.29 ) $ (0.86 ) $ (0.82 ) $ (2.90 )

Impact on Fully Diluted Earnings Per Share:

Net loss before change in accounting principle $ (0.29 ) $ (0.95 ) $ (0.65 ) $ (3.08 )


— consolidated companies — 0.03 — 0.05

— equity method companies — 0.06 — 0.13

Adjusted net loss before change in accounting principle (0.29 ) (0.86 ) (0.65 ) (2.90 )

Cumulative effect of change in accounting principle — — (0.18 ) — Adjusted net loss $ (0.29 ) $ (0.86 ) $ (0.83 ) $ (2.90 )

Other Public Strategic Private Companies Private Companies (excluding Total Companies and Funds CompuCom) CompuCom Segments

(in thousands) (unaudited) Balance at December 31, 2001 $ 53,344 $ 2,502 $ 1,415 $ 102,279 $ 159,540

Cumulative change in accounting principle — negative goodwill — — — 1,253 1,253

Cumulative change in accounting principle — impairment test (21,815 ) — — — (21,815 )

8

Additions 18,346 — 18,450 908 37,704

Deconsolidation — (2,173 ) — — (2,173 )

Impairment charges — (329 ) — — (329 ) Balance at June 30, 2002 $ 49,875 $ — $ 19,865 $ 104,440 $ 174,180

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Intangible assets with definite useful lives are amortized over their respective estimated useful lives to their estimated residual values. The following table provides a summary of the Company’s intangible assets with definite useful lives:

Amortization expense related to intangible assets was $0.9 million and $1.9 million for the three and six months ended June 30, 2002 and $0.5 million and $1.1 million for the three and six months ended June 30, 2001, respectively. The following table provides estimated future amortization expense related to intangible assets:

9

June 30, 2002

Gross Amortization Carrying Accumulated Period Value Amortization Net


Customer-related 6-11 years $ 15,467 $ 7,920 $ 7,547

Contract-related 2-3 years 2,840 777 2,063

Technology-related 2-17 years 484 246 238 Total $ 18,791 $ 8,943 $ 9,848

December 31, 2001

Gross Amortization Carrying Accumulated Period Value Amortization Net

(in thousands)

Customer-related 6-11 years $ 15,467 $ 6,690 $ 8,777

Contract-related 2-3 years 2,840 171 2,669

Technology-related 2-17 years 373 149 224 Total $ 18,680 $ 7,010 $ 11,670

Total


Remainder of 2002 $ 1,890

2003 3,191

2004 2,502

2005 587

2006 and thereafter 1,678 $ 9,848

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In August 2001, the FASB issued Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations”. SFAS 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. The Company will adopt SFAS 143 in fiscal year 2003. The Company does not expect the provisions of SFAS 143 to have any significant impact on its financial statements.

In October 2001, the FASB issued Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, which supercedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of”. The Company has adopted SFAS 144 in fiscal year 2002. The adoption of SFAS 144 did not have a significant impact on the Company’s financial statements.

In April 2002, the FASB issued SFAS No. 145, “Recission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections”. Generally, SFAS 145 is effective for transactions occurring after May 15, 2002. The adoption of SFAS 145 did not have a significant impact on the Company’s financial statements.

In July 2002, the FASB issued SFAS No, 146 “Accounting for Costs Associated with Exit or Disposal Activities”. Under SFAS 146, companies will record exit or disposal costs when they are “incurred” and can be measured at fair value, and they will subsequently adjust the recorded liability for changes in estimated cash flow. SFAS 146 is effective prospectively for exit or disposal activities initiated after December 31, 2002.

Comprehensive loss is the change in equity of a business enterprise from transactions and other events and circumstances from non-owner sources. Excluding net loss, the Company’s source of comprehensive loss is from net unrealized appreciation (depreciation) on its holdings classified as available-for-sale. Reclassification adjustments result from the recognition in net loss of unrealized gains or losses that were included in comprehensive loss in prior periods.

The following summarizes the components of comprehensive loss, net of income taxes:

10

4. OTHER NEW ACCOUNTING PRONOUNCEMENTS

5. COMPREHENSIVE LOSS

Three Months Ended June 30, Six Months Ended June 30

2002 2001 2002 2001


Net Loss $ (33,909 ) $ (110,472 ) $ (96,037 ) $ (360,215 ) Other Comprehensive Income (Loss), Before Taxes:

Unrealized holding losses in available-for-sale securities (84 ) (2,809 ) (344 ) (4,891 )

Reclassification adjustments 74 (4,009 ) 629 4,571

Related Tax (Expense) Benefit:

Unrealized holding losses in available-for-sale securities 29 983 120 1,712

Reclassification adjustments (26 ) 1,403 (220 ) (1,600 ) Other Comprehensive Income (Loss) (7 ) (4,432 ) 185 (208 ) Comprehensive Loss $ (33,916 ) $ (114,904 ) $ (95,852 ) $ (360,423 )

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Certain prior year amounts have been reclassified to conform to the current year presentation. In accordance with EITF Topic No. D-103, “Income Statement Characterization of Reimbursements Received for ‘Out-of-Pocket’ Expenses Incurred”, the Company reclassified out-of-pocket expenses reimbursed by clients as revenue and reported the related costs in general and administrative expense in the Consolidated Statements of Operations. This reclassification had no effect on net income or loss. In addition, in accordance with SFAS 141, “Business Combinations”, identifiable intangible assets have been presented apart from goodwill.

In 1999, the Company entered into two forward sale contracts related to 3.4 million shares of its holdings in Tellabs common stock. The Company pledged these shares of Tellabs under contracts that expire in March and August 2002 and, in return, received 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. In March 2002, the Company settled $91 million of the liability entered into in connection with the first hedge of its Tellabs holdings by delivering 2.0 million shares of Tellabs. This settlement resulted in a reduction of Trading Securities and Other Current Liabilities of $91 million, and had no impact on the Company’s cash balances.

The net gain recognized during the three and six months ended June 30, 2002 was $0.5 million and $1.2 million. This amount reflects a $6.4 million gain on the change in the fair value of the hedging contract, reduced by a $5.9 million loss on the change in fair value of the Tellabs holdings for the three months ended June 30, 2002 and $22.3 million gain on the fair value of the hedging contract, reduced by a $21.1 million loss on the fair value of the Tellabs holdings for the six months ended June 30, 2002. These gains are reflected in Other Loss, Net in the Consolidated Statements of Operations.

The Company currently intends to settle the remaining liability of $86 million in August 2002 by delivering the remaining 1.4 million shares of Tellabs. This liability is included in Other Current Liabilities on the Consolidated Balance Sheets. The August 2002 settlement will reduce Trading Securities and Other Current Liabilities by approximately $86 million in the third quarter of 2002. This settlement will have no impact on cash.

Trading Securities

The fair market value of trading securities consisted of the following:

11

6. RECLASSIFICATIONS

7. FINANCIAL INSTRUMENTS

8. TRADING AND AVAILABLE-FOR-SALE SECURITIES

June 30, December 31, 2002 2001


Tellabs (a) $ 86,378 $ 175,728

Palm (b) — 14,211

VerticalNet 1,684 14,732

Other 207 882 $ 88,269 $ 205,553

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Available-for-Sale Securities

Available-for-sale securities consisted of the following:

At June 30, 2002

At December 31, 2001

The following summarizes the carrying value of 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, 2002 and December 31, 2001.

(a) As discussed in Note 7, the Company settled a portion of its liability entered into in connection with the first hedge of Tellabs holdings by delivering 2.0 million shares of Tellabs in March 2002. The remaining liability will be settled in August 2002 by delivering all of the remaining Tellabs shares.

(b) The Company sold all of its holdings in Palm in the first quarter of 2002.

Unrealized Holding Fair Cost Gains Value


Pac-West Telecomm $ 1,087 $ — $ 1,087

Other public companies 6 3,313 3,319 $ 1,093 $ 3,313 $ 4,406

Unrealized Holding Fair Cost Gains (Losses) Value

(in thousands)

Pac-West Telecomm $ 1,642 $ (283 ) $ 1,359

Other public companies 152 3,311 3,463 $ 1,794 $ 3,028 $ 4,822

9. OWNERSHIP INTERESTS IN AND ADVANCES TO AFFILIATES

June 30, December 31, 2002 2001


Equity Method

Public Companies $ 21,759 $ 32,178

Non-Public Companies 4,814 23,923

Private Equity Funds 50,474 62,168 77,047 118,269

Cost Method

12

Non-Public Companies 5,929 7,950

Private Equity Funds 4,274 6,221

Advances to Affiliates — 500 $ 87,250 $ 132,940

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The market value of the Company’s public companies accounted for under the equity method was $71 million at June 30, 2002 and $161 million at December 31, 2001. Of the total decline, $28 million relates to ChromaVision, which is not included in the equity ownership balance at June 30, 2002, as it was consolidated effective in June 2002. The remaining decline is due to an overall decline in market valuations as a result of current economic conditions.

During management’s ongoing review of the recoverability of recorded carrying value versus fair value, it was determined that the carrying value of goodwill and certain other intangible assets were not fully recoverable. For the three months ended June 30, 2002 and 2001, the Company recorded impairment charges totaling $7.2 million and $39.4 million, respectively. Impairment charges associated with equity method companies for the three months ended June 30, 2002 and 2001 of $4.4 million and $20.6 million are included in Equity Loss on the Consolidated Statements of Operations. Impairment charges related to consolidated and cost method companies for the three months ended June 30, 2002 and 2001 of $2.8 million and $18.8 million are included in Other loss, Net (Note 13) in the Consolidated Statements of Operations.

For the six months ended June 30, 2002 and 2001, the Company recorded impairment charges totaling $19.1 million and $81.4 million, respectively. Impairment charges associated with equity method companies for the six months ended June 30, 2002 and 2001 of $12.7 million and $58.6 million are included in Equity Loss on the Consolidated Statements of Operations. Impairment charges related to consolidated and cost method companies for the six months ended June 30, 2002 and 2001 of $6.4 million and $22.8 million are included in Other loss, Net (Note 13) in the Consolidated Statements of Operations. The amount of the impairment charge was determined by comparing the carrying value of the affiliate to fair value.

The following is a summary of long-term debt:

In May 2002, the Company entered into a revolving credit facility providing for borrowings, issuances of letters of credit and guarantees of up to $25 million. This credit facility matures in May 2003 and bears interest at the prime rate (4.75% at June 30, 2002) for outstanding borrowings. The credit facility is subject to an unused commitment fee of 0.125% which is subject to reduction based on deposits maintained at the bank. The facility requires cash collateral equal to two times any outstanding amounts under the facility. This facility provides the Company additional flexibility to implement its strategy and support its partner companies. As of June 30, 2002, a guarantee totaling $5 million related to a partner company credit facility was outstanding. The Company’s prior credit facility provided for the issuances of letters of credit up to $10 million.

Parent company and other recourse debt includes primarily mortgage obligations ($17.2 million), bank credit facilities ($4.0 million) and capital lease obligations ($0.5 million). These obligations bear interest at fixed rates between 7.75% to 9.75%, and variable rates between 72% of the prime rate (4.75% at June 30, 2002) and prime plus 1%.

13

10. DEBT

June 30, December 31, 2002 2001


Parent company and other recourse debt $ 21,649 $ 22,224

Subsidiary debt (non-recourse to parent) 3,399 5,675 Total debt 25,048 27,899

Current maturities of long-term debt (7,194 ) (7,761 ) Long-term debt $ 17,854 $ 20,138

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At June 30, 2002, CompuCom has a $25 million working capital facility and a $125 million receivables securitization facility. Consistent with its financing requirements, CompuCom reduced the working capital facility from $50 million to $25 million in May 2002. The working capital facility, which had a May 2002 maturity date but has been extended to a October 2002 maturity date, bears interest at a rate of LIBOR plus an agreed-upon spread and is secured by a lien on CompuCom’s assets. CompuCom expects the working capital facility to be renewed prior to its maturity date. Availability under the working capital facility is subject to a borrowing base calculation. As of June 30, 2002, availability under the working capital facility was $25 million. No amounts were outstanding under the working capital facility as of June 30, 2002 and December 31, 2001. Terms of the working capital facility limit the amounts available for capital expenditures and dividends. The securitization facility’s pricing is based on a designated short-term interest rate plus an agreed upon spread. The securitization allows CompuCom to sell, on an ongoing basis, its trade accounts receivable to a consolidated, wholly owned special purpose subsidiary (SPS). The risk that CompuCom bears from bad debt losses on trade receivables sold is addressed in its allowance for doubtful accounts. The SPS has sold and, subject to certain conditions, may from time to time sell an undivided ownership interest in the pool of purchased receivables to financial institutions. As collections reduce receivables balances sold, CompuCom may sell interests in new receivables to bring the amount available up to the maximum allowed. CompuCom records these transactions as sales of accounts receivable. These sales are reflected as reductions of accounts receivable on the Consolidated Balance Sheets and are included in Net Cash Provided by Operating Activities on the Consolidated Statements of Cash Flows. CompuCom is retained as servicer of the receivables; however, the cost of servicing the receivables is not material. Discounts associated with the sale of receivables totaled $0.5 million and $0.9 million for the three and six months ended June 30, 2002, respectively, and $1.5 million and $3.7 million for the three and six months ended June 30, 2001, respectively, and are included in Interest and Financing Expenses on the Consolidated Statements of Operations. Amounts outstanding as sold receivables as of June 30, 2002, consisted of two certificates totaling $60 million, one certificate for $10 million which had an April 2002 maturity date but has been extended to a September 2002 maturity date, and one certificate for $50 million with an October 2003 maturity date. CompuCom expects the $10 million certificate to be renewed at its maturity date. Both facilities are subject to CompuCom’s compliance with selected financial covenants and ratios.

Subsidiary debt includes bank credit facilities, term loans and capital lease obligations of consolidated partner companies. These obligations bear interest at fixed rates ranging between 7.0% and 12% and variable rates consisting of the prime rate plus 1%.

Aggregate maturities of long-term debt during future years are (in millions): $6.0 — 2002; $2.0 — 2003; $1.3 — 2004; $0.6 — 2005; $0.6 — 2006; and $14.5 — thereafter.

The Company made an offer to its employees to exchange stock options held by these employees for restricted shares of the Company’s stock. Under the exchange program, each employee with an outstanding stock option with an exercise price in excess of $15.00 per share was offered the opportunity to exchange the options for shares of restricted stock. In order to participate in the exchange, a participant had to exchange all eligible options held. The shares of restricted stock were issued on January 22, 2002, and vest on the later of July 22, 2002, or the date on which the unvested eligible option exchanged for the restricted shares would have vested. Vesting will be accelerated upon certain circumstances. Until the restricted stock vests, the shares are generally subject to forfeiture in the event an employee leaves the Company for a reason other than a termination for cause. As a result of the exchange, the Company issued 537,878 shares of restricted stock in January 2002 in return for 2,038,071 stock options that were canceled. As of June 30, 2002, total options available for future grant totaled 3.7 million.

Approximately $2.0 million of non-cash deferred compensation associated with this restricted stock will be expensed as the restricted stock vests, and will be reduced to the extent that a participant forfeits his or her shares of restricted stock received in the exchange prior to vesting. The deferred compensation charge is unaffected by future changes in the price of the common stock.

14

11. STOCK-BASED COMPENSATION

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The following tables reflect the effect on the Company’s outstanding options of the exchange program:

In addition to the above, the Company issued shares of restricted stock to employees in 2001 and 2002. During the first six months of 2002, the Company issued 1.3 million shares of restricted stock to employees with a value on the date of grant of $4.5 million, which was recorded as deferred compensation. The restricted stock is subject to pro-rata vesting over periods ranging from two to four years. Compensation expense is recognized on a straight-line basis over the vesting period and is reduced to the extent that a participant forfeits shares of restricted stock received prior to vesting. The deferred compensation charge is unaffected by future changes in the price of the common stock.

Total compensation expense for restricted stock issuances was $1.0 million and $1.9 million for the three and six months ended June 30, 2002.

Pro Forma Disclosures – Stock Options Issued to Employees and Directors

The Company, its subsidiaries and its partner companies that are accounted for under the equity method apply APB 25 and related interpretations in accounting for stock option plans. The Company provides pro forma disclosures on an annual basis to reflect what the Company’s consolidated net loss and loss per share would have been reduced to if compensation cost related to options had been recorded under SFAS 123. At December 31, 2001, the Company’s unamortized compensation expense related to options it issued to its employees was $36.5 million. At June 30, 2002, this amount was reduced to $12.5 million, primarily as a result of the Company’s January 2002 option exchange program.

15

Weighted Average Shares Exercise Price

(in thousands)

Outstanding at December 31, 2001 12,472 $ 15.80

Options canceled/forfeited under exchange program (2,038 ) 36.94 10,434 $ 11.68

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During the first quarter of 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 facilities, and reducing its workforce. As a result, CompuCom recorded a restructuring charge of $5.2 million. During the fourth quarter of 1998, CompuCom recorded a $16.4 million restructuring charge, primarily consisting of costs associated with the closing of facilities and disposing of related fixed assets as well as employee severance and benefits related to a reduction in workforce.

The following table provides a summary rollforward by category of the activity in CompuCom’s restructuring accrual for the six months ended June 30, 2002:

The remaining accrual at June 30, 2002 is reflected in Accrued Expenses on the Consolidated Balance Sheets and relates to eight leases for former office sites that have not been terminated, two of which have not been sublet. CompuCom believes the restructuring accrual is adequate. Differences, if any, between the estimated amount accrued and actual amounts paid will be reflected in operating expenses in future periods.

16

12. RESTRUCTURING

Accrual at Cash Accrual at 12/31/01 Payments 6/30/02


Lease termination costs $ 1,861 $ (154 ) $ 1,707

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Other loss, net, consists of the following:

During the first quarter of 2002, we sold shares of public holdings, primarily Palm, for aggregate net cash proceeds of $13.1 million, and recorded losses of $1.2 million.

During 2002, the Company received $2.9 million and $9.0 million in the three and six months ended June 30, 2002 related to the release of escrowed proceeds from the sale of a partner company in 2000. The net gain on the sale of private partner companies was $4.7 million and $10.5 million for the three and six months ended June 30, 2002.

The net gain recognized during the three and six months ended June 30, 2002 related to the Company’s holdings in Tellabs was $0.5 million and $1.2 million. This amount reflects a $6.4 million gain on the change in the fair value of the hedging contract, reduced by a $5.9 million loss on the change in fair value of the Tellabs holdings for the three months ended June 30, 2002 and $22.3 million gain on the fair value of the hedging contract, reduced by a $21.1 million loss gain on the fair value of the Tellabs holdings for the six months ended June 30, 2002. This gain is reflected in Other Loss, Net in the Consolidated Statements of Operations.

Impairment charges reflect certain holdings accounted for under the consolidation or cost method judged to have experienced an other than temporary decline in value (Note 9).

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 and six months ended June 30, 2002 was $1.9 million and $3.1 million, net of a recorded valuation allowance of $12.9 million and $27.6 million. The Company recorded a valuation allowance against its deferred tax assets since it is more likely than not that these assets will not be realized in future years.

17

13. OTHER LOSS, NET


2002 2001 2002 2001

(in thousands) (in thousands) (unaudited) (unaudited)

Gain (loss) on sale of public holdings, net $ (17 ) $ 1,551 $ (1,183 ) $ 1,392

Gain on sale of private partner companies, net 4,726 1,454 10,523 1,518

Gain on distributions from private equity funds, net — — 486 —

Unrealized gain (loss) on Tellabs and related forward sales contracts, net 527 (12,196 ) 1,242 (16,528 )

Unrealized loss on other trading securities, net (6,015 ) (272 ) (13,718 ) (1,126 )

Impairment charges (2,770 ) (18,837 ) (6,430 ) (22,831 )

Other 152 — 152 — $ (3,397 ) $ (28,300 ) $ (8,928 ) $ (37,575 )

14. INCOME TAXES

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The calculations of net loss per share were:

If a consolidated or equity method public company has dilutive options or securities outstanding, diluted net loss per share is computed first by deducting from net 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 loss for purposes of calculating diluted net loss per share.

The computation of average common shares outstanding for the three and six months ended June 30, 2002, excludes 1.8 million and 1.7 million shares of non-vested restricted stock.

Approximately 0.1 million and 0.2 million weighted average common stock equivalents related to stock options were excluded from the denominator in the calculation of diluted loss per share for the three and six months ended June 30, 2002 and 0.1 million and 0.5 million for the three and six months ended June 30, 2001 because their effect was anti-dilutive. Approximately 8.3 million shares representing the weighted

15. NET LOSS PER SHARE


2002 2001 2002 2001

(in thousands except per share data) (unaudited) Basic:

Net loss prior to cumulative effect of change in accounting principle $ (33,909 ) $ (110,472 ) $ (74,647 ) $ (360,215 )

Cumulative effect of change in accounting principle — — (21,390 ) — Net loss after cumulative effect of change in accounting principle $ (33,909 ) $ (110,472 ) $ (96,037 ) $ (360,215 ) Average common shares outstanding 117,572 117,300 117,548 117,269 Basic prior to cumulative effect of change in accounting principle $ (0.29 ) $ (0.94 ) $ (0.64 ) $ (3.07 )

Cumulative effect of change in accounting principle — — (0.18 ) — Basic after cumulative effect of change in accounting principle $ (0.29 ) $ (0.94 ) $ (0.82 ) $ (3.07 ) Diluted:

Net loss prior to cumulative effect of change in accounting principle $ (33,909 ) $ (110,472 ) $ (74,647 ) $ (360,215 )

Effect of public holdings (714 ) (389 ) (1,170 ) (744 ) Adjusted net loss $ (34,623 ) $ (110,861 ) $ (75,817 ) $ (360,959 ) Average common shares outstanding 117,572 117,300 117,548 117,269 Diluted prior to cumulative effect of change in accounting

principle $ (0.29 ) $ (0.95 ) $ (0.65 ) $ (3.08 ) Net loss after cumulative effect of change in accounting principle $ (33,909 ) $ (110,472 ) $ (96,037 ) $ (360,215 )

Effect of public holdings (714 ) (389 ) (1,244 ) (744 ) Adjusted net loss $ (34,623 ) $ (110,861 ) $ (97,281 ) $ (360,959 ) Average common shares outstanding 117,572 117,300 117,548 117,269 Diluted after cumulative effect of change in accounting principle $ (0.29 ) $ (0.95 ) $ (0.83 ) $ (3.08 )

average effect of assumed conversion of the convertible subordinated notes were excluded in all periods presented from the denominator in the calculation of diluted loss per share because their effect was anti-dilutive.

18

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The Company’s Consolidated Financial Statements reflect all wholly-owned subsidiaries, including aligne and Lever8 Solutions, which are accounted for under the consolidation method of accounting.

Parent company financial information is provided to present the financial position and results of operations of the Company as if the less than wholly owned consolidated companies (see Note 2) were accounted for under the equity method of accounting for all periods presented during which the Company owned its interest in these companies. Parent company financial statements include the results of the Company’s wholly-owned subsidiaries including aligne and Lever 8 Solutions.

Parent Company Balance Sheets

19

16. PARENT COMPANY FINANCIAL INFORMATION

June 30, December 31, 2002 2001


Assets

Cash and cash equivalents $ 192,485 $ 171,531

Restricted cash 3,612 8,033

Trading securities 88,269 205,553

Income tax receivable — 62,647

Other current assets 13,420 18,299 Total current assets 297,786 466,063

Ownership interests in and advances to affiliates 278,111 274,389

Available-for-sale securities 4,406 4,822

Note receivable — related party 24,983 25,046

Other 50,855 71,009 Total Assets $ 656,141 $ 841,329 Liabilities and Shareholders’ Equity

Current liabilities, primarily accrued expenses and accounts payable $ 17,695 $ 23,632

Other current liabilities 85,670 171,804 Total current liabilities 103,365 195,436

Long-term debt 16,416 16,676

Other long-term liabilities 11,495 10,541

Convertible subordinated notes 200,000 200,000

Shareholders’ equity 324,865 418,676 Total Liabilities and Shareholders’ Equity $ 656,141 $ 841,329

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Debt includes primarily mortgage obligations bearing interest at fixed rates between 7.75% to 9.75%, and variable rates of 72% of the prime rate (4.75% at June 30, 2002) and prime plus 1%.

Aggregate maturities of long-term debt during future years are (in millions): $0.4 — 2002; $0.6 — 2003; $0.5 — 2004; $0.5 — 2005; $0.6 — 2006; and $14.6 — thereafter.

Parent Company Statements of Operations

The Company’s share of income or losses of its less than wholly owned consolidated subsidiaries is reflected in Equity Loss.

20


2002 2001 2002 2001


Revenue $ 12,744 $ 16,434 $ 26,287 $ 35,350

Operating expenses:

Cost of sales 4,487 7,966 11,136 15,580

Selling 611 458 1,403 872

General and administrative 14,690 17,905 27,138 35,334

Depreciation and amortization 446 2,145 919 4,336 20,234 28,474 40,596 56,122 (7,490 ) (12,040 ) (14,309 ) (20,772 )

Other loss, net (3,456 ) (28,300 ) (6,913 ) (37,575 )

Interest and financing expense, net (2,922 ) (2,864 ) (7,515 ) (5,612 ) Loss before income taxes and equity loss (13,868 ) (43,204 ) (28,737 ) (63,959 )

Income taxes (9 ) (2,193 ) (9 ) 7,826

Equity loss (20,032 ) (65,075 ) (45,476 ) (304,082 ) Net loss prior to cumulative change in accounting principle (33,909 ) (110,472 ) (74,222 ) (360,215 )

Cumulative effect of change in accounting principle — — (21,815 ) — Net loss $ (33,909 ) $ (110,472 ) $ (96,037 ) $ (360,215 )

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Parent Company Statements of Cash Flows

21

Six Months Ended June 30,

2002 2001


Net cash provided by (used in) operating activities $ 43,012 $ (10,430 )

Investing Activities

Proceeds from sales of trading securities 13,269 11,029

Proceeds from sales of and distributions from affiliates 16,649 20,730

Advances to affiliates (4,897 ) (12,582 )

Repayment of advances to affiliates — 955

Acquisitions of ownership interests in affiliates and subsidiaries, net cash acquired (51,091 ) (48,927 )

Capital expenditures (346 ) (3,018 )

Advances to related party, net (588 ) (26,499 )

Repayments of advances to related party, net 1,459 —

Decrease in restricted cash and short-term investments 4,421 86,728

Other, net (683 ) (955 ) Net cash provided by (used in) investing activities (21,807 ) 27,461

Financing Activities

Borrowings on long-term debt — 1,976

Repayments on long-term debt (251 ) (1,198 )

Issuance of Company common stock, net — 139 Net cash (used in) provided by financing activities (251 ) 917 Net Increase in Cash and Cash Equivalents 20,954 17,948

Cash and Cash Equivalents at beginning of year 171,531 117,774 Cash and Cash Equivalents at end of year $ 192,485 $ 135,722

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Our reportable segments include i) Strategic Private Companies, which includes those companies that we focus on providing superior operational and management support with the goal of accelerating value creation; ii) Public Companies (excluding CompuCom), which includes the results of operations of our publicly-traded companies (excluding CompuCom); iii) CompuCom, which represents the results of our subsidiary, CompuCom; and iv) Other Private Companies and Funds, which represents other private companies and private equity funds in which we hold an equity interest.

In periods prior to 2002, our reportable segments were General Safeguard Operations, Partner Company Operations and CompuCom Operations. All prior periods have been restated to conform to the current-year presentation. The development of the current segments corresponds to the implementation of our shift in strategic focus announced in early 2002, and represents management’s view of the Company’s operations.

The following tables reflect our consolidated operating data by reportable segments. Each segment includes the results of the consolidated companies and records our share of income or losses for entities accounted for under the equity method. Segment results also include impairment charges, gains or losses related to the disposition of partner companies and the mark to market of trading securities. All significant intersegment activity has been eliminated. Accordingly, segment results reported exclude the effect of transactions between us and our subsidiaries.

Other items, which include corporate expenses, results of operations of disposed companies, goodwill amortization and income taxes, are reviewed by management independent of segment results.

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17. OPERATING SEGMENTS

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Three Months Ended June 30, 2002

23

Other Public Strategic Private Companies Private Companies (excluding Total Consolidated Companies and Funds CompuCom) CompuCom Segments Other Items Results

(in thousands) (unaudited) Revenue

Product sales $ 2,484 $ 129 $ 827 $ 350,290 $ 353,730 $ — $ 353,730

Service sales 9,199 5,961 2,085 75,852 93,097 — 93,097

Other — 6,033 — — 6,033 (8 ) 6,025 11,683 12,123 2,912 426,142 452,860 (8 ) 452,852

Operating expenses

Cost of sales — product 405 327 16 324,011 324,759 — 324,759

Cost of sales — service 6,129 3,926 429 47,893 58,377 — 58,377

Selling and service 6,901 860 3,175 22,600 33,536 — 33,536

General and administrative 4,506 6,728 95 18,720 30,049 6,091 36,140

Depreciation and amortization 794 584 708 4,687 6,773 337 7,110 Total operating expenses 18,735 12,425 4,423 417,911 453,494 6,428 459,922 (7,052 ) (302 ) (1,511 ) 8,231 (634 ) (6,436 ) (7,070 )

Other income (loss), net — 2,041 (5,563 ) — (3,522 ) 125 (3,397 )

Interest and financing expense, net (74 ) 69 (267 ) (241 ) (513 ) (2,738 ) (3,251 ) Net income (loss) before equity loss,

minority interest, income taxes and change in accounting principle (7,126 ) 1,808 (7,341 ) 7,990 (4,669 ) (9,049 ) (13,718 )

Income taxes — — — — — (1,944 ) (1,944 )

Minority interest 1,628 2 765 (3,003 ) (608 ) — (608 )

Equity income (loss) (895 ) (12,978 ) (3,798 ) — (17,671 ) 32 (17,639 ) Net Income (Loss) $ (6,393 ) $ (11,168 ) $ (10,374 ) $ 4,987 $ (22,948 ) $ (10,961 ) $ (33,909 )

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24



Product sales $ 5,728 $ — $ 1,305 $ 419,718 $ 426,751 $ — $ 426,751

Service sales 11,093 — 1,855 68,991 81,939 — 81,939

Other — 6,253 — — 6,253 81 6,334 16,821 6,253 3,160 488,709 514,943 81 515,024

Operating expenses

Cost of sales — product 331 — 473 381,824 382,628 — 382,628

Cost of sales — service 8,635 — 450 43,410 52,495 — 52,495

Selling and service 3,161 — 1,645 31,298 36,104 — 36,104


Depreciation and amortization 821 106 753 5,720 7,400 2,366 9,766 Total operating expenses 15,971 6,425 3,940 484,501 510,837 12,768 523,605 850 (172 ) (780 ) 4,208 4,106 (12,687 ) (8,581 )

Other loss, net — (10,487 ) (11,275 ) — (21,762 ) (6,538 ) (28,300 )


minority interest and income taxes 806 (10,651 ) (12,060 ) 3,460 (18,445 ) (22,191 ) (40,636 )

Income taxes — — — — — (3,071 ) (3,071 )

Minority interest — — — (1,248 ) (1,248 ) — (1,248 )

Equity loss — (29,514 ) (6,118 ) — (35,632 ) (29,885 ) (65,517 ) Net Income (Loss) $ 806 $ (40,165 ) $ (18,178 ) $ 2,212 $ (55,325 ) $ (55,147 ) $ (110,472 )

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Six Months Ended June 30, 2002

25



Product sales $ 2,865 $ 1,948 $ 2,125 $ 609,559 $ 616,497 $ — $ 616,497

Service sales 17,553 10,594 3,882 143,531 175,560 — 175,560

Other — 11,562 — — 11,562 37 11,599 20,418 24,104 6,007 753,090 803,619 37 803,656

Operating expenses

Cost of sales – product 457 979 32 556,549 558,017 — 558,017

Cost of sales – service 13,007 7,447 830 92,013 113,297 — 113,297

Selling and service 11,151 1,678 4,459 45,735 63,023 — 63,023

General and administrative 7,393 14,105 1,145 36,278 58,921 11,853 70,774

Depreciation and amortization 1,214 1,762 1,383 9,474 13,833 678 14,511 Total operating expenses 33,222 25,971 7,849 740,049 807,091 12,531 819,622

(12,804 ) (1,867 ) (1,842 ) 13,041 (3,472 ) (12,494 ) (15,966 )

Other loss, net (16 ) 5,228 (14,265 ) — (9,053 ) 125 (8,928 )

Interest and financing expense, net (150 ) (135 ) (343 ) (550 ) (1,178 ) (7,518 ) (8,696 ) Net income (loss) before equity loss,

minority interest and income taxes (12,970 ) 3,226 (16,450 ) 12,491 (13,703 ) (19,887 ) (33,590 )

Income taxes — — — — — (3,062 ) (3,062 )

Minority interest 2,274 135 765 (4,623 ) (1,449 ) — (1,449 )

Equity loss (1,958 ) (27,458 ) (6,999 ) — (36,415 ) (131 ) (36,546 ) Net Income (Loss) before cumulative

effect of change in accounting principle (12,654 ) (24,097 ) (22,684 ) 7,868 (51,567 ) (23,080 ) (74,647 )

Cumulative effect of change in accounting principle (21,815 ) — — 425 (21,390 ) — (21,390 )

Net Income (Loss) $ (34,469 ) $ (24,097 ) $ (22,684 ) $ 8,293 $ (72,957 ) $ (23,080 ) $ (96,037 )

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26



Product sales $ 7,207 $ — $ 2,928 $ 902,079 $ 912,214 $ — $ 912,214

Service sales 22,173 — 3,732 140,918 166,823 — 166,823

Other — 12,801 — — 12,801 161 12,962 29,380 12,801 6,660 1,042,997 1,091,838 161 1,091,999

Operating expenses

Cost of sales – product 1,735 — 959 822,095 824,789 — 824,789

Cost of sales – service 16,880 — 832 91,744 109,456 — 109,456



Depreciation and amortization 1,504 176 1,460 11,389 14,529 4,931 19,460 Total operating expenses 32,379 12,915 7,944 1,033,905 1,087,143 23,366 1,110,509 (2,999 ) (114 ) (1,284 ) 9,092 4,695 (23,205 ) (18,510 )

Other loss, net — (13,329 ) (17,708 ) — (31,037 ) (6,538 ) (37,575 )

Interest and financing expense, net (105 ) 20 (83 ) (2,477 ) (2,645 ) (5,857 ) (8,502 ) Net income (loss) before equity loss,

minority interest and income taxes (3,104 ) (13,423 ) (19,075 ) 6,615 (28,987 ) (35,600 ) (64,587 )

Income taxes — — — — — 6,186 6,186


Equity loss — (67,076 ) (150,924 ) — (218,000 ) (81,516 ) (299,516 ) Net Income (Loss) $ (3,104 ) $ (80,499 ) $ (169,999 ) $ 4,317 $ (249,285 ) $ (110,930 ) $ (360,215 )

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Acquisitions by the Company

In June 2002, the Company acquired a majority ownership interest in ChromaVision Medical Systems for $16.2 million in cash, including $9.8 million to purchase shares of preferred stock from existing shareholders. ChromaVision’s product, Automated Cellular Imaging Systems, substantially improves the accuracy, sensitivity and reproducibility of cell imaging.

In April 2002, the Company acquired a majority ownership interest in Mantas for $14.5 million in cash. Mantas provides comprehensive monitoring and analysis of every transaction to detect and discover behaviors of interest through its software products.

The Company has not completed the allocation of the purchase price of these acquisitions. Therefore, the allocation of the purchase price could be adjusted once the valuation of assets acquired and liabilities assumed is completed.

In January 2002, the Company acquired a majority ownership interest in Protura Wireless for $4 million in cash. Protura has developed patent-pending technology that makes it possible for cellular manufacturers to switch from cumbersome external antennas to Protura internal antennas without losing performance.

In October 2001, the Company acquired a majority ownership interest in Agari Mediaware for $5 million in cash. Agari provides middleware software that makes it possible to quickly integrate disparate applications that store and process rich media, documents or any digital content.

The Company believes that these acquisitions are consistent with its strategy of creating long-term value by acquiring technology-related companies.

These transactions were accounted for as purchases and, accordingly, the Consolidated Financial Statements reflect the operations of these companies from the respective acquisition dates.

27


2002 2001 2002 2001

(in thousands) (in thousands) (unaudited) (unaudited) Other Items

Corporate

Corporate operations $ (9,017 ) $ (13,915 ) $ (20,018 ) $ (25,544 )

Results of operations – dispositions — (29,621 ) — (73,413 )

Goodwill amortization — (8,540 ) — (18,159 )

Income tax (expense) benefit (1,944 ) (3,071 ) (3,062 ) 6,186 $ (10,961 ) $ (55,147 ) $ (23,080 ) $ (110,930 )

18. BUSINESS COMBINATIONS

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Acquisitions by Subsidiaries

During 2001, CompuCom consummated four business combinations (collectively, “the 2001 acquisitions”). The 2001 acquisitions have been accounted for as purchases and, accordingly, the Consolidated Financial Statements reflect the operations of these companies from the respective acquisition dates. The aggregate purchase price of the 2001 acquisitions, net of cash acquired, was approximately $121 million. CompuCom’s allocation of the aggregate purchase price for the 2001 acquisitions consisted of approximately $93 million to current assets, $1 million to non-current assets, $31 million to goodwill, $6 million to intangible assets with definite useful lives, and $10 million to current liabilities. CompuCom used available cash to finance the 2001 acquisitions.

Pro Forma Financial Information

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, 2001, after giving effect to certain adjustments, including amortization of intangibles with definite useful lives, increased interest and financing 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 are not intended to be a projection of future results.

In May 2001, we consummated a definitive agreement with our former Chairman and CEO, Mr. Musser, under which we loaned him $26.5 million. 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. 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, 2002 was approximately $25.0 million. Proceeds received from dispositions of the collateral may not be sufficient to repay the loan in full.

Litigation Arising Out Of The Initial Public Offeri ng of Opus360 Corporation

Beginning in April 2001, the Company, CompuCom and a former officer of the Company who served 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.

28


2002 2001 2002 2001

(in thousands except per share data) (unaudited)

Total revenues $ 454,691 $ 538,471 $ 810,338 $ 1,139,354

Net loss $ (35,332 ) $ (112,751 ) $ (99,147 ) $ (364,779 )

Diluted loss per share $ (0.31 ) $ (0.97 ) $ (0.85 ) $ (3.12 )

19. RELATED PARTY TRANSACTIONS

20. COMMITMENTS AND CONTINGENCIES

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The cases are brought against Opus360, its officers and directors (including the former Company officer), the Company, 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 need for additional financing in the 12 month period following the initial public offering; 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. The cases have been consolidated into a single proceeding and the court has approved the designation of a lead plaintiff and the retention of lead plaintiffs’ counsel. Plaintiffs have filed a consolidated and amended complaint. Safeguard and the other defendants have moved to dismiss this complaint for failure to state a claim upon which relief may be granted. 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.

Safeguard Scientifics Securities Litigation

On June 26, 2001, the Company and Warren V. Musser, the Company’s former 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, the loan to Mr. Musser, the guarantee of certain margin debt 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.

On August 17, 2001, a second putative class action was filed against the Company and Mr. Musser asserting claims similar to those brought in the first proceeding. In addition, plaintiffs in the second case allege that the defendants failed to disclose possible or actual manipulative aftermarket trading in the securities of the Company’s partner companies, the impact of competition on prospects for one or more of the Company’s partner companies and the Company’s lack of a superior business plan.

These two cases have been consolidated for further proceedings under the name “In Re: Safeguard Scientifics Securities Litigation” and the Court has approved the designation of a lead plaintiff and the retention of lead plaintiffs’ counsel. The plaintiffs have filed a consolidated and amended complaint. On May 23, 2002, the defendants filed a motion to dismiss the consolidated and amended complaint for failure to state claim upon which relief may be granted. 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.

Other

The Company and its subsidiaries are involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position or results of operations.

In connection with its ownership interests in certain affiliates, the Company has guaranteed $7 million of bank loan and other commitments, and has committed capital of approximately $59 million to various affiliates, to be funded over the next several years, including approximately $16 million which is expected to be funded in the next twelve months.

The Company has received distributions as both a general partner and a limited partner from certain private equity funds. Under certain circumstances, the Company may be required to return a portion or all the distributions it received as a general partner to the fund for a further distribution to the funds limited partners.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The statements contained in this Quarterly 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. We do not assume any obligation to update any forward-looking statements or other information contained in this Quarterly 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 an operating company that seeks to create long-term value by acquiring technology-related companies that we develop by providing superior operations and management support. We also develop and operate emerging technology companies through our extensive network of partner companies and private equity funds (collectively, affiliates). We provide the resources to address the challenges facing our partner companies and enable these companies to capitalize on their potential opportunities. These resources include capital, management and operational expertise. We believe that our experience in developing and operating technology companies enables us to identify and attract companies with the greatest potential for success and to assist these companies to become market leaders and create value for us.

In the past, we have focused on early-stage, technology companies in software, communications and e-Services in the “time-to-market” stage of development. Time-to-market is the process of getting from an idea to a commercially viable product, and involves the conception and development of a technology or product.

We shifted our strategy to build on specific paths to value creation for our shareholders. We will first focus on acquiring and developing business and IT services companies where positive and recurring cash flow opportunities exist, as well as the potential for growth and operational improvement. Our goal in this sector is to become self-sustainable from internally generated cash flow. We will build on our base of existing companies in the business and IT services area and will seek to acquire controlling ownership in other service companies, which have the proper profile to allow us to leverage our operational and management expertise in order to maximize the companies’ cash generating potential. We are focusing on building software companies with compelling technology and market potential for growth in the “time-to-volume” stage of development. Time-to-volume is the process of taking a commercially viable product and building a viable company with distribution channels, a sales and marketing organization, and a corporate infrastructure that has the capability to grow rapidly and achieve market success. Our focus in software will be to provide capital, operating leadership and post-acquisition involvement to build the go-to-market model, and enhance the likelihood of success of these companies. Once progress has been made in the services and software areas, we expect to continue to support entrepreneurs in creating new technologies and applications by acquiring interests in their companies. Our goal in this area will be to continue to allow our shareholders and us to participate in the rewards of value creation inherent in technology innovation. Although this strategy represents a shift in focus for us, the goal of providing long-term shareholder value through operating and managing promising companies to realize their full potential remains the same.

We expect business and IT service companies to provide the operating cash flow for us, existing and to-be-acquired software companies to provide growth and value generation and emerging technologies to allow our shareholders to participate in entrepreneurial new technologies. Our strategy is to create long-term value as an operating company that focuses on technology-related asset acquisitions. These assets will be developed through superior operations and management.

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In order to focus capital resources on our strategy, we have reviewed our investing posture with respect to private equity funds, and have concluded that we likely will not enter into new investment commitments to off-campus funds in the immediate future. We are also evaluating our current participation in off-campus private equity funds. During 2002, we sold our interest in an off-campus fund and reduced our unfunded commitments by over $6 million. We continue to participate in the management of 12 private equity funds which are located on our corporate campus, which have total committed capital of more than $2.6 billion.

The private equity funds help us to provide operational and management support to our partner companies. The private equity funds provide acquisition syndication opportunities, increase our capital base, facilitate strategic partner development and increase our geographic penetration. 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 do not fit our operating strategy to an appropriate fund. The funds may pursue broader investment strategies and may invest at earlier stages and at less significant ownership percentages than us. The diversification within the funds allows us to identify and take advantage of a broader range of emerging technologies, to maintain relationships with a greater number of promising entrepreneurs and to evaluate perceived shifts in technologies.

Our operations are classified into the following operating segments: i) Strategic Private Companies; ii) Other Private Companies and Funds; iii) Public Companies (excluding CompuCom); and iv) CompuCom.

Because we acquire significant interests in technology-related 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 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. These transactions and events include dispositions of, and changes to, our affiliate ownership interests and impairment charges. We do not know if we will report net income in any period.

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 methods: consolidation, equity and cost. The applicable accounting method is generally determined based on our voting interest in the entity.

Our Consolidated Financial Statements include the accounts of the Company and all subsidiaries in which we directly or indirectly own more than 50% of the outstanding voting securities. 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. Minority interest adjusts our consolidated net income (loss) to reflect only our share of the earnings or losses of the consolidated partner company.

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. 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. Under the equity method of accounting, a partner company’s results of operations are not reflected within our Consolidated Statements of Operations; however, our share of the income or losses of the partner company is reflected in Equity Loss in our Consolidated Statements of Operations. When the carrying value of a partner company accounted for under the equity method is reduced to zero, we no longer include our share of losses of that company in our operating results unless we have outstanding guarantee obligations or have committed additional financing. When that company subsequently reports income, we will not record our share of such income until it equals the amount of our share of losses not previously recognized. The share of income or losses is generally based upon our voting ownership of the partner company’s securities, which may be different from the percentage of the economic ownership of the partner company held by us.

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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.

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 the cost method, the Company’s share of the income or losses of such entities is not included in the 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.

Many of our partner companies that we account for under the equity method or consolidation method are technology-related companies with limited operating histories that have not generated significant revenues and have incurred substantial losses in prior years. We expect these losses to continue in 2002. We expect to continue to acquire interests in more technology-related companies that may have operating losses when we acquire them. Additionally, we expect certain of our existing partner companies to continue to invest in their products and services and to recognize operating losses related to those activities.

We periodically assess the impairment of goodwill and other intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors that we consider important which could trigger an impairment review include significant underperformance relative to historical or expected future operating results, significant changes in the manner or use of the acquired assets or the strategy for the overall business, significant negative industry or economic trends or a decline in its stock price for a sustained period. Additionally, 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 then determine whether there has been an other than temporary decline in the carrying value of the affiliate. Impairment charges are determined by comparing the estimated fair value of a partner company with the carrying value. The fair value of our ownership interests in and advances to privately held partner companies is generally determined based on the value at which independent third parties have invested or have committed to invest in these companies, or the value negotiated with the partner company’s founders. The fair value of our ownership interests in private equity funds is generally determined based on the value of our pro rata portion of the funds’ net assets.

We operate in an industry which is rapidly evolving and extremely competitive. It is reasonably possible that our accounting estimates with respect to the 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 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 is significantly influenced by the consolidated results of operations of CompuCom, which we consolidate based on our 60% voting interest.

To understand our net results of operations and financial position without the effect of consolidating our consolidated partner companies, please refer to Note 16 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

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companies is included in Equity Loss in the Parent Company Statements of Operations. The carrying value of these companies is included in Ownership Interests In and Advances to Affiliates on the Parent Company Balance Sheets.

Although the Parent Company Statements of Operations and Balance Sheets presented in Note 16 reflect our historical results, they are not necessarily indicative of future parent company balance sheets and statements of operations.

Net Results of Operations

Our reportable segments include i) Strategic Private Companies, which includes those companies that we focus on providing superior operational and management support with the goal of accelerating value creation; ii) Public Companies (excluding CompuCom), which includes the results of operations of our publicly-traded companies (excluding CompuCom); iii) CompuCom, which represents the results of our subsidiary, CompuCom; and iv) Other Private Companies and Funds, which represents other private companies and private equity funds in which we hold an equity interest.

At June 30, 2002, we had ownership in 23 partner companies, which were classified into the following segments:

The percentages above reflect our voting ownership at June 30, 2002. Although we own less than 20% of the voting stock of some of these companies, we accounted for these companies on the equity method as we believe we have the ability to exercise significant influence based on our representation of each company’s board of directors and other factors.

In periods prior to 2002, our reportable segments were General Safeguard Operations, Partner Company Operations and CompuCom Operations. All prior periods have been restated to conform to the current-year presentation. The development of the current segments corresponds to the implementation of our shift in strategic focus announced in early 2002, and represents management’s view of our operations.

The following tables reflect our consolidated operating data by reported segments. Each segment includes the results of the consolidated companies and records our share of income or losses for entities accounted for under the equity method. Segment results also include impairment charges, gains or losses related to the disposition of partner companies and the mark to market of trading securities. All significant intersegment activity has been eliminated. Accordingly, segment results reported exclude the effect of transactions between us and our subsidiaries.

Other items, which include corporate expenses, results of operations of disposed companies, goodwill amortization and income taxes, are reviewed by management independent of segment results.

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Strategic Private Other Private Companies Public Companies Companies and Funds (excluding CompuCom) CompuCom

Consolidated

Agari Mediaware (70%) aligne (100%) Lever8 Solutions (100%) Mantas (63%) Protura (56%) Sotas (75%)

PTM Productions (84%)

Tangram (58%) ChromaVision Medical Systems (51%)

CompuCom (60%)

Equity

Aptas (45%) Kanbay (30%) Nextone (30%) Persona (31%) QuestOne (31%) Zer0to5ive (33%)

DocuCorp (20%) eMerge Interactive (16%) Internet Capital Group (13%) Sanchez (24%) USDATA (34%)

Cost Realtime Media (9%) Pac-West Telecomm (7%)

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34



Product sales $ 2,484 $ 129 $ 827 $ 350,290 $ 353,730 $ — $ 353,730

Service sales 9,199 5,961 2,085 75,852 93,097 — 93,097

Other — 6,033 — — 6,033 (8 ) 6,025 11,683 12,123 2,912 426,142 452,860 (8 ) 452,852

Operating expenses



Selling and service 6,901 860 3,175 22,600 33,536 — 33,536


Depreciation and amortization 794 584 708 4,687 6,773 337 7,110 Total operating expenses 18,735 12,425 4,423 417,911 453,494 6,428 459,922 (7,052 ) (302 ) (1,511 ) 8,231 (634 ) (6,436 ) (7,070 )

Other income (loss), net — 2,041 (5,563 ) — (3,522 ) 125 (3,397 )


minority interest, income taxes and change in accounting principle (7,126 ) 1,808 (7,341 ) 7,990 (4,669 ) (9,049 ) (13,718 )

Income taxes — — — — — (1,944 ) (1,944 )

Minority interest 1,628 2 765 (3,003 ) (608 ) — (608 )

Equity income (loss) (895 ) (12,978 ) (3,798 ) — (17,671 ) 32 (17,639 ) Net Income (Loss) $ (6,393 ) $ (11,168 ) $ (10,374 ) $ 4,987 $ (22,948 ) $ (10,961 ) $ (33,909 )

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Product sales $ 5,728 $ — $ 1,305 $ 419,718 $ 426,751 $ — $ 426,751

Service sales 11,093 — 1,855 68,991 81,939 — 81,939

Other — 6,253 — — 6,253 81 6,334 16,821 6,253 3,160 488,709 514,943 81 515,024

Operating expenses

Cost of sales – product 331 — 473 381,824 382,628 — 382,628




Depreciation and amortization 821 106 753 5,720 7,400 2,366 9,766 Total operating expenses 15,971 6,425 3,940 484,501 510,837 12,768 523,605 850 (172 ) (780 ) 4,208 4,106 (12,687 ) (8,581 )

Other loss, net — (10,487 ) (11,275 ) — (21,762 ) (6,538 ) (28,300 )


minority interest and income taxes 806 (10,651 ) (12,060 ) 3,460 (18,445 ) (22,191 ) (40,636 )

Income taxes — — — — — (3,071 ) (3,071 )


Equity loss — (29,514 ) (6,118 ) — (35,632 ) (29,885 ) (65,517 ) Net Income (Loss) $ 806 $ (40,165 ) $ (18,178 ) $ 2,212 $ (55,325 ) $ (55,147 ) $ (110,472 )

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Product sales $ 2,865 $ 1,948 $ 2,125 $ 609,559 $ 616,497 $ — $ 616,497

Service sales 17,553 10,594 3,882 143,531 175,560 — 175,560

Other — 11,562 — — 11,562 37 11,599 20,418 24,104 6,007 753,090 803,619 37 803,656

Operating expenses



Selling and service 11,151 1,678 4,459 45,735 63,023 — 63,023


Depreciation and amortization 1,214 1,762 1,383 9,474 13,833 678 14,511 Total operating Expenses 33,222 25,971 7,849 740,049 807,091 12,531 819,622 (12,804 ) (1,867 ) (1,842 ) 13,041 (3,472 ) (12,494 ) (15,966 )

Other loss, net (16 ) 5,228 (14,265 ) — (9,053 ) 125 (8,928 )

Interest and financing expense, net (150 ) (135 ) (343 ) (550 ) (1,178 ) (7,518 ) (8,696 ) Net income (loss) before equity loss,

minority interest and income taxes (12,970 ) 3,226 (16,450 ) 12,491 (13,703 ) (19,887 ) (33,590 )

Income taxes — — — — — (3,062 ) (3,062 )

Minority interest 2,274 135 765 (4,623 ) (1,449 ) — (1,449 )

Equity loss (1,958 ) (27,458 ) (6,999 ) — (36,415 ) (131 ) (36,546 ) Net Income (Loss) before cumulative

effect of change

in accounting principle (12,654 ) (24,097 ) (22,684 ) 7,868 (51,567 ) (23,080 ) (74,647 )

Cumulative effect of change

in accounting principle (21,815 ) — — 425 (21,390 ) — (21,390 ) Net Income (Loss) $ (34,469 ) $ (24,097 ) $ (22,684 ) $ 8,293 $ (72,957 ) $ (23,080 ) $ (96,037 )

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Corporate expenses include the costs of providing operations and management support to our partner companies. Results of operations - dispositions includes the results for partner companies which were disposed of prior to the new segments being developed. Goodwill is no longer amortized as a result of the adoption of SFAS 142 effective January 2002.

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Product sales $ 7,207 $ — $ 2,928 $ 902,079 $ 912,214 $ — $ 912,214

Service sales 22,173 — 3,732 140,918 166,823 — 166,823

Other — 12,801 — — 12,801 161 12,962 29,380 12,801 6,660 1,042,997 1,091,838 161 1,091,999

Operating expenses

Cost of sales – product 1,735 — 959 822,095 824,789 — 824,789




Depreciation and amortization 1,504 176 1,460 11,389 14,529 4,931 19,460 Total operating expenses 32,379 12,915 7,944 1,033,905 1,087,143 23,366 1,110,509 (2,999 ) (114 ) (1,284 ) 9,092 4,695 (23,205 ) (18,510 )

Other loss, net — (13,329 ) (17,708 ) — (31,037 ) (6,538 ) (37,575 )

Interest and financing expense, net (105 ) 20 (83 ) (2,477 ) (2,645 ) (5,857 ) (8,502 ) Net income (loss) before equity loss,

minority interest and income taxes (3,104 ) (13,423 ) (19,075 ) 6,615 (28,987 ) (35,600 ) (64,587 )

Income taxes — — — — — 6,186 6,186


Equity loss — (67,076 ) (150,924 ) — (218,000 ) (81,516 ) (299,516 ) Net Income (Loss) $ (3,104 ) $ (80,499 ) $ (169,999 ) $ 4,317 $ (249,285 ) $ (110,930 ) $ (360,215 )


2002 2001 2002 2001

(in thousands) (in thousands) (unaudited) (unaudited) Other Items

Corporate

Corporate operations $ (9,017 ) $ (13,915 ) $ (20,018 ) $ (25,544 )

Results of operations – dispositions — (29,621 ) — (73,413 )

Goodwill amortization — (8,540 ) — (18,159 )

Income tax (expense) benefit (1,944 ) (3,071 ) (3,062 ) 6,186 $ (10,961 ) $ (55,147 ) $ (23,080 ) $ (110,930 )

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Strategic Private Companies

Revenue . Revenue consists of sales by aligne, Lever8 Solutions and Sotas and, for 2002, sales by Agari and Mantas. Revenue decreased $5.1 million and $9.0 million for the three and six months ended June 30, 2002 compared to the prior year periods. Of this decrease, $4.5 million and $7.6 million relate to a decline in consulting revenue at aligne and Lever8 for the three and six months ended June 30, 2002 compared to the prior year period. The decrease is due to reduced demand for IT services and continued market softness. During the first quarter, we integrated two existing partner companies, Palarco, a provider of global IT solutions, and aligne Solutions (formerly K Consultants), an IT management organization, to create a full service IT solutions company, Lever8 Solutions. Lever8 provides tailored software, staffing and infrastructure outsourcing solutions to fit the needs of its clients, which span multiple industries, including pharmaceuticals, consumer packaged goods, manufacturing, healthcare, financial services and technology. The remaining decrease relates to a decline in revenue at SOTAS partially offset by the inclusion of revenue for Mantas subsequent to consolidating its results in April 2002.

Operating Expenses . Operating expenses increased $2.8 million and $0.8 million for the three and six months ended June 30, 2002 compared to the prior year periods. Of the increases, $8.0 million and $10.9 million of operating expenses related to Agari, Mantas and Protura subsequent to consolidating their results in 2002. Excluding these companies, total operating expenses decreased $5.3 million and $10.0 million for the three and six months ended June 30, 2002 compared to the prior year period. This is due to a $1.9 million and $5.3 million decrease in costs at SOTAS and a $3.4 million and $4.7 million decrease in costs at aligne and Lever8 Solutions for the three and six months ended June 30, 2002 compared to the prior year period. During the second half of 2001 and the first half of 2002, these companies took steps to reduce their costs to better align their overall cost structure and organization with anticipated demand for their products and services. These steps, including a reduction in the number of consultants and functional support personnel, were taken as a result of the continued decline in demand for technology services.

Equity Loss . Equity loss for the three and six months ended June 30, 2002 includes our share of Mantas’ results of operations. We acquired a controlling interest in Mantas in April 2002. As a result, we have consolidated Mantas’ results in the second quarter of 2002.

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2002 2001 2002 2001


Revenue $ 11,683 $ 16,821 $ 20,418 $ 29,380

Total operating expenses 18,735 15,971 33,222 32,379 (7,052 ) 850 (12,804 ) (2,999 )

Other loss, net — — (16 ) —

Interest expense, net (74 ) (44 ) (150 ) (105 )

Minority interest 1,628 — 2,274 —

Equity loss (895 ) — (1,958 ) — (6,393 ) 806 (12,654 ) (3,104 )

Cumulative effect of change in accounting principle — — (21,815 ) — $ (6,393 ) $ 806 $ (34,469 ) $ (3,104 )

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Other Private Companies and Funds

Revenue . Revenue includes management fees charged to private equity funds for operational and management services and, in 2002, sales by PTM Productions and Aptas [for the six months ended]. Revenue increased $5.9 million and $11.3 million for the three and six months ended June 30, 2002 compared to the prior year periods. The increase is due to an additional $6.1 million and $12.5 million of revenue related to the operations of PTM and Aptas subsequent to consolidating their results, partially offset by reduced management fees for the three and six months ended June 30, 2002 compared to the prior year period.

Operating Expenses . Operating expenses increased $6.0 million and $13.1 million for the three and six months ended June 30, 2002 compared to the prior year period. The increase is due to an additional $6.2 million and $14.4 million of costs related to the operations of PTM and Aptas subsequent to consolidating their results, partially offset by reduced costs at the private equity funds for the three and six months ended June 30, 2002 compared to the prior year period.

Other Income (Loss), Net . Other income (loss), net includes $2.9 million and $9.0 million for the three and six months ended June 30, 2002 related to the release of escrowed proceeds from the sale of a partner company in 2000. Other income (loss), net also includes $2.6 million and $3.6 million of impairment charges for the three and six months ended June 30, 2002 and $12.1 million and $15.0 million for the three and six months ended June 30, 2001. Impairment charges reflect certain holdings judged to have experienced an other than temporary decline in value.

Equity Loss . Equity loss fluctuates with the number of companies accounted for under the equity method, our voting ownership percentage in these companies and the net results of operations of these companies. Equity loss decreased $16.5 million and $39.6 million for the three and six months ended June 30, 2002 compared to the prior year periods. Of the total decrease, $1.7 million and $11.7 million relate to our share of losses of a private equity funds. An additional $6.3 million and $9.9 million of the decrease relates to impairment charges on affiliates accounted for under the equity method, and $2.3 million and $5.5 million of the decrease is due to discontinuing the recording of equity losses of partner companies whose carrying value was reduced to $0 during 2001. The remaining decline is primarily due to reduced operating losses at certain companies.

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.

As a result, equity losses could continue to be significant. 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 additional material impairment charges in future periods.

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2002 2001 2002 2001


Revenue $ 12,123 $ 6,253 $ 24,104 $ 12,801

Operating expenses 12,425 6,425 25,971 12,915 (302 ) (172 ) (1,867 ) (114 )

Other income (loss), net 2,041 (10,487 ) 5,228 (13,329 )

Interest and financing expense, net 69 8 (135 ) 20

Minority interest 2 — 135 —

Equity loss (12,978 ) (29,514 ) (27,458 ) (67,076 ) $ (11,168 ) $ (40,165 ) $ (24,097 ) $ (80,499 )

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Public Companies (excluding CompuCom)

Revenue and Operating Expenses . Revenue decreased $0.2 million and $0.7 million for the three and six months ended June 30, 2002 compared to the prior year periods. Of the total decline, $0.7 million and $1.2 million relate to Tangram, partially offset by a $0.4 million increase related to the operations of ChromaVision, which was consolidated effective June 2002.

Other Loss, Net.

During the first quarter of 2002, we sold shares of public holdings, primarily Palm, for aggregate net cash proceeds of $13.1 million, and recorded losses of $1.2 million.

We recognized a net gain of $0.5 million and $1.2 million for the three and six months ended June 30, 2002 related to our holdings in Tellabs. This amount reflects a $6.4 million gain on the change in the fair value of the hedging contract, reduced by a $5.9 million loss on the change in fair value of the Tellabs holdings for the three months ended June 30, 2002 and $22.3 million gain on the fair value of the hedging contract, reduced by a $21.1 million loss gain on the fair value of the Tellabs holdings for the six months ended June 30, 2002.

Impairment charges reflect certain equity holdings judged to have experienced an other than temporary decline in value (Note 9).

Equity Loss. Equity loss for the six months ended June 30, 2001 includes $136.5 million related to Internet Capital Group. As of June 30, 2001, as a result of recording our share of Internet Capital Group’s losses, our carrying value was reduced to $0. As a result, we no longer record our share of Internet Capital Group’s operating results in our Consolidated Statements of Operations.

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2002 2001 2002 2001


Revenue $ 2,912 $ 3,160 $ 6,007 $ 6,660

Operating expenses 4,423 3,940 7,849 7,944 (1,511 ) (780 ) (1,842 ) (1,284 )

Other loss, net (5,563 ) (11,275 ) (14,265 ) (17,708 )

Interest and financing expense, net (267 ) (5 ) (343 ) (83 )

Minority interest 765 — 765 —

Equity loss (3,798 ) (6,118 ) (6,999 ) (150,924 ) $ (10,374 ) $ (18,178 ) $ (22,684 ) $ (169,999 )


2002 2001 2002 2001


Gain (loss) on sale of companies $ (17 ) $ 1,374 $ (1,183 ) $ 1,215

Unrealized gain (loss) on Tellabs and related forward sale contracts, net 527 (12,196 ) 1,242 (16,528 )

Unrealized loss on other trading securities (6,015 ) (272 ) (13,718 ) (1,126 )

Impairment charges (58 ) (181 ) (606 ) (1,269 ) $ (5,563 ) $ (11,275 ) $ (14,265 ) $ (17,708 )

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Excluding equity loss attributable to Internet Capital Group, equity loss was $3.8 million and $7.0 million for the three and six months ended June 30, 2002 and $6.1 million and $14.4 million for the three and six months ended June 30, 2001, which represents a decrease of $2.3 million for the three months ended June 30, 2002 and $7.4 million for the six months ended June 30, 2002. This decrease is primarily due to reduced losses at certain partner companies.

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 equity method partner companies are technology-related companies with limited operating histories that have not generated significant revenues and have incurred substantial losses in prior years. We expect these losses to continue in 2002. We expect to continue to acquire interests in more technology-related companies that may have operating losses when we acquire them 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 related to those activities.

As a result, equity losses could continue to be significant. 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 additional material impairment charges in future periods.

CompuCom

In November 2001, CompuCom purchased certain assets and assumed certain liabilities associated with ClientLink, which provides high-end technical consulting, development, deployment and maintenance services. In November 2001, CompuCom acquired Northern NEF, Inc. (NNEF), a Federal systems integrator and solutions provider, whose services include systems engineering, software development, integration, test and training as well as related program management support services to various defense and civilian agencies of the Federal and state governments and commercial accounts. In July 2001, CompuCom purchased certain assets and assumed certain liabilities of Excell Data Corporation. 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.

Revenue. Revenue, which consists of product revenue and service revenue, decreased $63 million or 13% for the three months ended June 30, 2002 and $290 million or 28% for the six months ended June 30, 2002 as compared to the same periods in 2001. Of the total decrease for the three months ended June 30, 2002, $70 million or 17% was attributable to product revenue, which was partially offset by an increase of $7 million or 10% attributable to service revenue. Of the total decrease for the six months ended June 30, 2002, $293 million or 32% was attributable to product revenue, which was partially offset by an increase in service revenue of $3 million or 2% as compared to the same period in 2001. CompuCom attributes the product revenue decrease primarily to general economic conditions that have resulted in lower demand for

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2002 2001 2002 2001


Revenue $ 426,142 $ 488,709 $ 753,090 $ 1,042,997

Cost of Sales 371,904 425,234 648,562 913,839 54,238 63,475 104,528 129,158

Other operating expenses 46,007 59,267 91,487 120,066 8,231 4,208 13,041 9,092

Interest and financing expense, net (241 ) (748 ) (550 ) (2,477 )

Minority interest (3,003 ) (1,248 ) (4,623 ) (2,298 ) 4,987 2,212 7,868 4,317

Cumulative effect of change in accounting principle — — 425 — $ 4,987 $ 2,212 $ 8,293 $ 4,317

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personal computer products mainly from its Fortune 1000 client base. Product revenue was negatively impacted by certain clients electing to purchase product directly from manufacturers. The increase in service revenue was primarily due to services directly related to the 2001 acquisitions, partially offset by a decline in field engineering revenue.

Cost of Sales/Gross Margin. Product gross margin for the three and six months ended June 30, 2002 was 7.5% and 8.7% compared to 9.0% and 8.9% for the same period in 2001. CompuCom believes this decrease is due to an increase in the proportion of lower margin software revenue relative to total product revenue, lower volume incentive dollars from suppliers as well as increased buying from its traditionally larger, higher volume clients as a result of more selective aggressive pricing by CompuCom. Service gross margin remained relatively flat for the three and six months ended June 30, 2002 at 36.9% and 35.9% compared to 37.1% and 34.9% for the same period in 2001.

Due to competitive conditions, CompuCom expects to experience continued pressure on both revenue and gross margin, the result of which may be lower revenue and related gross margin when compared to the comparable prior year period or previous quarter.

Other Operating Expenses. Other operating expenses decreased 22.4% and 23.8% for the three and six months ended June 30, 2002 as compared to the same periods in 2001. CompuCom attributes this decrease to its own cost management efforts related to selling and service expenses and general administrative expenses, including personnel and related costs and infrastructure costs.

Interest and Financing Expense, Net. Interest and financing expense, net was $0.2 million and $0.7 million for the three months ended June 30, 2002 and 2001 and $0.6 million and $2.5 million for the six months ended June 30, 2002 and 2001. The decrease is primarily due to CompuCom’s continued improvement in management of working capital, lower financing requirements due to the decline in product revenues and the effect of lower effective interest rates in the six months ended June 30, 2002 as compared to the six months ended June 30, 2001.

Reconciling Items

Corporate Operations

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 expenses decreased $5.2 million and $8.4 million for the three and six months ended June 30, 2002 when compared to 2001. The decrease is due to certain cost reduction efforts undertaken during 2001, including reduced compensation and travel-related costs as a result of a reduction in headcount and the reduction in the use of outside consulting services.

We issued shares of restricted stock to employees in 2001 and 2002. The value of these shares is recorded as deferred compensation and is recognized as expense on a straight-line basis over the vesting period.

Interest expense, net, decreased $0.2 million for the three months ended June 30, 2002 compared to 2001. The decrease is due to the elimination of accretion of the obligation and amortization of the cost of our initial Tellabs forward sale contract which was settled in March 2002, partially offset by lower interest rates earned on invested balances. Interest expense, net increased $1.7 million for the six months ended June 30, 2002 when compared to 2001. The increased expense is due to lower interest rates earned on invested balances, partially offset by the elimination of financing fees incurred in the first

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2002 2001 2002 2001


General and administrative costs, net $ 5,130 $ 10,300 $ 9,895 $ 18,253

Stock-based compensation 969 21 1,921 21

Depreciation and amortization 337 590 678 1,267

Interest expense, net 2,738 2,966 7,518 5,857

Other (157 ) 38 6 146 $ 9,017 $ 13,915 $ 20,018 $ 25,544

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quarter of 2001 and the elimination of costs associated with the initial Tellabs contract settled in March 2002. Interest includes the accretion of the obligation and amortization of the cost of the two forward sale contracts on our Tellabs holdings entered into in March and August of 1999.

In March 2002, we settled the liability related to our first hedge of our Tellabs holdings by delivering Tellabs shares. We intend to settle the second hedge of our Tellabs holdings by delivering Tellabs shares in August 2002.

Income Taxes. Our consolidated income tax expense recorded for the three and six months ended June 30, 2002, was $1.9 million and $3.1 million, net of recorded valuation allowance of $12.9 million and $27.6 million. We have recorded a valuation allowance to reduce our deferred tax asset to an amount that is more likely than not to be realized in future years. Our consolidated effective tax rate before valuation allowance increased to 34.4% for the three months ended June 30, 2002 compared to 32.5% for the prior year period. For the six months ended June 30, 2002 our consolidated effective tax rate before valuation allowance increased to 34.3% compared to 33.3% for the prior year period. This rate differs from the federal statutory rate due to miscellaneous non-deductible expenses.

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 affiliates, distributions from private equity funds and operating cash flow from our wholly owned business and IT service companies. Our ability to raise proceeds could be adversely affected by market declines and other factors.

Proceeds from sales of and distributions from affiliates for the six months ended June 30, 2002 were $29.8 million.

In May 2002, we entered into a credit agreement providing for borrowings’, issuances of letters of credit and guarantees of up to $25 million. We occasionally use letters of credit to provide transactional support to our partner companies. This credit facility matures in May 2003 and bears interest at the prime rate for outstanding borrowings. The credit facility is subject to an unused commitment fee of 0.125% which is subject to reduction based on deposits maintained at the bank. The facility requires cash collateral equal to two times any outstanding amounts under the facility. This facility provides us additional flexibility to implement our strategy and support our partner companies. As of June 30, 2002, a guarantee totaling $5.0 million was outstanding.

In August 1999, in order to mitigate our market exposure and generate cash, we entered into a forward sale contract related to 3.4 million shares of our holdings in Tellabs common stock. We pledged these shares of Tellabs under a contract that expires in August 2002 and, in return, received cash. In March 2002, we settled $91 million of the liability entered into in connection with our first hedge of our Tellabs holdings by delivering 2.0 million shares of Tellabs. We currently intend to settle the remaining liability of $86 million in August 2002 by delivering the remaining 1.4 million shares. These settlements have no impact on our cash balances.

Our cash and cash equivalents at June 30, 2002 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 May 2001, we consummated a definitive agreement with our former Chairman and CEO, Mr. Musser, under which we loaned him $26.5 million. 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. 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, 2002 was approximately $25.0 million. Proceeds received from dispositions of the collateral may not be sufficient to repay the loan in full.

At June 30, 2002 we have guaranteed $7 million of bank loan and other commitments. Additionally, we have committed capital of approximately $59 million, including commitments made in prior years to various affiliates, to be funded over the next several years, including approximately $16 million which is expected to be funded in the next twelve months.

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CompuCom maintains separate, independent financing arrangements, which are non-recourse to us and are secured by certain assets of CompuCom. During recent years, CompuCom has utilized bank financing arrangements and internally generated funds to fund its cash requirements.

At June 30, 2002, CompuCom has a $25 million working capital facility and a $125 million receivables securitization facility. Consistent with its financing requirements, CompuCom reduced the working capital facility to $25 million in May 2002. The working capital facility, which had a May 2002 maturity date but has been extended to a October 2002 maturity date, bears interest at a rate of LIBOR plus an agreed-upon spread and is secured by a lien on CompuCom’s assets. CompuCom expects the working capital facility to be renewed prior to its maturity date. Availability under the working capital facility is subject to a borrowing base calculation. As of June 30, 2002, availability under the working capital facility was $25 million. No amounts were outstanding under the working capital facility as of June 30, 2002 and December 31, 2001. Terms of the working capital facility limit the amounts available for capital expenditures and dividends. The securitization facility’s pricing is based on a designated short-term interest rate plus an agreed upon spread. The securitization allows CompuCom to sell, on an ongoing basis, its trade accounts receivable to a consolidated, wholly owned special purpose subsidiary (SPS). The risk that CompuCom bears from bad debt losses on trade receivables sold is addressed in its allowance for doubtful accounts. The SPS has sold and, subject to certain conditions, may from time to time sell an undivided ownership interest in the pool of purchased receivables to financial institutions. As collections reduce receivables balances sold, CompuCom may sell interests in new receivables to bring the amount available up to the maximum allowed. CompuCom records these transactions as sales of accounts receivable. These sales are reflected as reductions of accounts receivable on the Consolidated Balance Sheets and are included in Net Cash Provided by Operating Activities on the Consolidated Statements of Cash Flows. CompuCom is retained as servicer of the receivables; however, the cost of servicing the receivables is not material. Amounts outstanding as sold receivables as of June 30, 2002, consisted of two certificates totaling $60 million, one certificate for $10 million which had an April 2002 maturity date but has been extended to a September 2002 maturity date, and one certificate for $50 million with an October 2003 maturity date. CompuCom expects the $10 million certificate to be renewed at its maturity date. Both facilities are subject to CompuCom’s compliance with selected financial covenants and ratios.

CompuCom’s liquidity is 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 have been at times a material factor in CompuCom’s financing needs. As of both June 30, 2002 and December 31, 2001, CompuCom was owed approximately $14 million, respectively, 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.

Net cash provided from operating activities was $30 million for the six months ended June 30, 2002 compared to $174 million during the same prior year period. The decrease was due to a $190 million decline in cash provided by operating activities at CompuCom, primarily due to changes in accounts receivable and inventory when compared to the prior year periods. This decrease was partially offset by a $63 million tax refund received by the Company in 2002.

Consolidated working capital decreased to $302 million at June 30, 2002 compared to $349 million at December 31, 2001. This decrease is primarily due to the sale of Palm shares and the decline in the market value of VerticalNet.

From July 1, 2002 through August 14, 2002, we funded $1.1 million to acquire ownership interests in or make advances to affiliates.

We are involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the our consolidated financial position or results of operations.

Our general operations are not capital 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, 2002.

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Recent Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets”. Under SFAS No. 142, we are required to perform transitional impairment tests for its goodwill and intangible assets with indefinite useful lives as of the date of adoption. Step one of the transitional goodwill impairment test, which compares the fair values of our reporting units to their respective carrying values, will be completed by June 30, 2002. Under step two of SFAS No. 142, any transitional impairment losses for goodwill will be recognized as the cumulative effect of a change in accounting principle in the Consolidated Statements of Operations.

In August 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations” (SFAS 143). SFAS 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. We will adopt SFAS 143 in fiscal year 2003. We do not expect the provisions of SFAS 143 to have any significant impact on our financial condition or results of operations.

In October 2001, the FASB issued SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which supercedes SFAS 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.” We are required to adopt SFAS 144 in fiscal year 2002. We do not expect the adoption of SFAS 144 to have a significant impact on our financial statements.

In April 2002, the FASB issued SFAS No. 145, “Recission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections”. Generally, SFAS 145 is effective for transactions occurring after May 15, 2002. The adoption of SFAS 145 did not have a significant impact on our financial statements.

In July 2002, the FASB issued SFAS No, 146 “Accounting for Costs Associated with Exit or Disposal Activities”. Under SFAS 146, companies will record exit or disposal costs when they are “incurred” and can be measured at fair value, and they will subsequently adjust the recorded liability for changes in estimated cash flow. SFAS 146 is effective prospectively for exit or disposal activities initiated after December 31, 2002.

Factors That May Affect Future Results

Forward-looking statements in this report and those made from time to time by us through our senior management team 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, 2001. These factors include, but are not limited to, the following:

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• The performance of our affiliates, which face risks 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 creating value for our shareholders and the owners of our partner companies by helping our partner companies

grow, and, if and when appropriate, monetizing our interests in certain of the developed partner companies, is dependent on the strength of the public and private capital markets for technology related companies and on the level of activity in the mergers and acquisitions market in the partner companies industry, as well as on the requirements of the Federal securities laws regulating the sale of securities.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to equity price risks on the marketable portion of our securities. These securities include equity positions in companies in the 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, 2002, the fair market value of our holdings in public securities was approximately $221 million (excluding our holdings in Tellabs). A 20% decrease in equity prices would result in an approximate $44 million decrease in the fair value of our publicly traded securities.

The Company has an outstanding forward sale contract related to its holdings in Tellabs. We pledged shares of Tellabs for three years in exchange for 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. We intend to deliver our remaining shares of Tellabs in August 2002 to settle the contract in full. This settlement will have no impact on our cash balances.

CompuCom is exposed to interest rate risk primarily through its receivables securitization and working capital facilities. CompuCom utilizes these facilities to meet its working capital and other financing needs. At June 30, 2002, the securitization facility had borrowings of approximately $60 million, and there were no borrowings on the working capital facility. If CompuCom’s effective interest rate were to increase by 100 basis points, or 1.00%, CompuCom’s annual interest and financing expense would increase by $0.6 million based on CompuCom’s average balances utilized under its facilities during the six months ended June 30, 2002. Our share of this increase would be approximately $0.4 million after deduction for minority interest but before income taxes.

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• 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 ability to execute our strategy. • 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.

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PART II

OTHER INFORMATION

Item 1. Legal Proceedings

Safeguard Scientifics Securities Litigation. On April 5, 2002, plaintiffs filed a consolidated and amended complaint in this litigation described in Item 3 of Safeguard’s Annual Report on Form 10-K for the year ended December 31, 2001 (the “2001 Form 10-K”). On May 23, 2002, the defendants filed a motion to dismiss the consolidated and amended complaint for failure to state claim upon which relief may be granted. Safeguard and the other defendant responded to this complaint on May 23, 2002. While the outcome of this litigation is uncertain, we believe that it has valid defenses to plaintiffs’ claims and intends to defend the lawsuit vigorously.

Except in the case of the Safeguard Scientifics Securities Litigation, there have been no material developments during the quarter in litigation disclosed in the 2001 Form 10-K. 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.

Item 4. Submission of Matters to a Vote of Security Holders

Item 6. Exhibits and Reports on Form 8-K

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The Company held its Annual Meeting of Shareholders on May 22, 2002. At the meeting the shareholders voted in favor of the following items listed in the Proxy Statement dated April 19, 2002 I. ELECTION OF DIRECTORS: FOR WITHHELD

Vincent G. Bell, Jr. 94,692,919 2,049,122

Walter W. Buckley, III 94,713,186 2,028,855

Anthony L. Craig 91,011,481 5,730,560

Robert A. Fox 95,058,476 1,683,565

Robert E. Keith, Jr. 94,200,473 2,541,568

Jack L. Messman 95,213,067 1,528,974

Russell E. Palmer 94,468,908 2,273,133

John W. Poduska, Sr. 94,656,047 2,085,994

(a) Exhibits. 10.1

Loan Agreement dated May 10, 2002 by and among Comerica Bank – California, Safeguard Delaware, Inc. and Safeguard Scientifics (Delaware), Inc. (exhibits omitted)

99.1

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

99.2

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(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, 2002.

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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.

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EXHIBIT 10.1

SAFEGUARD DELAWARE, INC.

SAFEGUARD SCIENTIFICS (DELAWARE), INC.

LOAN AGREEMENT

SAFEGUARD SCIENTIFICS, INC. (Registrant)

Date: August 14, 2002

/s/ Anthony L. Craig

Anthony L. Craig Chief Executive Officer and President

Date: August 14, 2002

/s/ Christopher J. Davis

Christopher J. Davis Managing Director and Chief Financial Officer

This LOAN AGREEMENT is entered into as of May 10,2002, by and between COMERICA BANK-CALIFORNIA ("Bank") and SAFEGUARD DELAWARE, INC. ("Safeguard Delaware") and SAFEGUARD SCIENTIFICS (DELAWARE), INC. ("Safeguard Scientifics"; Safeguard Scientifics and Safeguard Delaware are sometimes referred to, individually, as a "Borrower" and collectively, the "Borrowers").

RECITALS

Borrowers wish to obtain credit from time to time from Bank, and Bank desires to extend credit to Borrowers. This Agreement sets forth the terms on which Bank will advance credit to Borrowers, and Borrowers will repay the amounts owing to Bank.

AGREEMENT

The parties agree as follows:

1. DEFINITIONS AND CONSTRUCTION.

1.1 Definitions. As used in this Agreement, the following terms shall have the following definitions:

"Advance" or "Advances" means a cash advance or cash advances under the Revolving Facility.

"Affiliate" means, with respect to any Person, any Person that owns or controls directly or indirectly such Person, any Person that controls or is controlled by or is under common control with such Person, and each of such Person's senior executive officers, directors, and partners.

"Bank Expenses" means all: reasonable costs or expenses (including reasonable attorneys' fees and expenses) incurred in connection with the preparation, negotiation, administration, and enforcement of the Loan Documents; reasonable Collateral audit fees; and Bank's reasonable attorneys' fees and expenses incurred in amending, enforcing or defending the Loan Documents (including fees and expenses of appeal), incurred before, during and after an Insolvency Proceeding, whether or not suit is brought.

"Borrower's Books" means all of a Borrower's books and records including: ledgers; records concerning Borrower's assets or liabilities, the Collateral, business operations or financial condition; and all computer programs, or tape files, and the equipment, containing such information.

"Business Day" means any day that is not a Saturday, Sunday, or other day on which banks in the State of California or the Commonwealth of Pennsylvania are authorized or required to close.

"Cash Equivalents" means (i) marketable direct obligations issued or unconditionally guaranteed by the United States of America or any agency or any State thereof maturing within one (1) year from the date of acquisition thereof, (ii) commercial paper maturing no more than one (1) year from the date of creation thereof and currently having a rating of at least A-2 or P-2 from either Standard & Poor's Corporation or Moody's Investors Service, (iii) certificates of deposit, time deposits or Euro time deposits maturing no more than one (1) year from the date of investment therein, and (iv) money market accounts.

"Change in Control" means a transaction in which any "person" or "group" (within the meaning of Section 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended) becomes the "beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended), directly or indirectly, of a sufficient number of shares of all classes of stock then outstanding of Borrower ordinarily entitled to vote in the election of directors, empowering such "person" or "group" to elect a majority of the Board of Directors of Borrower, who did not have such power before such transaction.

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"Charter Documents" means, as to each Borrower, its certificate of incorporation and bylaws.

"Closing Date" means the date of this Agreement.

"Code" means the California Uniform Commercial Code in effect from time to time.

"Contingent Obligation" means, as applied to any Person, any direct or indirect liability, contingent or otherwise, of that Person with respect to (i) any indebtedness, lease, dividend, letter of credit or other obligation of another, including, without limitation, any such obligation directly or indirectly guaranteed, endorsed, co-made or discounted or sold with recourse by that Person, or in respect of which that Person is otherwise directly or indirectly liable; (ii) any obligations with respect to undrawn letters of credit issued for the account of that Person; and (iii) all obligations arising under any interest rate, currency or commodity swap agreement, interest rate cap agreement, interest rate collar agreement, or other agreement or arrangement designated to protect a Person against fluctuation in interest rates, currency exchange rates or commodity prices; provided, however, that the term "Contingent Obligation" shall not include endorsements for collection or deposit in the ordinary course of business. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determined amount of the primary obligation in respect of which such Contingent Obligation is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof as determined by such Person in good faith; provided, however, that such amount shall not in any event exceed the maximum amount of the obligations under the guarantee or other support arrangement.

"Credit Extension" means each Advance, Letter of Credit, Private Partner Guaranty or any other extension of credit by Bank for the benefit of Borrowers hereunder.

"Daily Balance" means the amount of the Obligations owed at the end of a given day.

"Event of Default" has the meaning assigned in Article 7.

"GAAP" means generally accepted accounting principles as in effect from time to time.

"Guarantor" means Safeguard Scientifics, Inc.

"Indebtedness" means (a) all indebtedness for borrowed money or the deferred purchase price of property or services, including without limitation reimbursement and other obligations with respect to surety bonds and letters of credit, (b) all obligations evidenced by notes, bonds, debentures or similar instruments, (c) all capital lease obligations and (d) all Contingent Obligations.

"Insolvency Proceeding" means any proceeding commenced by or against any person or entity under any provision of the United States Bankruptcy Code, as amended, or under any other bankruptcy or insolvency law, including assignments for the benefit of creditors, formal or informal moratoria, compositions, extension generally with its creditors, or proceedings seeking reorganization, arrangement, or other relief.

"Investment" means any beneficial ownership of (including stock, partnership interest or other securities) any Person, or any loan, advance or capital contribution to any Person.

"IRC" means the Internal Revenue Code of 1986, as amended, and the regulations thereunder.

"Lien" means any mortgage, lien, deed of trust, charge, pledge, security interest or other encumbrance.

"Loan Documents" means, collectively, this Agreement, any note or notes executed by a Borrower, and any other agreement entered into between a Borrower and Bank in connection with this Agreement, all as amended or extended from time to time.

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"Material Adverse Effect" means a material adverse effect on (i) the business operations or condition (financial or otherwise) of the Borrowers, taken as a whole or (ii) the ability of a Borrower to repay the Obligations or otherwise perform its obligations under the Loan Documents.

"Obligations" means all debt, principal, interest, Bank Expenses and other amounts owed to Bank by a Borrower pursuant to this Agreement or any other agreement, whether absolute or contingent, due or to become due, now existing or hereafter arising, including any interest that accrues after the commencement of an Insolvency Proceeding and including any debt, liability, or obligation owing from a Borrower to others that Bank may have obtained by assignment or otherwise.

"Payment Advance Form" means the form attached hereto in substantially the form of Exhibit B.

"Periodic Payments" means all installments or similar recurring payments that a Borrower may now or hereafter become obligated to pay to Bank pursuant to the terms and provisions of any instrument, or agreement now or hereafter in existence between Borrower and Bank.

"Permitted Indebtedness" means:

(a) Indebtedness of a Borrower in favor of Bank arising under this Agreement or any other Loan Document;

(b) Indebtedness existing on the Closing Date and disclosed in the Schedule;

(c) Guaranties in support of Private Partner Companies;

(d) Indebtedness in the form of equipment leases or purchase money financing for equipment, provided the aggregate outstanding amount of such Indebtedness does not exceed $5,000,000;

(e) Contingent Obligations in the form of hedging agreements entered into in the ordinary course of a Borrower's business on terms reasonably acceptable to Bank; and

(f) Subordinated Debt

(g) Extensions, refinancings, modifications, amendment and restatement of any item of Permitted Indebtedness described in clauses (a) through (f) above; provided that the principal amount thereof is not increased or the terms thereof are not modified to impose more burdensome terms upon Borrower.

"Permitted Liens" means the following:

(a) Any Liens existing on the Closing Date and disclosed in the Schedule or arising under this Agreement or the other Loan Documents;

(b) Liens for taxes, fees, assessments or other governmental charges or levies, either not delinquent or being contested in good faith by appropriate proceedings;

(c) Liens (i) upon or in any equipment acquired or held by a Borrower to secure the purchase price of such equipment or indebtedness incurred solely for the purpose of financing the acquisition of such equipment, or (ii) existing on such equipment at the time of its acquisition, provided that the Lien is confined solely to the property so acquired and improvements thereon, and the proceeds of such equipment;

(d) Liens incurred in connection with the extension, renewal or refinancing of the indebtedness secured by Liens of the type described in clauses (a) through (c) above, provided that any extension, renewal or replacement Lien shall be limited to the property encumbered by the existing Lien and the principal amount of the indebtedness being extended, renewed or refinanced does not increase; and

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(e) Carrier's, warehousemen's, mechanic's, materialmen's, repairmen's or other like Liens imposed by law;

"Person" means any individual, sole proprietorship, partnership, limited liability company, joint venture, trust, unincorporated organization, association, corporation, institution, public benefit corporation, firm, joint stock company, estate, entity or governmental agency.

"Portfolio Company" or "Portfolio Companies" means Persons in which a Borrower or Fund has made and retains Investments in accordance with the Charter Documents.

"Prime Rate" means the variable rate of interest, per annum, most recently announced by Bank, as its "prime rate," whether or not such announced rate is the lowest rate available from Bank.

"Private Partner Company" or "Private Partner Companies" means Persons in which a Borrower or Guarantor has an equity investment, as reported or as will be reported in Guarantor's consolidated financial statements from time to time.

"Private Partner Guaranty" or "Private Partner Guaranties" means one or more guaranties by Borrower for the benefit of Bank.

"Responsible Officer" means each of the individuals or officers of each of the Borrowers listed on Schedule 1 attached hereto (as the same may be modified from time to time).

"Revolving Facility" means the facility under which a Borrower may request Bank to make Advances, as specified in Section 2.1 hereof.

"Revolving Line" means aggregate Credit Extensions of up to Twenty Five Million Dollars ($25,000,000).

"Revolving Maturity Date" means the day before the first anniversary of the Closing Date.

"Schedule" means the schedule of exceptions attached hereto.

"Shares" means shares of stock of the Private Partner Companies.

"Subordinated Debt" means any debt incurred by a Borrower that is subordinated to the debt owing by a Borrower to Bank on terms reasonably acceptable to Bank (and identified as being such by a Borrower and Bank).

"Subsidiary" means any corporation or partnership in which (i) any general partnership interest or (ii) more than 50% of the stock of which by the terms thereof ordinary voting power to elect the Board of Directors, managers or trustees of the entity, at the time as of which any determination is being made, is owned by a Borrower, either directly or through an Affiliate.

1.2 Accounting Terms. All accounting terms not specifically defined herein shall be construed in accordance with GAAP and all calculations made hereunder shall be made in accordance with GAAP. When used herein, the terms "financial statements" shall include the notes and schedules thereto.

2. LOAN AND TERMS OF PAYMENT.

2.1 Credit Extensions,

Borrowers promise to pay to the order of Bank, in lawful money of the United States of America, the aggregate unpaid principal amount of all Credit Extensions made by Bank to each Borrower and/or

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Borrowers hereunder. Borrowers shall also pay interest on the unpaid principal amount of such Credit Extensions at rates in accordance with the terms hereof.

(a) Revolving Advances.

(i) Subject to and upon the terms and conditions of this Agreement, Borrowers may request Advances at any time before the Revolving Maturity Date in an aggregate outstanding amount not to exceed the Revolving Line minus the face amount of outstanding Letters of Credit and minus the face amount of outstanding Private Partner Guaranties. Subject to the terms and conditions of this Agreement, amounts borrowed pursuant to this Section may be repaid and reborrowed at any time prior to the Revolving Maturity Date, at which time all Advances under this Section shall be immediately due and payable. Borrowers may prepay any Advances without penalty or premium. If at any time the aggregate outstanding Advances made under this Section exceed the Revolving Line minus the face amount of outstanding Letters of Credit and minus the face amount of outstanding Private Partner Guaranties, Borrowers shall immediately pay Bank the excess in cash.

(ii) Whenever Borrowers desire an Advance, Borrowers will notify Bank by facsimile transmission or telephone no later than 1:00 p.m. Pacific time, on the Business Day that the Advance is to be made. Each such notification shall be promptly confirmed by a Payment/Advance Form in substantially the form of Exhibit B hereto, together with a statement in form and substance acceptable to Bank setting forth each Borrower's Investments. Bank is authorized to make Advances under this Agreement, based upon instructions received from a Responsible Officer or a designee of a Responsible Officer, or without instructions if in Bank's discretion such Advances are necessary to meet Obligations which have become due and remain unpaid. Bank shall be entitled to rely on any telephonic notice given by a person who Bank reasonably believes to be a Responsible Officer or a designee thereof, and Borrowers shall indemnify and hold Bank harmless for any damages or loss suffered by Bank as a result of such reliance. Bank will credit the amount of Advances made under this Section to a Borrower's deposit account, as directed by the Borrower requesting the Advance.

(b) Letters of Credit.

(i) Subject to the terms and conditions of this Agreement, Bank agrees to issue or cause to be issued letters of credit for the account of Borrower (each, a "Letter of Credit" and collectively, the "Letters of Credit") in an aggregate outstanding face amount not to exceed the Revolving Line. All Letters of Credit shall be, in form and substance, acceptable to Bank in its sole discretion and shall be subject to the terms and conditions of Bank's form of standard application and letter of credit agreement (the "Application"), which Borrower hereby agrees to execute, including Bank's standard fee equal to 0.5% per annum of the face amount of each Letter of Credit. Prior to the Revolving Maturity Date, Borrower shall secure in cash all obligations under any outstanding Letters of Credit on terms acceptable to Bank.

(ii) The obligation of Borrower to reimburse Bank for drawings made under Letters of Credit shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement, the Application, and such Letters of Credit, under all circumstances whatsoever. Borrower shall indemnify, defend, protect, and hold Bank harmless from any loss, cost, expense or liability, including, without limitation, reasonable attorneys' fees, arising out of or in connection with any Letters of Credit, except for expenses caused by Bank's gross negligence or willful misconduct.

(iii) Borrower shall use the Letters of Credit to support the business operations of Borrower and its Affiliates and obligations of the Private Partner Companies.

2.2 Interest Rates, Payments. and Calculations.

(a) Interest Rates. Except as set forth in Section 2.2(b), the Advances shall bear interest on the outstanding daily balance thereof, at a rate equal to the Prime Rate.

(b) Late Fee; Default Rate. If any payment is not made within ten (10) calendar days after the date such payment is due, Borrowers shall pay Bank a late fee equal to the lesser of (i) five percent

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(5%) of the amount of such unpaid amount or (ii) the maximum amount permitted to be charged under applicable law. All Obligations shall bear interest, from and after the occurrence and during the continuance of an Event of Default, at a rate equal to five (5) percentage points above the interest rate applicable immediately prior to the occurrence of the Event of Default.

(c) Payments. Interest hereunder shall be due and payable on the first calendar day of each month during the term hereof. Bank shall, at its option, charge such interest, all Bank Expenses, and all Periodic Payments against any of a Borrower's deposit accounts or against the Revolving Line, in which case those amounts shall thereafter accrue interest at the rate then applicable hereunder. Any interest not paid when due shall be compounded by becoming a part of the Obligations, and such interest shall thereafter accrue interest at the rate then applicable hereunder.

(d) Computation. In the event the Prime Rate is changed from time to time hereafter, the applicable rate of interest hereunder shall be increased or decreased, effective as of the day the Prime Rate is changed, by an amount equal to such change in the Prime Rate. All interest chargeable under the Loan Documents shall be computed on the basis of a three hundred sixty (360) day year for the actual number of days elapsed. All payments shall be free and clear of any taxes, withholdings, duties, impositions or other charges, to the end that Bank will receive the entire amount of any Obligations payable hereunder, regardless of source of payment.

2.3 Crediting Payments. Bank shall credit a wire transfer of funds, check or other item of payment to such deposit account or Obligation as Borrowers specify. After the occurrence and during the continuance of an Event of Default, the receipt by Bank of any wire transfer of funds, check, or other item of payment shall be immediately applied to conditionally reduce Obligations, but shall not be considered a payment on account unless such payment is of immediately available federal funds or unless and until such check or other item of payment is honored when presented for payment. Notwithstanding anything to the contrary contained herein, any wire transfer or payment received by Bank after 12:00 noon Pacific time shall be deemed to have been received by Bank as of the opening of business on the immediately following Business Day. Whenever any payment to Bank under the Loan Documents would otherwise be due (except by reason of acceleration) on a date that is not a Business Day, such payment shall instead be due on the next Business Day, and additional fees or interest, as the case may be, shall accrue and be payable for the period of such extension.

2.4 Fees. Borrowers shall pay to Bank the following:

(a) Facility Fee. A facility fee equal to 0.125% of the difference between the Revolving Line and the average Daily Balance for each quarter, which fee shall be due and payable within ten days of the last day of each such quarter, provided Bank waives such fee for each quarter in which Borrowers, collectively, maintain an average daily balance of at least $5,000,000 in deposit accounts with Bank; and

(b) Bank Expenses. On the Closing Date, all Bank Expenses incurred through the Closing Date, including reasonable attorneys' fees and expenses and, after the Closing Date, all Bank Expenses, including reasonable attorneys' fees and expenses, as and when they become due.

2.5 Additional Costs. In case any law, regulation, treaty or official directive or the interpretation or application thereof by any court or any governmental authority charged with the administration thereof or the compliance with any guideline or request of any central bank or other governmental authority (whether or not having the force of law):

(a) subjects Bank to any tax with respect to payments of principal or interest or any other amounts payable hereunder by a Borrower or otherwise with respect to the transactions contemplated hereby (except for taxes on the overall net income of Bank imposed by the United States of America or any political subdivision thereof);

(b) imposes, modifies or deems applicable any deposit insurance, reserve, special deposit or similar requirement against assets held by, or deposits in or for the account of, or loans by, Bank; or

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(c) imposes upon Bank any other condition with respect to its performance under this Agreement,

and the result of any of the foregoing is to increase the cost to Bank, reduce the income receivable by Bank or impose any expense upon Bank with respect to the Obligations, Bank shall notify Borrowers thereof. Borrowers agrees to pay to Bank the amount of such increase in cost, reduction in income or additional expense as and when such cost, reduction or expense is incurred or determined, upon presentation by Bank of a statement of the amount and setting forth Bank's calculation thereof, all in reasonable detail, which statement shall be deemed true and correct absent manifest error.

2.6 Term. This Agreement shall become effective on the Closing Date and, subject to Section 12.7, shall continue in full force and effect for so long as any Obligations are outstanding. Borrowers may terminate this Agreement at any time upon written notice to Bank and satisfaction of all outstanding obligations. Notwithstanding the foregoing, Bank shall have the right to terminate its obligation to make Credit Extensions under this Agreement immediately and without notice upon the occurrence and during the continuance of an Event of Default.

3. CONDITIONS OF CREDIT EXTENSIONS.

3.1 Conditions Precedent to Initial Credit Extension. The obligation of Bank to make the initial Credit Extension is subject to the condition precedent that Bank shall have received, in form and substance satisfactory to Bank, the following:

(a) this Agreement executed by Borrowers;

(b) a certificate of a Responsible Officer of each Borrower with respect to incumbency and resolutions authorizing the execution and delivery of this Agreement;

(c) a guaranty of the Guarantor;

(d) a copy of the Certificate of Incorporation of each Borrower and Guarantor, certified by the Secretary of State of Delaware;

(e) a good standing certificate for each Borrower and Guarantor, issued by the Secretary of State of Delaware;

(f) an opinion of counsel to Borrowers and Guarantor;

(g) payment of the fees and Bank Expenses then due specified in Section 2.4 hereof; and

(h) such other documents, and completion of such other matters, as Bank may reasonably deem necessary or appropriate.

3.2 Conditions Precedent to all Credit Extensions. The obligation of Bank to make each Credit Extension, including the initial Credit Extension, is further subject to the following conditions:

(a) timely receipt by Bank of the Payment/Advance Form as provided in Section 2.1: and

(b) the representations and warranties contained in Section 4 shall be true and correct in all material respects on and as of the date of such Payment/Advance Form and on the effective date of each Credit Extension as though made at and as of each such date, and no Event of Default shall have occurred and be continuing, or would exist after giving effect to such Credit Extension. The making of each Credit Extension

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shall be deemed to be a representation and warranty by Borrower on the date of such Credit Extension that the facts referred to in this Section 3.2 are accurate.

4. REPRESENTATIONS AND WARRANTIES.

Each Borrower represents and warrants as follows:

4.1 Due Organization and Qualification. Borrower is a corporation duly existing under the laws of Delaware and qualified and licensed to do business in any state in which the conduct of its business or its ownership of property requires that it be so qualified except where the failure to be so qualified or licensed could not reasonably be expected to have a Material Adverse Effect.

4.2 Due Authorization; No Conflict. The execution, delivery, and performance of the Loan Documents are within Borrower's powers, have been duly authorized, and are not in conflict with nor constitute a breach of any provision contained in any Charter Document, nor will they constitute an event of default under any material agreement to which Borrower is a party or by which Borrower is bound. Borrower is not in default under any agreement to which it is a party or by which it is bound, which default could have a Material Adverse Effect.

4.3 No Prior Encumbrances. Borrower has good and marketable title to its property, free and clear of Liens, except for Permitted Liens.

4.4 Charter Documents. Except for amendments permitted hereby, each Charter Document is in full force and effect in the form presented to Bank as of the Closing Date.

4.5 Name; Location of Chief Executive Office. Except as disclosed in the Schedule, Borrower has not done business under any name other than that specified on the signature page hereof. The chief executive office of Borrower is located at the address indicated in Section 9 hereof.

4.6 Litigation. Except as set forth in the Schedule, there are no actions or proceedings pending by or against Borrower before any court or administrative agency in which an adverse decision could have a Material Adverse Effect.

4.7 No Material Adverse Change in Financial Statements. All consolidated financial statements related to Borrower that Bank has received fairly present in all material respects Borrower's consolidated financial condition as of the date thereof and Borrower's consolidated results of operations for the period then ended. There has not been a material adverse change in the consolidated financial condition of Borrower since the date of the most recent of such financial statements submitted to Bank.

4.8 Solvency, Payment of Debts. Borrower is solvent and able to pay its debts (including trade debts) as they mature.

4.9 Regulatory Compliance. Borrower is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. Borrower is not engaged principally, or as one of the important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulations T and U of the Board of Governors of the Federal Reserve System). Borrower has not violated any statutes, laws, ordinances or rules applicable to it, violation of which could have a Material Adverse Effect.

4.10 Environmental Condition. Except as disclosed in the Schedule, none of Borrower's properties or assets has ever been used by Borrower or, to the best of Borrower's knowledge, by previous owners or operators, in the disposal of, or to produce, store, handle, treat, release, or transport, any hazardous waste or hazardous substance other than in accordance with applicable law; to the best of Borrower's knowledge, none of Borrower's properties or assets has ever been designated or identified in any manner pursuant to any environmental protection statute as a hazardous waste or hazardous substance disposal site, or a candidate for closure pursuant to any environmental protection statute; no lien arising under any environmental protection statute has attached to any

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revenues or to any real or personal property owned by Borrower; and Borrower has not received a summons, citation, notice, or directive from the Environmental Protection Agency or any other federal, state or other governmental agency concerning any action or omission by Borrower resulting in the releasing, or otherwise disposing of hazardous waste or hazardous substances into the environment.

4.11 Taxes. Borrower has filed or caused to be filed all tax returns required to be tiled, and has paid, or has made adequate provision for the payment of, all taxes reflected therein.

4.12 Government Consents. Borrower has obtained all consents, approvals and authorizations of, made all declarations or filings with, and given all notices to, all governmental authorities that are necessary for the continued operation of Borrower's business as currently conducted, the failure to obtain which could have a Material Adverse Effect.

4.13 Full Disclosure. No representation, warranty or other statement made by Borrower in any certificate or written statement furnished to Bank contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained in such certificates or statements not misleading in light of the circumstances in which they were made.

5. AFFIRMATIVE COVENANTS.

Each Borrower covenants and agrees that, until payment in full of all outstanding Obligations, and for so long as Bank may have any commitment to make a Credit Extension hereunder, Borrower shall do all of the following:

5.1 Good Standing. Borrower shall maintain its corporate existence in its jurisdiction of incorporation and maintain qualification in each jurisdiction in which the failure to so qualify could have a Material Adverse Effect. Borrower shall maintain in force all licenses, approvals and agreements, the loss of which could have a Material Adverse Effect.

5.2 Government Compliance. Borrower shall comply with all statutes, laws, ordinances and government rules and regulations to which it is subject, noncompliance with which could have a Material Adverse Effect.

5.3 Financial Statements, Reports, Certificates. Borrower shall deliver to Bank:

(a) as soon as available, but in any event within forty five (45) days after the last day of each fiscal quarter ending March 31, June 30 and September 30, (i) Guarantor's report on Form 10-Q filed or required to be filed with the Securities and Exchange Commission, (ii) Guarantor-prepared consolidating financial statements of Guarantor and its Subsidiaries prepared in accordance with GAAP, consistently applied, and (iii) a Compliance Certificate in substantially the form of Exhibit B attached hereto;

(b) as soon as available, but in any event by March 31 after the end of each Borrower's fiscal year, (i) Guarantor's report on Form 10-K filed or required to be filed with the Securities and Exchange Commission, (ii) Guarantor-prepared consolidating financial statements of Guarantor and Borrowers prepared in accordance with GAAP, consistently applied, and (iii) a Compliance Certificate in substantially the form of Exhibit B attached hereto;

(c) promptly upon receipt of notice thereof, a report of any legal actions pending or threatened against Borrower that is reasonably likely to result in damages or costs to Borrower of One Million Dollars ($1,000,000) or more; and

(d) such other financial information as Bank may reasonably request from time to time, including financial information on Private Partner Companies.

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5.4 Charter Documents. Borrower shall cause the Charter Documents to remain in full force and effect in the form presented to Bank on the Closing Date.

5.5 Taxes. Borrower shall make, due and timely payment or deposit of all material federal, state, and local taxes, assessments, or contributions required of it by law, and will execute and deliver to Bank, on demand, appropriate certificates attesting to the payment or deposit thereof; and Borrower will make, timely payment or deposit of all material tax payments and withholding taxes required of it by applicable laws, and will, upon request, furnish Bank with proof satisfactory to Bank indicating that Borrower has made such payments or deposits; provided that Borrower need not make any payment if the amount or validity of such payment is contested in good faith by appropriate proceedings and is reserved against (to the extent required by GAAP) by Borrower.

5.6 Insurance. Borrower shall maintain insurance relating to Borrower's business in amounts and of a type that are customary to businesses similar to Borrower's All such policies of insurance shall be in such form, with such companies and in such amounts as may be reasonably satisfactory to Bank.

5.7 Unrestricted Cash. The sum of (i) the amount that Borrowers maintain in unrestricted deposit accounts maintained by Bank or in certificates of deposit issued by Bank, plus (ii) unrestricted cash and Cash Equivalents on their balance sheets (exclusive of amounts counted in (i)) shall at all times during the term of this Agreement be at least Fifty Million Dollars ($50,000,000).

5.8 Depository Balances. At all times during the term of this Agreement, Borrowers, collectively, shall maintain in unrestricted deposit accounts maintained by Bank, or in certificates of deposit issued by Bank, a balance of cash and Cash Equivalents that is at least two (2.0) times the outstanding balance of the Credit Extensions. Borrowers shall maintain their principal depository accounts with Bank.

6. NEGATIVE COVENANTS.

Each Borrower covenants and agrees that, until payment in full of the outstanding Obligations or for so long as Bank may have any commitment to make any Credit Extensions, such Borrower will not do any of the following without the prior consent of Bank:

6.1 Dispositions. Convey, sell, lease, transfer or otherwise dispose of (collectively, a "Transfer") all or any part of its business or property, other than Transfers of securities, including debt and equity securities and partnership interests, in the ordinary course of Borrowers' businesses.

6.2 Change in Business; Change in Control or Executive Office. Engage in any business other than the businesses currently engaged in by Borrowers and any business substantially similar or related thereto (or incidental thereto); suffer a Change in Control; or change its state of incorporation; or, except upon thirty (30) days prior written notification to Bank, relocate its chief executive office.

6.3 Mergers or Acquisitions. Merge or consolidate with or into any other business organization, or acquire all or substantially all of the capital stock or property of another Person other than Private Partner Companies. Notwithstanding the foregoing, this Section 6.3 shall not apply to (i) transactions in which all outstanding Obligations are satisfied in full concurrent with the closing of that transaction, and any commitment by Bank to make any additional Credit Extensions is terminated, and (ii) cash investment into and acquisition of Private Partner Companies made in the ordinary course of Borrowers' businesses. Notwithstanding the foregoing, no Borrower's interests in any Private Partner Company shall not be deemed in violation of this Section 6.3.

6.4 Impairment Charges. Impairment charges relating to Private Partner Companies on a cumulative basis during the term of this Agreement, excluding mandatory FASB 142 charges, shall not exceed $50,000,000.

6.5 Indebtedness. Create, incur, assume or be or remain liable with respect to any Indebtedness other than Permitted Indebtedness.

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6.6 Encumbrances. Create, incur, assume or suffer to exist any Lien with respect to any of its property, or assign or otherwise convey any right to receive income other than Permitted Liens.

6.7 Distributions. Pay any dividends or make any other distribution or payment on account of or in redemption, retirement or purchase of any capital stock, membership unit or partnership interests, except that Borrower may make distributions in accordance with its Charter Documents in the ordinary course of Borrower's business as long as an Event of Default does not exist prior to such distributions or would not exist after giving effect to such distributions.

6.8 Transactions with Affiliates. Directly or indirectly enter into or permit to exist any material transaction with any Affiliate of Borrower except for transactions that are in the ordinary course of Borrower's business or as disclosed in Guarantor's Annual Report on Form 10k and related proxy statement, upon fair and reasonable terms that are no less favorable to Borrower than would be obtained in an arm's length transaction with a non-affiliated Person.

6.9 Subordinated Debt. Make any payment in respect of any Subordinated Debt if an Event of Default exists at the time of such proposed payment or would exist after giving effect thereto.

6.10 Compliance. Become an "investment company" or be controlled by an "investment company," within the meaning of the Investment Company Act of 1940, or become principally engaged in, or undertake as one of its important activities, the business of extending credit for the purpose of purchasing or carrying margin stock, or use the proceeds of any Credit Extension for such purpose; or fail to comply with, or violate any, law or regulation, which failure or violation could have a Material Adverse Effect.

7. EVENTS OF DEFAULT.

Any one or more of the following events shall constitute an Event of Default under this Agreement:

7.1 Payment Default. If a Borrower fails to pay, within five (5) Business Days of the date due, any of the non-principal or non-interest Obligations hereunder, or fails to pay, when due, any of the principal or interest Obligations hereunder;

7.2 Covenant Default. If a Borrower fails to perform any obligation under Article 5 or violates any of the covenants contained in Article 6 of this Agreement, or fails or neglects to perform, keep, or observe any other term, provision, condition, covenant, or agreement contained in this Agreement, in any of the Loan Documents, or in any other present or future agreement between a Borrower and Bank and as to any default under such other term provision, condition, covenant or agreement that can be cured, has failed to cure such default within twenty (20) days after Borrower receives notice thereof or any officer of Borrower becomes aware thereof;

7.3 Borrower Composition. If a Borrower is dissolved or any action is taken to effect such dissolution, or if a Change in Control occurs, or if a Borrower's or Guarantor's existence is otherwise terminated or any action is taken to effect such termination;

7.4 Material Adverse Effect. If any circumstance occurs that could reasonably be expected to have a Material Adverse Effect;

7.5 Attachment. If any portion of a Borrower's assets is attached, seized, subjected to a writ or distress warrant, or is levied upon, or comes into the possession of any trustee, receiver or person acting in a similar capacity and such attachment, seizure, writ or distress warrant or levy has not been removed, discharged or rescinded within ten (10) days, or if a Borrower is enjoined, restrained, or in any way prevented by court order from continuing to conduct all or any material part of its business affairs, or if a judgment or other claim becomes a lien or encumbrance upon any material portion of a Borrower's assets, or if a notice of lien, levy, or assessment is filed of record with respect to any of a Borrower's assets by the United States Government, or any department, agency, or instrumentality thereof, or by any state, county, municipal, or governmental agency, and the same is not paid within

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ten (10) days after a Borrower receives notice thereof, provided that none of the foregoing shall constitute an Event of Default where such action or event is stayed or an adequate bond has been posted pending a good faith contest by a Borrower (provided that no Credit Extensions will be required to be made during such cure period);

7.6 Insolvency or Bankruptcy. If a Borrower becomes insolvent, or if an Insolvency Proceeding is commenced by a Borrower, or if an Insolvency Proceeding is commenced against a Borrower and is not dismissed or stayed within thirty (30) days (provided that no Credit Extensions will be made prior to the dismissal of such Insolvency Proceeding);

7.7 Other Agreements. If there is a default in any agreement to which a Borrower is a party with a third party or parties resulting in a right by such third party or parties, whether or not exercised, to accelerate the maturity of any Indebtedness in an amount in excess of Two Million Dollars ($2,000,000) or that could have a Material Adverse Effect;

7.8 Subordinated Debt. If a Borrower makes any payment on account of Subordinated Debt, except to the extent such payment is allowed under any subordination agreement entered into with Bank;

7.9 Judgments. If a judgment or judgments for the payment of money in an amount, individually or in the aggregate, of at least Two Million Dollars ($2,000,000) shall be rendered against a Borrower and shall remain unsatisfied and unstayed for a period of ten (10) days (provided that no Credit Extensions will be made prior to the satisfaction or stay of such judgment);

7.10 Misrepresentations. If any material misrepresentation or material misstatement exists now or hereafter in any warranty or representation set forth herein or in any certificate delivered to Bank by any Responsible Officer pursuant to this Agreement or to induce Bank to enter into this Agreement or any other Loan Document; or

7.11 Guaranty. If the Guaranty ceases for any reason to be in full force and effect, or the Guarantor fails to perform any obligation under the Guaranty, or any misrepresentation or material misstatement exists now or hereafter in any warranty or representation set forth in the Guaranty or in any certificate delivered to Bank in connection with the Guaranty, or the Guarantor revokes or purports to revoke its obligations under the Guaranty, or if any of the circumstances or events described in any of Sections 7.3 through 7.10 occurs with respect to the Guarantor or its property.

8. BANK'S RIGHTS AND REMEDIES.

8.1 Rights and Remedies. Upon the occurrence and during the continuance of an Event of Default, Bank may, at its election, without notice of its election and without demand, do any one or more of the following, all of which are authorized by Borrowers:

(a) Declare all Obligations, whether evidenced by this Agreement, by any of the other Loan Documents, or otherwise, immediately due and payable (provided that upon the occurrence of an Event of Default described in Section 7.6, all Obligations shall become immediately due and payable without any action by Bank); and

(b) Cease advancing money or extending credit to or for the benefit of a Borrower under this Agreement or under any other agreement between a Borrower and Bank.

8.2 Right of Setoff; Deposit Accounts. Upon and after the occurrence of any Event of Default, Bank is hereby authorized by each Borrower, at any time and from time to time, (a) to set off against, and to appropriate and apply to the payment of, the obligations and liabilities of a Borrower under the Loan Documents (whether matured or unmatured, fixed or contingent or liquidated or unliquidated) any and all amounts owing by Bank to a Borrower (whether payable in U.S. Dollars or any other currency, whether matured or unmatured, and, in the case of deposits, whether general or special, time or demand and however evidenced) and (b) pending any such action, to the extent necessary, to hold such amounts as collateral to secure such obligations and liabilities and to

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return as unpaid for insufficient funds any and all checks and other items drawn against any deposits so held as Bank in its sole discretion may elect.

8.3 Power of Attorney. Effective only upon the occurrence and during the continuance of an Event of Default, each Borrower hereby irrevocably appoints Bank (and any of Bank's designated officers, or employees) as Borrower's true and lawful attorney to: (a) endorse Borrower's name on any checks or other forms of payment or security that may come into Bank's. The appointment of Bank as each Borrower's attorney in fact, and each and every one of Bank's rights and powers, being coupled with an interest, is irrevocable until all of the Obligations have been fully repaid and performed and Bank's obligation to provide advances hereunder is terminated.

8.4 Remedies Cumulative. Bank's rights and remedies under this Agreement, the Loan Documents, and all other agreements shall be cumulative. Bank shall have all other rights and remedies not inconsistent herewith as provided under the Code, by law, or in equity. No exercise by Bank of one right or remedy shall be deemed an election, and no waiver by Bank of any Event of Default on a Borrower's part shall be deemed a continuing waiver. No delay by Bank shall constitute a waiver, election, or acquiescence by it. No waiver by Bank shall be effective unless made in a written document signed on behalf of Bank and then shall be effective only in the specific instance and for the specific purpose for which it was given.

8.5 Demand; Protest. Each Borrower waives demand, protest, notice of protest, dishonor, notice of any default, nonpayment at maturity, release, compromise, settlement, extension, or renewal of accounts, documents, instruments, chattel paper, and guarantees at any time held by Bank on which a Borrower may in any way be liable.

9. NOTICES.

Unless otherwise provided in this Agreement, all notices or demands by any party relating to this Agreement or any other agreement entered into in connection herewith shall be in writing and (except for financial statements and other informational documents which may be sent by first-class mail, postage prepaid) shall be personally delivered or sent by a recognized overnight delivery service, certified mail, postage prepaid, return receipt requested, or by telefacsimile to Borrowers or to Bank, as the case may be, at its addresses set forth below:

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If to any Borrower: c/o Safeguard Delaware, Inc. 435 Devon Park Drive 800 The Safeguard Building Wayne, PA 19087 Attn: Christopher J. Davis FAX: (610) 293-0601 with a copy to: Safeguard Scientifics, Inc. 435 Devon Park Drive 800 The Safeguard Building Wayne, PA 19087 Attn: N. Jeffrey Klauder, Managing Director and General Counsel FAX: (610) 293-0601 If to Bank: Comerica Bank-California 226 Airport Parkway San Jose, CA 95110-1024 Attn: Corporate Banking Center FAX: (408) 451-8586

The parties hereto may change the address at which they are to receive notices hereunder, by notice in writing in the foregoing manner given to the other. A notice given to a party hereunder shall be effective regardless of whether a copy of such notice is given to any other Person.

10. CO-BORROWERS

10.1 Primary Obligation. This Agreement is a primary and original obligation of each Borrower and shall remain in effect notwithstanding future changes in conditions, including any change of law or any invalidity or irregularity in the creation or acquisition of any Obligations or in the execution or delivery of any agreement between Bank and any Borrower. Each Borrower shall be liable for existing and future Obligations as fully as if all of the Advances were advanced to such Borrower. Bank may rely on any certificate or representation made by any Borrower as made on behalf of, and binding on, all Borrowers, including without limitation Advance Request Forms and Compliance Certificates.

10.2 Enforcement of Rights. Borrowers are jointly and severally liable for the Obligations and Bank may proceed against one or more of the Borrowers to enforce the Obligations without waiving its right to proceed against any of the other Borrowers.

10.3 Borrowers as Agents. Each Borrower appoints the other Borrower as its agent with all necessary power and authority to give and receive notices, certificates or demands for and on behalf of both Borrowers, to act as disbursing agent for receipt of any Advances on behalf of each Borrower and to apply to Bank on behalf of each Borrower for Advances, any waivers and any consents. This authorization cannot be revoked, and Bank need not inquire as to each Borrower's authority to act for or on behalf of Borrower.

10.4 Subrogation and Similar Rights. Notwithstanding any other provision of this Agreement or any other Loan Document, each Borrower irrevocably waives all rights that it may have at law or in equity (including, without limitation, any law subrogating the Borrower to the rights of Bank under the Loan Documents) to seek contribution, indemnification, or any other form of reimbursement from any other Borrower, or any other Person now or hereafter primarily or secondarily liable for any of the Obligations, for any payment made by the Borrower with respect to the Obligations in connection with the Loan Documents or otherwise and all rights that it might have to benefit from, or to participate in, any security for the Obligations as a result of any payment made by the Borrower with respect to the Obligations in connection with the Loan Documents or otherwise. Any agreement providing for indemnification, reimbursement or any other arrangement prohibited under this Section 10.4 shall be null and void. If any payment is made to a Borrower in contravention of this Section 10.4, such Borrower shall hold such payment in trust for Bank and such payment shall be promptly delivered to Bank for application to the Obligations, whether matured or unmatured.

10.5 Waivers of Notice. Each Borrower waives notice of acceptance hereof; notice of the existence, creation or acquisition of any of the Obligations; notice of an Event of Default; notice of the amount of the Obligations outstanding at any time; notice of intent to accelerate; notice of acceleration; notice of any adverse change in the financial condition of any other Borrower or of any other fact that might increase the Borrower's risk; presentment for payment; demand; protest and notice thereof as to any instrument; default; and all other notices and demands to which the Borrower would otherwise be entitled. Each Borrower waives any defense arising from any defense of any other Borrower, or by reason of the cessation from any cause whatsoever of the liability of any other Borrower. Bank's failure at any time to require strict performance by any Borrower of any provision of the Loan Documents shall not waive, alter or diminish any right of Bank thereafter to demand strict compliance and performance therewith. Nothing contained herein shall prevent Bank from foreclosing on the Lien of any deed of trust, mortgage or other security instrument, or exercising any rights available thereunder, and the exercise of any such rights shall not constitute a legal or equitable discharge of any Borrower. Each Borrower also waives any defense arising from any act or omission of Bank that changes the scope of the Borrower's risks hereunder. Each

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with a copy to: Comerica Bank-California 2420 Sand Hill Road, Suite 102 Menlo Park, CA 94025 Attn: Judith Erwin FAX: (650) 233-3075

Borrower hereby waives any right to assert against Bank any defense (legal or equitable), setoff, counterclaim, or claims that such Borrower individually may now or hereafter have against another Borrower or any other Person liable to Bank with respect to the Obligations in any manner or whatsoever.

10.6 Subrogation Defenses. Each Borrower hereby waives any defense based on impairment or destruction of its subrogation or other rights against any other Borrower and waives all benefits which might otherwise be available to it under California Civil Code Sections 2809, 2810, 2819, 2839, 2845, 2848, 2849, 2850, 2899, and 3433 and California Code of Civil Procedure Sections 580a, 580b, 580d and 726, as those statutory provisions are now in effect and hereafter amended, and under any other similar statutes now and hereafter in effect.

10.7 Right to Settle, Release.

(a) The liability of Borrowers hereunder shall not be diminished by (i) any agreement, understanding or representation that any of the Obligations is or was to be guaranteed by another Person or secured by other property, or (ii) any release or unenforceability, whether partial or total, of rights, if any, which Bank may now or hereafter have against any other Person, including another Borrower, or property with respect to any of the Obligations.

(b) Without notice to any Borrower and without affecting the liability of any Borrower hereunder, Bank may (i) compromise, settle, renew, extend the time for payment, change the manner or terms of payment, discharge the performance of, decline to enforce, or release all or any of the Obligations with respect to a Borrower, (ii) grant other indulgences to a Borrower in respect of the Obligations, (iii) modify in any manner any documents relating to the Obligations with respect to a Borrower, (iv) release, surrender or exchange any deposits or other property securing the Obligations, whether pledged by a Borrower or any other Person, or (v) compromise, settle, renew, or extend the time for payment, discharge the performance of, decline to enforce, or release all or any obligations of any guarantor, endorser or other Person who is now or may hereafter be liable with respect to any of the Obligations.

11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.

This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of California, without regard to principles of conflicts of law. Each Borrower and Bank hereby submit to the jurisdiction of the state and Federal courts located in the County of Santa Clara, State of California for purposes of this Agreement. BORROWERS AND BANK EACH HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.

12. GENERAL PROVISIONS.

12.1 Successors and Assigns. This Agreement shall bind and inure to the benefit of the respective successors and permitted assigns of each of the parties; provided, however, that neither this Agreement nor any rights hereunder may be assigned by a Borrower without Bank's prior written consent, which consent may be granted or withheld in Bank's sole discretion. Bank shall have the right without the consent of or notice to a Borrower to sell, transfer, negotiate, or grant participation in all or any part of, or any interest in, Bank's obligations, rights and benefits hereunder.

12.2 Indemnification. Borrowers shall defend, indemnify and hold harmless Bank and its officers, employees, and agents against: (a) all obligations, demands, claims, and liabilities claimed or asserted by any other party in connection with the transactions contemplated by this Agreement; and (b) all losses or Bank

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Expenses in any way suffered, incurred, or paid by Bank as a result of or in any way arising out of, following, or consequential to transactions between Bank and a Borrower whether under this Agreement, or otherwise (including without limitation reasonable attorneys fees and expenses), except for losses caused by Bank's gross negligence or willful misconduct.

12.3 Time of Essence. Time is of the essence for the performance of all obligations set forth in this Agreement.

12.4 Severability of Provisions. Each provision of this Agreement shall be severable from every other provision of this Agreement for the purpose of determining the legal enforceability of any specific provision.

12.5 Amendments in Writing, Integration. This Agreement cannot be amended or terminated orally. All prior agreements, understandings, representations, warranties, and negotiations between the parties hereto with respect to the subject matter of this Agreement, if any, are merged into this Agreement and the Loan Documents.

12.6 Counterparts. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Agreement.

12.7 Survival. All covenants, representations and warranties made in this Agreement shall continue in full force and effect so long as any Obligations remain outstanding. The obligations of Borrowers to indemnify Bank with respect to the expenses, damages, losses, costs and liabilities described in Section 12.2 shall survive until all applicable statute of limitations periods with respect to actions that may be brought against Bank have run.

[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLAN K]

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written.

SAFEGUARD DELAWARE, INC.

SAFEGUARD SCIENTIFICS (DELAWARE), INC.

COMERICA BANK-CALIFORNIA

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By: /s/ Christopher J. Davis ------------------------------ Title: Managing Director and CFO ---------------------------

By: /s/ Christopher J. Davis ------------------------------ Title: Managing Director and CFO ---------------------------

By: /s/ Stacy Arrigo ------------------------------ Title: Vice President ---------------------------

Exhibit 99.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Safeguard Scientifics, Inc. (the "Company") on Form 10-Q for the quarter ended June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I Anthony L. Craig, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1. The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934, (15 U.S.C. 78m(a)); and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


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Date: August 14, 2002 /s/ ANTHONY L. CRAIG --------------------------------- Anthony L. Craig Chief Executive Officer

Exhibit 99.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Safeguard Scientifics, Inc. (the "Company") on Form 10-Q for the quarter ended June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I Christopher J. Davis, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

3. The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934, (15 U.S.C. 78m(a)); and

4. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


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End of Filing

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Date: August 14, 2002 /s/ CHRISTOPHER J. DAVIS ---------------------------------- Christopher J. Davis Chief Financial Officer