SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Form 10-K
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the Fiscal Year Ended December 31, 2009
Commission File Number 1-5620
Safeguard Scientifics,
Inc.
(Exact name of Registrant as
specified in its charter)
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Pennsylvania
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23-1609753
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer ID
No.)
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435 Devon Park Drive
Building 800
Wayne, PA
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19087
(Zip Code)
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(Address of principal executive
offices)
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(610) 293-0600
(Registrants telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock ($.10 par value)
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the Registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the Registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange
Act. Yes o No þ
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of Registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the Exchange Act. (Check one):
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Large accelerated
filer o
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Accelerated
filer þ
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Non-accelerated
filer o
(Do not check if a smaller reporting company)
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Smaller reporting
company o
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Indicate by check mark whether the Registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
As of June 30, 2009, the aggregate market value of the
Registrants common stock held by non-affiliates of the
registrant was $159,260,690 based on the closing sale price as
reported on the New York Stock Exchange.
The number of shares outstanding of the Registrants Common
Stock, as of March 15, 2010 was 20,465,160.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the definitive proxy statement (the Definitive
Proxy Statement) to be filed with the Securities and
Exchange Commission for the Companys 2010 Annual Meeting
of Shareholders are incorporated by reference into Part III
of this report.
SAFEGUARD
SCIENTIFICS, INC.
FORM 10-K
DECEMBER 31, 2009
2
PART I
Cautionary
Note concerning Forward-Looking Statements
This Annual Report on
Form 10-K
contains forward-looking statements that are based on current
expectations, estimates, forecasts and projections about
Safeguard Scientifics, Inc. (Safeguard or
we), the industries in which we operate and other
matters, as well as managements beliefs and assumptions
and other statements regarding matters that are not historical
facts. These statements include, in particular, statements about
our plans, strategies and prospects. For example, when we use
words such as projects, expects,
anticipates, intends, plans,
believes, seeks, estimates,
should, would, could,
will, opportunity, potential
or may, variations of such words or other words that
convey uncertainty of future events or outcomes, we are making
forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Our
forward-looking statements are subject to risks and
uncertainties. Factors that could cause actual results to differ
materially, include, among others, managing rapidly changing
technologies, limited access to capital, competition, the
ability to attract and retain qualified employees, the ability
to execute our strategy, the uncertainty of the future
performance of our partner companies, acquisitions and
dispositions of companies, the inability to manage growth,
compliance with government regulation and legal liabilities,
additional financing requirements, labor disputes and the effect
of economic conditions in the business sectors in which our
partner companies operate, all of which are discussed in
Item 1A. Risk Factors. Many of these factors
are beyond our ability to predict or control. In addition, as a
result of these and other factors, our past financial
performance should not be relied on as an indication of future
performance. All forward-looking statements attributable to us,
or to persons acting on our behalf, are expressly qualified in
their entirety by this cautionary statement. We undertake no
obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future
events or otherwise, except as required by law. In light of
these risks and uncertainties, the forward-looking events and
circumstances discussed in this report might not occur.
Business
Overview
Safeguards charter is to build value in growth-stage
technology and life sciences businesses by providing partner
companies with capital and a range of strategic, operational and
management resources. Safeguard may participate in expansion
financings, corporate spin-outs, management buy-outs,
recapitalizations, industry consolidations and early-stage
financings. Our vision is to be the preferred catalyst for
creating great technology and life sciences companies.
Throughout this document, we use the term partner
company to generally refer to those companies that we have
an economic interest in and that we are actively involved in
influencing the development of, usually through board
representation in addition to our equity ownership stake. From
time to time, in addition to our partner companies, we also hold
economic interest in other enterprises that we are not actively
involved in the management of.
We strive to create long-term value for our shareholders by
helping partner companies increase their market penetration,
grow revenue and improve cash flow. We focus on companies with
capital requirements of up to $25 million that operate in
two sectors:
Technology including companies focused on
healthcare information technology, financial services technology
and internet/new media businesses that have recurring or
transactional revenue models; and
Life Sciences including companies focused on
molecular and
point-of-care
diagnostics, medical devices/regenerative medicine, specialty
pharmaceuticals and healthcare services.
In 2009, our management team executed against the following
objectives, to:
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Deploy capital in companies within our strategic
focus;
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Build value in partner companies by developing
strong management teams, growing the companies organically and
through acquisitions, and positioning the companies for
liquidity at premium valuations;
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Realize the value of partner companies through
selective, well-timed exits to maximize risk-adjusted
value; and
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Provide the tools needed for investors to fully
recognize the shareholder value that has been created by our
efforts.
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To meet these strategic objectives during 2010, Safeguard will
continue to focus on:
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finding opportunities to deploy our capital in additional
partner companies;
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helping partner companies to achieve additional market
penetration, revenue growth, cash flow improvement and growth in
long-term value; and
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realizing value in our partner companies if and when we believe
doing so will maximize value for our shareholders.
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We incorporated in the Commonwealth of Pennsylvania in 1953. Our
corporate headquarters is located at 435 Devon Park Drive,
Building 800, Wayne, Pennsylvania 19087.
Significant
2009 Highlights
Here are our key developments from 2009:
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During 2009, we deployed $24.9 million in additional
capital to support the growth of ten existing partner companies.
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In March and May, Clarient, Inc. completed a private placement
of $40.0 million of convertible preferred stock with Oak
Investment Partners. The new capital from Oak enabled Clarient
to retire all of its outstanding debt, except for receivable
financing, and provided additional working capital to support
Clarients growth and geographic expansion. As a result of
the transaction, our $30 million mezzanine debt facility
was terminated after Clarient repaid all $19.5 million in
borrowings then outstanding. In addition, the financing released
$12.3 million in cash collateral which supported our
guarantee of Clarient debt with another lender. Our ownership
position was reduced to 47%.
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In July, we deployed $6.7 million in MediaMath, Inc.
leading a $7.2 million financing round. MediaMath has
developed the advertising industrys leading real-time
algorithmic buying platform for display media, utilizing data
and optimization for superior performance.
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In August, we completed a
one-for-six
reverse split of our common stock, reducing the number of shares
outstanding to 20.4 million from 122.3 million. We
believe this transaction broadened our appeal to investors. As
of August 26, 2009, the day prior to the reverse split, the
market price of our common stock was $10.44 on a post-reverse
split basis. As of March 15, 2010, our stock price was
$12.98.
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In the third quarter, we sold 18.4 million shares of
Clarients common stock to a diverse group of institutional
investors. This transaction further reduced our ownership
position in Clarient to 28%. Total proceeds from the sale were
$61.3 million.
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In October, we deployed $5 million in Quinnova
Pharmaceuticals, Inc., leading a $17.4 million financing
round.
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During the third and fourth quarters, we repurchased an
additional $7.8 million in face value of our 2.625%
convertible senior debentures, due March 2024. These
transactions brought our debenture repurchase total to
$71.8 million in face value since 2006 and reduced the
outstanding balance of the original 2004 issue of
$150 million to $78.2 million.
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Our
Strategy
We focus on companies that address the strategic challenges
facing businesses today and the opportunities they present. We
believe these challenges have five general themes:
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Maturity Many existing technologies,
solutions and therapies are reaching the end of their designed
lives or patent protection; the population of the U.S. is
aging; IT infrastructure is maturing and the sectors are
consolidating; and many businesses based on once-novel
technologies are now facing consolidation and other competitive
pressures.
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Migration Many technology platforms
are migrating to newer technologies with changing cost
structures; many medical treatments are moving toward earlier
stage intervention or generics; there is a migration from
generalized treatments to personalized medicine; many business
models are migrating towards different revenue-generation
models, integrating technologies and services; and traditional
media such as newspapers and advertising are migrating online.
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Convergence Many technology and life
sciences businesses are intersecting in fields like medical
devices and diagnostics for targeted therapies. Within life
sciences itself, devices, diagnostics and therapeutics are
converging.
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Compliance Regulatory compliance is
driving buying behavior in technology and life sciences. HIPPA,
Sarbanes-Oxley, the FDA and the SEC are all telling businesses
how to spend money.
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Cost containment The importance of
cost containment grows as healthcare costs and IT infrastructure
maintenance costs grow and as a recessionary dynamic weakens
sectors of the economy.
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These strategic themes tend to drive growth and attract
entrepreneurs who need capital, operational support and
strategic guidance. Safeguard deploys capital, combined with
management expertise, process excellence and marketplace
insight, to provide tangible benefits to our partner companies.
Our corporate staff (29 employees at December 31,
2009) is dedicated to creating long-term value for our
shareholders by helping our partner companies build value and by
finding additional acquisition opportunities.
Identifying
Opportunities
Safeguards
go-to-market
strategy and marketing and sourcing activities are designed to
generate a large volume of high-quality opportunities to acquire
majority or primary shareholder stakes in partner companies. Our
principal focus is on acquiring stakes in growth-stage companies
with attractive growth prospects in the technology and life
sciences sectors. Generally, we prefer candidates:
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operating in large
and/or
growing markets;
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with barriers to entry by competitors, such as proprietary
technology and intellectual property, or other competitive
advantages;
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with capital requirements of up to $25 million; and
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with a compelling strategy for achieving growth.
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Our sourcing efforts are targeted primarily on the eastern
U.S. However, in-bound deal leads generate opportunities
throughout the U.S. and southeastern Canada. Leads come
from a variety of sources, including investment bankers,
syndication partners, existing partner companies and advisory
board members.
Our Technology Group currently targets companies with recurring
revenue, transaction-based or software as a service business
models and companies in the internet/new media, financial
services IT or healthcare IT vertical markets.
Our Life Sciences Group currently targets companies with Product
or Technology-Enabled Service business models and companies in
the molecular and
point-of-care
diagnostics, medical device, regenerative medicine and specialty
pharmaceutical vertical markets.
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We believe there are many opportunities within these business
models and vertical markets, and our sourcing activities are
focused on finding candidate companies and evaluating how well
they align with our criteria. However, we recognize we may have
difficulty identifying candidate companies and completing
transactions on terms we believe appropriate. As a result, we
cannot be certain how frequently we will enter into transactions
with new or existing partner companies.
Competition. We face intense competition from
other companies that acquire, or provide capital to technology
and life sciences businesses. Competitors include venture
capital and, occasionally, private equity investors, as well as
companies seeking to make strategic acquisitions. Many providers
of growth capital also offer strategic guidance, networking
access for recruiting and general advice. Nonetheless, we
believe we are a preferable capital provider to potential
partner companies because our strategy and capabilities offer:
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responsive operational assistance, including strategy design and
execution, business development, corporate development, sales,
marketing, finance, risk management, human resources and legal
support;
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the flexibility to structure minority or majority transactions
with or without debt;
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occasional liquidity opportunities for founders and existing
investors;
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a focus on maximizing risk-adjusted value growth, rather
than absolute value growth within a narrow or
predetermined time frame;
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interim C-level management support, as needed;
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opportunities to leverage Safeguards balance sheet for
borrowing and stability; and
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a record of building value in our partner companies.
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Helping
Our Partner Companies Build Value
We offer operational and management support to each of our
partner companies through our experienced professionals. Our
employees have expertise in business and technology strategy,
sales and marketing, operations, finance, legal and
transactional support. We provide hands-on assistance to the
management teams of our partner companies to support their
growth. We believe our strengths include:
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applying our expertise to support a companys introduction
of new products and services;
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leveraging our market knowledge to generate additional growth
opportunities;
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leveraging our business contacts and relationships; and
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identifying and evaluating potential acquisitions and providing
capital to pursue potential acquisitions to accelerate growth.
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Strategic Support. By helping our partner
companies management teams remain focused on critical
objectives through the provision of human, financial and
strategic resources, we believe we are able to accelerate their
development and success. We play an active role in developing
the strategic direction of our partner companies, including:
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defining short and long-term strategic goals;
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identifying and planning for the critical success factors to
reach these goals;
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identifying and addressing the challenges and operational
improvements required to achieve the critical success factors
and, ultimately, the strategic goals;
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identifying and implementing the business measurements that we
and others will apply to measure a companys
success; and
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providing capital to drive growth.
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Management and Operational Support. We provide
management and operational support, as well as ongoing planning
and development assessment. Our executives and Advisory Board
members provide mentoring,
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advice and guidance to develop partner company management. Our
executives serve on the boards of directors of partner
companies, working with them to develop and implement strategic
and operating plans. We measure and monitor achievement of these
plans through regular operational and financial performance
measurements. We believe these services provide partner
companies with significant competitive advantages within their
respective markets.
Realizing
Value
In general, we will hold our stake in a partner company as long
as we believe the risk-adjusted value of that stake is maximized
by our continued ownership and effort. From time to time, we
engage in discussions with other companies interested in our
partner companies, either in response to inquiries or as part of
a process we initiate. To the extent we believe that a partner
companys further growth and development can best be
supported by a different ownership structure or if we otherwise
believe it is in our shareholders best interests, we may
sell some or all of our stake in the partner company. These
sales may take the form of privately negotiated sales of
securities or assets, public offerings of the partner
companys securities and, in the case of publicly traded
partner companies, sales of their securities in the open market.
We have taken partner companies public through rights offerings
and direct share subscription programs, and we will continue to
consider these (or similar) programs to maximize partner company
value for our shareholders. We expect to use proceeds from these
sales (and sales of other assets) primarily to pursue
opportunities to create new partner company relationships or for
other working capital purposes, either with existing partner
companies or at Safeguard.
Our
Partner Companies
An understanding of our partner companies is important to
understanding Safeguard and its value-building strategy.
Following are descriptions of partner companies in which we
owned a stake at December 31, 2009. The indicated ownership
percentage is presented as of December 31, 2009 and
reflects the percentage of the vote we are entitled to cast
based on issued and outstanding voting securities (on a common
stock equivalent basis), excluding the effect of options,
warrants and convertible debt (primary ownership).
LIFE
SCIENCES PARTNER COMPANIES
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Advanced
BioHealing, Inc. |
(Safeguard Ownership: 28.3%) |
Advanced BioHealing (www.advancedbiohealing.com), is a leader in
the science and clinical application of regenerative medicine.
Advanced BioHealing develops and markets cell-based and
tissue-engineered products that use living cells to repair or
replace body tissue damaged by injury, disease or the aging
process. The companys lead product,
Dermagrafttm
(www.dermagraft.com), is FDA- approved for treatment of diabetic
foot ulcers, a common affliction of persons with diabetes. The
company also is developing sales channels within the
U.S. government and a treatment for venous leg ulcers.
We believe that Advanced BioHealings products help
healthcare providers respond to increasing demand for effective
treatments at lower costs. Diabetes affects approximately
16 million people in the U.S. Annual cases of diabetic
foot ulcers in the U.S. are estimated at nearly
1 million, representing an addressable market of more than
$1 billion. Clinical trials are underway to extend
Dermagraft treatments to venous leg ulcers, a market opportunity
estimated at an additional $600 million.
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Alverix,
Inc. |
(Safeguard Ownership: 49.6%) |
Alverix (www.alverix.com) produces low-cost, handheld readers
with the accuracy and precision of laboratory instruments.
Alverix partners with diagnostic and original equipment
manufacturers (OEMs) seeking to increase current test accuracy,
improve portability of existing tests, or develop new assays for
use at the
point-of-care
(POC). Whether at a physicians office, laboratory outreach
location, retail clinic or a patients home, Alverixs
POC devices enable central laboratory quality results to be
obtained where test information is critical to patient care.
Previously, this level of performance required expensive
laboratory instrumentation. Alverix is building on 30 years
of expertise in optical sensors, image processing, software and
signal enhancement algorithms to develop proprietary
technologies for low-cost, portable detection devices for
medical diagnostics and other applications.
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Alverix was spun out of Avago Technologies, which itself was
spun out of Agilent, Inc. Current applications include testing
for drugs of abuse (DOA), and cardiac, cancer and infectious
diseases. Alverix has signed two partnerships, representing
significant potential revenue over the next five years. The
company continues to grow its platform of OEM partners and await
FDA approval of its first partnered product, which could lead to
domestic sales in 2010.
Alverix is attempting to capitalize on two macro trends: first,
growing demand for reduced cost and improved efficiency of
healthcare delivery; and second, greater consumer control of
personal healthcare. Both of these trends are increasing demand
for rapid POC tests. In 2006, the POC professional segment of
the overall in vitro diagnostic industry was valued
at $4.7 billion, growing at 11% annually. Instrumentation
represented more than $900 million in annual expenditures.
We believe Alverix will be able to exploit significant portions
of the fragmented multi-billion dollar POC market because its
devices provide immediate, accurate results with potential for
increased functionality and sensitivity. Additionally,
Alverixs flexible technology platform permits product
expansions that increase access to new and existing diagnostic
tests by physicians and patients.
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Avid
Radiopharmaceuticals, Inc. |
(Safeguard Ownership: 13.5%) |
Avid (www.avidrp.com) is developing molecular imaging agents to
detect neurodegenerative diseases, initially Alzheimers
disease (AD), Parkinsons disease
(PD) and Dementia with Lewy Bodies
(DLB). Avid is conducting clinical trials at more
than 25 research centers across the U.S. and initiated
Phase III trials in early 2009 for its amyloid imaging
compound, florpiramine F18 (18F-AV-45), which tests for the
presence of AD pathology in people with dementia. Avid remains
on track with Phase III trials of its lead compound,
18F-AV-45, which binds to amyloid plaques in the brain to image
AD, and anticipates completion and an NDA submission in 2010.
AV-45 is also being employed by large biopharmaceutical
companies including Lilly and Pfizer in clinical trials of drugs
in development to treat AD. Avids 18F-AV-133 imaging
compound for detection of Parkinsons disease is currently
in Phase II trials, while its compound for imaging diabetes
is currently in proof of concept Phase I trials.
Avid is developing a new technology that targets the increasing
demand among an aging population for value-oriented diagnostics.
We believe Avid is well positioned to address the critical need
to improve diagnosis and characterization of AD, PD and other
chronic neurological disorders. The addressable market for Avid
products is over $1 billion.
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Cellumen,
Inc. |
(Safeguard Ownership: 58.7%) |
Cellumen (www.cellumen.com) delivers proprietary services and
products to support drug discovery and development. By
leveraging its cellular systems biology (CSB)
technology, Cellumens objective is to improve efficacy,
decrease toxicity and optimize patient stratification and
treatment for pharmaceutical companies new and existing
drugs. The goal of this approach is to obtain accurate measures
of efficacy and potential toxicity of these drugs and biologics
well before entering expensive clinical testing. Another goal is
to improve clinical trial enrollment and increase new drug
efficacy by conducting theranostic (predicting response to
therapeutics) patient profiling. With the drug development
failure rate surpassing 90%, there is a clear need for more
efficient drug discovery methods and technologies.
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Clarient,
Inc. |
(Safeguard Ownership: 28.0%) |
Clarient (www.clarientinc.com) is a leading provider of
comprehensive, cancer-diagnostic laboratory services, offering a
menu of more than 300 advanced molecular tests to pathologists,
oncologists, hospitals and biopharmaceutical companies
throughout the U.S. From its
state-of-the-art
commercial laboratory and through its Internet-based
application, Clarient also is developing proprietary companion
diagnostic markers for therapeutics in breast, prostate, lung
and colon cancers, as well as leukemia/lymphoma. After five
years of rapid growth, Clarient is approaching sustainable
profitability, due to new economies of scale, reduced bad debt
expense as a percentage of revenue and improved timeliness of
billing and collections. Revenue in 2009 of $91.6 million
increased 24% from 2008. Shares of Clarients common stock
trade on the Nasdaq Capital Market under the symbol
CLRT.
The companys primary competitors are two larger national
laboratories, Laboratory Corporation of America Holdings and
Quest Diagnostics Incorporated. Both competitors offer a wide
test and product menu with significant
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financial, sales, and logistical resources, and have extensive
contracts with a variety of payor groups. Safeguard first took
an ownership interest in Clarient in 1996.
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Garnet
BioTherapeutics, Inc. |
(Safeguard Ownership: 31.1%) |
Garnet (www.garnetbio.com) is a clinical stage regenerative
medicine company focused on accelerating healing and reducing
scarring in cosmetic, orthopedic and cardiovascular surgical
wounds. Progress continues in Garnets Phase II
clinical trial of its lead product candidate, a safe cell
therapy that releases pro-healing and anti-inflammatory factors
to accelerate wound closure and reduce or eliminate scarring.
The company expects to complete Phase II trials in 2010. In
addition, Garnets cost-effective, compliant manufacturing
process generates a large number of patient doses from a single,
adult donor of bone marrow stem cells.
We believe that Garnet is well positioned within the
regenerative medicine field. In 2007, $8.3 billion was
spent on cosmetic surgery in the U.S. An effective product
at reducing or preventing scarring would apply to 13 of the top
21 cosmetic procedures, resulting in an addressable
U.S. market of more than $850 million. Indications
including burns and orthopedic surgery represent additional
market potential of more than $1 billion.
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Molecular
Biometrics, Inc. |
(Safeguard Ownership: 35.4%) |
Molecular Biometrics (www.molecularbiometrics.com) applies novel
metabolomic technologies to develop accurate, non-invasive
clinical tools to increase the probability of pregnancy and
decrease multiple births from in vitro fertilization. The
company has refined and validated its ViaMetrics-E test platform
over the past two years, completing clinical testing on more
than 3,000 samples. The product will be launched in Australia,
Japan and Europe in 2010, with the U.S. launch expected in
2011. The patented technology also can be applied to other areas
of reproductive medicine and neurodegenerative diseases.
Infertility affects 7.3 million people in the U.S. and
millions of others worldwide. Molecular Biometrics
ViaMetrics-E technology addresses a $10 billion global
annual IVF market. Todays IVF success rate is estimated at
25% to 35% worldwide. ViaMetrics-E holds significant potential
to increase IVF success rates, while minimizing the number of
IVF cycles
and/or the
number of embryos required to be implanted to achieve a live
birth. ViaMetrics-E also could provide physicians with a
procedure to reduce the incidence, costs and medical risk
associated with multiple births, which constitute more than
one-third of births under current IVF methods. Currently, the
annual number of assisted reproductive technologies (ART)
cycles, with the majority being IVF, exceeds 1 million
worldwide. The typical IVF cycle in the U.S. costs between
$10,000 and $15,000. The ability to reduce the number of IVF
cycles and the complications associated with multiple births
could result in substantial savings to the overall healthcare
system.
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NuPathe,
Inc. |
(Safeguard Ownership: 22.9%) |
NuPathe (www.nupathe.com) specializes in development of
therapeutics for treatment of neurological and psychiatric
disorders including migraine and Parkinsons disease.
Phase III trials for
Zelrixtm,
the first and only migraine patch that delivers sumatriptan
through NuPathes proven, proprietary
SmartRelieftm
technology, met all of its clinical endpoints and confirmed
clear clinical benefits for migraine patients, including
reductions in pain, nausea, sensitivity to light and sensitivity
to sound compared with placebo patches. An NDA filing for Zelrix
is anticipated in 2010. Steady progress is being made in
pre-clinical,
proof-of-concept
studies for NuPathes NP201, a novel approach to the
treatment of Parkinsons.
Of the 12 million patients treated annually for migraines
in the U.S., 2.4 million are placed on triptan therapy.
Approximately 70% of these patients suffer from migraine-related
nausea and vomiting, which reduces or prevents the effectiveness
of an oral tablet. In addition, 30% of patients on triptan
therapy experience recurring migraines despite medication. The
current market for triptans in the U.S. is more than
$2 billion, or 20% of the total $10 billion market for
migraine treatments.
9
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Quinnova
Pharmaceuticals, Inc. |
(Safeguard Ownership: 25.7%) |
Quinnova (www.quinnova.com) develops and markets novel delivery,
platform-based prescription dermatology drugs. The
companys FDA-approved Proderm
Technologytm
Foam Delivery System addresses the need for improved
cost-effective treatment options, while simultaneously enhancing
efficacy and patient compliance in skin disorders, such as
dermatitis, fungal infection, psoriasis and acne. The company
currently has several products on the market. Growth capital is
funding a Phase III clinical trial for an NDA product,
expansion of the companys sales and marketing
capabilities, facilitating the companys other NDA and
medical device clinical trials, and supporting research and
development initiatives to bring new products to market.
Quinnovas products are based on proprietary delivery
platforms, improve efficacy and patient compliance, and address
more than half of the therapeutic dermatology market.
Dermatology is a highly fragmented therapeutic category and
market, which was estimated at $6.4 billion in 2007 and
projected to grow to $8.9 billion by 2013.
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Tengion,
Inc. |
(Safeguard Ownership: 4.5%) |
Tengion (www.tengion.com) is a clinical stage regenerative
medicine company developing, manufacturing and commercializing
human neo-organs and neo-tissues for treatment of urologic and
renal diseases. The company recently completed a Phase II
trial of its patented Tengion Neo-Bladder
Augment®
for children with neurogenic bladders due to spina bifida.
Enrollment is complete in a second Phase II trial with the
Neo-Bladder Augment in adults with neurogenic bladders due to
spinal cord injuries. In 2010, human clinical trials are planned
with Tengions Neo-Urinary
Conduittm
for patients with bladder cancer and the company expects to have
additional pre-clinical
proof-of-concept
for its
Neo-Kidneytm
intended to slow development of renal failure.
Tengions patented technology Autologous Organ
Regeneration
Platformtm
addresses critical problems facing organ-failure patients,
including the shortage of donor organs, the risk of organ
rejection and the high cost and toxicity of anti-rejection
medications. The estimated cost of procuring an organ is between
$50,000 and $100,000. With 21,000 annual bladder reconstructions
or removals in the U.S. per year, the addressable market is
estimated at more than $1 billion, and up to
$3 billion worldwide.
In December 2009, Tengion filed an initial preliminary
registration statement for an initial public offering of its
common stock. It is currently anticipated that if such an
initial public offering occurs, it will take place in 2010.
TECHNOLOGY
PARTNER COMPANIES
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Advantedge
Healthcare Solutions, Inc. |
(Safeguard Ownership: 39.7%) |
AHS (www.ahsrcm.com) is among the nations largest
medical-billing firms, using proven, proprietary software to
deliver outsourced billing solutions to hospital physician
groups. AHS employs continuous business-process improvement
methods to increase the operating efficiencies of medical
billing and to improve results for its physician customers.
AHS competes in a highly fragmented U.S. market estimated
at $4.5 billion in 2008. Fewer than 20% of physician
practices outsource billing and practice management. AHS
continues to gain meaningful scale through organic growth and
strategic acquisitions. The company completed four significant
acquisitions from 2007 to early 2010, and is actively pursuing
additional acquisition opportunities in targeted specialties. In
2009, AHS completed three acquisitions: Recency Alliance
Services, Staten Island University Hospital physician billing
division; Physicians Service Center, a medical billing and
practice management service provider located in Lombard,
Illinois; and Medical Account Services, a medical billing and
practice management service provider located in Dayton, Ohio.
The company is actively pursuing additional acquisition
opportunities.
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Authentium,
Inc. |
(Safeguard Ownership: 20.0%) |
Authentium (www.authentium.com) develops software and services
to protect consumers in a connected world. Its anti-malware and
identity-protection software are used by leading software
providers, including Google, Microsoft and Symantec to create or
enhance their offerings. Consumers use Authentiums
identity-theft prevention product
SafeCentraltm
(www.safecentral.com) to protect
e-commerce
transactions through an
end-to-end,
secured
10
online environment. SafeCentral significantly reduces the risk
of consumers having their personal information stolen while
using internet services such as online banking, tax filing, etc.
(which are significant sources of identity theft).
Rapid proliferation of viruses and malware has spawned an
enormous anti-malware market expected to exceed
$9.6 billion in 2012. Authentiums SafeCentral, is a
next generation anti-malware solution that is gaining traction
with customers and partners such as Cyberdefender and Trend
Micro. More than 8 million U.S. adults were affected
by identity theft in 2007.
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Beyond.com,
Inc. |
(Safeguard Ownership: 38.3%) |
Beyond (www.beyond.com) is the largest internet career network,
comprised of thousands of local, industry and niche communities
in the U.S. and Canada. Beyond attracts niche audiences of
job seekers, professionals, employees and advertisers and
delivers targeted and highly relevant results through a
multitude of online media and advertising models, including:
recruitment advertising, email marketing, banner advertising and
other lead generation vehicles. Despite a slow economy that
impacted the job market, Beyond managed to grow both its local
and niche brands and its community traffic, experiencing over
100% growth in unique visitors in 2009.
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Bridgevine,
Inc. |
(Safeguard Ownership: 23.6%) |
Bridgevine (www.bridgevine.com) is an internet marketing company
that enables online consumers to compare and purchase digital
services, including internet, phone, VoIP, TV, wireless, music,
and entertainment. Bridgevine leverages its proprietary
technology platform to acquire leads through numerous sources,
including search,
e-tail and
retail, and then offers a bundle of services from its growing
base of participating merchants, which now totals over 140.
Founded to capitalize on a fragmented and confusing market for
online services, Bridgevine simplifies shopping and enhances the
experience through unique content and promotions, education and
comparison services from its network of websites.
Bridgevines advertising partners include Comcast,
AT&T, Charter, Real Networks, Dlink, Vonage, Netflix,
Qwest, Time Warner and Verizon.
Bridgevine participates in the large customer-generation segment
of the U.S. digital services, which has been projected to
grow to $10 billion by 2014. As additional services migrate
to the digital domain, we believe that Bridgevine is well
positioned to take advantage of new opportunities.
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MediaMath,
Inc. |
(Safeguard Ownership: 17.5%) |
MediaMath (www.mediamath.com) has developed the advertising
industrys leading real-time algorithmic buying platform
for display media, utilizing data and optimization for superior
performance. MediaMaths
TerminalOnetm
automated buying platform provides advertising agencies with
access to tens of billions of impressions (including banner ads
and page displays) daily, and a simple workflow that manages the
powerful analytics and rich data necessary to make best use of
them. MediaMath first marketed its technology in 2007 and
continues to build on its
first-to-market
advantage.
The advertising industry is undergoing a transformational shift,
bringing more advertising dollars to online media
from traditional offline outlets. This shift is
driven by the increased level of performance-driven metrics in
online advertising. MediaMath is positioned in the middle of
this transformation.
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Portico
Systems, Inc. |
(Safeguard Ownership: 45.4%) |
Portico (www.porticosys.com) offers software and services to
health insurance providers that help reduce administrative,
medical and IT costs. Porticos offerings also allow health
insurance providers to eliminate duplicate processes, to shorten
the cycle for launching new products and services, and to comply
with federal privacy regulations. Through recent acquisitions
and contracts with global healthcare companies including CIGNA
and MMM Holdings, Portico now serves more than 35 healthcare
systems with 42 million members annually.
Porticos exclusive focus on provider operations has
allowed the company to design the only modular
end-to-end
provider platform that streamlines the interactions between
payors and their provider networks. In 2009,
11
Portico acquired Kryptiq Corps. Choreo health plan
business which nearly doubled the number of customers. Portico
competes in a market for U.S. healthcare payer IT spending
estimated at $7 billion.
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Swaptree,
Inc. |
(Safeguard Ownership: 29.3%) |
Swaptree (www.swaptree.com) is the internets largest
online swapping site that enables users to trade books, CDs,
DVDs and video games using its proprietary trading platform.
With Swaptree, users can choose from tens of thousands of books,
CDs, DVDs and video games that they can receive in trade for
items which they no longer want. Swaptrees innovative
model has gained significant media attention, driving a
five-fold increase in its user base and a 400% gain in
unique-visitor total since becoming a Safeguard partner company
in 2008. In a challenging economy, Swaptree expects to continue
its rapid growth as consumers look towards swapping used items
as an alternative to buying new items or paying for used items.
FINANCIAL
INFORMATION ABOUT OPERATING SEGMENTS
Information on revenue, operating income (loss), equity income
(loss) and net income (loss) from continuing operations for each
operating segment of Safeguards business for each of the
three years in the period ended December 31, 2009 and
assets as of December 31, 2009 and 2008 is contained in
Note 18 to the Consolidated Financial Statements.
OTHER
INFORMATION
The operations of Safeguard and its partner companies are
subject to environmental laws and regulations. Safeguard does
not believe that expenditures relating to those laws and
regulations will have a material adverse effect on the business,
financial condition or results of operations of Safeguard.
AVAILABLE
INFORMATION
All periodic and current reports, registration statements, and
other filings that Safeguard is required to file with the
Securities and Exchange Commission (SEC), including
our annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and amendments to those reports filed or furnished pursuant to
Section 13(a) of the Exchange Act, are available free of
charge from the SECs website
(http://www.sec.gov)
or public reference room at 450 Fifth Street N.W.,
Washington, DC 20549
(1-800-SEC-0330)
or through Safeguards internet website
(http://www.safeguard.com).
Such documents are available as soon as reasonably practicable
after electronic filing of the material with the SEC. Copies of
these reports (excluding exhibits) also may be obtained free of
charge, upon written request to: Investor Relations, Safeguard
Scientifics, Inc., 435 Devon Park Drive, Building 800, Wayne,
Pennsylvania 19087.
The internet website addresses for Safeguard and its companies
are included in this report for identification purposes. The
information contained therein or connected thereto are not
intended to be incorporated into this Annual Report on
Form 10-K.
The following corporate governance documents are available free
of charge on Safeguards website: the charters of our
Audit, Compensation and Nominating & Corporate
Governance Committees, our Corporate Governance Guidelines and
our Code of Business Conduct and Ethics. We also will post on
our website any amendments to or waivers of our Code of Business
Conduct and Ethics that relate to our directors and executive
officers.
12
You should carefully consider the information set forth below.
The following risk factors describe situations in which our
business, financial condition or results of operations could be
materially harmed, and the value of our securities may decline.
You should also refer to other information included or
incorporated by reference in this report.
Our
business depends upon our ability to make good decisions
regarding the deployment of capital into new or existing partner
companies and, ultimately, the performance of our partner
companies, which is uncertain.
If we make poor decisions regarding the deployment of capital
into new or existing partner companies, our business model will
not succeed. Our success as a company ultimately depends on our
ability to choose the right partner companies. If our partner
companies do not succeed, the value of our assets could be
significantly reduced and require substantial impairments or
write-offs and our results of operations and the price of our
common stock could decline. The risks relating to our partner
companies include:
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most of our partner companies have a history of operating losses
or a limited operating history;
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the intensifying competition affecting the products and services
our partner companies offer could adversely affect their
businesses, financial condition, results of operations and
prospects for growth;
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the inability to adapt to the rapidly changing marketplaces;
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the inability to manage growth;
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the need for additional capital to fund their operations, which
we may not be able to fund or which may not be available from
third parties on acceptable terms, if at all;
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the inability to protect their proprietary rights
and/or
infringing on the proprietary rights of others;
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that certain of our partner companies could face legal
liabilities from claims made against them based upon their
operations, products or work;
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the impact of economic downturns on their operations, results
and growth prospects;
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the inability to attract and retain qualified personnel; and
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the existence of government regulations and legal uncertainties
may place financial burdens on the businesses of our partner
companies.
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These risks are discussed in greater detail under the caption
Risks Related to Our Partner Companies below.
Our
partner companies (and the nature of our interests in them)
could vary widely from period to period.
As part of our strategy, we continually assess the value to our
shareholders of our interests in our partner companies. We also
regularly evaluate alternative uses for our capital resources.
As a result, depending on market conditions, growth prospects
and other key factors, we may at any time:
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change the partner companies on which we focus;
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sell some or all of our interests in any of our partner
companies; or
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otherwise change the nature of our interests in our partner
companies.
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Therefore, the nature of our holdings could vary significantly
from period to period.
Our consolidated financial results also may vary significantly
based upon which partner companies are included in our
Consolidated Financial Statements. For example:
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For the period from January 1, 2009 through May 14,
2009 and the years ended December 31, 2008 and 2007, we
consolidated the results of operations of Clarient in continuing
operations. On May 14, 2009, we deconsolidated Clarient and
subsequently account for our holdings in Clarient under the fair
value option.
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13
Our
business model does not rely, or plan, upon the receipt of
operating cash flows from our partner companies. Our partner
companies currently provide us with no cash flow from their
operations. We rely on cash on hand, liquidity events and our
ability to generate cash from capital raising activities to
finance our operations.
We need capital to develop new partner company relationships and
to fund the capital needs of our existing partner companies. We
also need cash to service and repay our outstanding debt,
finance our corporate overhead and meet our existing funding
commitments. As a result, we have substantial cash requirements.
Our partner companies currently provide us with no cash flow
from their operations. To the extent our partner companies
generate any cash from operations, they generally retain the
funds to develop their own businesses. As a result, we must rely
on cash on hand, liquidity events and new capital raising
activities to meet our cash needs. If we are unable to find ways
of monetizing our holdings or to raise additional capital on
attractive terms, we may face liquidity issues that will require
us to curtail our new business efforts, constrain our ability to
execute our business strategy and limit our ability to provide
financial support to our existing partner companies.
Fluctuations
in the price of the common stock of our publicly traded holdings
affect our net income (loss) and may affect the price of our
common stock.
Fluctuations in the market prices of the common stock of our
publicly traded holdings affect our net income (loss) and are
likely to affect the price of our common stock. The market
prices of our publicly traded holdings have been highly volatile
and subject to fluctuations unrelated or disproportionate to
operating performance. We have elected to apply the fair value
option to account for our retained interest in Clarient
following its deconsolidation on May 14, 2009. As a result,
gains and losses on the
mark-to-market
of our holdings in Clarient are and will continue to be
recognized in income (loss) from continuing operations for each
accounting period for which we continue to maintain an interest
in Clarient. The aggregate market value of our holdings in
Clarient (Nasdaq: CLRT), our only public company holding, at
December 31, 2009 was approximately $80.5 million and
could vary significantly from period to period. By way of
example, the aggregate market value of our holdings in Clarient
was $74.0 million at March 15, 2010.
Intense
competition from other acquirors of interests in companies could
result in lower gains or possibly losses on our partner
companies.
We face intense competition from other capital providers as we
acquire and develop interests in our partner companies. Some of
our competitors have more experience identifying, acquiring and
selling companies and have greater financial and management
resources, brand name recognition or industry contacts than we
have. Despite making most of our acquisitions at a stage when
our partner companies are not publicly traded, we may still pay
higher prices for those equity interests because of higher
valuations of similar public companies and competition from
other acquirers and capital providers, which could result in
lower gains or possibly losses.
We may
be unable to obtain maximum value for our holdings or to sell
our holdings on a timely basis.
We hold significant positions in our partner companies.
Consequently, if we were to divest all or part of our holdings
in a partner company, we may have to sell our interests at a
relative discount to a price which may be received by a seller
of a smaller portion. For partner companies with publicly traded
stock, we may be unable to sell our holdings at then-quoted
market prices. The trading volume and public float in the common
stock of Clarient, our only publicly traded partner company, are
small relative to our holdings. As a result, any significant
open-market divestiture by us of our holdings in these partner
companies, if possible at all, would likely have a material
adverse effect on the market price of their common stock and on
our proceeds from such a divestiture. Additionally, we may not
be able to take our partner companies public as a means of
monetizing our position or creating shareholder value.
Registration and other requirements under applicable securities
laws may adversely affect our ability to dispose of our holdings
on a timely basis.
14
Our
success is dependent on our executive management.
Our success is dependent on our executive management teams
ability to execute our strategy. A loss of one or more of the
members of our executive management team without adequate
replacement could have a material adverse effect on us.
Our
business strategy may not be successful if valuations in the
market sectors in which our partner companies participate
decline.
Our strategy involves creating value for our shareholders by
helping our partner companies build value and, if appropriate,
accessing the public and private capital markets. Therefore, our
success is dependent on the value of our partner companies as
determined by the public and private capital markets. Many
factors, including reduced market interest, may cause the market
value of our publicly traded partner companies to decline. If
valuations in the market sectors in which our partner companies
participate decline, their access to the public and private
capital markets on terms acceptable to them may be limited.
Our
partner companies could make business decisions that are not in
our best interests or with which we do not agree, which could
impair the value of our holdings.
Although we may seek a controlling equity interest and
participation in the management of our partner companies, we may
not be able to control the significant business decisions of our
partner companies. We may have shared control or no control over
some of our partner companies. In addition, although we
currently own a controlling interest in some of our partner
companies, we may not maintain this controlling interest.
Acquisitions of interests in partner companies in which we share
or have no control, and the dilution of our interests in or loss
of control of partner companies, will involve additional risks
that could cause the performance of our interests and our
operating results to suffer, including:
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the management of a partner company having economic or business
interests or objectives that are different than ours; and
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the partner companies not taking our advice with respect to the
financial or operating difficulties they may encounter.
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Our inability to control our partner companies also could
prevent us from assisting them, financially or otherwise, or
could prevent us from liquidating our interests in them at a
time or at a price that is favorable to us. Additionally, our
partner companies may not act in ways that are consistent with
our business strategy. These factors could hamper our ability to
maximize returns on our interests and cause us to recognize
losses on our interests in these partner companies.
We may
have to buy, sell or retain assets when we would otherwise not
wish to do so in order to avoid registration under the
Investment Company Act.
The Investment Company Act of 1940 regulates companies which are
engaged primarily in the business of investing, reinvesting,
owning, holding or trading in securities. Under the Investment
Company Act, a company may be deemed to be an investment company
if it owns investment securities with a value exceeding 40% of
the value of its total assets (excluding government securities
and cash items) on an unconsolidated basis, unless an exemption
or safe harbor applies. We refer to this test as the 40%
Test. Securities issued by companies other than
consolidated partner companies are generally considered
investment securities for purpose of the Investment
Company Act; unless other circumstances exist which actively
involve the company holding such interests in the management of
the underlying company. We are a company that partners with
growth-stage technology and life sciences companies to build
value; we are not engaged primarily in the business of
investing, reinvesting or trading in securities. We are in
compliance with the 40% Test. Consequently, we do not believe
that we are an investment company under the Investment Company
Act.
We monitor our compliance with the 40% Test and seek to conduct
our business activities to comply with this test. It is not
feasible for us to be regulated as an investment company because
the Investment Company Act rules are inconsistent with our
strategy of actively helping our partner companies in their
efforts to build value. In order to
15
continue to comply with the 40% Test, we may need to take
various actions which we would otherwise not pursue. For
example, we may need to retain a controlling interest in a
partner company that we no longer consider strategic, we may not
be able to acquire an interest in a company unless we are able
to obtain a controlling ownership interest in the company, or we
may be limited in the manner or timing in which we sell our
interests in a partner company. Our ownership levels also may be
affected if our partner companies are acquired by third parties
or if our partner companies issue stock which dilutes our
controlling ownership interest. The actions we may need to take
to address these issues while maintaining compliance with the
40% Test could adversely affect our ability to create and
realize value at our partner companies.
Recent
economic disruptions and downturns may have negative
repercussions for the Company.
Events over the past two years in the United States and
international capital markets, debt markets and economies
generally have and may negatively impact the Companys
ability to pursue certain tactical and strategic initiatives,
such as accessing additional public or private equity or debt
financing for itself or for its partner companies and selling
the Companys interests in partner companies on terms
acceptable to the Company and in time frames consistent with our
expectations.
We
have had material weaknesses in our internal controls over
financial reporting related to Clarient in the recent past and
cannot provide assurance that additional material weaknesses
will not be identified in the future. Our failure to effectively
maintain our internal control over financial reporting could
result in material misstatements in our Consolidated Financial
Statements which could require us to restate financial
statements, cause us to fail to meet our reporting obligations,
cause investors to lose confidence in our reported financial
information and/or have a negative effect on our stock
price.
We cannot assure that material weaknesses in our internal
controls over financial reporting will not be identified in the
future. Any failure to maintain or implement required new or
improved controls, or any difficulties we encounter in their
implementation, could result in additional material weaknesses,
or could result in material misstatements in our Consolidated
Financial Statements. These misstatements could result in a
restatement of financial statements, cause us to fail to meet
our reporting obligations
and/or cause
investors to lose confidence in our reported financial
information, leading to a decline in our stock price.
Risks
Related to our Partner Companies
Most
of our partner companies have a history of operating losses or
limited operating history and may never be
profitable.
Most of our partner companies have a history of operating losses
or limited operating history, have significant historical losses
and may never be profitable. Many have incurred substantial
costs to develop and market their products, have incurred net
losses and cannot fund their cash needs from operations. We
expect that the operating expenses of certain of our partner
companies will increase substantially in the foreseeable future
as they continue to develop products and services, increase
sales and marketing efforts, and expand operations.
Our
partner companies face intense competition, which could
adversely affect their business, financial condition, results of
operations and prospects for growth.
There is intense competition in the technology and life sciences
marketplaces, and we expect competition to intensify in the
future. Our business, financial condition, results of operations
and prospects for growth will be materially adversely affected
if our partner companies are not able to compete successfully.
Many of the present and potential competitors may have greater
financial, technical, marketing and other resources than those
of our partner companies. This may place our partner companies
at a disadvantage in responding to the offerings of their
competitors, technological changes or changes in client
requirements. Also, our partner companies may be at a
competitive disadvantage because many of their competitors have
greater name recognition, more extensive client bases and a
broader range of product offerings. In addition, our partner
companies may compete against one another.
16
Our
partner companies may fail if they do not adapt to the rapidly
changing technology and life sciences
marketplaces.
If our partner companies fail to adapt to rapid changes in
technology and customer and supplier demands, they may not
become or remain profitable. There is no assurance that the
products and services of our partner companies will achieve or
maintain market penetration or commercial success, or that the
businesses of our partner companies will be successful.
The technology and life sciences marketplaces are characterized
by:
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rapidly changing technology;
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evolving industry standards;
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frequently introducing new products and services;
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shifting distribution channels;
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evolving government regulation;
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frequently changing intellectual property landscapes; and
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changing customer demands.
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Our future success will depend on our partner companies
ability to adapt to these rapidly evolving marketplaces. They
may not be able to adequately or economically adapt their
products and services, develop new products and services or
establish and maintain effective distribution channels for their
products and services. If our partner companies are unable to
offer competitive products and services or maintain effective
distribution channels, they will sell fewer products and
services and forego potential revenue, possibly causing them to
lose money. In addition, we and our partner companies may not be
able to respond to the rapid technology changes in an
economically efficient manner, and our partner companies may
become or remain unprofitable.
Our
partner companies may grow rapidly and may be unable to manage
their growth.
We expect some of our partner companies to grow rapidly. Rapid
growth often places considerable operational, managerial and
financial strain on a business. To successfully manage rapid
growth, our partner companies must, among other things:
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improve, upgrade and expand their business infrastructures;
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scale up production operations;
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develop appropriate financial reporting controls;
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attract and maintain qualified personnel; and
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maintain appropriate levels of liquidity.
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If our partner companies are unable to manage their growth
successfully, their ability to respond effectively to
competition and to achieve or maintain profitability will be
adversely affected.
Based
on our business model, some or all of our partner companies will
need to raise additional capital to fund their operations at any
given time. We may not be able to fund some or all of such
amounts and such amounts may not be available from third parties
on acceptable terms, if at all.
We cannot be certain that our partner companies will be able to
obtain additional financing on favorable terms, if at all.
Because our resources and our ability to raise capital are
limited, we may not be able to provide partner companies with
sufficient capital resources to enable them to reach a cash-flow
positive position. Recent economic disruptions and downturns
have also negatively affected the ability of some of our partner
companies to fund their operations from other stockholders and
capital sources. We also may fail to accurately project the
capital needs of partner companies. If partner companies need to
but are not able to raise capital from us or other outside
sources,
17
then they may need to cease or scale back operations. In such
event, our interest in any such partner company will become less
valuable.
Recent
economic disruptions and downturns may negatively affect our
partner companies plans and their results of
operations.
Many of our partner companies are largely dependant upon outside
sources of capital to fund their operations. Disruptions in the
availability of capital from such sources will negatively affect
the ability of such partner companies to pursue their business
models and will force such companies to revise their growth and
development plans accordingly. Any such changes will, in turn,
affect the ability of the Company to realize the value of its
capital deployments in such companies.
In addition, the downturn in the economy as well as possible
governmental responses to such downturn
and/or to
specific situations in the economy could affect the business
prospects of certain of our partner companies, including, but
not limited to, in the following ways: weaknesses in the
financial services industries; reduced business
and/or
consumer spending;
and/or
systematic changes in the ways the healthcare system operates in
the United States.
Some
of our partner companies may be unable to protect their
proprietary rights and may infringe on the proprietary rights of
others.
Partner companies assert various forms of intellectual property
protection. Intellectual property may constitute an important
part of partner company assets and competitive strengths.
Federal law, most typically, copyright, patent, trademark and
trade secret laws, generally protects intellectual property
rights. Although we expect that partner companies will take
reasonable efforts to protect the rights to their intellectual
property, third parties may develop similar technology
independently. Moreover, the complexity of international trade
secret, copyright, trademark and patent law, coupled with the
limited resources of these partner companies and the demands of
quick delivery of products and services to market, create a risk
that partner company efforts to prevent misappropriation of
their technology will prove inadequate.
Some of our partner companies also license intellectual property
from third parties and it is possible that they could become
subject to infringement actions based upon their use of the
intellectual property licensed from those third parties. Our
partner companies generally obtain representations as to the
origin and ownership of such licensed intellectual property.
However, this may not adequately protect them. Any claims
against our partner companies proprietary rights, with or
without merit, could subject the companies to costly litigation
and divert their technical and management personnel from other
business concerns. If our partner companies incur costly
litigation and their personnel are not effectively deployed, the
expenses and losses incurred by our partner companies will
increase and their profits, if any, will decrease.
Third parties have and may assert infringement or other
intellectual property claims against our partner companies based
on their patents or other intellectual property claims. Even
though we believe our partner companies products do not
infringe any third-partys patents, they may have to pay
substantial damages, possibly including treble damages, if it is
ultimately determined that they do. They may have to obtain a
license to sell their products if it is determined that their
products infringe another persons intellectual property.
Our partner companies might be prohibited from selling their
products before they obtain a license, which, if available at
all, may require them to pay substantial royalties. Even if
infringement claims against our partner companies are without
merit, defending these types of lawsuits takes significant time,
may be expensive and may divert management attention from other
business concerns.
Certain
of our partner companies could face legal liabilities from
claims made against their operations, products or
work.
Because manufacture and sale of certain partner company products
entail an inherent risk of product liability, certain partner
companies maintain product liability insurance. Although none of
our partner companies to date have experienced any material
losses, there can be no assurance that they will be able to
maintain or acquire adequate product liability insurance in the
future and any product liability claim could have a material
adverse effect
18
on partner company revenue and income. In addition, many of the
engagements of our partner companies involve projects that are
critical to the operation of their clients businesses. If
our partner companies fail to meet their contractual
obligations, they could be subject to legal liability, which
could adversely affect their business, operating results and
financial condition. Partner company contracts typically include
provisions designed to limit their exposure to legal claims
relating to their services and the applications they develop.
However, these provisions may not protect our partner companies
or may not be enforceable. Also, as consultants, some of our
partner companies depend on their relationships with their
clients and their reputation for high-quality services and
integrity to retain and attract clients. As a result, claims
made against our partner companies work may damage their
reputation, which in turn could impact their ability to compete
for new work and negatively impact their revenue and
profitability.
Our
partner companies success depends on their ability to
attract and retain qualified personnel.
Our partner companies depend upon their ability to attract and
retain senior management and key personnel, including trained
technical and marketing personnel. Our partner companies also
will need to continue to hire additional personnel as they
expand. At present, none of our partner companies have employees
represented by labor unions. Although our partner companies have
not been the subject of a work stoppage, any future work
stoppage could have a material adverse effect on their
respective operations. A shortage in the availability of the
requisite qualified personnel or work stoppage would limit the
ability of our partner companies to grow, to increase sales of
their existing products and services, and to launch new products
and services.
Government
regulations and legal uncertainties may place financial burdens
on the businesses of our partner companies.
Failure to comply with applicable requirements of the FDA or
comparable regulation in foreign countries can result in fines,
recall or seizure of products, total or partial suspension of
production, withdrawal of existing product approvals or
clearances, refusal to approve or clear new applications or
notices and criminal prosecution. Manufacturers of
pharmaceuticals and medical diagnostic devices and operators of
laboratory facilities are subject to strict federal and state
regulation regarding validation and the quality of manufacturing
and laboratory facilities. Failure to comply with these quality
regulation systems requirements could result in civil or
criminal penalties or enforcement proceedings, including the
recall of a product or a cease distribution order.
The enactment of any additional laws or regulations that affect
healthcare insurance policy and reimbursement (including
Medicare reimbursement) could negatively affect our partner
companies. If Medicare or private payors change the rates at
which our partner companies or their customers are reimbursed by
insurance providers for their products, such changes could
adversely impact our partner companies.
Some
of our partner companies are subject to significant
environmental, health and safety regulation.
Some of our partner companies are subject to licensing and
regulation under federal, state and local laws and regulations
relating to the protection of the environment and human health
and safety, including laws and regulations relating to the
handling, transportation and disposal of medical specimens,
infectious and hazardous waste and radioactive materials, as
well as to the safety and health of manufacturing and laboratory
employees. In addition, the federal Occupational Safety and
Health Administration have established extensive requirements
relating to workplace safety.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
Our corporate headquarters and administrative offices in Wayne,
Pennsylvania contain approximately 18,000 square feet of
office space in one building. We currently lease our corporate
headquarters under a lease with approximately 4.5 years
remaining.
19
|
|
Item 3.
|
Legal
Proceedings
|
We, as well as our partner companies, are involved in various
claims and legal actions arising in the ordinary course of
business. While in the current opinion of management, the
ultimate disposition of these matters will not have a material
adverse effect on our consolidated financial position or results
of operations, no assurance can be given as to the outcome of
these lawsuits, and one or more adverse rulings could have a
material adverse effect on our consolidated financial position
and results of operations, or that of our partner companies. See
Note 15 included in Item 8 Financial
Statements and Supplementary Data in this Annual Report on
Form 10-K
for a discussion of ongoing claims and legal actions.
ANNEX TO
PART I EXECUTIVE OFFICERS OF THE
REGISTRANT
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Executive Officer Since
|
|
Peter J. Boni
|
|
|
64
|
|
|
President, Chief Executive Officer and Director
|
|
|
2005
|
|
James A. Datin
|
|
|
47
|
|
|
Executive Vice President and Managing Director, Life Sciences
|
|
|
2005
|
|
Kevin L. Kemmerer
|
|
|
41
|
|
|
Executive Vice President and Managing Director, Technology
|
|
|
2008
|
|
Brian J. Sisko
|
|
|
49
|
|
|
Senior Vice President and General Counsel
|
|
|
2007
|
|
Stephen T. Zarrilli
|
|
|
48
|
|
|
Senior Vice President and Chief Financial Officer
|
|
|
2008
|
|
Mr. Boni joined Safeguard as President and Chief Executive
Officer in August 2005. Prior to joining Safeguard,
Mr. Boni was an Operating Partner for Advent International,
a global private equity firm with $10 billion under
management, from April 2004 to August 2005; Chairman and Chief
Executive Officer of Surebridge, Inc., an applications
outsourcer serving the mid-market, from March 2002 to April
2004; Managing Principal of Vested Interest LLC, a management
consulting firm, from January 2001 to March 2002; and President
and Chief Executive Officer of Prime Response, Inc., an
enterprise applications software provider, from February 1999 to
January 2001. Mr. Boni is a director of Clarient, Inc. and
previously served as Non-executive Chairman of Intralinks, Inc.
Mr. Datin joined Safeguard as Executive Vice President and
Managing Director, Life Sciences Group in September 2005.
Mr. Datin served as Chief Executive Officer of Touchpoint
Solutions, Inc., a provider of software that enables customers
to develop and deploy applications, content and media on
multi-user interactive devices, from December 2004 to June 2005;
Group President in 2004, and as Group President, International,
from 2001 to 2003, of Dendrite International, a provider of
sales, marketing, clinical and compliance solutions and services
to global pharmaceutical and other life sciences companies; and
Group Director, Corporate Business Strategy and Planning at
GlaxoSmithKline, from 1999 to 2001, where he also was a member
of the companys Predictive Medicine Board of Directors
that evaluated acquisitions and alliances. His prior experience
also includes international assignments with and identifying
strategic growth opportunities for E Merck and Baxter.
Mr. Datin is a director of Clarient, Inc.
Mr. Kemmerer joined Safeguard as Principal, Technology
Group, in June 2004, became Senior Vice President, Technology in
April 2006, Senior Vice President and Managing Director,
Technology in April 2008 and Executive Vice President and
Managing Director, Technology in September 2008.
Mr. Kemmerer served most recently as Director of Kennet
Venture Partners, a venture capital firm for which he worked
from November 2000 to June 2004 and previously as Principal,
Mergers and Acquisitions of Broadview International, for whom he
worked from August 1997 to November 2000.
20
Mr. Sisko joined Safeguard as Senior Vice President and
General Counsel in August 2007. Prior to joining Safeguard,
Mr. Sisko served as Chief Legal Officer, Senior Vice
President and General Counsel of Traffic.com (at the time, a
public company), a former partner company of Safeguard that is a
leading provider of accurate, real-time traffic information in
the United States, from February 2006 until June 2007 (following
its acquisition by NAVTEQ Corporation in March 2007); Chief
Operating Officer from February 2005 to January 2006 of Halo
Technology Holdings, Inc., a public holding company for
enterprise software businesses (Halo Technology Holdings filed
for bankruptcy protection under Chapter 11 of the United
States Bankruptcy Code in August 2007); ran B/T Business and
Technology, an advisor and strategic management consultant to a
variety of public and private companies, from January 2002 to
February 2005; and was a Managing Director from April 2000 to
January 2002, of Katalyst, LLC, a venture capital and consulting
firm. Mr. Sisko also previously served as Senior Vice
President Corporate Development and General Counsel
of National Media Corporation, at the time a New York Stock
Exchange-listed multi-media marketing company with operations in
70 countries, and as a partner in the corporate finance, mergers
and acquisitions practice group of the Philadelphia-based law
firm, Klehr, Harrison, Harvey, Branzburg & Ellers LLP.
Mr. Zarrilli joined Safeguard as Senior Vice President and
Chief Financial Officer in June 2008. Prior to joining
Safeguard, Mr. Zarrilli co-founded, in 2004, the Penn
Valley Group, a middle-market management advisory and private
equity firm, and served as a Managing Director until June 2008,
and continues to serve as non-executive chairman of the Penn
Valley Group. While at the Penn Valley Group, Mr. Zarrilli
also served as Acting Senior Vice President, Acting Chief
Administrative Officer and Acting Chief Financial Officer of
Safeguard from December 2006 to June 2007. Mr. Zarrilli
also served as the Chief Financial Officer, from 2001 to 2004,
of Fiberlink Communications Corporation, a provider of remote
access VPN solutions for large enterprises; as the Chief
Executive Officer, from 2000 to 2001, of Concellera Software,
Inc., a developer of content management software; as the Chief
Executive Officer, from 1999 to 2000, and Chief Financial
Officer, from 1994 to 1998, of US Interactive, Inc. (at the time
a public company), a provider of internet strategy consulting,
marketing and technology services (US Interactive filed for
bankruptcy protection under Chapter 11 of the United States
Bankruptcy Code in January 2001); and, previously, with
Deloitte & Touche from 1983 to 1994. Mr. Zarrilli
is a director and Chairman of the Audit Committee of
NutriSystem, Inc. and a director of Clarient, Inc.
PART II
|
|
Item 5.
|
Market
for the Registrants Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
|
Safeguards common stock is listed on the New York Stock
Exchange (Symbol: SFE). The high and low sale prices reported
within each quarter of 2009 and 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
High
|
|
Low
|
|
Fiscal year 2009:
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
5.16
|
|
|
$
|
2.04
|
|
Second quarter
|
|
|
8.40
|
|
|
|
3.48
|
|
Third quarter
|
|
|
11.94
|
|
|
|
6.60
|
|
Fourth quarter
|
|
|
12.47
|
|
|
|
8.60
|
|
Fiscal year 2008:
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
11.64
|
|
|
$
|
7.86
|
|
Second quarter
|
|
|
10.44
|
|
|
|
7.26
|
|
Third quarter
|
|
|
9.12
|
|
|
|
6.42
|
|
Fourth quarter
|
|
|
7.56
|
|
|
|
2.76
|
|
The high and low sale prices reported in the first quarter of
2010 through March 15, 2010 were $13.33 and $10.07,
respectively, and the last sale price reported on March 15,
2010, was $12.98. No cash dividends have been declared in any of
the years presented, and Safeguard has no present intention to
declare cash dividends. Sale prices
21
for periods prior to August 27, 2009 have been restated to
reflect a
one-for-six
reverse split of our common stock which became effective on
August 27, 2009.
As of March 15, 2010, there were approximately 31,000
beneficial holders of Safeguards common stock.
The following graph compares the cumulative total return on $100
invested in our common stock for the period from
December 31, 2004 through December 31, 2009 with the
cumulative total return on $100 invested for the same period in
the Russell 2000 Index and the Dow Jones Wilshire 4500 Index. In
light of the diverse nature of Safeguards business and
based on our assessment of available published industry or
line-of-business
indices, we determined that no single industry or
line-of-business
index would provide a meaningful comparison to Safeguard.
Further, we did not believe that we could readily identify an
appropriate group of industry peer companies for this
comparison. Accordingly, under SEC rules, we selected the Dow
Jones Wilshire 4500 Index, a published market index in which the
median market capitalization of the included companies is
similar to our own. Safeguards common stock is included as
a component of the Russell 2000 and Dow Jones Wilshire 4500
indices.
Comparison
of Cumulative Total Returns
|
|
|
|
|
Assumes reinvestment of dividends. We have not distributed cash
dividends during this period.
|
|
|
|
Assumes an investment of $100 on December 31, 2004.
|
Purchases
of Equity Securities by the Issuer and Affiliated
Purchasers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
Maximum Number of
|
|
|
|
|
|
|
Shares Purchased as
|
|
Shares that
|
|
|
Total Number
|
|
Average
|
|
Part of Publicly
|
|
May Yet Be
|
|
|
of Shares
|
|
Price Paid
|
|
Announced Plans or
|
|
Purchased Under the
|
Period
|
|
Purchased
|
|
Per Share
|
|
Programs
|
|
Plans or Programs
|
|
October 1, 2009(1)
|
|
|
43,441
|
|
|
$
|
10.9607
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
(1) |
|
The purchases reported in this table represent shares of Company
common stock that were transferred to the Company by Warren V.
Musser, the former Chairman and CEO of the Company, in partial
payment against an outstanding loan obligation. |
22
|
|
Item 6.
|
Selected
Consolidated Financial Data
|
The following table sets forth our selected consolidated
financial data for the five-year period ended December 31,
2009. The selected consolidated financial data presented below
should be read in conjunction with Item 7.
Managements Discussion and Analysis of Financial Condition
and Results of Operations and Item 8. Consolidated
Financial Statements and Notes thereto included in this report.
The historical results presented herein may not be indicative of
future results. During the five-year period ended
December 31, 2009, certain consolidated partner companies,
or components thereof, were sold. These businesses are reflected
in discontinued operations through their respective disposal
dates: Acsis, Inc., Alliance Consulting Group Associates, Inc.
and Laureate Pharma, Inc. (May, 2008), Pacific Title &
Art Studio Inc. (March 2007), Clarients technology
business (March 2007), Mantas (October 2006), Alliance
Consultings Southwest region business (July 2006) and
Laureate Pharmas Totowa, New Jersey operation (December
2005). The accounts of Clarient are included in continuing
operations through May 14, 2009, the date of its
deconsolidation. Effective January 1, 2009, we reflect the
portion of equity (net assets) of our consolidated partner
companies, if any, not attributable, directly or indirectly, to
the parent company as a non-controlling interest within equity.
Accordingly, Total equity has been restated for the years 2007,
2006 and 2005 to reflect this change. In addition, all share
amounts and earnings per share information have been restated to
reflect our
one-for-six
reverse stock split which became effective on August 27,
2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
|
(In thousands)
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
67,347
|
|
|
$
|
75,051
|
|
|
$
|
96,201
|
|
|
$
|
60,381
|
|
|
$
|
117,633
|
|
Short-term investments
|
|
|
39,066
|
|
|
|
14,701
|
|
|
|
590
|
|
|
|
94,155
|
|
|
|
31,770
|
|
Restricted cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,098
|
|
Cash held in escrow
|
|
|
6,910
|
|
|
|
6,934
|
|
|
|
22,686
|
|
|
|
19,398
|
|
|
|
|
|
Working capital of continuing operations
|
|
|
105,983
|
|
|
|
88,400
|
|
|
|
97,184
|
|
|
|
133,643
|
|
|
|
139,877
|
|
Total assets of continuing operations
|
|
|
282,099
|
|
|
|
232,402
|
|
|
|
258,075
|
|
|
|
277,019
|
|
|
|
220,657
|
|
Convertible senior debentures
|
|
|
78,225
|
|
|
|
86,000
|
|
|
|
129,000
|
|
|
|
129,000
|
|
|
|
150,000
|
|
Long-term debt, net of current portion
|
|
|
|
|
|
|
345
|
|
|
|
906
|
|
|
|
1,939
|
|
|
|
2,073
|
|
Other long-term liabilities
|
|
|
5,461
|
|
|
|
9,600
|
|
|
|
9,111
|
|
|
|
9,276
|
|
|
|
12,571
|
|
Total equity
|
|
|
190,507
|
|
|
|
104,710
|
|
|
|
155,831
|
|
|
|
216,698
|
|
|
|
175,453
|
|
Certain amounts for prior periods in the Consolidated Financial
Statements have been reclassified to conform with current period
presentations.
23
Consolidated
Statements of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands except per share amounts)
|
|
|
Revenue
|
|
$
|
34,839
|
|
|
$
|
73,736
|
|
|
$
|
42,995
|
|
|
$
|
27,723
|
|
|
$
|
11,439
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
13,811
|
|
|
|
33,007
|
|
|
|
26,914
|
|
|
|
19,824
|
|
|
|
10,959
|
|
Selling, general and administrative
|
|
|
37,214
|
|
|
|
60,744
|
|
|
|
50,783
|
|
|
|
44,924
|
|
|
|
34,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
51,025
|
|
|
|
93,751
|
|
|
|
77,697
|
|
|
|
64,748
|
|
|
|
45,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(16,186
|
)
|
|
|
(20,015
|
)
|
|
|
(34,702
|
)
|
|
|
(37,025
|
)
|
|
|
(33,693
|
)
|
Other income (loss), net
|
|
|
108,881
|
|
|
|
10,280
|
|
|
|
(5,077
|
)
|
|
|
5,762
|
|
|
|
7,101
|
|
Interest income
|
|
|
480
|
|
|
|
3,097
|
|
|
|
7,520
|
|
|
|
6,805
|
|
|
|
4,975
|
|
Interest expense
|
|
|
(3,164
|
)
|
|
|
(4,732
|
)
|
|
|
(5,489
|
)
|
|
|
(5,203
|
)
|
|
|
(5,195
|
)
|
Equity loss
|
|
|
(23,227
|
)
|
|
|
(34,697
|
)
|
|
|
(15,178
|
)
|
|
|
(3,732
|
)
|
|
|
(6,597
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations before income taxes
|
|
|
66,784
|
|
|
|
(46,067
|
)
|
|
|
(52,926
|
)
|
|
|
(33,393
|
)
|
|
|
(33,409
|
)
|
Income tax benefit
|
|
|
14
|
|
|
|
24
|
|
|
|
687
|
|
|
|
1,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
|
66,798
|
|
|
|
(46,043
|
)
|
|
|
(52,239
|
)
|
|
|
(32,133
|
)
|
|
|
(33,409
|
)
|
Income (loss) from discontinued operations, net of tax
|
|
|
1,975
|
|
|
|
(9,620
|
)
|
|
|
(17,282
|
)
|
|
|
70,358
|
|
|
|
(5,026
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
68,773
|
|
|
|
(55,663
|
)
|
|
|
(69,521
|
)
|
|
|
38,225
|
|
|
|
(38,435
|
)
|
Net (income) loss attributable to noncontrolling interest
|
|
|
(1,163
|
)
|
|
|
3,650
|
|
|
|
3,653
|
|
|
|
7,218
|
|
|
|
6,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Safeguard Scientifics,
Inc.
|
|
$
|
67,610
|
|
|
$
|
(52,013
|
)
|
|
$
|
(65,868
|
)
|
|
$
|
45,443
|
|
|
$
|
(32,070
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Income (Loss) Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
$
|
3.26
|
|
|
$
|
(2.10
|
)
|
|
$
|
(2.28
|
)
|
|
$
|
(1.32
|
)
|
|
$
|
(1.32
|
)
|
Net income (loss) from discontinued operations
|
|
|
0.07
|
|
|
|
(0.46
|
)
|
|
|
(0.96
|
)
|
|
|
3.54
|
|
|
|
(0.30
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
3.33
|
|
|
$
|
(2.56
|
)
|
|
$
|
(3.24
|
)
|
|
$
|
2.22
|
|
|
$
|
(1.62
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic income (loss) per share
|
|
|
20,308
|
|
|
|
20,326
|
|
|
|
20,328
|
|
|
|
20,246
|
|
|
|
20,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Income (Loss) Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
$
|
3.08
|
|
|
$
|
(2.10
|
)
|
|
$
|
(2.28
|
)
|
|
$
|
(1.32
|
)
|
|
$
|
(1.32
|
)
|
Net income (loss) from discontinued operations
|
|
|
0.06
|
|
|
|
(0.46
|
)
|
|
|
(0.96
|
)
|
|
|
3.54
|
|
|
|
(0.30
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
3.14
|
|
|
$
|
(2.56
|
)
|
|
$
|
(3.24
|
)
|
|
$
|
2.22
|
|
|
$
|
(1.62
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing diluted income (loss) per share
|
|
|
22,383
|
|
|
|
20,326
|
|
|
|
20,328
|
|
|
|
20,246
|
|
|
|
20,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certain amounts for prior periods in the Consolidated Financial
Statements have been reclassified to conform with current period
presentations.
24
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Cautionary
Note concerning Forward-Looking Statements
This Annual Report on
Form 10-K
contains forward-looking statements that are based on current
expectations, estimates, forecasts and projections about
Safeguard Scientifics, Inc. (Safeguard or
we), the industries in which we operate and other
matters, as well as managements beliefs and assumptions
and other statements regarding matters that are not historical
facts. These statements include, in particular, statements about
our plans, strategies and prospects. For example, when we use
words such as projects, expects,
anticipates, intends, plans,
believes, seeks, estimates,
should, would, could,
will, opportunity, potential
or may, variations of such words or other words that
convey uncertainty of future events or outcomes, we are making
forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Our
forward-looking statements are subject to risks and
uncertainties. Factors that could cause actual results to differ
materially, include, among others, managing rapidly changing
technologies, limited access to capital, competition, the
ability to attract and retain qualified employees, the ability
to execute our strategy, the uncertainty of the future
performance of our partner companies, acquisitions and
dispositions of companies, the inability to manage growth,
compliance with government regulation and legal liabilities,
additional financing requirements, labor disputes and the effect
of economic conditions in the business sectors in which our
partner companies operate, all of which are discussed in
Item 1A. Risk Factors. Many of these factors
are beyond our ability to predict or control. In addition, as a
result of these and other factors, our past financial
performance should not be relied on as an indication of future
performance. All forward-looking statements attributable to us,
or to persons acting on our behalf, are expressly qualified in
their entirety by this cautionary statement. We undertake no
obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future
events or otherwise, except as required by law. In light of
these risks and uncertainties, the forward-looking events and
circumstances discussed in this report might not occur.
Overview
Safeguards charter is to build value in growth-stage
technology and life sciences businesses by providing partner
companies with capital and a range of strategic, operational and
management resources. Safeguard may participate in expansion
financings, corporate spin-outs, management buy-outs,
recapitalizations, industry consolidations and early-stage
financings. Our vision is to be the preferred catalyst for
creating great technology and life sciences companies.
We strive to create long-term value for our shareholders by
helping our partner companies increase market penetration, grow
revenue and improve cash flow. We focus on companies with
capital requirements of up to $25 million that operate in
two categories:
Technology including companies focused on
providing healthcare information technology, financial services
technology and internet/new media businesses that have recurring
or transactional revenue models.
Life Sciences including companies focused on
molecular and
point-of-care
diagnostics, medical devices/regenerative medicine, specialty
pharmaceuticals and healthcare services.
Principles
of Accounting for Ownership Interests in Partner
Companies
We account for our interests in our partner companies and
private equity funds using any of four methods: consolidation,
fair value, equity or cost. The accounting method applied is
generally determined by the degree of our influence over the
entity, primarily determined by our voting interest in the
entity.
Consolidation Method. We account for our
partner companies in which we maintain a controlling financial
interest, generally those in which we directly or indirectly own
more than 50% of the outstanding voting securities, using the
consolidation method of accounting. Upon consolidation of our
partner companies, we reflect the portion of equity (net assets)
in a subsidiary not attributable, directly or indirectly, to the
parent company as a noncontrolling interest in the Consolidated
Balance Sheet. The noncontrolling interest is presented within
equity, separately from the equity of the parent company. Losses
attributable to the parent company and the noncontrolling
interest may exceed their interest in the subsidiarys
equity. As a result, the noncontrolling interest shall continue
to be attributed
25
its share of losses even if that attribution results in a
deficit noncontrolling interest balance as of each balance sheet
date. Revenue, expenses, gains, losses, net income or loss are
reported in the Consolidated Statements of Operations at the
consolidated amounts, which include the amounts attributable to
the parent companys common shareholders and the
noncontrolling interest. As of December 31, 2009, we did
not hold a controlling interest in any of our partner companies.
Equity Method. We account for partner
companies whose results are not consolidated, but over whom we
exercise significant influence, using the equity method of
accounting. We also account for our interests in some private
equity funds under the equity method of accounting, depending on
our general and limited partner interests. Under the equity
method of accounting, our share of the income or loss of the
company is reflected in Equity loss in the Consolidated
Statements of Operations. We report our share of the income or
loss of the equity method partner companies on a one quarter lag.
When the carrying value of our holding in an equity method
partner company is reduced to zero, no further losses are
recorded in our Consolidated Statements of Operations unless we
have outstanding guarantee obligations or have committed
additional funding to the equity method partner company. When
the equity method partner 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.
Cost Method. We account for partner companies
which are not consolidated or accounted for under the equity
method using the cost method of accounting. Under the cost
method, our share of the income or losses of such partner
companies is not included in our Consolidated Statements of
Operations. However, the effect of the change in market value of
cost method partner company holdings classified as trading
securities is reflected in Other income (loss), net in the
Consolidated Statements of Operations. At December 31,
2009, we did not maintain any cost method partner company
holdings classified as trading securities.
Fair Value Method. We account for our holdings
in Clarient, our publicly traded partner company, under the fair
value option following its deconsolidation on May 14, 2009.
Unrealized gains and losses on the
mark-to-market
of our holdings in Clarient and realized gains and losses on the
sale of any of our holdings in Clarient are recognized in Income
(loss) from continuing operations in the Consolidated Statements
of Operations.
Critical
Accounting Policies and Estimates
Accounting policies, methods and estimates are an integral part
of the Consolidated Financial Statements prepared by management
and are based upon managements current judgments. These
judgments are normally based on knowledge and experience with
regard to past and current events and assumptions about future
events. Certain accounting policies, methods and estimates are
particularly important because of their significance to the
financial statements and because of the possibility that future
events affecting them may differ from managements current
judgments. While there are a number of accounting policies,
methods and estimates affecting our financial statements as
described in Note 1 to our Consolidated Financial
Statements, areas that are particularly significant include the
following:
|
|
|
|
|
Revenue recognition;
|
|
|
|
Allowance for doubtful accounts and bad debt expense;
|
|
|
|
Impairment of ownership interests in and advances to companies;
|
|
|
|
Income taxes;
|
|
|
|
Commitments and contingencies; and
|
|
|
|
Stock-based compensation.
|
Revenue
Recognition
As of May 14, 2009, the date that Clarient was
deconsolidated, we no longer report revenue from Clarients
continuing operations. Prior to that date, all of our revenue
from continuing operations for the periods presented was
attributable to Clarient.
26
Revenue for Clarients diagnostic testing and interpretive
services was recognized at the time of completion of such
services. Clarients services were billed to various
payors, including Medicare, health insurance companies and other
directly billed healthcare institutions and patients. Clarient
reported revenue from contracted payors, including certain
health insurance companies and healthcare institutions, based on
the contracted rate or, in certain instances, Clarients
estimate of such rate. For billings to Medicare, Clarient
utilized the published fee schedules, net of standard discounts
commonly referred to as contractual allowances.
Clarient reported revenue from non-contracted payors, including
certain insurance companies and patients, based on the amount
expected to be collected for services provided. Adjustments
resulting from actual collections compared to Clarients
estimates were recognized in the period realized.
Allowance
for Doubtful Accounts and Bad Debt Expense
All trade accounts receivable on our Consolidated Balance Sheet
at December 31, 2008 related to Clarient. On May 14,
2009, all of the assets and liabilities of Clarient were
deconsolidated. We have no trade accounts receivable at
December 31, 2009 on the Consolidated Balance Sheet.
An allowance for doubtful accounts was recorded for estimated
uncollectible amounts due from various payor groups such as
Medicare and private health insurance companies. The process for
estimating the allowance for doubtful accounts associated with
Clarients diagnostic services involved significant
assumptions and judgments. Specifically, the allowance for
doubtful accounts was adjusted periodically, based upon an
evaluation of historical collection experience. Clarient also
reviewed the age of receivables by payor class to assess its
allowance at each period end. The payment realization cycle for
certain governmental and managed care payors can be lengthy;
involving denial, appeal and adjudication processes, and was
subject to periodic adjustments that may be significant.
Accounts receivable were periodically written off when
identified as uncollectible and deducted from the allowance for
doubtful accounts after appropriate collection efforts had been
exhausted. Additions to the allowance for doubtful accounts were
charged to bad debt expense within Selling, general and
administrative expense in the Consolidated Statements of
Operations.
Impairment
of Ownership Interests In and Advances to
Companies
On a periodic basis, but no less frequently than quarterly, we
evaluate the carrying value of our equity and cost method
partner companies for possible impairment based on achievement
of business plan objectives and milestones, the financial
condition and prospects of the company, market conditions 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 hiring of
key employees or the establishment of strategic relationships.
We then determine whether there has been an other than temporary
decline in the value of our ownership interest in the company.
Impairment to be recognized is measured as the amount by which
the carrying value of an asset exceeds its fair value. The new
carrying value of a partner company is not increased if
circumstances suggest the value of the partner company has
subsequently recovered.
The fair value of 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
based on other valuation methods including discounted cash
flows, valuations of comparable public companies and valuations
of acquisitions of comparable companies. 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 and estimated future proceeds from sales
of investments provided by the funds managers. The fair
value of our ownership interest in Clarient is determined by
reference to quoted prices in an active market for
Clarients publicly traded common stock.
Our partner companies operate in industries which are rapidly
evolving and extremely competitive. It is reasonably possible
that our accounting estimates with respect to the ultimate
recoverability of the carrying value of ownership interests in
and advances to companies 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 equity and cost method companies
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 will not be required in the future.
27
Total impairment charges related to ownership interests in and
advances to our equity and cost method partner companies were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Accounting Method
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In millions)
|
|
|
Equity
|
|
$
|
4.1
|
|
|
$
|
6.6
|
|
|
$
|
|
|
Cost
|
|
|
10.1
|
|
|
|
2.3
|
|
|
|
5.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
14.2
|
|
|
$
|
8.9
|
|
|
$
|
5.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment charges related to equity method partner companies
are included in Equity loss in the Consolidated Statements of
Operations. Impairment charges related to cost method partner
companies are included in Other income (loss), net in the
Consolidated Statements of Operations.
Income
Taxes
We are required to estimate income taxes in each of the
jurisdictions in which we operate. This process involves
estimating our actual current tax exposure together with
assessing temporary differences resulting from differing
treatment of items for tax and accounting purposes. These
differences result in deferred tax assets and liabilities, which
are included within our Consolidated Balance Sheets. We must
assess the likelihood that the deferred tax assets will be
recovered from future taxable income and to the extent that we
believe recovery is not likely, we must establish a valuation
allowance. To the extent we establish a valuation allowance in a
period, we must include an expense within the tax provision in
the Consolidated Statements of Operations. We have recorded a
valuation allowance to reduce our deferred tax assets to an
amount that is more likely than not to be realized in future
years. If we determine in the future that it is more likely than
not that the net deferred tax assets would be realized, then the
previously provided valuation allowance would be reversed.
Commitments
and Contingencies
From time to time, we are a defendant or plaintiff in various
legal actions which arise in the normal course of business.
Additionally, we have received distributions as both a general
partner and a limited partner from private equity funds. In
certain circumstances, we may be required to return a portion or
all the distributions we received as a general partner of a fund
for a further distribution to such funds limited partners
(clawback). We are also a guarantor of various
third-party obligations and commitments and are subject to the
possibility of various loss contingencies arising in the
ordinary course of business (see Note 15). We are required
to assess the likelihood of any adverse outcomes to these
matters as well as potential ranges of probable losses. A
determination of the amount of provision required for these
commitments and contingencies, if any, which would be charged to
earnings, is made after careful analysis of each matter. The
provision may change in the future due to new developments or
changes in circumstances. Changes in the provision could
increase or decrease our earnings in the period the changes are
made.
Stock-Based
Compensation
We measure all employee stock-based compensation awards using a
fair value method and record such expense in our Consolidated
Statements of Operations.
We estimate the grant date fair value of stock options using the
Black-Scholes option-pricing model which requires the input of
highly subjective assumptions. These assumptions include
estimating the expected term of the award and the estimated
volatility of our stock price over the expected term. Changes in
these assumptions and in the estimated forfeitures of stock
option awards can materially affect the amount of stock-based
compensation recognized in the Consolidated Statements of
Operations. The requisite service periods for market-based stock
option awards are based on our estimate of the dates on which
the market conditions will be met as determined using a Monte
Carlo simulation model. Changes in the derived requisite service
period or achievement of market capitalization targets earlier
than estimated can materially affect the amount of stock-based
compensation recognized in the Consolidated Statements of
Operations. The requisite service periods for performance-based
awards are based on our best estimate of when the performance
conditions will be met. Compensation expense is
28
recognized for performance-based awards for which the
performance condition is considered probable of achievement.
Changes in the requisite service period or the estimated
probability of achievement of performance conditions can
materially affect the amount of stock-based compensation
recognized in the Consolidated Statements of Operations.
Results
of Operations
Prior to deconsolidating Clarient on May 14, 2009, we
presented Clarient as a separate segment. As of May 14,
2009, we account for our retained interest in Clarient at fair
value with unrealized gains and losses on the
mark-to-market
of our Clarient holdings and realized gains and losses on the
sale of any of our Clarient holdings included in Other income
(loss), net in the Consolidated Statements of Operations. During
2009, we re-evaluated our reportable operating segments and we
made the determination that Clarient would no longer be reported
as a separate segment since we do not separately evaluate
Clarients performance based upon its operating results.
Clarient is now included in the Life Sciences segment. We have
restated the segment information for all of the periods
presented to report Clarient as part of the Life Sciences
segment. The results of operations of all of our partner
companies are reported in our Life Sciences and Technology
segments. The Life Sciences and Technology segments also include
the gain or loss on the sale of respective partner companies,
except for gains and losses included in discontinued operations.
On May 6, 2008, we consummated a transaction (the
Bundle Transaction) pursuant to which we sold all of
our equity and debt interests in Acsis, Inc.
(Acsis), Alliance Consulting Group Associates, Inc.
(Alliance Consulting), Laureate Pharma, Inc.
(Laureate Pharma), ProModel Corporation
(ProModel) and Neuronyx, Inc. (Neuronyx)
(collectively, the Bundle Companies). Of the
companies included in the Bundle Transaction, Acsis, Alliance
Consulting and Laureate Pharma were majority-owned partner
companies and Neuronyx and ProModel were minority-owned partner
companies. We have presented the results of operations of Acsis,
Alliance Consulting and Laureate Pharma as discontinued
operations for all periods presented.
Our management evaluates the Life Sciences and Technology
segments performance based on equity income (loss) which
is based on the number of partner companies accounted for under
the equity method, our voting ownership percentage in these
partner companies and the net results of operations of these
partner companies and Other income or loss associated with cost
method partner companies.
Other items include certain expenses, which are not identifiable
to the operations of our operating business segments. Other
items primarily consist of general and administrative expenses
related to corporate operations, including employee
compensation, insurance and professional fees, interest income,
interest expense, other income (loss) and equity income (loss)
related to private equity holdings. Other Items also include
income taxes, which are reviewed by management independent of
segment results.
29
The following tables reflect our consolidated operating data by
reportable segment. Segment results include our share of income
or losses for entities accounted for under the equity method,
when applicable. Segment results also include impairment charges
and gains or losses related to the disposition of partner
companies, except for those reported in discontinued operations.
All significant inter-segment activity has been eliminated in
consolidation. Our operating results, including net income
(loss) before income taxes by segment, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Life Sciences
|
|
$
|
99,289
|
|
|
$
|
(26,317
|
)
|
|
$
|
(28,357
|
)
|
Technology
|
|
|
(12,742
|
)
|
|
|
(12,947
|
)
|
|
|
(5,249
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segments
|
|
|
86,547
|
|
|
|
(39,264
|
)
|
|
|
(33,606
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other items:
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate operations
|
|
|
(19,763
|
)
|
|
|
(6,803
|
)
|
|
|
(19,320
|
)
|
Income tax benefit
|
|
|
14
|
|
|
|
24
|
|
|
|
687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other items
|
|
|
(19,749
|
)
|
|
|
(6,779
|
)
|
|
|
(18,633
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
|
66,798
|
|
|
|
(46,043
|
)
|
|
|
(52,239
|
)
|
Income (loss) from discontinued operations, net of tax
|
|
|
1,975
|
|
|
|
(9,620
|
)
|
|
|
(17,282
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
68,773
|
|
|
|
(55,663
|
)
|
|
|
(69,521
|
)
|
Net (income) loss attributable to noncontrolling interest
|
|
|
(1,163
|
)
|
|
|
3,650
|
|
|
|
3,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Safeguard Scientifics,
Inc.
|
|
$
|
67,610
|
|
|
$
|
(52,013
|
)
|
|
$
|
(65,868
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There is intense competition in the markets in which our partner
companies operate, and we expect competition to intensify in the
future. Additionally, the markets in which these companies
operate are characterized by rapidly changing technology,
evolving industry standards, frequent introduction of new
products and services, shifting distribution channels, evolving
government regulation, frequently changing intellectual property
landscapes and changing customer demands. Their future success
depends on each companys ability to execute its business
plan and to adapt to its respective rapidly changing markets.
As previously stated, throughout this document, we use the term
partner company to generally refer to those
companies that we have an economic interest in and that we are
actively involved in influencing the development of, usually
through board representation in addition to our equity ownership
stake.
For purposes of the following listing of our Life Science and
Technology partner companies, we omit from the listing companies
which we have since sold our interest in or which we no longer
consider to be active partner companies because we no longer
actively influence the operations of such entities.
30
Life
Sciences
The following active partner companies were included in Life
Sciences during the years ended December 31, 2009, 2008 and
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Safeguard Primary Ownership as of December 31
|
|
Accounting
|
Partner Company
|
|
2009
|
|
2008
|
|
2007
|
|
Method
|
|
Advanced BioHealing
|
|
|
28.3
|
%
|
|
|
28.3
|
%
|
|
|
28.3
|
%
|
|
Equity
|
Alverix
|
|
|
49.6
|
%
|
|
|
50.0
|
%
|
|
|
50.0
|
%
|
|
Equity
|
Avid
|
|
|
13.5
|
%
|
|
|
13.5
|
%
|
|
|
13.8
|
%
|
|
Cost
|
Cellumen
|
|
|
58.7
|
%
|
|
|
40.6
|
%
|
|
|
40.3
|
%
|
|
Equity(1)
|
Clarient
|
|
|
28.0
|
%
|
|
|
60.4
|
%
|
|
|
58.7
|
%
|
|
Fair Value(2)
|
Garnet
|
|
|
31.1
|
%
|
|
|
31.2
|
%
|
|
|
NA
|
|
|
Equity
|
Molecular Biometrics
|
|
|
35.4
|
%
|
|
|
37.8
|
%
|
|
|
NA
|
|
|
Equity
|
NuPathe
|
|
|
22.9
|
%
|
|
|
23.5
|
%
|
|
|
26.2
|
%
|
|
Equity
|
Quinnova
|
|
|
25.7
|
%
|
|
|
NA
|
|
|
|
NA
|
|
|
Equity
|
Tengion
|
|
|
4.5
|
%
|
|
|
4.5
|
%
|
|
|
NA
|
|
|
Cost
|
|
|
|
(1) |
|
Due to the substantive participating rights of the minority
shareholders in the significant operating decisions of Cellumen,
we continue to account for our holdings in Cellumen under the
equity method. |
(2) |
|
Prior to May 14, 2009, we accounted for Clarient under the
consolidation method. |
Results for the Life Sciences segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Revenue
|
|
$
|
34,839
|
|
|
$
|
73,736
|
|
|
$
|
42,995
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
13,811
|
|
|
|
33,007
|
|
|
|
26,914
|
|
Selling, general and administrative
|
|
|
19,407
|
|
|
|
42,329
|
|
|
|
28,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
33,218
|
|
|
|
75,336
|
|
|
|
54,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
1,621
|
|
|
|
(1,600
|
)
|
|
|
(11,919
|
)
|
Other income, net
|
|
|
114,222
|
|
|
|
|
|
|
|
(5,331
|
)
|
Interest income
|
|
|
4
|
|
|
|
21
|
|
|
|
60
|
|
Interest expense
|
|
|
(275
|
)
|
|
|
(880
|
)
|
|
|
(1,269
|
)
|
Equity loss
|
|
|
(16,283
|
)
|
|
|
(23,858
|
)
|
|
|
(9,898
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations before income taxes
|
|
$
|
99,289
|
|
|
$
|
(26,317
|
)
|
|
$
|
(28,357
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2009 versus year ended December 31,
2008
Results of operations for the year ended December 31, 2009
include the results of operations of Clarient for the
134 days in the period from January 1, 2009 through
May 14, 2009 that Clarient was consolidated. Upon the
deconsolidation of Clarient on May 14, 2009, we no longer
reported revenue, cost of sales, selling, general and
administrative expenses interest income and interest expense
from Clarients continuing operations in our results of
operations. Prior to that date, all of our Life Science
segments revenue, cost of sales, selling, general and
administrative expenses, interest income and interest expense
from continuing operations was attributable to Clarient.
31
Other Income (Loss), Net. On May 14,
2009, we deconsolidated our holdings in Clarient because we
ceased to have a controlling financial interest in Clarient and
recognized an unrealized gain on deconsolidation of
$106.0 million as of that date. In addition, we recognized
an unrealized gain of $19.5 million on the
mark-to-market
of our holdings in Clarient through December 31, 2009 which
was offset by a $7.3 million realized loss of the sale of
18.4 million shares of common stock of Clarient and an
impairment charge of $3.9 million related to our holdings
in Tengion.
Equity Loss. Equity loss fluctuates with the
number of Life Sciences partner companies accounted for under
the equity method, our voting ownership percentage in these
partner companies and the net results of operations of these
partner companies. We recognize our share of losses to the
extent we have cost basis in the equity of the partner company
or we have outstanding commitments or guarantees. 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. We report
our share of the results of our equity method partner companies
on a one quarter lag basis. Equity loss for Life Sciences
decreased $7.6 million for the year ended December 31,
2009 compared to the prior year. Included in equity loss for the
year ended December 31, 2009 were impairment charges and
equity losses of $4.0 million associated with Rubicor Inc.,
a former partner company and $0.8 million in impairment
charges associated with Cellumen. Rubicor effectively halted
operations in 2008 after failing to attract sufficient capital
to continue operations. At present, Rubicor is undergoing
reorganization under Chapter 11 of the United States
Bankruptcy Code. The carrying value of Rubicor was zero at
December 31, 2009. Also included in 2008 equity loss were
expenses of $2.5 and $1.3 million associated with acquired
in-process research and development related to our holdings in
Molecular Biometrics and Nupathe, respectively.
Year
ended December 31, 2008 versus year ended December 31,
2007
Revenue. Revenue of $73.7 million for the
year ended December 31, 2008 increased 71.5% or
$30.7 million from $43.0 million in the prior year.
The increase resulted from Clarients increase of
diagnostic services volume of 51.5%, and increased Medicare
reimbursement rates.
Clarient expanded its menu of oncology diagnostic testing
services in the first quarter of 2008 to include markers for
tumors of the colon, prostate, and lung. Clairents
expanded capabilities in the test methodologies of
immunohistochemistry (IHC), flow cytometry, fluorescent in situ
hybridization (FISH), and molecular/PCR, and its accompanying
sales and marketing efforts drove its net revenue growth in the
year ended December 31, 2008, as compared to 2007.
Cost of Sales. Cost of sales for the year
ended December 31, 2008 was $33.0 million compared to
$26.9 million in the prior year, an increase of 22.6%. The
$6.1 million increase was driven by an overall increase in
revenue, and was primarily related to: additional laboratory
personnel costs of $2.1 million, increased laboratory
reagents and other supplies expense of $1.4 million,
increased allocated facilities expense of $0.4 million,
increased cost of tests performed on its behalf by other
laboratories of $1.7 million and an increase in shipping
expense of $1.2 million.
Selling, General and Administrative
Expenses. Selling, general and administrative
expenses of $42.3 million for the year ended
December 31, 2008 increased 51.2%, or $14.3 million,
from $28.0 million for the prior year. The increase was
primarily related to a $8.6 million increase in bad debt
expense, additional administrative personnel costs of
$2.6 million to support its business growth and new in
house billing and collection department, additional sales and
marketing personnel costs of $1.7 million, a
$0.3 million increase in travel-related expenses and a
$0.2 million increase in tradeshow and advertising
expenses, partially offset by a $1.0 million decrease in
third-party billing and collection fees. Accounting and legal
fees increased by $0.8 million and $0.6 million,
respectively. The increase in accounting fees was primarily
associated with the testing of internal controls over financial
reporting. The increase in legal fees was primarily associated
with SEC compliance, corporate governance, financing
arrangements and executive compensation.
The increase in bad debt expense was primarily related to
Clarients increase in revenue as compared to the prior
year and the impact on cash collections of delays in
Clarients internal billing and collection efforts. Bad
debt expense was also impacted by higher loss experience,
including significant uncollectible accounts identified during
the second half of 2008 which were previously serviced by
Clarients former third-party billing and collection
service provider.
32
Interest, net. Interest expense in 2008 was
$0.9 million, compared to $1.2 million in 2007. The
decrease was due to lower outstanding borrowings under
Clarients third party financing facilities.
Net Income (Loss). Net income in 2008 was
$0.8 million compared to a net loss of $7.4 million in
2007. The improvement was primarily attributable to higher
margins from increased revenue.
Equity Loss. Equity loss for Life Sciences
increased $14.0 million for the year ended
December 31, 2008 compared to the prior year. Included in
equity loss for the year ended December 31, 2008 were
impairment charges and equity losses of $8.8 million
related to Rubicor, which effectively halted operations in 2008
after failing to attract sufficient capital to continue
operations, and expense of $2.5 million associated with
acquired in-process research and development related to our
acquisition of a 37% interest in Molecular Biometrics. In
addition, we recognized a $1.3 million expense in the
fourth quarter of 2008 related to an in-process research and
development charge recorded by NuPathe. The increase in equity
loss was also due to an increase in the number of equity method
partner companies, each of which generated losses, and larger
losses incurred at certain partner companies. Other loss for the
year ended December 31, 2007 reflected an impairment charge
related to our holdings in Ventaira Pharmaceuticals, a former
partner company as well as equity losses associated with other
partner companies.
Technology
The following active partner companies were included in
Technology during the years ended December 31, 2009, 2008
and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Safeguard Primary Ownership as of
|
|
|
Accounting
|
Partner Company
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Method
|
|
AHS
|
|
|
39.7
|
%
|
|
|
37.7
|
%
|
|
|
35.2
|
%
|
|
Equity
|
Authentium
|
|
|
20.0
|
%
|
|
|
20.0
|
%
|
|
|
19.9
|
%
|
|
Equity(1)
|
Beyond.com
|
|
|
38.3
|
%
|
|
|
37.1
|
%
|
|
|
37.1
|
%
|
|
Equity
|
Bridgevine
|
|
|
23.6
|
%
|
|
|
20.8
|
%
|
|
|
20.9
|
%
|
|
Equity
|
MediaMath
|
|
|
17.5
|
%
|
|
|
NA
|
|
|
|
NA
|
|
|
Cost
|
Portico Systems
|
|
|
45.4
|
%
|
|
|
46.8
|
%
|
|
|
46.9
|
%
|
|
Equity
|
Swaptree
|
|
|
29.3
|
%
|
|
|
29.3
|
%
|
|
|
NA
|
|
|
Equity
|
|
|
|
(1) |
|
During 2008, we increased our ownership interest in Authentium
to 20.0%, a threshold at which we believe we exercise
significant influence. Accordingly, we adopted the equity method
of accounting for our holdings in Authentium. We have adjusted
the financial statements for all prior periods presented to
retrospectively apply the equity method of accounting for our
holdings in Authentium since the initial date of acquisition in
April 2006. |
Results for the Technology segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Other income (loss), net
|
|
$
|
(5,846
|
)
|
|
$
|
(2,251
|
)
|
|
$
|
|
|
Equity loss
|
|
|
(6,896
|
)
|
|
|
(10,696
|
)
|
|
|
(5,249
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations before income taxes
|
|
$
|
(12,742
|
)
|
|
$
|
(12,947
|
)
|
|
$
|
(5,249
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2009 versus year ended December 31,
2008
Other Income (Loss), Net. Other loss increased
$3.6 million in 2009 compared to the prior year. The
current year loss was entirely attributable to an impairment
related to our holdings in GENBAND, a former partner company.
The prior year loss reflected an impairment related to our
holdings in Kadoo Inc., a former partner company.
33
Equity Loss. Equity loss fluctuates with the
number of Technology partner companies accounted for under the
equity method, our voting ownership percentage in these partner
companies and the net results of operations of these partner
companies. We recognize our share of losses to the extent we
have cost basis in the equity partner company or we have
outstanding commitments or guarantees. 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. We report our share of
the results of our equity method partner companies on a one
quarter lag. Equity loss for Technology decreased
$3.8 million for the year ended December 31, 2009
compared to the prior year. The decrease was due principally to
smaller losses incurred at certain partner companies and an
impairment charge of $2.6 million related to our holdings
in Authentium recorded in 2008.
Year
ended December 31, 2008 versus year ended December 31,
2007
Other Income (Loss), Net. Other loss for the
year ended December 31, 2008 reflects a $2.3 million
impairment charge related to our holdings in Kadoo.
Equity Loss. Equity loss for Technology
increased $5.4 million for the year ended December 31,
2008 compared to the prior year. The increase was due
principally to larger losses incurred at certain partner
companies and an impairment charge of $2.6 million related
to our holdings in Authentium.
Corporate
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
General and administrative
|
|
$
|
(14,695
|
)
|
|
$
|
(16,511
|
)
|
|
$
|
(19,058
|
)
|
Stock-based compensation
|
|
|
(2,982
|
)
|
|
|
(1,738
|
)
|
|
|
(3,530
|
)
|
Depreciation
|
|
|
(130
|
)
|
|
|
(166
|
)
|
|
|
(195
|
)
|
Interest income
|
|
|
476
|
|
|
|
3,076
|
|
|
|
7,460
|
|
Interest expense
|
|
|
(2,889
|
)
|
|
|
(3,852
|
)
|
|
|
(4,220
|
)
|
Other income (loss), net
|
|
|
505
|
|
|
|
12,531
|
|
|
|
254
|
|
Equity loss
|
|
|
(48
|
)
|
|
|
(143
|
)
|
|
|
(31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(19,763
|
)
|
|
$
|
(6,803
|
)
|
|
$
|
(19,320
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and Administrative. Our general and
administrative expenses consist primarily of employee
compensation, insurance, professional services such as legal,
accounting and consulting, and travel-related costs.
General and administrative expenses decreased $1.8 million
in 2009 as compared to 2008. The decrease is largely
attributable to a $1.5 million decrease in severance costs,
a $0.9 million decrease in professional fees and a
$0.9 million decrease in other administrative expenses
offset by an increase in employee costs of $1.5 million.
General and administrative expenses decreased $2.5 million
in 2008 as compared to 2007. The decrease is largely
attributable to a $1.7 million decrease in employee costs,
a $2.2 million decrease in professional fees and a
$0.2 million decrease in insurance costs offset by an
increase in severance costs of $1.5 million due to an
increase in the actuarial liability for amounts payable to our
former Chairman and CEO under an ongoing agreement.
Stock-Based Compensation. Stock-based
compensation consists primarily of expense related to grants of
stock options, restricted stock and deferred stock units to our
employees.
The $1.2 million increase in 2009 as compared to 2008
relates to stock option forfeitures during 2008. The
$1.8 million decrease in 2008 as compared to 2007 relates
to stock option forfeitures during 2008 and higher expense in
the prior year period due to the acceleration of stock-based
compensation expense related to our market-based stock options.
Stock-based compensation expense related to market-based awards
was $1.5 million, $0.4 million and $1.7 million
in 2009, 2008 and 2007, respectively. Stock-based compensation
expense related to service-based awards was $1.0 million,
$1.1 million and $1.8 million in 2009, 2008 and 2007,
respectively.
34
Stock-based compensation expense related to corporate operations
is included in Selling, general and administrative expenses in
the Consolidated Statements of Operations.
Interest Income. Interest income includes all
interest earned on cash and marketable security balances.
Interest income decreased $2.6 million and
$4.4 million in 2009 and 2008 respectively. The decrease in
both years was due to declining interest rates and lower average
cash balances over the past two years.
Interest Expense. Interest expense is
primarily related to our 2024 Debentures.
Interest expense decreased $1.0 million in 2009 as compared
to 2008. Interest expense decreased $0.4 million in 2008 as
compared to 2007. The decline in each year was attributable to
the repurchase of $7.8 million and $43 million in face
value of the 2024 Debentures in 2009 and 2008, respectively.
Other Income (Loss), Net. Other income (loss),
net in 2008 included a net gain of $9.0 million on the
repurchase of $43 million in face value of the 2024
Debentures, a $2.5 million net gain on the sale of company
interests, including the receipt of escrowed funds from a legacy
asset and $1.0 gain on distributions from private equity funds.
Income
Tax (Expense) Benefit
Our consolidated net income tax (expense) benefit for 2009, 2008
and 2007 was $0.0 million, $0.0 million and
$0.7 million, respectively. We recognized $0.7 million
tax benefit in 2007 related to uncertain tax positions for which
the statute of limitations expired during the respective period
in the applicable tax jurisdictions. We have recorded a
valuation allowance to reduce our net deferred tax asset to an
amount that is more likely than not to be realized in future
years. Accordingly, the tax expense that would have been
recognized in 2009 and the net operating loss benefit that would
have been recognized in 2008 and 2007 was offset by changes in
the valuation allowance.
Discontinued
Operations
The following are reported in discontinued operations for all
periods through their respective sale date.
In May 2008, we sold all of our equity and debt interests in
Acsis, Alliance Consulting, Laureate Pharma, ProModel and
Neuronyx. The gross proceeds from the Bundle Transaction were
$74.5 million, of which $6.4 million was placed in
escrow pending expiration of a claims period, plus amounts
advanced to certain Bundle Companies during the time between the
signing of the Bundle Sale agreement and its consummation.
In March 2007, we sold Pacific Title & Art Studio for
net cash proceeds of approximately $21.9 million, including
$2.3 million held in escrow. As a result of the sale, we
recorded a pre-tax gain of $2.7 million in 2007. In the
first quarter of 2010, we received the final $0.5 million
in cash from the escrow account. This amount was recorded as
income from discontinued operations in 2009.
In March 2007, Clarient sold its technology business and related
intellectual property for an aggregate purchase price of
$12.5 million. The $12.5 million consisted of
$11.0 million in cash and an additional $1.5 million
in contingent consideration, subject to the satisfaction of
certain post-closing conditions through March 2009. Clarient
received the contingent consideration and recorded the
$1.5 million in income from discontinued operations in 2009.
Income from discontinued operations in 2009 of $2.0 million
was attributable to the receipt by Clarient of $1.5 million
contingent consideration during 2009, prior to the
deconsolidation of Clarient and our receipt of $0.5 million
from escrow related to the sale of Pacific Title & Art
Studio. The loss from discontinued operations in 2008 of
$9.2 million was primarily attributable to operating losses
incurred by Acsis, Alliance Consulting and Laureate Pharma of
$1.6 million, an impairment loss of $3.6 million
related to the write down of the aggregate carrying value of the
Bundle Companies to the anticipated net proceeds, a
$1.4 million pre-tax gain on disposal of the Bundle
Companies, $0.9 million charge to accrue for severance
payments due the former CEO of Alliance Consulting and charges
totaling $2.7 million related to additional compensation
paid to the former CEO of Pacific Title & Art Studio
in connection with the March 2007 sale and related legal fees.
The loss from discontinued operations in 2007 of
$19.4 million was attributable primarily to the operating
losses incurred by Acsis, Alliance
35
Consulting and Laureate Pharma, partially offset by the gain on
the sale of Pacific Title & Art Studio and
Clarients technology business.
Liquidity
And Capital Resources
Parent
Company
We fund our operations with cash on hand as well as proceeds
from sales of and distributions from partner companies, private
equity funds and marketable securities. In prior periods, we
have also used sales of our equity and issuance of debt as
sources of liquidity and may do so in the future. Our ability to
generate liquidity from sales of partner companies, sales of
marketable securities and from equity and debt issuances has
been adversely affected from time to time by adverse
circumstances in the U.S. capital markets and other factors.
As of December 31, 2009, at the parent company level, we
had $67.3 million of cash and cash equivalents and
$39.1 million of marketable securities for a total of
$106.4 million. In addition, $6.9 million of cash was
held in escrow, including accrued interest.
During 2009, we sold 18.4 million shares of common stock of
Clarient for $61.3 million in net proceeds.
In connection with the Bundle Sale, an aggregate of
$6.4 million of the gross proceeds of the sale were placed
in escrow pending the expiration of a predetermined notification
period, subject to possible extension in the event of a claim
against the escrowed amounts. On April 25, 2009, the
purchaser in the Bundle Sale notified us of claims being
asserted against the entire escrowed amounts. We do not believe
that such claims are valid and have instituted legal action to
obtain the release of such amounts from escrow. The proceeds
being held in escrow will remain there until the dispute over
the claims have been settled or determined pursuant to legal
process.
In February 2004, we completed the sale of the 2024 Debentures.
At December 31, 2009, we had $78.2 million in face
value of the 2024 Debentures outstanding. Interest on the 2024
Debentures is payable semi-annually. At the holders
option, the 2024 Debentures are convertible into our common
stock before the close of business on March 14, 2024
subject to certain conditions. The conversion rate of the 2024
Debentures is $43.3044 of principal amount per share. The
closing price of our common stock on December 31, 2009 was
$10.31. The 2024 Debentures holders have the right to require
repurchase of the 2024 Debentures on March 21, 2011,
March 20, 2014 or March 20, 2019 at a repurchase price
equal to 100% of their respective face amount, plus accrued and
unpaid interest. The 2024 Debentures holders also have the right
to require repurchase of the 2024 Debentures upon certain
events, including sale of all or substantially all of our common
stock or assets, liquidation, dissolution, a change in control
or the delisting of our common stock from the NYSE if we were
unable to obtain a listing for our common stock on another
national or regional securities exchange. Subject to certain
conditions, we have the right to redeem all or some of the 2024
Debentures.
During 2009, we repurchased $7.8 million in face value of
the 2024 Debentures for $7.3 million in cash, including
accrued interest. In connection with the repurchases, we
recorded $0.1 million of expense related to the
acceleration of deferred debt issuance costs associated with the
2024 Debentures, resulting in a net gain of $0.5 million
which was included in Other income. Through December 31,
2009, we repurchased a total of $71.8 million in face value
of the 2024 debentures. We may seek to refinance, restructure,
acquire or repay some or all of the remaining outstanding face
amount of the 2024 Debentures prior to March, 2011. On
March 10, 2010, we entered into agreements with
institutional holders of an aggregate of $46.9 million in
face value of our 2024 Debentures to exchange the debentures
held by such holders for $46.9 million in face amount of
newly issued 10.125% senior convertible debentures, due
2014. See Note 21 to the Consolidated Financial Statements.
In May 2008, our Board of Directors authorized us, from time to
time and depending on market conditions, to repurchase shares of
our outstanding common stock, with up to an aggregate value of
$10.0 million, exclusive of fees and commissions.
Approximately 4 thousand fractional shares were repurchased in
2009 for $44 thousand in connection with our
one-for-six
stock split in August 2009. During the year ended
December 31, 2008, we repurchased approximately 163
thousand shares of common stock at a cost of $1.3 million.
These repurchases, as well as repurchases of 2024 Debentures,
have been and will be made in open market or privately
negotiated transactions in compliance with the
U.S. Securities and Exchange Commission regulations and
other applicable legal requirements. The manner, timing and
amount of any purchases have been and will be determined by us
based
36
upon an evaluation of market conditions, stock price and other
factors. Our Board of Directors authorizations regarding
common stock and 2024 Debentures repurchases do not obligate us
to acquire any particular amount of common stock or 2024
Debentures and may be modified or suspended at any time at our
discretion.
In February 2009, we entered into a loan agreement which
provides us with a revolving credit facility in the maximum
aggregate amount of $50 million in the form of borrowings,
guarantees and issuances of letters of credit (subject to a
$20 million sublimit). Actual availability under the credit
facility is based on the amount of cash maintained at the bank
as well as the value of our public and private partner company
interests. This credit facility bears interest at the prime rate
for outstanding borrowings, subject to an increase in certain
circumstances. Other than for limited exceptions, we are
required to maintain all of our depository and operating
accounts and not less than 75% of our investment and securities
accounts at the bank. The credit facility matures on
December 31, 2010. Under the credit facility, we provided a
$6.3 million letter of credit expiring on March 19,
2019 to the landlord of CompuCom Systems, Inc.s Dallas
headquarters which has been required in connection with our sale
of CompuCom Systems in 2004. Availability under our revolving
credit facility at December 31, 2009 was $43.7 million.
We have committed capital of approximately $1.6 million,
including conditional commitments to provide partner companies
with additional funding and commitments made to various private
equity funds in prior years. These commitments will be funded
over the next several years, including approximately
$1.5 million which is expected to be funded in the next
12 months.
The transactions we enter into in pursuit of our strategy could
increase or decrease our liquidity at any point in time. As we
seek to acquire interests in technology and life sciences
companies, provide additional funding to existing partner
companies, or commit capital to other initiatives, we may be
required to expend our cash or incur debt, which will decrease
our liquidity. Conversely, as we dispose of our interests in
partner companies from time to time, we may receive proceeds
from such sales, which could increase our liquidity. From time
to time, we are engaged in discussions concerning acquisitions
and dispositions which, if consummated, could impact our
liquidity, perhaps significantly.
In May 2001, we entered into a $26.5 million loan agreement
with Warren V. Musser, our former Chairman and Chief Executive
Officer. In December 2006, we restructured the obligation to
reduce the amount outstanding to $14.8 million, bearing
interest at a rate of 5.0% per annum. Cash payments, when
received, are recognized as Recovery related party
in our Consolidated Statements of Operations. Since 2001 and
through December 31, 2009, we have received a total of
$16.8 million in payments on the loan. The carrying value
of the loan at December 31, 2009 was zero.
We have received distributions as both a general partner and a
limited partner from certain private equity funds. Under certain
circumstances, we may be required to return a portion or all the
distributions we received as a general partner of a fund for
further distribution to such funds limited partners
(clawback). The maximum clawback we could be
required to return related to our general partner interest is
$3.4 million, of which $2.0 million was reflected in
accrued expenses and other current liabilities and
$1.4 million was reflected in Other long-term liabilities
on the Consolidated Balance Sheet at December 31, 2009.
Our previous ownership in the general partners of the funds that
have potential clawback liabilities ranges from
19-30%. The
clawback liability is joint and several, such that we may be
required to fund the clawback for other general partners should
they default. The funds have taken several steps to reduce the
potential liabilities should other general partners default,
including withholding all general partner distributions and
placing them in escrow and adding rights of set-off among
certain funds. We believe our potential liability due to the
possibility of default by other general partners is remote.
For the reasons we presented above, we believe our cash and cash
equivalents at December 31, 2009, availability under our
revolving credit facility and other internal sources of cash
flow will be sufficient to fund our cash requirements for at
least the next 12 months, including debt repayments,
commitments to our existing companies and funds, possible
additional funding of existing partner companies and our general
corporate requirements. Our acquisition of new partner company
interests is always contingent upon our availability of cash to
fund such deployments, and our timing of monetization events
directly affects our availability of cash.
37
Analysis
of Parent Company Cash Flows
Cash flow activity for the Parent Company was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Net cash used in operating activities
|
|
$
|
(14,682
|
)
|
|
$
|
(14,124
|
)
|
|
$
|
(16,777
|
)
|
Net cash provided by investing activities
|
|
|
15,861
|
|
|
|
27,327
|
|
|
|
50,788
|
|
Net cash provided by (used in) financing activities
|
|
|
(7,045
|
)
|
|
|
(34,675
|
)
|
|
|
741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(5,866
|
)
|
|
$
|
(21,472
|
)
|
|
$
|
34,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Used
In Operating Activities
Year ended December 31, 2009 versus year ended
December 31, 2008. Net cash used in
operating activities increased $0.6 million in 2009 as
compared to 2008. The increase is primarily attributable
$1.2 million in cash used for interest payments on the 2024
Debentures in 2009 for which interest payments were previously
made using restricted marketable securities held in escrow,
partially offset by lower corporate operating expenditures.
Year ended December 31, 2008 versus year ended
December 31, 2007. Net cash used in
operating activities decreased $2.7 million in 2008 as
compared to 2007. The decrease was primarily due to lower
corporate operating expenditures.
Cash
Provided by Investing Activities
Year ended December 31, 2009 versus year ended
December 31, 2008. Net cash provided by
investing activities decreased $11.5 million in 2009 as
compared to 2008. The decrease was attributable to a
$84.5 million decrease in proceeds from the sale of
discontinued operations, a $10.3 million net increase in
purchases of marketable securities and a $5.4 million
increase in cash paid to acquire ownership interests in
companies and funds, partially offset by a $57.0 million
increase in proceeds from sales of and distributions from
companies and funds, a $16.5 million decrease in advances
to partner companies, a $14.3 million increase in repayment
of advances from partner companies and a $0.9 decrease in
restricted cash.
Year ended December 31, 2008 versus year ended
December 31, 2007. Net cash provided by
investing activities decreased $23.5 million in 2008 as
compared to 2007. The decrease was attributable to a
$107.7 million net increase in marketable securities and a
$12.6 million increase in advances to partner companies,
offset by a $64.9 million increase in proceeds from the
sale of discontinued operations and a $30.5 million
decrease in the acquisition of ownership interests in companies
and funds, net of cash acquired.
Cash
Provided by (Used In) Financing Activities
Year ended December 31, 2009 versus year ended
December 31, 2008. Net cash used in
financing activities decreased $27.6 million. The decrease
was primarily attributable to a $26.3 million decrease in
cash used to repurchase certain of our 2024 Debentures, as well
as a $1.3 million decrease in cash used to repurchase our
common stock as compared to the prior year.
Year ended December 31, 2008 versus year ended
December 31, 2007. Net cash used in
financing activities increased $35.4 million in 2008 as
compared to 2007. The increase was primarily attributable to
$33.5 million in repurchases of our 2024 Debentures,
excluding accrued interest and $1.3 million in purchases of
treasury stock.
Consolidated
Working Capital From Continuing Operations
Consolidated working capital from continuing operations
increased to $106.0 at December 31, 2009 compared to $88.4
at December 31, 2008. The increase was primarily due to the
sale of 18.4 million shares of common stock of Clarient
during 2009 for net cash proceeds of $61.3 million,
partially offset by the deconsolidation of Clarient on
May 14, 2009.
38
Analysis
of Consolidated Cash Flows
Cash flow activity was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Net cash used in operating activities
|
|
$
|
(19,170
|
)
|
|
$
|
(21,514
|
)
|
|
$
|
(36,253
|
)
|
Net cash provided by investing activities
|
|
|
47
|
|
|
|
32,805
|
|
|
|
53,063
|
|
Net cash provided by (used in) financing activities
|
|
|
11,419
|
|
|
|
(31,386
|
)
|
|
|
17,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(7,704
|
)
|
|
$
|
(20,095
|
)
|
|
$
|
34,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Used
In Operating Activities
Year ended December 31, 2009 versus year ended
December 31, 2008. Net cash used in
operating activities decreased $2.3 million in 2009 as
compared to 2008. The decrease is primarily attributable to the
deconsolidation of Clarient. The decrease is partially offset by
$1.2 million in cash used for interest payments on the 2024
Debentures in 2009 for which interest payments were previously
made using restricted marketable securities held in escrow,
partially offset by lower corporate operating expenditures
Year ended December 31, 2008 versus year ended
December 31, 2007. Net cash used in
operating activities decreased $14.7 million in 2008 as
compared to 2007. The decrease was primarily attributable to a
$7.0 million increase in accounts payable and accrued
expenses, a $4.9 million decrease in the cash outflows from
discontinued operations and a $13.9 million decrease in net
loss, partially offset by a $14.2 million increase in
accounts receivable.
Cash
Provided by Investing Activities
Year ended December 31, 2009 versus year ended
December 31, 2008. Net cash provided by
investing activities decreased $32.8 million in 2009 as
compared to 2008. The decrease was attributable to an
$82.2 million decrease in proceeds from the sale of
discontinued operations, a $10.3 million net increase in
purchases of marketable securities a $5.4 million increase
in cash paid to acquire ownership interests in companies and
funds, a $2.0 increase in restricted cash and a
$2.7 million decrease in cash resulting from the
deconsolidation of Clarient partially offset by a
$57.0 million increase in proceeds from sales of and
distributions from companies and funds, a $2.9 million
decrease in advances to partner companies, a $5.7 million
increase in repayment of advances from partner companies , a
$2.8 million decrease in the cash used in discontinued
operations, and a $1.4 million decrease in capital
expenditures.
Year ended December 31, 2008 versus year ended
December 31, 2007. Net cash provided by
investing activities decreased $20.3 million in 2008 as
compared to 2007. The decrease was attributable to a
$107.7 million net increase in marketable securities offset
by a $53.8 million increase in proceeds from the sale of
discontinued operations, a $4.9 million decrease in cash
used in discontinued operations and a $30.5 million
decrease in the acquisition of ownership interests in companies
and funds, net of cash acquired.
Cash
Provided by (Used In) Financing Activities
Year ended December 31, 2009 versus year ended
December 31, 2008. Net cash provided by
financing activities increased $42.8 million in 2009 as
compared to 2008. The increase was primarily related to a
$27.1 million increase in proceeds from the issuance of
subsidiary common stock, a $26.3 million decrease in cash
used to repurchase certain of our 2024 Debentures and a
$1.3 million decrease in cash used to repurchase our common
stock in the prior year period, partially offset by
$7.1 million net repayments of outstanding borrowings and a
$4.8 million decrease in cash provided from financing
activities of discontinued operations.
Year ended December 31, 2008 versus year ended
December 31, 2007. Net cash used in
financing activities increased $48.9 million in 2008 as
compared to 2007. The increase was attributable to
$33.5 million in repurchases of our 2024 Debentures,
excluding accrued interest, a $6.8 million increase in net
repayments on revolving credit
39
facilities, $1.3 million in purchases of treasury stock and
a $6.9 million decrease in the cash inflows from financing
activities of discontinued operations.
Contractual
Cash Obligations and Other Commercial Commitments
The following table summarizes our contractual obligations and
other commercial commitments as of December 31, 2009, by
period due or expiration of the commitment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
|
|
|
2011 and
|
|
|
2013 and
|
|
|
Due after
|
|
|
|
Total
|
|
|
2010
|
|
|
2012
|
|
|
2014
|
|
|
2014
|
|
|
|
(In millions)
|
|
|
Contractual Cash Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible senior debentures(a)
|
|
$
|
78.2
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
78.2
|
|
Operating leases
|
|
|
2.9
|
|
|
|
0.6
|
|
|
|
1.2
|
|
|
|
1.1
|
|
|
|
|
|
Funding commitments(b)
|
|
|
1.6
|
|
|
|
1.5
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
Potential clawback liabilities(c)
|
|
|
3.4
|
|
|
|
2.0
|
|
|
|
1.4
|
|
|
|
|
|
|
|
|
|
Other long-term obligations(d)
|
|
|
4.2
|
|
|
|
0.8
|
|
|
|
1.5
|
|
|
|
1.5
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Contractual Cash Obligations
|
|
$
|
90.3
|
|
|
$
|
4.9
|
|
|
$
|
4.2
|
|
|
$
|
2.6
|
|
|
$
|
78.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Commitment Expiration by Period
|
|
|
|
|
|
|
|
|
|
2011 and
|
|
|
2013 and
|
|
|
After
|
|
|
|
|
|
|
Total
|
|
|
2010
|
|
|
2012
|
|
|
2014
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
Other Commitments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Letters of credit(e)
|
|
$
|
6.3
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
6.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
In February 2004, we completed the issuance of
$150.0 million of the 2024 Debentures with a stated
maturity of March 15, 2024. Through December 31, 2009,
we have repurchased $71.8 million in face value of the 2024
Debentures. The 2024 Debentures holders have the right to
require the Company to repurchase the 2024 Debentures on
March 21, 2011, March 20, 2014 or March 20, 2019
at a repurchase price equal to 100% of their respective face
amount, plus accrued and unpaid interest. See Note 21 to
the Consolidated Financial Statements regarding the exchange of
a portion of the 2024 Debentures in 2010. |
|
(b) |
|
These amounts include $1.0 million in conditional
commitments to provide non-consolidated partner companies with
additional funding. Also included are funding commitments to
private equity funds which have been included in the respective
years based on estimated timing of capital calls provided to us
by the funds management. |
|
(c) |
|
We have received distributions as both a general partner and a
limited partner from certain private equity funds. Under certain
circumstances, we may be required to return a portion or all the
distributions we received as a general partner of a fund for a
further distribution to such funds limited partners
(clawback). The maximum clawback we could be
required to return is approximately $3.4 million, of which
$2.0 million was reflected in Accrued expenses and other
current liabilities and $1.4 million was reflected in Other
long-term liabilities on the Consolidated Balance Sheets. |
|
(d) |
|
Reflects the estimated amount payable to our former Chairman and
CEO under an ongoing agreement. |
|
(e) |
|
A $6.3 million letter of credit is provided to the landlord
of CompuComs Dallas headquarters lease as required in
connection with our sale of CompuCom in 2004. |
We have agreements with certain employees that provide for
severance payments to the employee in the event the employee is
terminated without cause or if the employee terminates his
employment for good reason. The maximum aggregate
cash exposure under the agreements was approximately
$8 million at December 31, 2009.
We remain guarantor of Laureate Pharmas Princeton, New
Jersey facility lease (the Laureate Lease Guaranty).
Such guarantee may extend through the lease expiration in 2016
under certain circumstances.
40
However, we are entitled to indemnification in connection with
the continuation of such guaranty. As of December 31, 2009,
scheduled lease payments to be made by Laureate Pharma over the
remaining lease term equaled $7.8 million.
As of December 31, 2009, Safeguard had federal net
operating loss carryforwards and federal capital loss
carryforwards of approximately $202.7 million and
$157.4 million, respectively. The net operating loss
carryforwards expire in various amounts from 2010 to 2027. The
capital loss carryforwards expire in various amounts from 2010
to 2012.
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 consolidated financial position
or results of operations.
Recent
Accounting Pronouncements
In September 2009, the Financial Accounting Standards Board
(FASB) clarified how an entity should measure the
fair value of liabilities and that restrictions which prevent
the transfer of a liability should not be considered as separate
inputs or adjustments in the measurement of the liabilitys
fair value. The guidance reaffirms the measurements concept of
determining fair value based on an orderly transaction between
market participants even though liabilities are infrequently
transferred due to contractual or other legal restrictions. The
guidance did not have a material effect on our Consolidated
Financial Statements.
In June 2009, the FASB issued a single source of authoritative
non-governmental United States Generally Accepted Accounting
Principles (US GAAP), referred to as the
Codification. The Codification does not change current
U.S. GAAP, but is intended to simplify user access to all
authoritative U.S. GAAP by providing all the authoritative
literature related to a particular topic in one place. All
existing accounting standard documents have been superseded and
all other accounting literature not included in the Codification
is considered non-authoritative. The Codification was effective
for interim and annual periods ending after September 15,
2009. The Codification did not impact our Consolidated Financial
Statements.
In April 2009, the FASB issued guidance which required
disclosures about fair value of financial instruments for
interim reporting periods as well as in annual financial
statements. The guidance requires those disclosures in
summarized financial statements at interim reporting periods.
The guidance requires that an entity disclose in the body or in
the accompanying notes of its financial information the fair
value of all financial instruments for which it is practicable
to estimate that value, whether recognized or not recognized in
the statement of financial position. In addition, an entity is
required disclose the method(s) and significant assumptions used
to estimate the fair value of financial instruments. We adopted
the provisions of this guidance on June 30, 2009 and have
provided the necessary additional disclosures.
In November 2008, the FASBs Emerging Issues Task Force
(EITF) reached a consensus on certain matters
associated with equity method accounting. The EITF retained the
accounting for the initial carrying value of equity method
investments which is based on a cost accumulation model and
generally excludes contingent consideration. The EITF also
specified that
other-than-temporary
impairment testing by the investor should be performed at the
investment level and that a separate impairment assessment of
the underlying assets is not required. An impairment charge by
the investee should result in an adjustment of the
investors basis of the impaired asset for the
investors pro-rata share of such impairment. In addition,
the EITF reached a consensus on how to account for an issuance
of shares by an investee that reduces the investors
ownership share of the investee. An investor should account for
such transactions as if it had sold a proportionate share of its
investment with any gains or losses recorded through earnings.
The EITF also addressed the accounting for a change in an
investment from the equity method to the cost method. The EITF
affirmed the existing guidance, which requires cessation of the
equity method of accounting and application of debt and equity
security accounting, or the cost method, as appropriate. The
guidance was effective for fiscal years beginning on or after
December 15, 2008. This consensus did not have a material
impact on our Consolidated Financial Statements.
In June 2008, the EITF clarified how to determine whether
certain instruments or features were indexed to an entitys
own stock. The consensus was effective for financial statements
issued for fiscal years beginning after
41
December 15, 2008, and interim periods within those fiscal
years. The adoption of the consensus did not have a material
impact on our Consolidated Financial Statements.
In May 2008, the FASB issued guidance on the accounting for
convertible debt instruments that may be settled in cash or
partially in cash upon conversion. An issuer of convertible debt
instruments with cash settlement features is required to
separately account for the liability and equity components of
the instrument. The debt is recognized at the present value of
its cash flows discounted using the issuers nonconvertible
debt borrowing rate. The equity component is recognized as the
difference between the proceeds from the issuance of the note
and the fair value of the liability. The resultant debt discount
is to be accreted over the expected life of the debt. The
guidance did not have any impact on our Consolidated Financial
Statements because the convertible senior debentures previously
issued by us do not include any cash settlement features within
the scope of this guidance. See Note 21 regarding the
exchange of a portion of our senior debentures.
In April 2008, the FASB issued guidance that addresses the
factors that should be considered in developing renewal or
extension assumptions used to determine the useful lives for
intangible assets. The guidance requires an entity to consider
its own historical experience in renewing or extending similar
arrangements, regardless of whether those arrangements have
explicit renewal or extension provisions, when determining the
useful life of an intangible asset. In the absence of such
experience, an entity shall consider the assumptions that market
participants would use about renewal or extension, adjusted for
entity-specific factors. The guidance was effective for fiscal
years beginning after December 31, 2008. The guidance did
not have a material impact on our Consolidated Financial
Statements.
In December 2007, the FASB revised the accounting for business
combinations. Under the new accounting, an acquiring entity is
required to recognize all the assets acquired and liabilities
assumed in a transaction at the acquisition-date at fair value
with limited exceptions. The accounting treatment for certain
specific items was revised as follows:
|
|
|
|
|
Acquisition costs are generally expensed as incurred;
|
|
|
|
Noncontrolling interests (formerly known as minority
interests) are valued at fair value at the acquisition
date;
|
|
|
|
Acquired contingent liabilities are recorded at fair value at
the acquisition date and subsequently measured at either the
higher of such amount or the amount determined under existing
guidance for non-acquired contingencies;
|
|
|
|
In-process research and development (IPR&D) is recorded at
fair value as an indefinite-lived intangible asset at the
acquisition date;
|
|
|
|
Restructuring costs associated with a business combination are
generally expensed subsequent to the acquisition date; and
|
|
|
|
Changes in deferred tax asset valuation allowances and income
tax uncertainties after the acquisition date generally affect
income tax expense.
|
The revised guidance also includes a substantial number of new
disclosure requirements. The revised guidance is applied
prospectively to business combinations for which the acquisition
date is on or after January 1, 2009.
In December 2007, the FASB issued new accounting and reporting
standards for the noncontrolling interest in a subsidiary and
for the deconsolidation of a subsidiary. Specifically, the
guidance requires the recognition of noncontrolling interests
(minority interests) as equity in the consolidated financial
statements and separate from the parents equity. The
guidance clarifies that changes in a parents ownership
interest in a subsidiary that does not result in deconsolidation
are treated as equity transactions if the parent retains its
controlling financial interest. Losses attributable to the
noncontrolling interest that exceed its basis in the
subsidiarys equity result in a deficit noncontrolling
interest reflected in the Consolidated Balance Sheet. Revenue,
expenses, gains, losses, net income or loss are reported in the
Consolidated Statements of Operations at the consolidated
amounts, which include the amounts attributable to the owners of
the parent and noncontrolling interest. The amount of net income
attributable to noncontrolling interests will be included in
consolidated net income on the face of the income statement. In
addition, this statement requires that a parent recognize a gain
or loss in net income when a subsidiary is deconsolidated. Such
gain or loss will be measured using the fair value of the
noncontrolling equity investment on
42
the deconsolidation date. Expanded disclosures are also required
regarding the interests of the parent and its noncontrolling
interest. The guidance was effective for fiscal years beginning
after November 15, 2008. On January 1, 2009, we
adopted the provisions of this guidance. As a result, we reflect
the portion of equity (net assets) of our consolidated partner
companies, if any, not attributable, directly or indirectly, to
the parent company as a noncontrolling interest within equity,
separate from the equity of the parent company.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
We are exposed to equity price risks on the marketable portion
of our ownership interests in our partner companies. At
December 31, 2009, these interests include our equity
position in Clarient, our only publicly-traded partner company,
which has experienced significant volatility in its stock price.
Historically, we have not attempted to reduce or eliminate our
market exposure related to these interests. Based on closing
market prices at December 31, 2009, the fair market value
of our holdings in Clarient was approximately
$80.5 million. A 20% decrease in Clarients stock
price would result in an approximate $16.1 million decrease
in the fair value of our holdings in Clarient.
In February 2004, we completed the issuance of
$150.0 million of our 2024 Debentures with a stated
maturity of March 15, 2024. Through December 31, 2009,
we repurchased $71.8 million in face value of the 2024
Debentures. Interest payments of approximately $1.0 million
are due in March and September of each year. The holders of
these 2024 Debentures have the right to require repurchase of
the 2024 Debentures on March 21, 2011, March 20, 2014
or March 20, 2019 at a repurchase price equal to 100% of
their face amount plus accrued and unpaid interest.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
|
|
|
|
|
|
|
|
|
After
|
|
Value at
|
Liabilities
|
|
2010
|
|
2011
|
|
2012
|
|
2012
|
|
December 31, 2009
|
|
2024 Debentures due by year (in millions)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
78.2
|
|
|
$
|
74.3
|
|
Fixed interest rate
|
|
|
2.625
|
%
|
|
|
2.625
|
%
|
|
|
2.625
|
%
|
|
|
2.625
|
%
|
|
|
N/A
|
|
Interest expense (in millions)
|
|
$
|
2.1
|
|
|
$
|
2.1
|
|
|
$
|
2.1
|
|
|
$
|
23.0
|
|
|
|
N/A
|
|
On March 10, 2010, we entered into agreements with
institutional holders of an aggregate of $46.9 million in
face value of our 2024 Debentures to exchange the debentures
held by such holders for $46.9 million in face amount of
newly issued 10.125% senior convertible debentures, due
2014. See Note 21 to the Consolidated Financial Statements.
We have historically had very low exposure to changes in foreign
currency exchange rates, and as such, have not used derivative
financial instruments to manage foreign currency fluctuation
risk.
We maintain cash and cash equivalents and marketable securities
with various financial institutions. The financial institutions
are highly rated.
43
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
The following Consolidated Financial Statements, and the related
Notes thereto, of Safeguard Scientifics, Inc. and the Reports of
Independent Registered Public Accounting Firm are filed as a
part of this
Form 10-K.
|
|
|
|
|
|
|
Page
|
|
|
|
|
45
|
|
|
|
|
46
|
|
|
|
|
47
|
|
|
|
|
48
|
|
|
|
|
49
|
|
|
|
|
50
|
|
|
|
|
51
|
|
|
|
|
52
|
|
44
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Safeguard Scientifics, Inc.:
We have audited Safeguard Scientifics, Inc.s (the Company)
internal control over financial reporting as of
December 31, 2009, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Safeguard Scientifics, Inc.s management
is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting, included in the
accompanying Managements Report on Internal Control Over
Financial Reporting (Item 9A.(b)). Our responsibility is to
express an opinion on the Companys internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our
opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Safeguard Scientifics, Inc. maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2009, based on criteria
established in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Safeguard Scientifics, Inc. as of
December 31, 2009 and 2008, and the related consolidated
statements of operations, comprehensive income (loss), changes
in equity and cash flows for each of the years in the three-year
period ended December 31, 2009, and our report dated March
16, 2010 expressed an unqualified opinion on those consolidated
financial statements.
Philadelphia, Pennsylvania
March 16, 2010
45
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Safeguard Scientifics, Inc.:
We have audited the accompanying consolidated balance sheets of
Safeguard Scientifics, Inc. (the Company) and
subsidiaries as of December 31, 2009 and 2008, and the
related consolidated statements of operations, comprehensive
income (loss), changes in equity and cash flows for each of the
years in the three-year period ended December 31, 2009.
These consolidated financial statements are the responsibility
of the Companys management. Our responsibility is to
express an opinion on these consolidated financial statements
based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Safeguard Scientifics, Inc. and subsidiaries as of
December 31, 2009 and 2008, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2009, in conformity
with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
Safeguard Scientifics, Inc.s internal control over
financial reporting as of December 31, 2009, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report
dated March 16, 2010 expressed an unqualified opinion on the
effectiveness of the Companys internal control over
financial reporting.
Philadelphia, Pennsylvania
March 16, 2010
46
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands except per share data)
|
|
|
ASSETS
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
67,347
|
|
|
$
|
75,051
|
|
Cash held in escrow and restricted cash
|
|
|
6,910
|
|
|
|
6,433
|
|
Marketable securities
|
|
|
39,066
|
|
|
|
14,701
|
|
Restricted marketable securities
|
|
|
|
|
|
|
1,990
|
|
Accounts receivable, less allowances
($8,045 2008)
|
|
|
|
|
|
|
20,465
|
|
Prepaid expenses and other current assets
|
|
|
566
|
|
|
|
1,507
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
113,889
|
|
|
|
120,147
|
|
Property and equipment, net
|
|
|
310
|
|
|
|
12,369
|
|
Ownership interests in and advances to companies ($80,483 at
fair value at December 31, 2009)
|
|
|
167,387
|
|
|
|
85,561
|
|
Goodwill
|
|
|
|
|
|
|
12,729
|
|
Cash held in escrow and restricted cash long-term
|
|
|
|
|
|
|
501
|
|
Other
|
|
|
513
|
|
|
|
1,095
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
282,099
|
|
|
$
|
232,402
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Current portion of credit line borrowings
|
|
$
|
|
|
|
$
|
14,104
|
|
Current maturities of long-term debt
|
|
|
|
|
|
|
263
|
|
Accounts payable
|
|
|
156
|
|
|
|
3,337
|
|
Accrued compensation and benefits
|
|
|
3,425
|
|
|
|
5,758
|
|
Accrued expenses and other current liabilities
|
|
|
4,325
|
|
|
|
8,285
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
7,906
|
|
|
|
31,747
|
|
Long-term debt
|
|
|
|
|
|
|
345
|
|
Other long-term liabilities
|
|
|
5,461
|
|
|
|
9,600
|
|
Convertible senior debentures
|
|
|
78,225
|
|
|
|
86,000
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.10 par value; 1,000 shares
authorized
|
|
|
|
|
|
|
|
|
Common stock, $0.10 par value; 83,333 shares
authorized; 20,420 and 20,265 shares issued and outstanding
in 2009 and 2008, respectively
|
|
|
2,042
|
|
|
|
2,026
|
|
Additional paid-in capital
|
|
|
790,868
|
|
|
|
773,456
|
|
Accumulated deficit
|
|
|
(601,916
|
)
|
|
|
(669,526
|
)
|
Accumulated other comprehensive loss
|
|
|
|
|
|
|
(29
|
)
|
Treasury stock, at cost
|
|
|
(487
|
)
|
|
|
(1,217
|
)
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
190,507
|
|
|
|
104,710
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Equity
|
|
$
|
282,099
|
|
|
$
|
232,402
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands except per share data)
|
|
|
Revenue
|
|
$
|
34,839
|
|
|
$
|
73,736
|
|
|
$
|
42,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
13,811
|
|
|
|
33,007
|
|
|
|
26,914
|
|
Selling, general and administrative
|
|
|
37,214
|
|
|
|
60,744
|
|
|
|
50,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
51,025
|
|
|
|
93,751
|
|
|
|
77,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(16,186
|
)
|
|
|
(20,015
|
)
|
|
|
(34,702
|
)
|
Other income (loss), net
|
|
|
108,881
|
|
|
|
10,280
|
|
|
|
(5,077
|
)
|
Interest income
|
|
|
480
|
|
|
|
3,097
|
|
|
|
7,520
|
|
Interest expense
|
|
|
(3,164
|
)
|
|
|
(4,732
|
)
|
|
|
(5,489
|
)
|
Equity loss
|
|
|
(23,227
|
)
|
|
|
(34,697
|
)
|
|
|
(15,178
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations before income taxes
|
|
|
66,784
|
|
|
|
(46,067
|
)
|
|
|
(52,926
|
)
|
Income tax benefit
|
|
|
14
|
|
|
|
24
|
|
|
|
687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
|
66,798
|
|
|
|
(46,043
|
)
|
|
|
(52,239
|
)
|
Income (loss) from discontinued operations, net of tax
|
|
|
1,975
|
|
|
|
(9,620
|
)
|
|
|
(17,282
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
68,773
|
|
|
|
(55,663
|
)
|
|
|
(69,521
|
)
|
Net (income) loss attributable to noncontrolling interest
|
|
|
(1,163
|
)
|
|
|
3,650
|
|
|
|
3,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Safeguard Scientifics,
Inc.
|
|
$
|
67,610
|
|
|
$
|
(52,013
|
)
|
|
$
|
(65,868
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Income (Loss) Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations attributable to
Safeguard Scientifics, Inc. common shareholders
|
|
$
|
3.26
|
|
|
$
|
(2.10
|
)
|
|
$
|
(2.28
|
)
|
Net income (loss) from discontinued operations attributable to
Safeguard Scientifics, Inc. common shareholders
|
|
|
0.07
|
|
|
|
(0.46
|
)
|
|
|
(0.96
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Safeguard Scientifics, Inc.
common shareholders
|
|
$
|
3.33
|
|
|
$
|
(2.56
|
)
|
|
$
|
(3.24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Income (Loss) Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations attributable to
Safeguard Scientifics, Inc. common shareholders
|
|
$
|
3.08
|
|
|
$
|
(2.10
|
)
|
|
$
|
(2.28
|
)
|
Net income (loss) from discontinued operations attributable to
Safeguard Scientifics, Inc. common shareholders
|
|
|
0.06
|
|
|
|
(0.46
|
)
|
|
|
(0.96
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Safeguard Scientifics, Inc.
common shareholders
|
|
$
|
3.14
|
|
|
$
|
(2.56
|
)
|
|
$
|
(3.24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares used in computing income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
20,308
|
|
|
|
20,326
|
|
|
|
20,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
22,383
|
|
|
|
20,326
|
|
|
|
20,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts attributable to Safeguard Scientifics, Inc. common
shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
$
|
66,240
|
|
|
$
|
(42,777
|
)
|
|
$
|
(46,481
|
)
|
Net income (loss) from discontinued operations
|
|
|
1,370
|
|
|
|
(9,236
|
)
|
|
|
(19,387
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Safeguard Scientifics,
Inc.
|
|
$
|
67,610
|
|
|
$
|
(52,013
|
)
|
|
$
|
(65,868
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Net income (loss)
|
|
$
|
68,773
|
|
|
$
|
(55,663
|
)
|
|
$
|
(69,521
|
)
|
Other comprehensive income (loss), before taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
(2
|
)
|
|
|
(54
|
)
|
|
|
(77
|
)
|
Holding losses on
available-for-sale
securities
|
|
|
|
|
|
|
|
|
|
|
(434
|
)
|
Reclassification adjustments
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss)
|
|
|
68,802
|
|
|
|
(55,717
|
)
|
|
|
(70,032
|
)
|
Comprehensive (income) loss attributable to the noncontrolling
interest
|
|
|
(1,163
|
)
|
|
|
3,650
|
|
|
|
3,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) attributable to Safeguard
Scientifics, Inc.
|
|
$
|
67,639
|
|
|
$
|
(52,067
|
)
|
|
$
|
(66,379
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Income
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Treasury Stock
|
|
|
Noncontrolling
|
|
|
|
Total
|
|
|
Deficit
|
|
|
(Loss)
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Shares
|
|
|
Amount
|
|
|
Interest
|
|
|
|
(In thousands)
|
|
|
Balance December 31, 2006
|
|
$
|
216,698
|
|
|
$
|
(551,645
|
)
|
|
$
|
536
|
|
|
|
120,419
|
|
|
$
|
12,042
|
|
|
$
|
750,361
|
|
|
|
|
|
|
$
|
|
|
|
$
|
5,404
|
|
Retroactive application of
one-for-six
reverse stock split
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(100,349
|
)
|
|
|
(10,035
|
)
|
|
|
10,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(69,521
|
)
|
|
|
(65,868
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,653
|
)
|
Stock options exercised, net
|
|
|
741
|
|
|
|
|
|
|
|
|
|
|
|
82
|
|
|
|
8
|
|
|
|
733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in redeemable subsidiary stock-based compensation
|
|
|
937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of restricted stock, net
|
|
|
167
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
|
|
4
|
|
|
|
163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense continuing and
discontinued operations
|
|
|
6,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of subsidiary equity transactions
|
|
|
941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
941
|
|
Other comprehensive loss
|
|
|
(511
|
)
|
|
|
|
|
|
|
(511
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2007
|
|
|
155,831
|
|
|
|
(617,513
|
)
|
|
|
25
|
|
|
|
20,187
|
|
|
|
2,019
|
|
|
|
768,608
|
|
|
|
|
|
|
|
|
|
|
|
2,692
|
|
Net loss
|
|
|
(55,663
|
)
|
|
|
(52,013
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,650
|
)
|
Stock options exercised, net
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
33
|
|
|
|
(12
|
)
|
|
|
82
|
|
|
|
|
|
Issuance of restricted stock, net
|
|
|
255
|
|
|
|
|
|
|
|
|
|
|
|
74
|
|
|
|
7
|
|
|
|
251
|
|
|
|
5
|
|
|
|
(3
|
)
|
|
|
|
|
Stock-based compensation expense continuing and
discontinued operations
|
|
|
3,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of common stock
|
|
|
(1,296
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
162
|
|
|
|
(1,296
|
)
|
|
|
|
|
Gain on change in interest of equity method partner company
|
|
|
653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of subsidiary equity transactions
|
|
|
958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
958
|
|
Other comprehensive loss
|
|
|
(54
|
)
|
|
|
|
|
|
|
(54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2008
|
|
|
104,710
|
|
|
|
(669,526
|
)
|
|
|
(29
|
)
|
|
|
20,265
|
|
|
|
2,026
|
|
|
|
773,456
|
|
|
|
155
|
|
|
|
(1,217
|
)
|
|
|
|
|
Net income
|
|
|
68,773
|
|
|
|
67,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,163
|
|
Stock options exercised, net
|
|
|
270
|
|
|
|
|
|
|
|
|
|
|
|
34
|
|
|
|
3
|
|
|
|
267
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
Issuance of restricted stock, net
|
|
|
225
|
|
|
|
|
|
|
|
|
|
|
|
121
|
|
|
|
13
|
|
|
|
(1,038
|
)
|
|
|
(157
|
)
|
|
|
1,250
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
3,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of common stock
|
|
|
(44
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
(44
|
)
|
|
|
|
|
Note receivable repayment in Company common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
476
|
|
|
|
43
|
|
|
|
(476
|
)
|
|
|
|
|
Impact of subsidiary equity transactions
|
|
|
12,750
|
|
|
|
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
13,882
|
|
|
|
|
|
|
|
|
|
|
|
(1,163
|
)
|
Other comprehensive loss
|
|
|
(2
|
)
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2009
|
|
$
|
190,507
|
|
|
$
|
(601,916
|
)
|
|
$
|
|
|
|
|
20,420
|
|
|
$
|
2,042
|
|
|
$
|
790,868
|
|
|
|
44
|
|
|
$
|
(487
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
50
SAFEGUARD
SCIENTIFICS, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
68,773
|
|
|
$
|
(55,663
|
)
|
|
$
|
(69,521
|
)
|
Adjustments to reconcile to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Income) loss from discontinued operations
|
|
|
(1,975
|
)
|
|
|
9,620
|
|
|
|
17,282
|
|
Depreciation and amortization
|
|
|
1,425
|
|
|
|
3,551
|
|
|
|
3,662
|
|
Equity loss
|
|
|
23,227
|
|
|
|
34,697
|
|
|
|
15,178
|
|
Other (income) loss, net
|
|
|
(108,881
|
)
|
|
|
(10,280
|
)
|
|
|
5,077
|
|
Bad debt expense
|
|
|
3,936
|
|
|
|
12,199
|
|
|
|
3,558
|
|
Stock-based compensation expense
|
|
|
3,825
|
|
|
|
3,449
|
|
|
|
5,350
|
|
Changes in assets and liabilities, net of effect of acquisitions
and dispositions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
(11,467
|
)
|
|
|
(20,495
|
)
|
|
|
(6,318
|
)
|
Accounts payable, accrued expenses, deferred revenue and other
|
|
|
1,967
|
|
|
|
4,696
|
|
|
|
(2,318
|
)
|
Cash flows from operating activities of discontinued operations
|
|
|
|
|
|
|
(3,288
|
)
|
|
|
(8,203
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(19,170
|
)
|
|
|
(21,514
|
)
|
|
|
(36,253
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales of and distributions from companies and funds
|
|
|
61,302
|
|
|
|
4,263
|
|
|
|
2,783
|
|
Advances to partner companies
|
|
|
(1,350
|
)
|
|
|
(4,210
|
)
|
|
|
(682
|
)
|
Repayment of advances to companies
|
|
|
5,679
|
|
|
|
|
|
|
|
|
|
Acquisitions of ownership interests in partner companies and
funds, net of cash acquired
|
|
|
(35,939
|
)
|
|
|
(30,496
|
)
|
|
|
(61,025
|
)
|
Increase in marketable securities
|
|
|
(73,187
|
)
|
|
|
(75,809
|
)
|
|
|
(111,858
|
)
|
Decrease in marketable securities
|
|
|
48,822
|
|
|
|
61,698
|
|
|
|
205,422
|
|
Increase in restricted cash, net
|
|
|
(1,956
|
)
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(2,157
|
)
|
|
|
(3,530
|
)
|
|
|
(3,625
|
)
|
Capitalized software costs
|
|
|
|
|
|
|
|
|
|
|
(156
|
)
|
Deconsolidation of subsidiary cash
|
|
|
(2,667
|
)
|
|
|
|
|
|
|
|
|
Proceeds from sale of discontinued operations, net
|
|
|
1,500
|
|
|
|
83,756
|
|
|
|
29,967
|
|
Cash flows from investing activities of discontinued operations
|
|
|
|
|
|
|
(2,867
|
)
|
|
|
(7,763
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
47
|
|
|
|
32,805
|
|
|
|
53,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of convertible senior debentures
|
|
|
(7,271
|
)
|
|
|
(33,494
|
)
|
|
|
|
|
Borrowings on revolving credit facilities
|
|
|
23,726
|
|
|
|
37,633
|
|
|
|
34,797
|
|
Repayments on revolving credit facilities
|
|
|
(33,237
|
)
|
|
|
(37,526
|
)
|
|
|
(28,766
|
)
|
Borrowings on term debt
|
|
|
|
|
|
|
|
|
|
|
449
|
|
Repayments on term debt
|
|
|
(107
|
)
|
|
|
(2,574
|
)
|
|
|
(2,128
|
)
|
Issuance of Company common stock, net
|
|
|
270
|
|
|
|
115
|
|
|
|
741
|
|
Issuance of subsidiary equity, net
|
|
|
28,082
|
|
|
|
966
|
|
|
|
|
|
Purchase of subsidiary common stock, net
|
|
|
|
|
|
|
|
|
|
|
691
|
|
Repurchase of Company common stock
|
|
|
(44
|
)
|
|
|
(1,296
|
)
|
|
|
|
|
Cash flows from financing activities of discontinued operations
|
|
|
|
|
|
|
4,790
|
|
|
|
11,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
11,419
|
|
|
|
(31,386
|
)
|
|
|
17,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash and Cash Equivalents
|
|
|
(7,704
|
)
|
|
|
(20,095
|
)
|
|
|
34,310
|
|
Changes in Cash and Cash Equivalents from and Advances to Acsis,
Alliance Consulting, Laureate Pharma, Pacific Title &
Art Studio and Mantas included in assets of discontinued
operations
|
|
|
|
|
|
|
(1,055
|
)
|
|
|
1,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,704
|
)
|
|
|
(21,150
|
)
|
|
|
35,820
|
|
Cash and Cash Equivalents at beginning of period
|
|
|
75,051
|
|
|
|
96,201
|
|
|
|
60,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at end of period
|
|
$
|
67,347
|
|
|
$
|
75,051
|
|
|
$
|
96,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
51
SAFEGUARD
SCIENTIFICS, INC.
|
|
1.
|
Significant
Accounting Policies
|
Description
of the Company
Safeguard Scientifics, Inc. (Safeguard or the
Company) seeks to build value in growth-stage
technology and life sciences businesses by providing partner
companies with capital and a range of strategic, operational and
management resources. The Company may participate in expansion
financings, corporate spin-outs, management buy-outs,
recapitalizations, industry consolidations and early-stage
financings. The Companys vision is to be the preferred
catalyst for creating great technology and life sciences
companies.
The Company strives to create long-term value for its
shareholders by helping its partner companies increase market
penetration, grow revenue and improve cash flow. Safeguard
focuses on companies with capital requirements of up to
$25 million that operate in two categories:
Technology including companies focused on
providing healthcare information technology, financial services
technology and internet/new media businesses that have recurring
or transactional revenue models.
Life Sciences including companies focused on
molecular and
point-of-care
diagnostics, medical devices/regenerative medicine, specialty
pharmaceuticals and healthcare services.
Basis
of Presentation
The Companys Consolidated Financial Statements include the
accounts of Clarient Inc. (Clarient) in continuing
operations through May 14, 2009, the date of its
deconsolidation. The Company has elected to apply the fair value
option to account for its retained interest in Clarient.
Unrealized gains and losses on the
mark-to-market
of its holdings in Clarient and realized gains and losses on the
sale of any of its holdings in Clarient are recognized in Other
income (loss), net in the Consolidated Statement of Operations
for all periods subsequent to the date that Clarient was
deconsolidated. See Note 6. The Company believes that
accounting for its holdings in Clarient at fair value rather
than applying the equity method of accounting provides a better
measure of the value of its holdings, given the reliable
evidence provided by quoted prices in an active market for
Clarients publicly traded common stock. The Company has
not elected the fair value option for its other partner company
holdings, which are accounted for under the equity method or
cost method, due to less readily determinable evidence of fair
value for these privately held companies and due to the
potential competitive disadvantage to the Company of such
disclosure.
The Companys voting interest in Cellumen, Inc.
(Cellumen) was 58.7% as of December 31, 2009,
on an as-converted basis. Due to the substantive participating
rights of the minority shareholders in the significant operating
decisions of Cellumen, the Company continues to account for its
holdings in Cellumen under the equity method. See Note 3.
In July 2009, the Companys Board of Directors approved a
one-for-six
reverse stock split of the Companys common stock. The
reverse split, which was approved by Safeguard shareholders in
July 2008, became effective on August 27, 2009. The number
of authorized shares of Company common stock was reduced from
500.0 million to 83.3 million. The reverse stock split
did not negatively affect any of the rights of holders of
Safeguard common stock, convertible debentures, options,
deferred stock units or other securities convertible into the
Companys common stock. All share and per share amounts
have been restated for all periods presented to reflect the
one-for-six
reverse stock split. In addition, $10.0 million was
reclassified from Common stock to Additional paid-in capital at
December 31, 2006 to reflect the
one-for-six
reverse stock split.
During 2008 and 2007, certain consolidated partner companies, or
components thereof, were sold and are reported in discontinued
operations. See Note 2.
52
SAFEGUARD
SCIENTIFICS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Principles
of Accounting for Ownership Interests in Companies
The Companys ownership interests in its partner companies
are accounted for under any of four methods: consolidation, fair
value, equity or cost. The applicable accounting method
generally is determined by the degree of the Companys
influence over the entity, primarily determined by the
Companys voting interest in the entity.
In addition to holding voting and non-voting equity and debt
securities, the Company also periodically makes advances to its
partner companies in the form of promissory notes which are
included in the Ownership interests in and advances to companies
line item in the Consolidated Balance Sheet.
Consolidation Method. The Company generally
accounted for partner companies in which it directly or
indirectly owned more than 50% of the outstanding voting
securities under the consolidation method of accounting. Under
this method, the Company included these partner companies
financial statements within the Companys Consolidated
Financial Statements, and all significant intercompany accounts
and transactions were eliminated. The Company reflected
participation of other stockholders in the net assets and in the
income or losses of these consolidated partner companies in
Equity in the Consolidated Balance Sheets and in Net (income)
loss attributable to noncontrolling interest in the Statements
of Operations. Net (income) loss attributable to noncontrolling
interest adjusted the Companys consolidated operating
results to reflect only the Companys share of the earnings
or losses of the consolidated partner company. The Company
accounted for results of operations and cash flows of a
consolidated partner company through the latest date in which it
held a controlling interest. If the Company subsequently
relinquished control but retained an interest in the partner
company, the accounting method was adjusted to the equity, cost
or fair value method of accounting, as appropriate. As of
December 31, 2009, the Company did not hold a controlling
interest in any of its partner companies.
Fair Value Method. The Company accounts for
its holdings in Clarient, its publicly traded partner company,
under the fair value method of accounting following its
deconsolidation on May 14, 2009. Unrealized gains and
losses on the
mark-to-market
of the Companys holdings in Clarient and realized gains
and losses on the sale of any holdings in Clarient are
recognized in Other income (loss), net in the Consolidated
Statements of Operations.
Equity Method. The Company accounts for
partner companies whose results are not consolidated, but over
which it exercises significant influence, under the equity
method of accounting. Whether or not the Company exercises
significant influence with respect to a partner company depends
on an evaluation of several factors including, among others,
representation of the Company on the partner companys
board of directors and the Companys ownership level, which
is generally a 20% to 50% interest in the voting securities of a
partner company (including voting rights associated with the
Companys holdings in common, preferred and other
convertible instruments in the company). The Company also
accounts for its interests in some private equity funds under
the equity method of accounting based on its general and limited
partner interests in such funds. Under the equity method of
accounting, the Company does not reflect a partner
companys financial statements within the Companys
Consolidated Financial Statements; however, the Companys
share of the income or loss of such partner company is reflected
in Equity loss in the Consolidated Statements of Operations. The
Company includes the carrying value of equity method partner
companies in Ownership interests in and advances to companies on
the Consolidated Balance Sheets. The Company reports its share
of the income or loss of the equity method partner companies on
a one quarter lag. This reporting lag could result in a delay in
recognition of the impact of changes in the business or
operations of these partner companies.
When the Companys carrying value in an equity method
partner company is reduced to zero, the Company records no
further losses in its Consolidated Statements of Operations
unless the Company has an outstanding guarantee obligation or
has committed additional funding to such equity method partner
company. When such equity method partner company subsequently
reports income, the Company will not record its share of such
income until it exceeds the amount of the Companys share
of losses not previously recognized.
Cost Method. The Company accounts for partner
companies not consolidated or accounted for under the equity
method or fair value method under the cost method of accounting.
Under the cost method, the Company does
53
SAFEGUARD
SCIENTIFICS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
not include its share of the income or losses of partner
companies in the Companys Consolidated Statements of
Operations. The Company includes the carrying value of cost
method partner companies in Ownership interests in and advances
to companies on the Consolidated Balance Sheets.
Accounting
Estimates
The preparation of the Consolidated Financial Statements in
accordance with accounting principles generally accepted in the
United States of America requires management to make estimates
and judgments that affect amounts reported in the financial
statements and accompanying notes. Actual results may differ
from these estimates. These estimates include the evaluation of
the recoverability of the Companys ownership interests in
and advances to companies and investments in marketable
securities, the evaluation of the impairment of goodwill,
intangible assets and property and equipment, revenue
recognition, income taxes, stock-based compensation and
commitments and contingencies. Following the deconsolidation of
Clarient on May 14, 2009, the Company no longer records
goodwill, intangible assets or revenue in its consolidated
financial statements. Management evaluates its estimates on an
ongoing basis using historical experience and other factors,
including the current economic environment, which management
believes to be reasonable under the circumstances. Illiquid
credit markets, volatile equity markets and reductions in
information technology spending have combined to increase the
uncertainty in such estimates.
Certain amounts recorded to reflect the Companys share of
income or losses of partner companies accounted for under the
equity method are based on unaudited results of operations of
those companies and may require adjustments in the future when
audits of these entities financial statements are
completed.
It is reasonably possible that the Companys accounting
estimates with respect to the ultimate recoverability of the
carrying value of the Companys ownership interests in and
advances to companies could change in the near term and that the
effect of such changes on the financial statements could be
material. At December 31, 2009, the Company believes the
recorded amount of carrying value of the Companys
ownership interests in and advances to companies is not
impaired, although there can be no assurance that the
Companys future results will confirm this assessment, that
a significant write-down or write-off will not be required in
the future, or that a significant loss will not be recorded in
the future upon the sale of a company.
Cash
and Cash Equivalents and Short-Term Marketable
Securities
The Company considers all highly liquid instruments with an
original maturity of 90 days or less at the time of
purchase to be cash equivalents. Cash and cash equivalents
consist of deposits that are readily convertible into cash. The
Company determines the appropriate classification of marketable
securities at the time of purchase and reevaluates such
designation as of each balance sheet date.
Held-to-maturity
securities are carried at amortized cost, which approximates
fair value. Short-term marketable securities consist of
held-to-maturity
securities, primarily consisting of commercial paper and
certificates of deposits. The Company has not experienced any
significant losses on cash equivalents and does not believe it
is exposed to any significant credit risk on cash and cash
equivalents.
Restricted
Marketable Securities
Restricted marketable securities includes
held-to-maturity
securities, based upon the Companys ability and intent to
hold these securities to maturity. The securities were
U.S. Treasury securities with various maturity dates.
Pursuant to terms of the 2.625% convertible senior debentures
due March 15, 2024 (2024 Debentures), as a
result of the sale of CompuCom in 2004, the Company pledged the
U.S. Treasury securities to an escrow agent for interest
payments through March 15, 2009 on the 2024 Debentures (See
Note 7).
54
SAFEGUARD
SCIENTIFICS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Long-Term
Marketable Securities
The Company records its ownership interest in cost method equity
securities that have readily determinable fair value as
available-for-sale
or trading securities.
Available-for-sale
securities are carried at fair value, based on quoted market
prices, with the unrealized gains and losses, net of tax,
reported as a separate component of Equity. Unrealized losses
are charged against net loss when a decline in the fair value is
determined to be other than temporary. Trading securities are
carried at fair value, based on quoted market prices, with the
unrealized gain or loss included in Other income (loss), net, in
the Consolidated Statements of Operations. The Company records
its ownership interest in debt securities at amortized cost
based on its ability and intent to hold these securities until
maturity.
Financial
Instruments
The Companys financial instruments (principally cash and
cash equivalents, marketable securities, restricted marketable
securities, accounts receivable, notes receivable, accounts
payable and accrued expenses) are carried at cost, which
approximates fair value due to the short-term maturity of these
instruments. The Companys long-term debt is carried at
cost. At December 31, 2009, the market value of the
Companys outstanding 2024 Debentures was approximately
$74.3 million based on quoted market prices as of that date.
Allowance
for Doubtful Accounts and Bad Debt Expense
All trade accounts receivable on the Companys Consolidated
Balance Sheet at December 31, 2008 related to Clarient. On
May 14, 2009, all of the assets and liabilities of Clarient
were deconsolidated. The Company has no trade accounts
receivable at December 31, 2009 on the Consolidated Balance
Sheet.
An allowance for doubtful accounts was recorded for estimated
uncollectible amounts due from customers. The process for
estimating the allowance for doubtful accounts associated with
Clarients diagnostic services involved significant
assumptions and judgments. The allowance for doubtful accounts
was adjusted periodically, based upon an evaluation of
historical collection experience and other relevant factors. The
payment realization cycle for certain governmental and managed
care payors was lengthy, involving denial, appeal, and
adjudication processes. Clarients receivables were subject
to periodic adjustments that could be significant. Adjustments
to the allowance for doubtful accounts were charged to bad debt
expense. Accounts receivable were written off when identified as
uncollectible and deducted from the allowance after appropriate
collection efforts had been exhausted.
Property
and Equipment
Property and equipment are stated at cost. Equipment under
capital leases are stated at the present value of minimum lease
payments. Provision for depreciation and amortization is based
on the lesser of the estimated useful lives of the assets or the
remaining lease term (buildings and leasehold improvements, 5 to
15 years; machinery and equipment, 3 to 15 years) and
is computed using the straight-line method.
Intangible
Assets, net
All intangible assets on the Companys Consolidated Balance
Sheet at December 31, 2008 related to Clarient. On
May 14, 2009, all of the assets and liabilities of Clarient
were deconsolidated. The Company has no intangible assets at
December 31, 2009 on the Consolidated Balance Sheet.
Intangible assets with indefinite useful lives were not
amortized but instead were tested for impairment at least
annually. Intangible assets with definite useful lives were
amortized over their respective estimated useful lives to their
estimated residual value.
55
SAFEGUARD
SCIENTIFICS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Goodwill
Impairment
All goodwill on the Companys Consolidated Balance Sheet at
December 31, 2008 related to Clarient. On May 14,
2009, all of the assets and liabilities of Clarient were
deconsolidated. The Company has no goodwill at December 31,
2009 on the Consolidated Balance Sheet.
The Company conducted an annual review for impairment of
goodwill as of December 1st and as otherwise required
by circumstances or events. Additionally, on an interim basis,
the Company assessed the impairment of goodwill whenever events
or changes in circumstances would more likely than not reduce
the fair value of a reporting unit below its carrying amount.
Impairment
of Equity Method and Cost Method Companies
On a periodic basis, but no less frequently than quarterly, the
Company evaluates the carrying value of its equity and cost
method partner companies for possible impairment based on
achievement of business plan objectives and milestones, the fair
value of each partner company relative to its carrying value,
the financial condition and prospects of the partner company and
other relevant factors. The business plan objectives and
milestones the Company considers 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
hiring of key employees or the establishment of strategic
relationships. Management then determines whether there has been
an other than temporary decline in the value of its ownership
interest in the company. Impairment is measured by the amount by
which the carrying value of an asset exceeds its fair value.
The fair value of privately held companies is generally
determined based on the value at which independent third parties
have invested or have committed to invest in these companies or
based on other valuation methods, including discounted cash
flows, valuation of comparable public companies and the
valuation of acquisitions of similar companies. The fair value
of the Companys ownership interests in private equity
funds generally is determined based on the value of its pro rata
portion of the fair value of the funds net assets.
Impairment charges related to equity method partner companies
are included in Equity loss in the Consolidated Statements of
Operations. Impairment charges related to cost method partner
companies are included in Other income (loss), net in the
Consolidated Statements of Operations.
The reduced cost basis of a previously impaired partner company
is not
written-up
if circumstances suggest the value of the company has
subsequently recovered.
Impairment
of Long-Lived Assets and Long-Lived Assets to Be Disposed
of
The Company reviews long-lived assets, including property and
equipment and amortizable intangibles, for recoverability
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to forecasted
undiscounted cash flows expected to be generated by the asset.
If such assets are considered to be impaired, the impairment to
be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets.
Revenue
Recognition
As of May 14, 2009, the date that Clarient was
deconsolidated, the Company no longer reports revenue from
Clarients continuing operations. Prior to that date, all
of the Companys revenue from continuing operations for the
periods presented was attributable to Clarient.
Revenue for Clarients diagnostic testing and interpretive
services was recognized at the time of completion of such
services. Clarients services were billed to various
payors, including Medicare, health insurance companies and other
directly billed healthcare institutions and patients. Clarient
reported revenue from contracted payors,
56
SAFEGUARD
SCIENTIFICS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
including certain health insurance companies and healthcare
institutions, based on the contracted rate or, in certain
instances, Clarients estimate of such rate. For billings
to Medicare, Clarient utilized the published fee schedules, net
of standard discounts commonly referred to as contractual
allowances. Clarient reported revenue from non-contracted
payors, including certain insurance companies and patients,
based on the amount expected to be collected for services
provided. Adjustments resulting from actual collections compared
to Clarients estimates were recognized in the period
realized.
Defined
Contribution Plans
Defined contribution plans are contributory and cover eligible
employees of the Company. The Companys defined
contribution plan allows eligible employees, as defined in the
plan, to contribute to the plan up to 75% of their pre-tax
compensation, subject to the maximum contributions allowed by
the Internal Revenue Code. The Company may make matching
contributions under the plan. Through May 14, 2009, the
Company reported the results of Clarient in its consolidated
operations. Clarient also generally matched a portion of
employee contributions to its plan. Expense relating to defined
contribution plans was $0.3 million in 2009,
$0.3 million in 2008 and $0.5 million in 2007.
Income
Taxes
The Company accounts for income taxes 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 bases. The Company measures deferred tax assets
and liabilities using enacted tax rates in effect for the year
in which the temporary differences are expected to be recovered
or settled. The Company recognizes the effect on deferred tax
assets and liabilities of a change in tax rates in income in the
period of the enactment date. The Company provides valuation
allowances against the net deferred tax asset for amounts which
are not considered more likely than not to be realized.
Net
income (loss) per share attributable to Safeguard Scientifics,
Inc.
The Company computes net income (loss) per share (EPS) using the
weighted average number of common shares outstanding during each
year. The Company includes in diluted EPS common stock
equivalents (unless anti-dilutive) which would arise from the
exercise of stock options and conversion of other convertible
securities and is adjusted, if applicable, for the effect on net
income (loss) of such transactions. Diluted EPS calculations
adjust net income (loss) for the dilutive effect of common stock
equivalents and convertible securities issued by the
Companys consolidated or equity method partner companies.
Comprehensive
income (loss) attributable to Safeguard Scientifics,
Inc.
Comprehensive income (loss) is the change in equity of a
business enterprise during a period from non-owner sources.
Excluding net income (loss), the Companys sources of other
comprehensive income (loss) are from net unrealized appreciation
(depreciation) on
available-for-sale
securities and foreign currency translation adjustments.
Reclassification adjustments result from the recognition in net
income (loss) of unrealized gains or losses that were included
in comprehensive income (loss) in prior periods.
Segment
Information
The Company reports segment data based on the management
approach which designates the internal reporting which is used
by management for making operating decisions and assessing
performance as the source of the Companys reportable
operating segments.
57
SAFEGUARD
SCIENTIFICS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
New
Accounting Pronouncements
In September 2009, the Financial Accounting Standards Board
(FASB) clarified how an entity should measure the
fair value of liabilities and that restrictions which prevent
the transfer of a liability should not be considered as separate
inputs or adjustments in the measurement of the liabilitys
fair value. The guidance reaffirms the measurements concept of
determining fair value based on an orderly transaction between
market participants even though liabilities are infrequently
transferred due to contractual or other legal restrictions. The
guidance did not have a material effect on the Companys
Consolidated Financial Statements.
In June 2009, the FASB issued a single source of authoritative
non-governmental United States Generally Accepted Accounting
Principles (US GAAP), referred to as the
Codification. The Codification does not change current
U.S. GAAP, but is intended to simplify user access to all
authoritative U.S. GAAP by providing all the authoritative
literature related to a particular topic in one place. All
existing accounting standard documents have been superseded and
all other accounting literature not included in the Codification
is considered non-authoritative. The Codification was effective
for interim and annual periods ending after September 15,
2009. The Codification did not impact the Companys
Consolidated Financial Statements.
In April 2009, the FASB issued guidance which required
disclosures about fair value of financial instruments for
interim reporting periods as well as in annual financial
statements. The guidance requires those disclosures in
summarized financial statements at interim reporting periods.
The guidance requires that an entity disclose in the body or in
the accompanying notes of its financial information the fair
value of all financial instruments for which it is practicable
to estimate that value, whether recognized or not recognized in
the statement of financial position. In addition, an entity is
required disclose the method(s) and significant assumptions used
to estimate the fair value of financial instruments. The Company
adopted the provisions of this guidance on June 30, 2009
and has provided the necessary additional disclosures.
In November 2008, the FASBs Emerging Issues Task Force
(EITF) reached a consensus on certain matters
associated with equity method accounting. The EITF retained the
accounting for the initial carrying value of equity method
investments which is based on a cost accumulation model and
generally excludes contingent consideration. The EITF also
specified that
other-than-temporary
impairment testing by the investor should be performed at the
investment level and that a separate impairment assessment of
the underlying assets is not required. An impairment charge by
the investee should result in an adjustment of the
investors basis of the impaired asset for the
investors pro-rata share of such impairment. In addition,
the EITF reached a consensus on how to account for an issuance
of shares by an investee that reduces the investors
ownership share of the investee. An investor should account for
such transactions as if it had sold a proportionate share of its
investment with any gains or losses recorded through earnings.
The EITF also addressed the accounting for a change in an
investment from the equity method to the cost method. The EITF
affirmed the existing guidance, which requires cessation of the
equity method of accounting and application of debt and equity
security accounting, or the cost method, as appropriate. The
guidance was effective for fiscal years beginning on or after
December 15, 2008. This consensus did not have a material
impact on the Companys Consolidated Financial Statements.
In June 2008, the EITF clarified how to determine whether
certain instruments or features were indexed to an entitys
own stock. The consensus was effective for financial statements
issued for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years. The adoption of
the consensus did not have a material impact on the
Companys Consolidated Financial Statements.
In May 2008, the FASB issued guidance on the accounting for
convertible debt instruments that may be settled in cash or
partially in cash upon conversion. An issuer of convertible debt
instruments with cash settlement features is required to
separately account for the liability and equity components of
the instrument. The debt is recognized at the present value of
its cash flows discounted using the issuers nonconvertible
debt borrowing rate. The equity component is recognized as the
difference between the proceeds from the issuance of the note
and the fair value of the liability. The resultant debt discount
is to be accreted over the expected life of the debt. The
guidance did not
58
SAFEGUARD
SCIENTIFICS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
have any impact on the Companys Consolidated Financial
Statements because the convertible senior debentures previously
issued by the Company do not include any cash settlement
features within the scope of this guidance. See Note 21
regarding the exchange of a portion of the Companys senior
debentures in 2010.
In April 2008, the FASB issued guidance that addresses the
factors that should be considered in developing renewal or
extension assumptions used to determine the useful lives for
intangible assets. The guidance requires an entity to consider
its own historical experience in renewing or extending similar
arrangements, regardless of whether those arrangements have
explicit renewal or extension provisions, when determining the
useful life of an intangible asset. In the absence of such
experience, an entity shall consider the assumptions that market
participants would use about renewal or extension, adjusted for
entity-specific factors. The guidance was effective for fiscal
years beginning after December 31, 2008. The guidance did
not have a material impact on the Companys Consolidated
Financial Statements.
In December 2007, the FASB revised the accounting for business
combinations. Under the new accounting, an acquiring entity is
required to recognize all the assets acquired and liabilities
assumed in a transaction at the acquisition-date at fair value
with limited exceptions. The accounting treatment for certain
specific items was revised as follows:
|
|
|
|
|
Acquisition costs are generally expensed as incurred;
|
|
|
|
Noncontrolling interests (formerly known as minority
interests) are valued at fair value at the acquisition
date;
|
|
|
|
Acquired contingent liabilities are recorded at fair value at
the acquisition date and subsequently measured at either the
higher of such amount or the amount determined under existing
guidance for non-acquired contingencies;
|
|
|
|
In-process research and development (IPR&D) is recorded at
fair value as an indefinite-lived intangible asset at the
acquisition date;
|
|
|
|
Restructuring costs associated with a business combination are
generally expensed subsequent to the acquisition date; and
|
|
|
|
Changes in deferred tax asset valuation allowances and income
tax uncertainties after the acquisition date generally affect
income tax expense.
|
The revised guidance also includes a substantial number of new
disclosure requirements. The revised guidance is applied
prospectively to business combinations for which the acquisition
date is on or after January 1, 2009.
In December 2007, the FASB issued new accounting and reporting
standards for the noncontrolling interest in a subsidiary and
for the deconsolidation of a subsidiary. Specifically, the
guidance requires the recognition of noncontrolling interests
(minority interests) as equity in the consolidated financial
statements and separate from the parents equity. The
guidance clarifies that changes in a parents ownership
interest in a subsidiary that does not result in deconsolidation
are treated as equity transactions if the parent retains its
controlling financial interest. Losses attributable to the
noncontrolling interest that exceed its basis in the
subsidiarys equity result in a deficit noncontrolling
interest reflected in the Consolidated Balance Sheet. Revenue,
expenses, gains, losses, net income or loss are reported in the
Consolidated Statements of Operations at the consolidated
amounts, which include the amounts attributable to the owners of
the parent and noncontrolling interest. The amount of net income
attributable to noncontrolling interests will be included in
consolidated net income on the face of the income statement. In
addition, this statement requires that a parent recognize a gain
or loss in net income when a subsidiary is deconsolidated. Such
gain or loss will be measured using the fair value of the
noncontrolling equity investment on the deconsolidation date.
Expanded disclosures are also required regarding the interests
of the parent and its noncontrolling interest. The guidance was
effective for fiscal years beginning after November 15,
2008. On January 1, 2009, the Company adopted the
provisions of this guidance. As a result, the Company reflects
the portion
59
SAFEGUARD
SCIENTIFICS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
of equity (net assets) of its consolidated partner companies, if
any, not attributable, directly or indirectly, to the parent
company as a noncontrolling interest within equity, separate
from the equity of the parent company.
|
|
2.
|
Discontinued
Operations
|
The following are reported in discontinued operations for all
periods through their respective sale date.
Acsis,
Alliance Consulting and Laureate Pharma
In May 2008, the Company consummated a transaction (the
Bundle Sale) pursuant to which it sold all of its
equity and debt interests in Acsis, Inc. (Acsis),
Alliance Consulting Group Associates, Inc. (Alliance
Consulting), Laureate Pharma, Inc. (Laureate
Pharma), ProModel Corporation (ProModel) and
Neuronyx, Inc. (Neuronyx) (collectively, the
Bundle Companies).
Of the companies included in the Bundle Sale, Acsis, Alliance
Consulting and Laureate Pharma were consolidated partner
companies and Neuronyx and ProModel were minority-owned partner
companies. The Company has presented the results of operations
of Acsis, Alliance Consulting and Laureate Pharma as
discontinued operations for all periods presented.
During 2008, the Company recognized an impairment loss of
$3.6 million to write down the aggregate carrying value of
the Bundle Companies to the total anticipated proceeds, less
estimated costs to complete the Bundle Sale. Prior to the
completion of the Bundle Sale, the Company recorded a net loss
of $1.6 million in discontinued operations related to the
operations of Acsis, Alliance Consulting and Laureate Pharma.
The Company recorded a charge of $0.9 million in
discontinued operations to accrue for severance payments due to
the former CEO of Alliance Consulting in connection with the
Bundle Sale and recorded a pre-tax gain on disposal of
$1.4 million which was also recorded in discontinued
operations.
The gross proceeds to the Company from the Bundle Sale were
$74.5 million, of which $6.4 million was placed in
escrow pending expiration of a claims period (see Note 15),
plus amounts advanced to certain of the Bundle Companies during
the time between the signing of the Bundle Sale agreement and
its consummation.
Clarient
Technology Business
In March 2007, Clarient sold its technology business and related
intellectual property to Carl Zeiss MicroImaging, Inc.
(Zeiss) for an aggregate purchase price of
$12.5 million. The $12.5 million consisted of
$11.0 million in cash and an additional $1.5 million
in contingent purchase price, subject to the satisfaction of
certain post-closing conditions through March 2009. Clarient
received the contingent consideration and recorded the
$1.5 million in income from discontinued operations in 2009.
Pacific
Title & Art Studio
In March 2007, the Company sold Pacific Title & Art
Studio for net cash proceeds of approximately
$21.9 million, including $2.3 million cash deposited
into escrow. As a result of the sale, the Company recorded a
pre-tax gain of $2.7 million in 2007. During 2008, the
Company recorded a loss of $2.7 million, which was included
within Income (loss) from discontinued operations in the
Consolidated Statements of Operations, related to additional
compensation paid to the former CEO of Pacific Title &
Art Studio in connection with the March 2007 sale and related
legal fees (see Note 15). Pacific Title & Art
Studio is reported in discontinued operations for all periods
presented. In the first quarter of 2010, the Company received
the final $0.5 million in cash from the escrow account.
This amount was recorded as income from discontinued operations
in 2009.
60
SAFEGUARD
SCIENTIFICS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Results of discontinued operations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Revenue
|
|
$
|
|
|
|
$
|
45,712
|
|
|
$
|
140,509
|
|
Operating expenses
|
|
|
|
|
|
|
(49,652
|
)
|
|
|
(156,688
|
)
|
Impairment of carrying value
|
|
|
|
|
|
|
(3,634
|
)
|
|
|
(5,438
|
)
|
Other
|
|
|
|
|
|
|
(1,547
|
)
|
|
|
(2,031
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations before income taxes
|
|
|
|
|
|
|
(9,121
|
)
|
|
|
(23,648
|
)
|
Income tax benefit
|
|
|
|
|
|
|
|
|
|
|
93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
|
|
|
|
(9,121
|
)
|
|
|
(23,555
|
)
|
Gain (loss) on disposal, net of tax
|
|
|
1,975
|
|
|
|
(499
|
)
|
|
|
6,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations
|
|
$
|
1,975
|
|
|
$
|
(9,620
|
)
|
|
$
|
(17,282
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.
|
Acquisitions
of Ownership Interests in Partner Companies
|
In December and June 2009, the Company exercised a total of
$4.5 million of warrants in Advantedge Healthcare Solutions
(AHS) thereby increasing its ownership interest to
39.7%. The Company previously deployed an aggregate of
$9.0 million in AHS in May 2008 and November 2006. AHS is a
technology-enabled service provider that delivers medical
billing services to physician groups. The Company accounts for
its holdings in AHS under the equity method. The difference
between the Companys cost and its interest in the
underlying net assets of AHS was allocated to intangible assets
and goodwill as reflected in the carrying value in Ownership
interests in and advances to companies on the Consolidated
Balance Sheets.
In December, May and February 2009, the Company deployed an
aggregate of $6.5 million in Molecular Biometrics, Inc.
(Molecular Biometrics), in conjunction with a larger
round of financing resulting in a decrease in the Companys
ownership interest from 37.8% to 35.4%. The Company had
previously acquired an interest in Molecular Biometrics in
September and December 2008, for $3.5 million in cash,
including the conversion into equity interests of
$1.9 million previously advanced to the company. Molecular
Biometrics is a metabolomics company that applies novel
metabolomic technologies to develop accurate, non-invasive
clinical tools to increase the probability of pregnancy and
decrease multiple births from in vitro fertilization. The
Company accounts for its holdings in Molecular Biometrics under
the equity method. The difference between the Companys
cost and its interest in the underlying net assets of Molecular
Biometrics was allocated to in-process research and development,
resulting in $0.4 million and $2.5 million of charges
which are reflected in Equity loss in the Consolidated
Statements of Operations for 2009 and 2008, respectively.
In October 2009, the Company contributed $5.0 million for a
25.7% primary and voting interest ownership in Quinnova
Pharmaceuticals, Inc. (Quinnova). Quinnova is a
specialty pharmaceutical company that develops and markets novel
delivery platforms-based prescription dermatology drugs. The
Company accounts for its interest in Quinnova under the equity
method. The difference between the Companys cost and its
interest in the underlying net assets of Quinnova, based on the
Companys preliminary allocation, was allocated to
intangible assets and goodwill as reflected in the carrying
value in Ownership interests in and advances to companies on the
Consolidated Balance Sheet.
In October, May and February 2009 the Company provided
additional funding to Cellumen Inc. (Cellumen), as
part of an up to $2.5 million convertible note financing to
be funded in five tranches. As part of this financing, the
Company agreed to provide Cellumen up to $1.0 million
(subject to certain conditions), $0.75 million of which the
Company funded as of December 31, 2009. The Company
previously acquired an interest in Cellumen in June 2007, paying
$6.0 million in cash for shares of Cellumens
Series B preferred stock. In conjunction with the
convertible
61
SAFEGUARD
SCIENTIFICS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
note financing, the Series B preferred stock conversion
price was adjusted, and will receive further adjustments upon
the closing of future tranches, increasing the economic and
voting interest of the Series B preferred stock in
Cellumen. The Companys voting interest in Cellumen
increased to 58.7%, on an as-converted basis, at
December 31, 2009. Due to the substantive participating
rights of the minority shareholders in the significant operating
decisions of Cellumen, the Company continues to account for its
holdings in Cellumen under the equity method. Cellumen delivers
proprietary services and products to support drug discovery and
development. The difference between the Companys cost and
its interest in the underlying net assets of Cellumen was
allocated to in-process research and development, resulting in a
$0.2 million charge in 2007, as reflected in Equity loss in
the Consolidated Statements of Operations, and to intangible
assets and goodwill as reflected in the carrying value in
Ownership interests in and advances to companies on the
Consolidated Balance Sheet.
In August 2009, the Company deployed an additional
$2.0 million in NuPathe, Inc. (NuPathe) in
connection with a larger round of financing, resulting in a
decrease in the Companys ownership interest from 23.5% to
22.9%. As a result of the decrease in the Companys
ownership position during 2009, the Company recognized a
$0.4 million change in interest gain in Equity loss in the
Consolidated Statements of Operations. The Company previously
deployed $10.0 million in NuPathe from August 2006 through
July 2008. NuPathe specializes in development of therapeutics
for treatment of neurological and psychiatric disorders
including migraine and Parkinsons disease. The Company
accounts for its holdings in NuPathe under the equity method.
The difference between the Companys cost and its interest
in the underlying net assets of NuPathe has been allocated to
in-process research and development, resulting in charges of
$0.1 million and $0.2 million in 2008 and 2007,
respectively, which are reflected in Equity loss in the
Consolidated Statements of Operations and goodwill as reflected
in the carrying value in Ownership interests in and advances to
partner companies on the Consolidated Balance Sheets. The
Company recognized a $1.3 million charge in 2008 in Equity
loss in the Consolidated Statements of Operations, related to an
in-process research and development charge recorded by NuPathe.
In July 2009, the Company deployed an additional
$1.5 million in Garnet BioTherapeutics, Inc.
(Garnet) to maintain an ownership interest of 31.1%.
The Company had previously acquired an interest in Garnet in
November 2008 for $2.5 million in cash. Garnet is a
clinical stage regenerative medicine company focused on
accelerating healing and reducing scarring in cosmetic,
orthopedic and cardiovascular surgical wounds. The Company
accounts for its holdings in Garnet under the equity method. The
difference between the Companys cost and its interest in
the underlying net assets, based on the Companys
preliminary allocation, was allocated to intangible assets and
goodwill as reflected in the carrying value in Ownership
interests in and advances to companies on the Consolidated
Balance Sheet.
In July 2009, the Company acquired 17.9% of MediaMath, Inc.
(MediaMath) for $6.7 million in cash. MediaMath
is an online media trading company that enables advertising
agencies and their advertisers to optimize their ad spending
across various exchanges through its proprietary algorithmic
bidding platform and data integration technology. The Company
accounts for its holdings in MediaMath under the cost method.
In November and May 2009, the Company deployed an aggregate of
$4.7 million of cash in Avid Radiopharmaceuticals, Inc.
(Avid), in conjunction with a larger round of
financing, reducing its ownership interest from 13.9% to 13.7%.
The Company had previously acquired an interest in Avid in May
2007 for $7.3 million in cash. Avid is developing molecular
imaging agents to detect neurodegenerative diseases. The Company
accounts for its holdings in Avid under the cost method.
In April 2009, the Company deployed an additional
$0.5 million of cash in Portico Systems, Inc
(Portico), in connection with a larger round of
financing, resulting in a decrease in the Companys
ownership interest from 46.0% to 45.6%. The Company previously
deployed an aggregate of $8.8 million in cash in Portico in
February 2008 and August 2006. Portico offers software and
services to health insurance providers that help reduce
administrative, medical and IT costs. The Company accounts for
its holdings in Portico under the equity method. The difference
between the Companys cost and its interest in the
underlying net assets of Portico was allocated to
62
SAFEGUARD
SCIENTIFICS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
intangible assets and goodwill as reflected in the carrying
value in Ownership interests in and advances to companies on the
Consolidated Balance Sheets.
In March 2009, the Company deployed an additional
$2.0 million and thereby increased its ownership interest
in Bridgevine, Inc. (Bridgevine) to 24.4%. The
Company had previously acquired an interest in Bridgevine in
August 2007 for $8.0 million in cash. Bridgevine is an
internet marketing company that enables online consumers to
compare and purchase digital services, including internet,
phone, VoIP, TV, wireless, music, and entertainment. The Company
accounts for its holdings in Bridgevine under the equity method.
The difference between the Companys cost and its interest
in the underlying net assets of Bridgevine was allocated to
intangible assets and goodwill as reflected in the carrying
value in Ownership interests in and advances to companies on the
Consolidated Balance Sheet.
In December 2008, the Company purchased additional shares of
Rubicor Medical, Inc. (Rubicor) from an existing
investor for nominal consideration, increasing its ownership
interest in Rubicor to 44.6% from 35.7%. The Company had
previously acquired an interest in Rubicor in August 2006 for
$20.0 million in cash. The Company recognized impairment
charges of $3.3 million in 2009 and $4.0 million in
2008, which are reflected in Equity loss in the Consolidated
Statements of Operations for the respective periods. The
carrying value of Rubicor at December 31, 2009 was zero.
In October 2008, the Company acquired 4.5% of Tengion, Inc.
(Tengion) for $7.5 million in cash. Tengion is
a clinical stage regenerative medicine company developing,
manufacturing and commercializing human neo-organs and
neo-tissues for treatment of urologic and renal diseases. During
2009, the Company recorded an impairment charge of
$3.9 million associated with its holdings in Tengion based
on the Companys determination that there had been an other
than temporary decline in the value of its holdings in this
company. The Company accounts for its holdings in Tengion under
the cost method.
In August 2008, the Company deployed $1.5 million in
Alverix, Inc. (Alverix), to maintain a 50.0%
ownership interest. The Company had previously acquired its
ownership interest in Alverix for $2.4 million in cash in
October 2007. Alverix is an optoelectronics company that
produces low-cost, handheld readers with the accuracy and
precision of laboratory instruments. The Company accounts for
its holdings in Alverix under the equity method. The difference
between the Companys cost and its interest in the
underlying net assets of Alverix was allocated to intangible
assets and goodwill as reflected in the carrying value in
Ownership interests in and advances to companies on the
Consolidated Balance Sheets.
In the third quarter of 2008, the Company provided
$1.6 million in funding to NextPoint Networks. In September
2008, NextPoint Networks was merged with GENBAND, resulting in
the Company holding a 2.3% ownership interest in the combined
company. GENBAND provides media gateway, IP security and session
border gateway technology to telecommunications providers. In
September and December 2007, the Company funded NexTone
Communications, Inc., a predecessor entity to NextPoint
Networks, $2.2 million and $2.1 million in cash,
respectively. In 2009, the Company recorded an impairment charge
of $5.8 million related to its holdings in GENBAND. The
carrying value of GENBAND at December 31, 2009 was zero.
The Company accounted for its holdings in GENBAND under the cost
method.
In July 2008, the Company provided additional funding to
Authentium, Inc. (Authentium) in the form of
$0.8 million convertible notes. In conjunction with this
funding, due to anti-dilution provisions contained in an earlier
equity funding, the Companys voting interest in Authentium
increased from 19.9% to 20.0%, the threshold at which the
Company believes it exercises significant influence.
Accordingly, the Company adopted the equity method of accounting
for its holdings in Authentium. The Company previously had
acquired an interest in Authentium in June 2007 and April 2006
for $3.0 million and $5.5 million, respectively.
Authentium provides anti-malware and identity protection
software.
In July 2008, the Company acquired 29.3% of Swaptree, Inc.
(Swaptree) for $3.4 million in cash. Swaptree
is an internet-based business that enables users to trade books,
CDs, DVDs and video games using its proprietary
63
SAFEGUARD
SCIENTIFICS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
trade matching software. The Company accounts for its holdings
in Swaptree under the equity method. The difference between the
Companys cost and its interest in the underlying net
assets of Swaptree was allocated to intangible assets and
goodwill as reflected in the carrying value in Ownership
interests in and advances to companies on the Consolidated
Balance Sheets.
In August 2007, the Company acquired 14.0% of Kadoo, Inc.
(Kadoo) for $2.2 million in cash. Kadoo was a
start-up
company established to enable online users to post, manage and
securely share large volumes of digital photos, videos and other
files. The Company accounted for its holdings in Kadoo under the
cost method. In 2008, the Company impaired its entire carrying
value in Kadoo and in 2009 sold its equity interest in exchange
for a $0.2 million interest in a convertible promissory
note, the carrying value of which is zero.
In May 2007, the Company increased its ownership interest in
Advanced BioHealing, Inc. to 28.3% for $2.8 million in
cash. The Company previously had acquired a 23.9% interest in
Advanced BioHealing in February 2007 for $8.0 million in
cash. Advanced BioHealing develops and markets cell-based and
tissue engineered products that use living cells to repair or
replace body tissue damaged by injury, disease or the aging
process. The Company accounts for its holdings in Advanced
BioHealing under the equity method. The difference between the
Companys cost and its interest in the underlying net
assets of Advanced BioHealing was allocated to intangible assets
and goodwill as reflected in the carrying value in Ownership
interests in and advances to companies on the Consolidated
Balance Sheets.
In March 2007, the Company acquired 37.1% of Beyond.com, Inc.
(Beyond.com) for $13.5 million in cash.
Beyond.com is an internet-based business that provides career
services and technology to job seekers and employers throughout
the United States and Canada. The Company accounts for its
holdings in Beyond.com under the equity method. The difference
between the Companys cost and its interest in the
underlying net assets of Beyond.com was allocated to intangible
assets and goodwill as reflected in the carrying value in
Ownership interests in and advances to companies on the
Consolidated Balance Sheets.
|
|
4.
|
Fair
Value Measurements
|
The Company categorizes its financial instruments into a
three-level fair value hierarchy that prioritizes the inputs to
valuation techniques used to measure fair value into three broad
levels. The fair value hierarchy gives the highest priority to
quoted prices in active markets for identical assets or
liabilities (Level 1) and the lowest priority to
unobservable inputs (Level 3). If the inputs used to
measure fair value fall within different levels of the
hierarchy, the category level is based on the lowest priority
level input that is significant to the fair value measurement of
the instrument. Financial assets recorded at fair value on the
Companys Consolidated Balance Sheets are categorized as
follows:
Level 1 Observable inputs that reflect quoted
prices (unadjusted) for identical assets or liabilities in
active markets.
Level 2 Include other inputs that are directly
or indirectly observable in the marketplace.
Level 3 Unobservable inputs which are supported
by little or no market activity.
The fair value hierarchy also requires an entity to maximize the
use of observable inputs and minimize the use of unobservable
inputs when measuring fair value.
64
SAFEGUARD
SCIENTIFICS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table provides the assets and liabilities measured
at fair value on a recurring basis as of December 31, 2009
and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Fair Value Measurement at December 31, 2009
|
|
|
|
Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
(In thousands)
|
|
|
Cash and cash equivalents
|
|
$
|
67,347
|
|
|
$
|
67,347
|
|
|
$
|
|
|
|
$
|
|
|
Cash held in escrow and restricted cash
|
|
$
|
6,910
|
|
|
$
|
6,910
|
|
|
$
|
|
|
|
$
|
|
|
Ownership interest in Clarient
|
|
$
|
80,483
|
|
|
$
|
80,483
|
|
|
$
|
|
|
|
$
|
|
|
Marketable securities
held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
$
|
10,380
|
|
|
$
|
10,380
|
|
|
$
|
|
|
|
$
|
|
|
U.S. Treasury Bills
|
|
|
4,981
|
|
|
|
4,981
|
|
|
|
|
|
|
|
|
|
Government agency bonds
|
|
|
8,384
|
|
|
|
8,384
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
|
15,321
|
|
|
|
15,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
39,066
|
|
|
$
|
39,066
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Fair Value Measurement at December 31, 2008
|
|
|
|
Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
(In thousands)
|
|
|
Cash and cash equivalents
|
|
$
|
75,051
|
|
|
$
|
75,051
|
|
|
$
|
|
|
|
$
|
|
|
Cash held in escrow and restricted cash
|
|
$
|
6,433
|
|
|
$
|
6,433
|
|
|
$
|
|
|
|
$
|
|
|
Cash held in escrow and restricted cash long-term
|
|
$
|
501
|
|
|
$
|
501
|
|
|
$
|
|
|
|
$
|
|
|
Marketable securities
held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
$
|
1,551
|
|
|
$
|
1,551
|
|
|
$
|
|
|
|
$
|
|
|
Restricted U.S. Treasury securities
|
|
|
1,990
|
|
|
|
1,990
|
|
|
|
|
|
|
|
|
|
U.S. Treasury Bills
|
|
|
499
|
|
|
|
499
|
|
|
|
|
|
|
|
|
|
Government agency bonds
|
|
|
351
|
|
|
|
351
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
|
12,300
|
|
|
|
12,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
16,691
|
|
|
$
|
16,691
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009, the contractual maturities of the
marketable securities were less than one year.
Held-to-maturity
securities are carried at amortized cost, which, due to the
short-term maturity of these instruments, approximates fair
value using quoted prices in active markets for identical assets
or liabilities defined as Level 1 inputs under the fair
value hierarchy.
The Companys holdings in Clarient are measured at fair
value using quoted prices for Clarients common stock as
traded on the NASDAQ Capital Market which is considered a
Level 1 input under the valuation hierarchy.
As described in Note 6, the Company recognized impairment
charges of $10.1 million related to cost method partner
companies and $4.1 million related to equity method partner
companies during the year ended December 31, 2009 measured
as the amount by which the partner companies carrying
values exceeded their respective estimated fair values. The fair
value measurements of these companies of $6.7 million at
December 31, 2009 were based on Level 3 inputs as
defined above. The inputs and valuation techniques used include
discounted cash flows and valuation of comparable public
companies.
65
SAFEGUARD
SCIENTIFICS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
5.
|
Property
and Equipment
|
Property and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Building and improvements
|
|
$
|
483
|
|
|
$
|
9,034
|
|
Machinery and equipment
|
|
|
1,039
|
|
|
|
17,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,522
|
|
|
|
26,769
|
|
Accumulated depreciation
|
|
|
(1,212
|
)
|
|
|
(14,400
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
310
|
|
|
$
|
12,369
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008, Property and equipment included
the assets of Clarient, which was deconsolidated as of
May 14, 2009.
|
|
6.
|
Ownership
Interests in and Advances to Companies
|
The following summarizes the carrying value of the
Companys ownership interests in and advances to partner
companies and private equity funds accounted for under the fair
value, equity or cost method of accounting.
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Fair Value:
|
|
$
|
80,483
|
|
|
$
|
|
|
Equity Method:
|
|
|
|
|
|
|
|
|
Partner companies
|
|
|
54,597
|
|
|
|
55,855
|
|
Private equity funds
|
|
|
2,224
|
|
|
|
2,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56,821
|
|
|
|
58,083
|
|
Cost Method:
|
|
|
|
|
|
|
|
|
Partner companies
|
|
|
24,887
|
|
|
|
23,332
|
|
Private equity funds
|
|
|
3,096
|
|
|
|
3,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,983
|
|
|
|
26,728
|
|
Advances to partner companies
|
|
|
2,100
|
|
|
|
750
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
167,387
|
|
|
$
|
85,561
|
|
|
|
|
|
|
|
|
|
|
Impairment charges related to cost method partner companies were
$10.1 million, $2.3 million and $5.3 million for
the years ended December 31, 2009, 2008 and 2007,
respectively. The charges in 2009 included $5.8 million
related to GENBAND, $3.9 million related to Tengion and
$0.4 million related to a private equity fund. The charge
in 2008 related to Kadoo and the charge in 2007 related to
Ventaria Pharmaceuticals. Impairment charges related to cost
method partner companies are included in Other income (loss),
net in the Consolidated Statements of Operations.
Impairment charges related to equity method partner companies
were $4.1 million and $6.6 million for the years ended
December 31, 2009 and 2008 respectively. There were no
impairment charges for the year ended December 31, 2007.
The impairment charges in 2009 included $3.3 million
related to Rubicor and $0.8 million impairment related to
Cellumen. The adjusted carrying value of Rubicor at
December 31, 2009 was zero. The amount of the impairment
charge was determined by comparing the carrying value of Rubicor
to its estimated fair value. The Company previously recognized a
$4.0 million impairment charge related to Rubicor in 2008
based on
66
SAFEGUARD
SCIENTIFICS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
estimates of fair value provided by an independent valuation
firm and a range of values indicated by potential investors in
Rubicor. At present, Rubicor is undergoing reorganization under
Chapter 11 of the United States Bankruptcy Code. The
Company believes it is unlikely that any payments will be made
to equity holders in the context of such bankruptcy proceedings.
During 2008, the Company also recognized an impairment charge of
$2.6 million related to Authentium. Impairment charges
associated with equity method partner companies are included in
Equity loss in the Consolidated Statements of Operations.
On March 25, 2009, Clarient entered into a stock purchase
agreement with Oak Investment Partners XII (Oak),
pursuant to which Clarient agreed to sell up to an aggregate of
6.6 million shares of its Series A Convertible
Preferred Stock in two or more tranches for aggregate
consideration of up to $50.0 million. Each preferred share
is initially convertible, at any time, into four shares of
Clarients common stock, subject to certain adjustments.
The initial closing of the Oak private placement occurred on
March 26, 2009, at which time Clarient issued
3.8 million preferred shares for aggregate consideration of
$29.1 million. After paying closing fees and legal
expenses, Clarient used the proceeds to repay in full and
terminate its revolving credit agreement with a bank and repay a
portion of the outstanding balance of its credit facility with
the Company. During the first quarter of 2009, the Company
accounted for the change in the Companys ownership
interest in Clarient as an equity transaction because the
Company retained its controlling financial interest in Clarient.
The Company recorded a $14.1 million credit to additional
paid-in capital in the first quarter of 2009 which represented
the Companys increase in its investment in Clarient as a
result of the Oak investment. In addition, the Company recorded
an additional noncontrolling interest of $14.0 million
which represented the increase in noncontrolling interest as a
result of the Oak investment.
On May 14, 2009, Clarient completed the second closing of
the Oak private placement and issued 1.4 million preferred
shares for aggregate consideration of $10.9 million. Upon
completion of the second closing, Clarient repaid in full and
terminated its credit facility with the Company.
Upon the second closing, the Companys ownership interest
in Clarients issued and outstanding voting securities, on
an as-converted basis, decreased from 50.2% to 47.3% and the
Company deconsolidated its holdings in Clarient because it
ceased to have a controlling financial interest in Clarient as
of such date. The Company recognized an unrealized gain on
deconsolidation of $106.0 million in Other income (loss),
net in the Consolidated Statements of Operations. The entire
unrealized gain on deconsolidation related to the remeasurement
to fair value of the Companys retained interest in
Clarient as of the deconsolidation date of May 14, 2009.
Later during 2009, the Company sold 18.4 million shares of
common stock of Clarient for $61.3 million in net proceeds.
The Company recognized a loss of $7.3 million on the sale,
based on the net proceeds received compared to the fair value at
the end of the previous quarter, which is included in Other
income (loss), net in the Consolidated Statements of Operations
for the year ended December 31, 2009.
For the period from May 14, 2009 through December 31,
2009, the Company recognized unrealized gains of
$19.5 million on the
mark-to-market
of its holdings in Clarient which are included in Other income
(loss), net in the Consolidated Statements of Operations. At
December 31, 2009, the fair value of the Companys
holdings in Clarient of $80.5 million was included in
Ownership interests in and advances to companies in the
Consolidated Balance Sheet.
The following unaudited summarized financial information for
partner companies and funds accounted for under the equity
method at December 31, 2009 and 2008 and for the three
years ended December 31, 2009, has been compiled from the
unaudited financial statements of our respective partner
companies and funds and reflects certain historical adjustments.
Results of operations of the partner companies and funds are
excluded for periods prior to their acquisition and subsequent
to their disposition. The unaudited financial information below
does not include information pertaining to Clarient. The Company
reports its share of the income or loss of the equity method
partner companies on a one quarter lag.
67
SAFEGUARD
SCIENTIFICS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Balance Sheets:
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
98,276
|
|
|
$
|
101,841
|
|
Non-current assets
|
|
|
64,889
|
|
|
|
111,274
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
163,165
|
|
|
$
|
213,115
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
48,460
|
|
|
$
|
39,847
|
|
Non-current liabilities
|
|
|
28,633
|
|
|
|
18,744
|
|
Shareholders equity
|
|
|
86,072
|
|
|
|
154,524
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity
|
|
$
|
163,165
|
|
|
$
|
213,115
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009, the Companys carrying value
in equity method partner companies, in the aggregate, exceeded
the Companys share of the net assets of such companies by
approximately $32.2 million. Of this excess,
$22.3 million was allocated to goodwill and
$9.9 million was allocated to intangible assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Results of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
144,771
|
|
|
$
|
92,366
|
|
|
$
|
39,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
98,626
|
|
|
$
|
52,906
|
|
|
$
|
23,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(50,436
|
)
|
|
$
|
(61,560
|
)
|
|
$
|
(43,986
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included above are the results of operations and assets and
liabilities of Rubicor. Rubicor has halted operations and
furloughed or terminated employees while it proceeds through a
reorganization in bankruptcy. Due to the significance of
Rubicors results of operations and the related impairment
charge to the Companys net loss from continuing operations
before income tax for the year ended December 31, 2008, the
unaudited summarized financial information for Rubicor is
presented below. Summarized financial information is not
available for Rubicor for periods subsequent to
December 31, 2008.
|
|
|
|
|
|
|
As of December 31, 2008
|
|
|
|
(In thousands)
|
|
|
Balance Sheets:
|
|
|
|
|
Current assets
|
|
$
|
1,290
|
|
Non-current assets
|
|
|
986
|
|
|
|
|
|
|
Total Assets
|
|
$
|
2,276
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
7,002
|
|
Non-current liabilities
|
|
|
95
|
|
Shareholders (deficit) equity
|
|
|
(4,821
|
)
|
|
|
|
|
|
Total Liabilities and Shareholders (Deficit) Equity
|
|
$
|
2,276
|
|
|
|
|
|
|
68
SAFEGUARD
SCIENTIFICS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Results of Operations:
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
638
|
|
|
$
|
631
|
|
|
|
|
|
|
|
|
|
|
Gross (loss) profit
|
|
$
|
(2,540
|
)
|
|
$
|
96
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(12,300
|
)
|
|
$
|
(13,027
|
)
|
|
|
|
|
|
|
|
|
|
|
|
7.
|
Convertible
Debentures, Long-Term Debt and Credit Arrangements
|
Convertible
Senior Debentures
In February 2004, the Company completed the sale of
$150 million of 2.625% convertible senior debentures with a
stated maturity of March 15, 2024 (the 2024
Debentures). Interest on the 2024 Debentures is payable
semi-annually. At the debentures holders option, the 2024
Debentures are convertible into the Companys common stock
through March 14, 2024, subject to certain conditions. The
conversion rate of the debentures is $43.3044 of principal
amount per share. The closing price of the Companys common
stock at December 31, 2009 was $10.31. The 2024 Debentures
holders have the right to require the Company to repurchase the
2024 Debentures on March 21, 2011, March 20, 2014 or
March 20, 2019 at a repurchase price equal to 100% of their
face amount, plus accrued and unpaid interest. The 2024
Debentures holders also have the right to require repurchase of
the 2024 Debentures upon certain events, including sale of all
or substantially all of our common stock or assets, liquidation,
dissolution, a change in control or the delisting of the
Companys common stock from the New York Stock Exchange if
the Company were unable to obtain a listing for its common stock
on another national or regional securities exchange. Subject to
certain conditions, the Company may redeem all or some of the
2024 Debentures.
During 2009, the Company repurchased $7.8 million in face
value of the 2024 Debentures for $7.3 million in cash,
including accrued interest. The Company recorded
$0.1 million of expense related to the acceleration of
deferred debt issuance costs associated with the 2024
Debentures, resulting in a net gain of $0.5 million, which
is included in Other income (loss), net in the Consolidated
Statements of Operations. During 2008, the Company repurchased
$43.0 million in face value of the 2024 Debentures for
$33.5 million in cash, including accrued interest. In
connection with the repurchase, the Company recorded
$0.5 million of expense related to the acceleration of
deferred debt issuance costs associated with the 2024
Debentures, resulting in a net gain of $9.0 million which
is included in Other income (loss), net in the Consolidated
Statements of Operations. Through December 31, 2009, the
Company has repurchased a total of $71.8 million in face
value of the 2024 Debentures. At December 31, 2009, the
market value of the outstanding 2024 Debentures was
approximately $74.3 million based on quoted market prices
as of such date. See Note 21 regarding the exchange of a
portion of the 2024 Debentures in 2010.
Long-Term
Debt and Credit Arrangements
Except for the convertible senior debentures, all of the
long-term debt on the Consolidated Balance Sheet at
December 31, 2008 related to Clarient. On May 14,
2009, the Company deconsolidated its holdings in Clarient.
69
SAFEGUARD
SCIENTIFICS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidated long-term debt consisted of the following as of
December 31, 2008:
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Consolidated partner company credit line borrowings
|
|
$
|
14,104
|
|
Capital lease obligations and other borrowings
|
|
|
608
|
|
|
|
|
|
|
|
|
|
14,712
|
|
Less current maturities
|
|
|
(14,367
|
)
|
|
|
|
|
|
Long-term debt, less current portion
|
|
$
|
345
|
|
|
|
|
|
|
Long-Term
Debt and Credit Arrangements
In February 2009, the Company entered into a loan agreement
which provides the Company with a revolving credit facility in
the maximum aggregate amount of $50 million in the form of
borrowings, guarantees and issuances of letters of credit
(subject to a $20 million sublimit). Actual availability
under the credit facility will be based on the amount of cash
maintained at the bank as well as the value of the
Companys public and private partner company interests.
This credit facility bears interest at the prime rate for
outstanding borrowings, subject to an increase in certain
circumstances. Other than for limited exceptions, the Company is
required to maintain all of its depository and operating
accounts and not less than 75% of its investment and securities
accounts at the bank. The credit facility matures on
December 31, 2010. Under the credit facility, the Company
provided a $6.3 million letter of credit expiring on
March 19, 2019 to the landlord of CompuCom Systems,
Inc.s Dallas headquarters which was required in connection
with the sale of CompuCom Systems in 2004. Availability under
the Companys revolving credit facility at
December 31, 2009 was $43.7 million.
There is no long term debt on the balance sheet at
December 31, 2009 associated with Clarient after its
deconsolidation on May 14, 2009. At December 31, 2008,
Clarient had an $11.3 million revolving credit agreement
with a bank, which was guaranteed by the Company, of which
$9.0 million was outstanding and the remainder was used to
maintain a $2.3 million stand-by letter of credit. Interest
expense on the outstanding balance under the revolving credit
agreement for 2009, 2008, and 2007 was $0.9 million,
$0.4 million, and $0.7 million, respectively.
On July 31, 2008, Clarient entered into a secured credit
agreement with a finance company. Outstanding borrowings under
the secured credit agreement were $5.1 million at
December 31, 2008.
|
|
8.
|
Accrued
Expenses and Other Current Liabilities
|
Accrued expenses consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Accrued professional fees
|
|
$
|
491
|
|
|
$
|
860
|
|
Other
|
|
|
3,834
|
|
|
|
7,425
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,325
|
|
|
$
|
8,285
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock
Shares of preferred stock, par value $0.10 per share, are voting
and are issuable in one or more series with rights and
preferences as to dividends, redemption, liquidation, sinking
funds and conversion determined by the Board of Directors. At
December 31, 2009 and 2008, there were one million shares
authorized and none outstanding.
70
SAFEGUARD
SCIENTIFICS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Shareholders
Rights Plan
In February 2000, the Company adopted a shareholders
rights plan. Under the plan, each shareholder of record on
March 24, 2000 received the right to purchase
1/1000
of a share of the Companys Series A Junior
Participating Preferred Stock at the rate of one right for each
share of the Companys common stock then held of record.
Each
1/1000
of a share of the Companys Series A Junior
Participating Preferred Stock is designed to be equivalent in
voting and dividend rights to one share of the Companys
common stock. The rights would have become exercisable only if a
person or group acquired beneficial ownership of 15% or more of
the Companys common stock or commenced a tender or
exchange offer that would have resulted in such a person or
group owning 15% or more of the Companys common stock.
This plan expired as of March 1, 2010.
|
|
10.
|
Stock-Based
Compensation
|
Equity
Compensation Plans
The Company has three equity compensation plans: the 1999 Equity
Compensation Plan, with 1.5 million shares authorized for
issuance; the 2001 Associates Equity Compensation Plan with
0.9 million shares authorized for issuance; and the amended
and restated 2004 Equity Compensation Plan, with
2.2 million shares authorized for issuance. Employees and
consultants are eligible for grants of stock options, restricted
stock awards, stock appreciation rights, stock units,
performance units and other stock-based awards under each of
these plans; directors and executive officers are eligible for
grants only under the 1999 and 2004 Equity Compensation Plans.
During 2008 and 2007, 0.3 million and 0.4 million
options, respectively, were awarded outside of existing plans as
inducement awards in accordance with New York Stock Exchange
rules. The 1999 Equity Compensation Plan expired by its terms on
February 10, 2009 and no further grants may be made under
that plan.
To the extent allowable, service-based awards are incentive
stock options. Options granted under the plans are at prices
equal to or greater than the fair market value at the date of
grant. Upon exercise of stock options, the Company issues shares
first from treasury stock, if available, then from authorized
but unissued shares. At December 31, 2009, the Company had
reserved 4.8 million shares of common stock for possible
future issuance under its equity compensation plans. The
Companys previously consolidated partner company also
maintained separate equity compensation plans for its employees,
directors and advisors.
Classification
of Stock-Based Compensation Expense
Stock-based compensation expense was recognized in continuing
operations of the Consolidated Statements of Operations as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Cost of sales
|
|
$
|
49
|
|
|
$
|
133
|
|
|
$
|
61
|
|
Selling, general and administrative
|
|
|
3,776
|
|
|
|
3,316
|
|
|
|
5,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,825
|
|
|
$
|
3,449
|
|
|
$
|
5,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009, the Company had outstanding options
that vest based on three different types of vesting schedules:
1) Market-based;
2) performance-based; and
3) service-based.
71
SAFEGUARD
SCIENTIFICS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Market-based awards entitle participants to vest in a number of
options determined by achievement by the Company of certain
target market capitalization increases (measured by reference to
stock price increases on a specified number of outstanding
shares) over an eight-year period. The requisite service periods
for the market-based awards are based on the Companys
estimate of the dates on which the market conditions will be met
as determined using a Monte Carlo simulation model. Compensation
expense is recognized over the requisite service periods using
the straight-line method but is accelerated if market
capitalization targets are achieved earlier than estimated.
During the years ended December 31, 2008 and 2007,
respectively, the Company issued 250 thousand and 406 thousand
market-based stock option awards to employees. During the years
ended December 31, 2009, 2008 and 2007, respectively, 16
thousand, seven thousand and 150 thousand market-based options
vested based on achievement of market capitalization targets.
During the years ended December 31, 2009, 2008 and 2007,
respectively, 67 thousand, 463 thousand and 80 thousand
market-based options were cancelled or forfeited. The Company
recorded compensation expense related to these awards of
$1.5 million, $0.4 million and $1.7 million
during the years ended December 31, 2009, 2008 and 2007,
respectively. Depending on the Companys stock performance,
the maximum number of unvested shares at December 31, 2009
attainable under these grants was 1.2 million shares.
Performance-based awards entitle participants to vest in a
number of awards determined by achievement by the Company of
target capital returns based on net cash proceeds received by
the Company upon the sale, merger or other exit transaction of
certain identified partner companies. Vesting may occur, if at
all, once per year. The requisite service periods for the
performance-based awards are based on the Companys
estimate of when the performance conditions will be met.
Compensation expense is recognized for performance-based awards
for which the performance condition is considered probable of
achievement. Compensation expense is recognized over the
requisite service periods using the straight-line method but is
accelerated if capital return targets are achieved earlier than
estimated. During the years ended December 31, 2009 and
2008, respectively, the Company issued 155 thousand and 341
thousand performance-based option awards to employees. During
the years ended December 31, 2009 and 2008, no options
vested based on the achievement of capital returns targets. The
Company recorded compensation expense related to these option
awards of $0.1 million and $0.0 million for the years
ended December 31, 2009 and 2008, respectively. The maximum
number of unvested shares at December 31, 2009 attainable
under these grants was 496 thousand shares.
All other outstanding options were service-based awards that
generally vest over four years after the date of grant and
expire eight years after the date of grant. Compensation expense
is recognized over the requisite service period using the
straight-line method. The requisite service period for
service-based awards is the period over which the award vests.
During the years ended December 31, 2009, 2008 and 2007,
respectively, the Company issued 113 thousand, 288 thousand and
216 thousand service-based option awards to employees. During
the years ended December 31, 2009, 2008 and 2007,
respectively, 231 thousand, 605 thousand and 26 thousand
service-based options were canceled or forfeited. The Company
recorded compensation expense related to these awards of
$1.0 million, $1.1 million and $1.8 million
during the years ended December 31, 2009, 2008 and 2007,
respectively.
72
SAFEGUARD
SCIENTIFICS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The fair value of the Companys stock-based awards to
employees was estimated at the date of grant using the
Black-Scholes option-pricing model. The risk-free rate is based
on the U.S. Treasury yield curve in effect at the end of
the quarter in which the grant occurred. The expected life of
stock options granted was estimated using the historical
exercise behavior of employees. Expected volatility was based on
historical volatility measured using weekly price observations
of the Companys common stock for a period equal to the
stock options expected term. Assumptions used in the
valuation of options granted in each period were as follows:
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
Service-Based Awards
|
|
|
|
|
|
|
Dividend yield
|
|
0%
|
|
0%
|
|
0%
|
Expected volatility
|
|
59%
|
|
52%
|
|
61%
|
Average expected option life
|
|
5 years
|
|
5 years
|
|
5 years
|
Risk-free interest rate
|
|
2.7%
|
|
3.1%
|
|
4.5%
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
Market-Based Awards
|
|
|
|
|
|
|
Dividend yield
|
|
N/A
|
|
0%
|
|
0%
|
Expected volatility
|
|
N/A
|
|
59%
|
|
55%
|
Average expected option life
|
|
N/A
|
|
5 - 7 years
|
|
5 - 7 years
|
Risk-free interest rate
|
|
N/A
|
|
3.4%
|
|
5.0%
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
Performance-Based Awards
|
|
|
|
|
|
|
Dividend yield
|
|
0%
|
|
0%
|
|
N/A
|
Expected volatility
|
|
59%
|
|
50%
|
|
N/A
|
Average expected option life
|
|
4.9 years
|
|
4.4 years
|
|
N/A
|
Risk-free interest rate
|
|
2.7%
|
|
3.0%
|
|
N/A
|
The weighted-average grant date fair value of options issued by
the Company during the years ended December 31, 2009, 2008
and 2007 was $5.22, $3.72 and $8.78 per share, respectively.
During the years ended December 31, 2009, 2008 and 2007,
respectively, the Company granted 12 thousand, 11 thousand and
four thousand stock options to members of its advisory boards,
which comprise non-employees. Such awards vest one year
following grant, are equity-classified and are
marked-to-market
each period.
73
SAFEGUARD
SCIENTIFICS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Option activity of the Company is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
Life
|
|
|
Value
|
|
|
|
(In thousands)
|
|
|
|
|
|
(In years)
|
|
|
(In thousands)
|
|
|
Outstanding at December 31, 2006
|
|
|
3,121
|
|
|
$
|
11.88
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
639
|
|
|
|
15.08
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
(82
|
)
|
|
|
9.05
|
|
|
|
|
|
|
|
|
|
Options canceled/forfeited
|
|
|
(108
|
)
|
|
|
21.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
|
3,570
|
|
|
|
12.22
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
880
|
|
|
|
7.47
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
(34
|
)
|
|
|
7.88
|
|
|
|
|
|
|
|
|
|
Options canceled/forfeited
|
|
|
(1,080
|
)
|
|
|
15.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008
|
|
|
3,336
|
|
|
|
10.05
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
267
|
|
|
|
9.99
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
(34
|
)
|
|
|
7.77
|
|
|