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EXCEL - IDEA: XBRL DOCUMENT - SAFEGUARD SCIENTIFICS INC | Financial_Report.xls |
EX-31.2 - EX-31.2 - SAFEGUARD SCIENTIFICS INC | c23588exv31w2.htm |
EX-32.2 - EX-32.2 - SAFEGUARD SCIENTIFICS INC | c23588exv32w2.htm |
EX-32.1 - EX-32.1 - SAFEGUARD SCIENTIFICS INC | c23588exv32w1.htm |
EX-31.1 - EX-31.1 - SAFEGUARD SCIENTIFICS INC | c23588exv31w1.htm |
Table of Contents
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended September 30, 2011
of the Securities Exchange Act of 1934
For the Quarter Ended September 30, 2011
Commission File Number 1-5620
Safeguard Scientifics, Inc.
(Exact name of registrant as specified in its charter)
Pennsylvania | ||
(State or other jurisdiction of incorporation or organization) |
23-1609753 (I.R.S. Employer ID No.) |
|
435 Devon Park Drive | ||
Building 800 | ||
Wayne, PA | 19087 | |
(Address of principal executive offices) | (Zip Code) |
(610) 293-0600
Registrants telephone number, including area code
Registrants telephone number, including area code
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days.
Yes 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 þ No o
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
definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the Registrant is a shell company (as defined in Exchange Act Rule 12b-2).
Yes o No þ
Number
of shares outstanding as of October 27, 2011
Common Stock 20,723,287
Common Stock 20,723,287
SAFEGUARD SCIENTIFICS, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
QUARTERLY REPORT ON FORM 10-Q
INDEX
Page | ||||||||
PART I FINANCIAL INFORMATION |
||||||||
Item 1 Financial Statements: |
||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
7-24 | ||||||||
25-41 | ||||||||
42 | ||||||||
43 | ||||||||
44 | ||||||||
44 | ||||||||
45 | ||||||||
46 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 | ||||||||
EX-32.2 | ||||||||
EX-101 INSTANCE DOCUMENT | ||||||||
EX-101 SCHEMA DOCUMENT | ||||||||
EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
EX-101 LABELS LINKBASE DOCUMENT | ||||||||
EX-101 PRESENTATION LINKBASE DOCUMENT | ||||||||
EX-101 DEFINITION LINKBASE DOCUMENT |
2
Table of Contents
SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED BALANCE SHEETS
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
(As Revised, See | ||||||||
Note 13) | ||||||||
(In thousands except | ||||||||
per share data) | ||||||||
(Unaudited) | ||||||||
ASSETS |
||||||||
Current Assets: |
||||||||
Cash and cash equivalents |
$ | 144,241 | $ | 183,419 | ||||
Cash held in escrow |
6,433 | 6,434 | ||||||
Marketable securities |
121,118 | 42,411 | ||||||
Restricted cash equivalents |
5,137 | 4,893 | ||||||
Prepaid expenses and other current assets |
1,253 | 785 | ||||||
Total current assets |
278,182 | 237,942 | ||||||
Property and equipment, net |
260 | 295 | ||||||
Ownership interests in and advances to partner companies |
117,417 | 60,256 | ||||||
Available-for-sale securities |
5,694 | 25,447 | ||||||
Long-term marketable securities |
15,019 | | ||||||
Long-term restricted cash equivalents |
7,128 | 11,881 | ||||||
Other |
585 | 724 | ||||||
Total Assets |
$ | 424,285 | $ | 336,545 | ||||
LIABILITIES AND EQUITY |
||||||||
Current Liabilities: |
||||||||
Convertible senior debentures current |
$ | | $ | 31,289 | ||||
Accounts payable |
238 | 493 | ||||||
Accrued compensation and benefits |
3,495 | 4,168 | ||||||
Accrued expenses and other current liabilities |
4,033 | 4,223 | ||||||
Total current liabilities |
7,766 | 40,173 | ||||||
Other long-term liabilities |
4,133 | 5,311 | ||||||
Convertible senior debentures non-current |
45,531 | 44,630 | ||||||
Commitments and contingencies |
||||||||
Equity: |
||||||||
Preferred stock, $0.10 par value; 1,000 shares authorized |
| | ||||||
Common stock, $0.10 par value; 83,333 shares authorized;
20,728 and 20,630 shares |
||||||||
issued and outstanding in 2011 and 2010, respectively |
2,073 | 2,063 | ||||||
Additional paid-in capital |
810,404 | 806,859 | ||||||
Accumulated deficit |
(440,171 | ) | (575,307 | ) | ||||
Accumulated other comprehensive income |
(5,451 | ) | 12,816 | |||||
Total equity |
366,855 | 246,431 | ||||||
Total Liabilities and Equity |
$ | 424,285 | $ | 336,545 | ||||
See Notes to Consolidated Financial Statements.
3
Table of Contents
SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(As Revised, See | (As Revised, See | |||||||||||||||
Note 13) | Note 13) | |||||||||||||||
(In thousands except per share data) | ||||||||||||||||
(Unaudited) | ||||||||||||||||
General and administrative expense |
$ | 5,100 | $ | 4,256 | $ | 15,554 | $ | 13,999 | ||||||||
Operating loss |
(5,100 | ) | (4,256 | ) | (15,554 | ) | (13,999 | ) | ||||||||
Other income (loss), net |
(324 | ) | 8,144 | (1,391 | ) | 11,255 | ||||||||||
Interest income |
278 | 180 | 969 | 516 | ||||||||||||
Interest expense |
(1,445 | ) | (1,674 | ) | (4,522 | ) | (4,061 | ) | ||||||||
Equity income (loss) |
28,922 | (1,798 | ) | 155,634 | (12,243 | ) | ||||||||||
Net income (loss) before income taxes |
22,331 | 596 | 135,136 | (18,532 | ) | |||||||||||
Income tax expense (benefit) |
| | | | ||||||||||||
Net income (loss) |
$ | 22,331 | $ | 596 | $ | 135,136 | $ | (18,532 | ) | |||||||
Net income (loss) per share: |
||||||||||||||||
Basic |
$ | 1.07 | $ | 0.03 | $ | 6.52 | $ | (0.90 | ) | |||||||
Diluted |
$ | 0.98 | $ | 0.03 | $ | 5.68 | $ | (0.90 | ) | |||||||
Average shares used in computing
income (loss) per share: |
||||||||||||||||
Basic |
20,790 | 20,583 | 20,737 | 20,502 | ||||||||||||
Diluted |
24,291 | 21,403 | 24,573 | 20,502 |
See Notes to Consolidated Financial Statements.
4
Table of Contents
SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, | ||||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
(Unaudited) | ||||||||
Cash Flows from Operating Activities: |
||||||||
Net cash used in operating activities |
$ | (13,584 | ) | $ | (12,276 | ) | ||
Cash Flows from Investing Activities: |
||||||||
Proceeds from sales of and distributions from companies |
171,167 | 2,760 | ||||||
and funds |
||||||||
Advances to partner companies |
(3,150 | ) | (6,116 | ) | ||||
Repayment of advances to partner companies |
5,000 | 1,300 | ||||||
Acquisitions of ownership interests in partner companies |
(74,692 | ) | (18,584 | ) | ||||
and funds |
||||||||
Increase in marketable securities |
(160,032 | ) | (33,294 | ) | ||||
Decrease in marketable securities |
66,306 | 45,966 | ||||||
Investment in
restricted cash equivalents for interest on convertible senior debentures |
| (18,864 | ) | |||||
Capital expenditures |
(58 | ) | (57 | ) | ||||
Proceeds from sale of discontinued operations, net |
1 | 477 | ||||||
Other, net |
107 | | ||||||
Net cash provided by (used in) investing activities |
4,649 | (26,412 | ) | |||||
Cash Flows from Financing Activities: |
||||||||
Repurchase of convertible senior debentures |
(30,848 | ) | | |||||
Issuance of Company common stock, net |
605 | 1,013 | ||||||
Costs on exchange of convertible senior debentures |
| (866 | ) | |||||
Net cash provided by (used in) financing activities |
(30,243 | ) | 147 | |||||
Net Decrease in Cash and Cash Equivalents |
(39,178 | ) | (38,541 | ) | ||||
Cash and
Cash Equivalents at beginning of period |
183,419 | 67,347 | ||||||
Cash and
Cash Equivalents at end of period |
$ | 144,241 | $ | 28,806 | ||||
See Notes to Consolidated Financial Statements.
5
Table of Contents
SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Accumulated | ||||||||||||||||||||||||
other | ||||||||||||||||||||||||
comprehensive | Additional | |||||||||||||||||||||||
Accumulated | income | Common stock | paid-in | |||||||||||||||||||||
Total | deficit | (loss) | Shares | Amount | capital | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
(unaudited) | ||||||||||||||||||||||||
Balance December 31,
2010 (As
Revised, See Note 13) |
$ | 246,431 | $ | (575,307 | ) | $ | 12,816 | 20,630 | $ | 2,063 | $ | 806,859 | ||||||||||||
Net income |
135,136 | 135,136 | | | | | ||||||||||||||||||
Stock options exercised, net |
605 | | | 74 | 8 | 597 | ||||||||||||||||||
Issuance of restricted stock, net |
105 | | | 24 | 2 | 103 | ||||||||||||||||||
Stock-based compensation expense |
2,845 | | | | | 2,845 | ||||||||||||||||||
Other comprehensive loss |
(18,267 | ) | | (18,267 | ) | | | | ||||||||||||||||
Balance September 30, 2011 |
$ | 366,855 | $ | (440,171 | ) | $ | (5,451 | ) | 20,728 | $ | 2,073 | $ | 810,404 | |||||||||||
See Notes to Consolidated Financial Statements.
6
Table of Contents
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The accompanying unaudited interim Consolidated Financial Statements of Safeguard Scientifics,
Inc. (the Company) were prepared in accordance with accounting principles generally accepted in
the United States of America and the interim financial statement rules and regulations of the SEC.
In the opinion of management, these statements include all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the Consolidated Financial Statements.
The interim operating results are not necessarily indicative of the results for a full year or for
any interim period. Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted in the United
States of America have been condensed or omitted pursuant to such rules and regulations relating to
interim financial statements. The Consolidated Financial Statements included in this Form 10-Q
should be read in conjunction with Managements Discussion and Analysis of Financial Condition and
Results of Operations included elsewhere in this Form 10-Q and included together with the Companys
Consolidated Financial Statements and Notes thereto included in the Companys 2010 Annual Report on
Form 10-K.
2. BASIS OF PRESENTATION
The Companys Consolidated Financial Statements included the accounts of Clarient Inc.
(Clarient) in continuing operations through May 14, 2009, the date of its deconsolidation.
Clarient was acquired by GE Healthcare in December 2010. The Company had elected to apply the fair
value option to account for its retained interest in Clarient upon deconsolidation. 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 were recognized in Other income (loss), net in the
Consolidated Statement of Operations for all periods subsequent to the date that Clarient was
deconsolidated through the date of its disposition.
The Companys ownership interests in Tengion, Inc. (Tengion) and NuPathe, Inc. (NuPathe)
are accounted for as available-for-sale securities following Tengions and NuPathes completion of
initial public offerings in April 2010 and August 2010, respectively. 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 income (loss) when a decline in the fair value is determined to be other than
temporary.
In February 2011, the Company increased its ownership interest in MediaMath, Inc.
(MediaMath) to 22.4%, a threshold at which the Company believes it exercises significant
influence. Accordingly, the Company adopted the equity method of accounting for its holdings in
MediaMath. The Company has adjusted the financial statements for all prior periods presented to
retrospectively apply the equity method of accounting for its holdings in MediaMath since the
initial date of acquisition in July 2009 (see Note 13).
7
Table of Contents
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. OWNERSHIP INTERESTS IN AND ADVANCES TO PARTNER COMPANIES
The following summarizes the carrying value of the Companys ownership interests in
and advances to partner companies and private equity funds.
September 30, 2011 | December 31, 2010 | |||||||
(In thousands) | ||||||||
(Unaudited) | ||||||||
Equity Method: |
||||||||
Partner companies |
$ | 105,359 | $ | 50,561 | ||||
Private equity funds |
5,860 | 2,265 | ||||||
111,219 | 52,826 | |||||||
Cost Method: |
||||||||
Private equity funds |
2,984 | 2,908 | ||||||
Advances to partner companies |
3,214 | 4,522 | ||||||
$ | 117,417 | $ | 60,256 | |||||
Available-for-sale securities |
$ | 5,694 | $ | 25,447 | ||||
In the third quarter of 2011, Portico Systems, Inc. (Portico), formerly an equity method
partner company was acquired by McKesson . The Company received cash proceeds in exchange for its
equity interests of approximately $32.8 million, excluding $3.4 million which will be held in
escrow for a period of one year. In addition, depending on the achievement of certain milestones,
the Company may receive an additional $1.9 million after a period of one year. Portico also repaid
its mezzanine loan facility with the Company in the principal amount of $5.0 million in connection with the
transaction. The Company recorded a gain of $35.4 million on the transaction which is recorded in
Equity income (loss) in the Consolidated Statement of Operations.
In the second quarter of 2011, Advanced BioHealing, Inc. (Advanced BioHealing), formerly an
equity method partner company, was acquired by Shire plc, resulting in net sale proceeds to the
Company of $137.9 million, excluding cash held in escrow of $7.6 million. The Company recognized a
gain on sale of $129.0 million which is reflected in Equity income (loss) in the Consolidated
Statement of Operations.
The Company recognized an impairment charge of $1.4 million related to SafeCentral, Inc. in
the first quarter of 2011 which is reflected in Equity income (loss) in the Consolidated Statement
of Operations for the nine months ended September 30, 2011, due to modifications to the strategic
direction of the business and changes in executive management at SafeCentral.
The
Company recognized an impairment charge of $0.4 million in the third quarter of 2011 which
is reflected in Other income (loss), net, in the Consolidated Statements of Operations,
representing the unrealized loss on the mark-to-market of its ownership interest in Tengion, which
was previously recorded as a separate component of equity. The Company had previously recognized
impairment charges of $0.3 million and $0.8 million in the first and second quarters of 2011,
respectively. Following the impairment charge, the Companys adjusted cost basis in Tengion was
$0.3 million. The Company determined that the decline in the value of its public holdings in
Tengion was other than temporary. The Company also recognized impairment charges on its holdings
in Tengion of $2.1 million and $1.1 million in the first and third quarters of 2010 respectively.
For the three and nine months ended September 30, 2010 the Company recognized
unrealized gains of $9.2 million and $22.4 million, respectively, on the mark-to-market of its
holdings in Clarient which is included in Other income (loss), net in the Consolidated Statements
of Operations.
8
Table of Contents
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. ACQUISITION OF INTERESTS IN PARTNER COMPANIES AND FUNDS
In September 2011, the Company acquired a 30.1% ownership interest in Putney, Inc. (Putney)
for $10.0 million. Putney is a specialty pharmaceutical company focused on providing generic
medicines for pets. The Company accounts for its interest in Putney under the equity method. The
difference between the Companys cost and its interest in the underlying net assets of Putney was
preliminarily allocated to intangible assets and goodwill as reflected in the carrying value in
Ownership interests in and advances to partner companies on the Consolidated Balance Sheets.
In August 2011, the Company acquired a 36% ownership interest in Penn Mezzanine for $3.9
million. Penn Mezzanine is a mezzanine lender focused on lower
middle-market, Mid-Atlantic
companies. The Company expects to deploy up to $26.1 million over a several year period in lending
opportunities that meet certain predefined criteria alongside existing and future Penn Mezzanine
funds. The Company accounts for its interest in Penn Mezzanine under the equity method of
accounting.
In August 2011, the Company funded $2.4 million of a convertible bridge loan to Swap.com. The
Company had previously deployed an aggregate of $8.1 million in Swap.com and currently maintains a
45.6% ownership interest. Swap.com is an internet based business that enables users to trade
books, music, movies, video games and fashion using its proprietary trade matching software. The
Company accounts for its interest in Swap.com under the equity method. The difference between the
Companys cost and its interest in the underlying net assets of Swap.com was allocated to
intangible assets and goodwill as reflected in the carrying value in Ownership interests in and
advances to partner companies on the Consolidated Balance Sheets.
In July 2011, the Company purchased $1.2 million of common shares and maintains a 22.5%
interest in MediaMath, Inc. (MediaMath). In February 2011, the Company deployed $9.0 million in
MediaMath. In conjunction with this funding, the Companys ownership interest in MediaMath
increased from 17.3% to 22.4%, a threshold at which the Company believes it exercises significant
influence. Accordingly, the Company adopted the equity method of accounting for its holdings in
MediaMath. See Note 13 regarding the change in accounting treatment for the Companys holdings in
MediaMath from the cost method to the equity method. The Company previously had acquired an
interest in MediaMath in July 2009 for $6.7 million. 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 difference between the Companys cost and its interest in the underlying net
assets of MediaMath was preliminarily allocated to intangible assets and goodwill as reflected in
the carrying value in Ownership interests in and advances to partner companies on the Consolidated
Balance Sheets.
In June 2011, the Company acquired a 31.7% ownership interest in NovaSom, Inc. (NovaSom) for
$20.0 million. NovaSom provides diagnostic devices and services
for home testing and evaluation of sleep-disordered breathing,
including obstructive sleep
apnea. The Company accounts for its interest in NovaSom under the equity method. The difference
between the Companys cost and its interest in the underlying net assets of NovaSom was
preliminarily allocated to intangible assets and goodwill as reflected in the carrying value in
Ownership interests in and advances to partner companies on the Consolidated Balance Sheets.
In April 2011, the Company acquired a 24.7% ownership interest in PixelOptics Inc.
(PixelOptics) for $25.0 million. PixelOptics provides electronic corrective eyeglasses designed
to substantially reduce or eliminate the visual distortion and other limitations associated with
multifocal lenses. The Company accounts for its interest in PixelOptics under the equity method.
The difference between the Companys cost and its interest in the underlying net assets of
PixelOptics was preliminarily allocated to intangible assets and goodwill as reflected in the
carrying value in Ownership interests in and advances to partner companies on the Consolidated
Balance Sheets.
In April 2011, the Company funded $0.8 million of a convertible bridge loan to Alverix, Inc.
(Alverix). The Company previously deployed an aggregate of $6.3 million in Alverix and currently
maintains a 49.6% ownership interest. Alverix provides next-generation instrument and connectivity
platforms for diagnostic Point-of-Care (POC) testing. 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 partner companies on the Consolidated
Balance Sheets.
In February 2011, the Company acquired a 30.7% ownership interest in ThingWorx, Inc.
(ThingWorx) for $5.0 million. ThingWorx offers a platform designed to accelerate the development
of applications connecting people, systems and devices. The Company accounts for its holdings in
ThingWorx under the equity method. The difference between the Companys cost and its interest in
the underlying net assets of ThingWorx was preliminarily allocated to intangible assets and
goodwill as reflected in the carrying value in Ownership interests in and advances to partner
companies on the Consolidated Balance Sheets.
9
Table of Contents
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. 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 1Observable inputs that reflect quoted prices (unadjusted) for identical assets or
liabilities in active markets.
Level 2Include other inputs that are directly or indirectly observable in the marketplace.
Level 3Unobservable 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.
10
Table of Contents
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 September 30, 2011 and December 31, 2010:
Carrying | Fair Value Measurement at September 30, 2011 | |||||||||||||||
Value | Level 1 | Level 2 | Level 3 | |||||||||||||
(in thousands) | ||||||||||||||||
(unaudited) | ||||||||||||||||
Cash and cash equivalents |
$ | 144,241 | $ | 144,241 | $ | | $ | | ||||||||
Cash held in escrow |
$ | 6,433 | $ | 6,433 | $ | | $ | | ||||||||
Restricted cash equivalents |
$ | 12,265 | $ | 12,265 | $ | | $ | | ||||||||
Available-for-sale securities |
$ | 5,694 | $ | 5,694 | $ | | $ | | ||||||||
Marketable securities -
held-to-maturity: |
||||||||||||||||
Commercial paper |
$ | 41,740 | $ | 41,740 | $ | | $ | | ||||||||
U.S. Treasury Bills |
27,593 | 27,593 | | | ||||||||||||
Government agency bonds |
55,178 | 55,178 | | | ||||||||||||
Certificates of deposit |
11,626 | 11,626 | | | ||||||||||||
$ | 136,137 | $ | 136,137 | $ | | $ | | |||||||||
Carrying | Fair Value Measurement at December 31, 2010 | |||||||||||||||
Value | Level 1 | Level 2 | Level 3 | |||||||||||||
(in thousands) | ||||||||||||||||
(unaudited) | ||||||||||||||||
Cash and cash equivalents |
$ | 183,419 | $ | 183,419 | $ | | $ | | ||||||||
Cash held in escrow |
$ | 6,434 | $ | 6,434 | $ | | $ | | ||||||||
Restricted cash equivalents |
$ | 16,774 | $ | 16,774 | $ | | $ | | ||||||||
Available-for-sale securities |
$ | 25,447 | $ | 25,447 | $ | | $ | | ||||||||
Marketable securities -
held-to-maturity: |
||||||||||||||||
Commercial paper |
$ | 27,362 | $ | 27,362 | $ | | $ | | ||||||||
U.S. Treasury Bills |
12,053 | 12,053 | | | ||||||||||||
Certificates of deposit |
2,996 | 2,996 | | | ||||||||||||
$ | 42,411 | $ | 42,411 | $ | | $ | | |||||||||
11
Table of Contents
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of September 30, 2011, $121.1 million of marketable securities had contractual maturities
which were less than one year and $15.0 million of marketable securities had contractual maturities
greater 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 during the three months and nine ended September 30, 2010
were 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.
The Company accounts for its holdings in Tengion as available-for-sale securities. The
Company recognized impairment charges of $0.4 million, $0.3 million and $0.8 million in the third,
second and first quarters of 2011, respectively, representing the unrealized losses on the
mark-to-market of its ownership interest in Tengion which were previously recorded as a separate
component of equity. As of September 30, 2011, the Companys adjusted cost basis in
available-for-sale securities of Tengion was $0.3 million. The value of the Companys holdings in
Tengion was measured by reference to quoted prices for Tengions common stock as traded on the
NASDAQ Capital Market, which is considered a Level 1 input under the valuation hierarchy.
The Company recognized an impairment charge of $1.4 million related to SafeCentral in the
first quarter of 2011 measured as the amount by which SafeCentrals carrying value exceeded its
estimated fair value. The fair market value of SafeCentral was determined based on Level 3 inputs
as defined above.
The Company accounts for its holdings in NuPathe as available-for-sale securities. As of
September 30, 2011, the Companys adjusted cost basis in available-for-sale securities of NuPathe
was $10.8 million. As of September 30, 2011 the Companys holdings of available-for-sale
securities in NuPathe had generated an unrealized loss of $5.5 million. The value of the Companys
holdings in NuPathe was measured by reference to quoted prices for NuPathes common stock as traded
on the NASDAQ Capital Market, which is considered a Level 1 input under the valuation hierarchy.
12
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SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is the change in equity of a business enterprise from
transactions and other events and circumstances from non-owner sources. Excluding net income
(loss), the Companys sources of comprehensive income (loss) were from changes in fair value of
available-for-sale securities.
The following summarizes the components of comprehensive income (loss):
Three Months ended September 30, | Nine Months ended September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In thousands) | ||||||||||||||||
(unaudited) | ||||||||||||||||
Net income (loss) |
$ | 22,331 | $ | 596 | $ | 135,136 | $ | (18,532 | ) | |||||||
Other comprehensive income (loss), before taxes: |
||||||||||||||||
Unrealized
net income (loss) on available-for-sale securities |
(14,552 | ) | 7,885 | (19,787 | ) | 7,131 | ||||||||||
Reclassification adjustment for other than temporary
impairment of available-for-sale securities
included in
net income (loss) |
389 | 1,108 | 1,520 | 1,108 | ||||||||||||
Total comprehensive income (loss) |
$ | 8,168 | $ | 9,589 | $ | 116,869 | $ | (10,293 | ) | |||||||
The Company accounts for its holdings in NuPathe and Tengion as available-for-sale securities.
The Company recorded unrealized net losses of $14.2 million and $18.3 million associated with
available-for-sale securities as a separate component of equity in the three and nine months ended
September 30, 2011, respectively. The Company reclassified $0.4 million and $1.5 million in
unrealized losses associated with Tengion in the three and nine months ended September 30, 2011,
respectively, as a result of managements determination that the security was impaired on an other
than temporary basis.
As of September 30, 2011, the Company had recorded a loss in other comprehensive income of
$5.5 million associated with its holdings in NuPathe. During the
quarter, NuPathe experienced a decline in its stock
price below the Companys adjusted basis. Such decline
occurred after the receipt of a Complete Response Letter
from the U.S. Food and Drug Administration (FDA) regarding the New Drug Application for
its migraine patch in August 2011. NuPathe has scheduled an
end-of review meeting with the FDA for
November 2011 and has publicly stated that it believes it has or will shortly have sufficient data to answer the FDAs
questions at which time it will reestablish a timeline for launch of its migraine patch. Given the
short period of time the stock price has been below the Companys adjusted basis, and the Companys
expectations regarding NuPathe, management currently believes that the impairment associated with NuPathe is temporary.
7. CONVERTIBLE DEBENTURES AND CREDIT ARRANGEMENTS
The carrying values of the Companys convertible senior debentures were as follows:
September 30, 2011 | December 31, 2010 | |||||||
(In thousands) | ||||||||
(Unaudited) | ||||||||
Convertible senior debentures due 2014 |
$ | 45,090 | $ | 44,630 | ||||
Convertible senior debentures due 2024 |
441 | 31,289 | ||||||
45,531 | 75,919 | |||||||
Less: current portion |
| (31,289 | ) | |||||
Convertible senior debentures non-current |
$ | 45,531 | $ | 44,630 | ||||
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SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Convertible Senior Debentures due 2024
In 2004, the Company issued an aggregate of $150 million in face value of convertible
senior debentures with a stated maturity date of March 15, 2024 (the 2024 Debentures). The
Company has $0.4 million of the 2024 Debentures outstanding at September 30, 2011. On March 21,
2011, the Company repurchased $30.8 million of the 2024 Debentures as required by the 2024
Debenture holders. 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 adjusted conversion rate of the debentures is $43.3044
of principal amount per share. The closing price of the Companys common stock at September 30,
2011 was $15.00. The remaining 2024 Debentures holders have the right to require the Company to
repurchase the 2024 Debentures on March 20, 2014 or March 20, 2019 at a repurchase price equal to
100% of their face amount, plus accrued and unpaid interest. In limited circumstances, the Company
has the right to redeem all or some of the 2024 Debentures.
At September 30, 2011, the fair value of the $0.4 million outstanding 2024 Debentures
approximated their carrying value based on quoted market prices as of such date.
Convertible Senior Debentures due 2014
In March 2010, the Company issued an aggregate of $46.9 million in face value of
convertible senior debentures with a stated maturity of March 15, 2014 (the 2014 Debentures).
Interest on the 2014 Debentures is payable semi-annually on March 15 and September 15. In the first
quarter of 2010, as required under the terms of the 2014 Debentures, the Company placed
approximately $19.0 million in a restricted escrow account to make all scheduled interest payments
on the 2014 Debentures through their maturity. In the first and third quarters of 2011, interest
payments of $2.4 million were made out of the restricted escrow account and are considered non-cash
investing activities. Including accrued interest, a total of $12.3 million was reflected in
Restricted cash equivalents on the Consolidated Balance Sheet at September 30, 2011, of which $5.1
million was classified as a current asset.
At the debentures holders option, the 2014 Debentures are convertible into the Companys
common stock at anytime after March 15, 2013; and, prior to March 15, 2013, under any of the
following conditions:
| during any fiscal quarter commencing after June 30, 2010 if the closing sale price per share of Company common stock is greater than or equal to 120% of the conversion price for at least 20 trading days during the period of 30 trading days ending on the last day of the preceding fiscal quarter; | ||
| during the five day period immediately following any 10 consecutive trading day period in which the trading price per $1,000 principal amount of 2014 Debentures for each trading day of such period was less than 100% of the product of the closing sale price per share of Company common stock multiplied by the conversion rate on each such trading day; | ||
| If a fundamental change (as defined) occurs, including sale of all or substantially all of the Companys common stock or assets, liquidation, dissolution or a change in control. |
The conversion price is $16.50 of principal amount per share, equivalent to a conversion rate
of 60.6061 shares of Company common stock per $1,000 principal amount of the 2014 Debentures. The
closing price of the Companys common stock at September 30, 2011 was $15.00. The 2014 Debentures
holders have the right to require repurchase of the 2014 Debentures upon a fundamental change,
including sale of all or substantially all of the Companys common stock or assets, liquidation,
dissolution or 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. None of the above conditions required for conversion
were met as of September 30, 2011.
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SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company may mandatorily convert all or some of the 2014 Debentures at any time after March
15, 2012 if the closing sale price per share of Company common stock exceeds 130% of the conversion
price for at least 20 trading days in a period of 30 consecutive trading days. If the Company
elects to mandatorily convert any of the 2014 Debentures, the Company will be required to pay any
interest that would have accrued and become payable on the debentures through their maturity. Upon
a conversion of the 2014 Debentures, the Company has the right to settle the conversion in stock,
cash or a combination thereof.
Because the 2014 Debentures may be settled in cash or partially in cash upon conversion, the
Company separately accounts for the liability and equity components of the 2014 Debentures. The
carrying amount of the liability component was determined at the exchange date by measuring the
fair value of a similar liability that does not have an associated equity component. The carrying
amount of the equity component represented by the embedded conversion option was determined by
deducting the fair value of the liability component from the carrying value of the 2014 Debentures
as a whole at the exchange date. The carrying value of the 2014 Debentures as a whole at the
exchange date was equal to their fair value of $55.2 million determined using a convertible bond
valuation model. At September 30, 2011, the fair value of the $46.9 million outstanding 2014
Debentures was approximately $58.2 million based on quoted market prices as of such date. At
September 30, 2011, the carrying amount of the equity component was $10.8 million, the principal
amount of the liability component was $46.9 million, the unamortized discount was $1.8 million and
the net carrying value of the liability component was $45.1 million. The Company is amortizing the
excess of the face value of the 2014 Debentures over their carrying value to interest expense over
their term. The effective interest rate on the 2014 Debentures is 12.5%.
Credit Arrangements
The Company is party to a loan agreement which provides it 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 lending 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 the lesser of $80 million or 75% of its investment and securities accounts
at the lending bank. The credit facility, as amended December 31, 2010, matures on December 31,
2012. 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 has been
required in connection with the sale of CompuCom Systems in 2004. Availability under the Companys
revolving credit facility at September 30, 2011 was $43.7 million.
8. STOCK-BASED COMPENSATION
Stock-based compensation expense was recognized in the Consolidated Statements of Operations
as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In thousands) | (In thousands) | |||||||||||||||
(unaudited) | (unaudited) | |||||||||||||||
General and
administrative
expense |
$ | 844 | $ | 775 | $ | 2,845 | $ | 2,592 | ||||||||
$ | 844 | $ | 775 | $ | 2,845 | $ | 2,592 | |||||||||
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 was based on the U.S.
Treasury yield curve in effect at the end of the quarter in which the grant occurred. The expected
term 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.
15
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SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
At September 30, 2011, 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. |
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 nine months ended September 30, 2011 and 2010, respectively, the Company did
not issue any market-based options to employees. During the nine months ended September 30, 2011
and 2010, respectively, 110 thousand and 11 thousand options vested based on achievement of market
capitalization targets. The Company recorded compensation expense related to market-based options
of $0.3 million and $0.4 million for the three months ended September 30, 2011 and 2010,
respectively and $1.2 million for both the nine months ended September 30, 2011 and 2010.
Depending on the Companys stock performance, the maximum number of unvested shares at September
30, 2011 attainable under these option grants was 1.1 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 on 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. During the nine months ended September 30, 2011 and 2010, respectively, the Company
issued 193 thousand and zero performance-based options to employees. During the nine months ended
September 30, 2011 and 2010 respectively, 56 thousand and zero performance-based options vested.
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. The Company recorded compensation expense related to
performance-based options of $0.1 million and $0.0 million for the three months ended September 30,
2011 and 2010, respectively and $0.3 million and $0.1 million for the nine months ended September
30, 2011 and 2010, respectively. The maximum number of unvested shares at September 30, 2011
attainable under these option grants was 756 thousand shares.
All other outstanding options are 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 nine months
ended September 30, 2011 and 2010, respectively, the Company issued 121 thousand and 45 thousand
service-based options to employees. The Company recorded compensation expense related to
service-based options of $0.2 million for both the three months ended September 30, 2011 and 2010,
and $0.7 million and $0.8 million for the nine months ended September 30, 2011 and 2010,
respectively.
During the nine months ended September 30, 2011 and 2010, respectively, the Company issued 61
thousand and zero performance-based stock units to employees which vest based on achievement by the
Company of target capital returns based on net cash proceeds received by the Company on the sale,
merger or other exit transaction of certain identified partner companies, as described above
related to performance-based option awards. Performance-based stock units represent the right to
receive shares of the Companys common stock, on a one-for-one basis. During the nine months ended
September 30, 2011 and 2010, respectively, the Company issued 20 thousand and zero restricted
shares to employees. The restricted shares issued vest 25% on the first anniversary of grant and
the remaining 75% thereafter in equal monthly installments over the next two or three years, as
applicable.
During the nine months ended September 30, 2011 and 2010, respectively, the Company issued 25
thousand and 29 thousand deferred stock units to non-employee directors for annual service grants
or fees earned during the preceding quarter. Deferred stock units issued in lieu of directors fees
are 100% vested at the grant date; matching deferred stock units equal to 25% of directors fees
deferred vest one year following the grant date or, if earlier, upon reaching age 65. Deferred
stock units are payable in stock on a one-for-one basis. Payments related to the deferred stock
units are generally distributable following termination of employment or service, death or
permanent disability.
Total compensation expense for deferred stock units, performance-based stock units and
restricted stock was approximately $0.2 million and $0.1 million for the three months ended
September 30, 2011 and 2010, respectively, and $0.6 million and $0.5 million for the nine months
ended September 30, 2011 and 2010, respectively.
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SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. INCOME TAXES
The Companys consolidated income tax benefit (expense) was $0.0 million for both the three
and nine months ended September 30, 2011 and 2010.
During
the nine months ended September 30, 2011, the Company generated
tax expense of $53.4 million on the sales of its holdings in Advanced BioHealing and Portico, which was entirely offset
by capital loss carryforwards and net operating loss carryforwards which had been reduced by a full
valuation allowance.
The Company has recorded a valuation allowance to reduce its net deferred tax asset to an
amount that is more likely than not to be realized in future years. Accordingly, the income tax
expense that would have been recognized in the nine months ended September 30, 2011 and the benefit
of the net operating loss that would have been recognized in the nine months ended September 30,
2010 were offset by changes in the valuation allowance.
During the nine months ended September 30, 2011, the Company had no material changes in
uncertain tax positions.
17
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SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. NET INCOME (LOSS) PER SHARE
The calculations of net income (loss) per share were as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In thousands except per share data) | ||||||||||||||||
(unaudited) | ||||||||||||||||
Basic: |
||||||||||||||||
Net income (loss) |
$ | 22,331 | $ | 596 | $ | 135,136 | $ | (18,532 | ) | |||||||
Average common shares outstanding |
20,790 | 20,583 | 20,737 | 20,502 | ||||||||||||
Net income (loss) per share |
$ | 1.07 | $ | 0.03 | $ | 6.52 | $ | (0.90 | ) | |||||||
Diluted: |
||||||||||||||||
Net income (loss) |
$ | 22,331 | $ | 596 | $ | 135,136 | $ | (18,532 | ) | |||||||
Interest on convertible senior debentures |
1,391 | | 4,353 | | ||||||||||||
Net income (loss) for dilutive share computation |
$ | 23,722 | $ | 596 | $ | 139,489 | $ | (18,532 | ) | |||||||
Number of
shares used in basic per share computation |
20,790 | 20,583 | 20,737 | 20,502 | ||||||||||||
Effect of dilutive securities: |
||||||||||||||||
Convertible senior debentures |
2,855 | | 3,061 | | ||||||||||||
Unvested restricted stock and DSUs |
46 | 96 | 68 | | ||||||||||||
Employee stock options |
600 | 724 | 707 | | ||||||||||||
Average common shares outstanding |
24,291 | 21,403 | 24,573 | 20,502 | ||||||||||||
Net income (loss) per share |
$ | 0.98 | $ | 0.03 | $ | 5.68 | $ | (0.90 | ) | |||||||
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SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Basic and diluted average common shares outstanding for purposes of computing net income
(loss) per share includes outstanding common shares and vested deferred stock units (DSUs).
If a consolidated or equity method partner company has dilutive stock options, unvested
restricted stock, DSUs, warrants or other securities outstanding, diluted net income (loss) per
share is computed by first deducting from net income (loss), the income attributable to the
potential exercise of the dilutive securities of the company. This impact is shown as an adjustment
to net income (loss) for purposes of calculating diluted net income (loss) per share.
The following potential shares of common stock and their effects on income were excluded from
the diluted net income (loss) per share calculation for the three months ended September 30, 2011
and 2010 because their effect would be anti-dilutive:
| At September 30, 2011 and 2010 options to purchase 0.2 million and 0.7 million shares of common stock, respectively, at prices ranging from $10.10 to $21.36, were excluded from the calculations. | ||
| At September 30, 2011 and 2010, unvested restricted stock units, performance stock units and DSUs convertible into 0.2 million and 0.1 million shares of stock, respectively, were excluded from the calculations. | ||
| At September 30, 2010, 0.7 million shares related to the Companys 2024 Debentures (see Note 7), representing the effect of assumed conversion of the 2024 Debentures, were excluded from the calculations. | ||
| At September 30, 2010, 2.8 million shares related to the Companys 2014 Debentures (see Note 7) representing the effect of assumed conversion of the 2014 Debentures, were excluded from the calculations. |
The following potential shares of common stock and their effects on income were excluded from
the diluted net income (loss) per share calculation for the nine months ended September 30, 2011
and 2010 because their effect would be anti-dilutive:
| At September 30, 2011 and 2010 options to purchase 0.1 million and 3.2 million shares of common stock at prices ranging from $10.10 to $21.36 per share, were excluded from the calculations. | ||
| At September 30, 2011 and 2010, unvested restricted stock units, performance stock units and DSUs convertible into 0.1 million shares of stock, were excluded from the calculations. | ||
| At September 30, 2010, 0.7 million shares related to the Companys 2024 Debentures (see Note 7), representing the effect of assumed conversion of the 2024 Debentures, were excluded from the calculations. | ||
| At September 30, 2010, 2.8 million shares related to the Companys 2014 Debentures (see Note 7), representing the effect of assumed conversion of the 2014 Debentures, were excluded from the calculations. |
19
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SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. OPERATING SEGMENTS
As discussed in Note 2, the Companys Consolidated Financial Statements included
the accounts of Clarient Inc. (Clarient) in continuing operations through May 14, 2009, the date
of its deconsolidation. Clarient was acquired by GE Healthcare in December 2010. The Company had
elected to apply the fair value option to account for its retained interest in Clarient upon
deconsolidation. 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 were recognized in Other
income (loss), net in the Consolidated Statement of Operations for all periods subsequent to the
date that Clarient was deconsolidated through the date of its disposition. The mark-to-market
activity associated with Clarient was included in the Life Sciences segment through the date of its
disposition.
As of September 30, 2011, the Company held an active interest in 13 non-consolidated partner
companies. The Companys reportable operating segments are Life Sciences and Technology.
20
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SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Companys active partner companies by segment were as follows as of September 30, 2011:
Life Sciences
Safeguard Primary Ownership | ||||
Partner Company | as of September 30, 2011 | Accounting Method | ||
Alverix, Inc. |
49.6% | Equity | ||
Good Start
Genetics, Inc. |
26.3% | Equity | ||
NovaSom, Inc. |
31.7% | Equity | ||
NuPathe, Inc. |
17.9% | Available-for-sale (1) | ||
PixelOptics, Inc. |
24.7% | Equity | ||
Putney, Inc. |
30.1% | Equity | ||
Tengion, Inc. |
2.5% | Available-for-sale (2) |
(1) | The Companys ownership interest in NuPathe is accounted for as available-for-sale securities following NuPathes completion of an initial public offering in August 2010. | |
(2) | The Companys ownership interest in Tengion is accounted for as available-for-sale securities following Tengions completion of an initial public offering in April 2010. |
Technology
Safeguard Primary Ownership | ||||
Partner Company | as of September 30, 2011 | Accounting Method | ||
Advantedge
Healthcare
Solutions, Inc. |
40.2% | Equity | ||
Beyond.com, Inc. |
38.3% | Equity | ||
Bridgevine, Inc. |
22.8% | Equity | ||
MediaMath, Inc. |
22.5% | Equity (3) | ||
Swap.com |
45.6% | Equity | ||
ThingWorx, Inc. |
30.2% | Equity |
(3) | In the first quarter of 2011, the Companys ownership interest in MediaMath increased from 17.3% to 22.4%, a threshold at which the Company believes it exercises significant influence. Accordingly, the Company changed its accounting for MediaMath from the cost method to the equity method. |
Management evaluates its Life Sciences and Technology segments performance based on
net income (loss) which is based on the number of partner companies accounted for under the equity
method, the Companys voting ownership percentage in these partner companies and the net results of
operations of these partner companies, mark-to-market gains and losses for companies accounted for
under the fair value method, any impairment charges and gains (losses) on the sale of partner
companies.
Other Items include certain expenses which are not identifiable to the operations of the
Companys operating business segments. Other Items primarily consist of general and administrative
expenses related to corporate operations, including employee compensation, insurance and
professional fees, including legal and finance, interest income, interest expense, other income
(loss) and equity income (loss) related to private equity fund holdings. Other Items also include
income taxes, which are reviewed by management independent of segment results.
As of September 30, 2011 and December 31, 2010, all of the Companys assets were located in
the United States.
21
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SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Segment assets in Other Items included primarily cash, cash equivalents, cash held in escrow,
restricted cash equivalents and marketable securities of $299.1 million and $249.0 million, at
September 30, 2011 and December 31, 2010, respectively.
Three Months Ended September 30, 2011 | ||||||||||||||||||||
Total | ||||||||||||||||||||
Life | Total | Other | Continuing | |||||||||||||||||
Sciences | Technology | Segments | Items | Operations | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
(unaudited) | ||||||||||||||||||||
Operating loss |
$ | | $ | | $ | | $ | (5,100 | ) | $ | (5,100 | ) | ||||||||
Net income (loss) |
(4,188 | ) | 32,896 | 28,708 | (6,377 | ) | 22,331 | |||||||||||||
Segment Assets: |
||||||||||||||||||||
September 30, 2011 |
63,278 | 50,989 | 114,267 | 310,018 | 424,285 | |||||||||||||||
December 31, 2010 |
37,710 | 42,820 | 80,530 | 256,015 | 336,545 |
Three Months Ended September 30, 2010 | ||||||||||||||||||||
Total | ||||||||||||||||||||
Life | Total | Other | Continuing | |||||||||||||||||
Sciences | Technology | Segments | Items | Operations | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
(unaudited) | ||||||||||||||||||||
Operating loss |
$ | | $ | | $ | | $ | (4,256 | ) | $ | (4,256 | ) | ||||||||
Net income (loss) |
7,311 | (957 | ) | 6,354 | (5,758 | ) | 596 |
Nine Months Ended September 30, 2011 | ||||||||||||||||||||
Total | ||||||||||||||||||||
Life | Total | Other | Continuing | |||||||||||||||||
Sciences | Technology | Segments | Items | Operations | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
(unaudited) | ||||||||||||||||||||
Operating loss |
$ | | $ | | $ | | $ | (15,554 | ) | $ | (15,554 | ) | ||||||||
Net income (loss) |
126,238 | 28,149 | 154,387 | (19,251 | ) | 135,136 |
Nine Months Ended September 30, 2010 | ||||||||||||||||||||
Total | ||||||||||||||||||||
Life | Total | Other | Continuing | |||||||||||||||||
Sciences | Technology | Segments | Items | Operations | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
(unaudited) | ||||||||||||||||||||
Operating loss |
$ | | $ | | $ | | $ | (13,999 | ) | $ | (13,999 | ) | ||||||||
Net income (loss) |
12,208 | (5,259 | ) | 6,949 | (25,481 | ) | (18,532 | ) |
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SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. COMMITMENTS AND CONTINGENCIES
The Company and its partner companies are involved in various claims and legal actions arising
in the ordinary course of business. While in the current opinion of the Company the ultimate
disposition of these matters will not have a material adverse effect on the Companys consolidated
financial position or results of operations, no assurance can be given as to the outcome of these
actions, and one or more adverse rulings could have a material adverse effect on the Companys
consolidated financial position and results of operations or that of its partner companies.
Not including the Laureate lease guaranty described below, the Company had outstanding
guarantees of $3.8 million at September 30, 2011.
The Company has committed capital of approximately $0.2 million to various private equity
funds. These commitments are expected to be funded during the next 12 months.
Under certain circumstances, the Company may be required to return a portion or all the
distributions it received as a general partner of certain private equity funds (clawback). The
maximum clawback the Company could be required to return due to our general partner interest is
approximately $2.2 million, of which $1.9 million was reflected in Accrued expenses and other
current liabilities and $0.3 million was reflected in Other long-term liabilities on the
Consolidated Balance Sheet at September 30, 2011.
The Companys ownership in the funds which have potential clawback liabilities ranges from
19-30%. The clawback liability is joint and several; such that the Company 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. The Company believes its potential liability due to the possibility of default by other
general partners is remote.
In connection with the Companys May 2008 sale of its equity and debt interests in Acsis,
Inc., Alliance Consulting Group Associates, Inc., Laureate Pharma, Inc., ProModel Corporation and
Neuronyx, Inc. (the Bundle Transaction), 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 Transaction notified the Company of claims being asserted against
the entire escrowed amounts. The Company does not believe that such claims are valid and has
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 has been settled or determined
pursuant to legal process.
The Company remains guarantor of Laureate Pharmas Princeton, New Jersey facility lease. Such
guarantee may extend through the lease expiration in 2016 under certain circumstances. However,
the Company is entitled to indemnification in connection with the continuation of such guaranty.
As of September 30, 2011, scheduled lease payments to be made by Laureate Pharma over the remaining
lease term equaled $6.3 million.
In October 2001, the Company entered into an agreement with its former Chairman and Chief
Executive Officer, to provide for annual payments of $650,000 per year and certain health care and
other benefits for life. The related current liability of $0.8 million was included in Accrued
expenses and other current liabilities and the long-term portion of $2.9 million was included in
Other long-term liabilities on the Consolidated Balance Sheet at September 30, 2011.
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 as required in connection with the sale of
CompuCom Systems in 2004.
The Company has agreements with certain employees that provide for severance payments to the
employee in the event the employee is terminated without cause or an employee terminates his
employment for good reason. The maximum aggregate exposure under the agreements was approximately
$8 million at September 30, 2011.
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SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. CHANGE IN ACCOUNTING PRINCIPLE
During first quarter of 2011, the Company increased its ownership interest in MediaMath to
22.4%, a threshold at which the Company believes it exercises significant influence. Accordingly,
the Company adopted the equity method of accounting for its holdings in MediaMath. The Company has
adjusted the financial statements for prior periods contained in this Form 10-Q to retrospectively
apply the equity method of accounting for its holdings in MediaMath since the initial date of
acquisition in July 2009. The effect of the change was to decrease Ownership interests in and
advances to partner companies by $0.5 million as of December 31, 2010 and to increase Equity loss
by $0.3 million for the nine months ended September 30, 2010, respectively. As revised, Equity loss
for the three months ended September 30, 2010 was substantially consistent with amounts previously
reported.
December 31, 2010 | ||||||||
(in thousands) | ||||||||
Previously | As | |||||||
Reported | Revised | |||||||
Balance Sheet: |
||||||||
Ownership interests in and advances to |
$ | 60,761 | $ | 60,256 | ||||
partner companies |
||||||||
Total Assets |
337,050 | 336,545 | ||||||
Accumulated deficit |
(574,802 | ) | (575,307 | ) | ||||
Equity |
246,936 | 246,431 |
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, 2010 | September 30, 2010 | |||||||||||||||
(In thousands except | (In thousands except | |||||||||||||||
per share data) | per share data) | |||||||||||||||
Previously | As | Previously | As | |||||||||||||
Reported | Revised | Reported | Revised | |||||||||||||
Statement of Operations: |
||||||||||||||||
Equity loss |
$ | (1,801 | ) | $ | (1,798 | ) | $ | (11,965 | ) | $ | (12,243 | ) | ||||
Net income (loss) |
593 | 596 | (18,254 | ) | (18,532 | ) | ||||||||||
before income taxes |
||||||||||||||||
Basic loss per share |
0.03 | 0.03 | (0.89 | ) | (0.90 | ) | ||||||||||
Diluted loss per share |
0.03 | 0.03 | (0.89 | ) | (0.90 | ) |
24
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Note Concerning Forward-Looking Statements
This Quarterly Report on Form 10-Q 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 in Safeguards Annual Report on Form
10-K and updated, as applicable, in Item 1A. Risk Factors below. 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 growing businesses by providing capital and
strategic, operational and management resources. Safeguard participates in expansion financings,
corporate spin-outs, management buyouts, recapitalizations, industry consolidations, and
early-stage financings. Our vision is to be the preferred catalyst to build great companies across
diverse capital platforms. 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 relatively
small economic interests 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 principally on companies in
which we anticipate deploying up to $25 million and that operate in two sectors:
Life Sciences including companies focused on molecular and point-of-care diagnostics,
medical devices, regenerative medicine, specialty pharmaceuticals and selected healthcare
services that have lower technological and regulatory risk; and
Technology including companies focused on internet/new media, financial services IT,
healthcare IT and selected business services that have transaction-enabling applications with a
recurring revenue stream.
As we continue to develop and grow, we will consider partner companies in additional sectors;
participating in different capital structures; other types of partner company relationships; and
extensions to our business model which leverage our core capabilities.
Principles of Accounting for Ownership Interests in Partner Companies
We account for our interests in our partner companies and private equity funds using one of
the following methods: consolidation, fair value, equity, cost or available-for-sale. 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 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 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 September 30,
2011, we did not hold a controlling interest in any of our partner companies.
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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, based on our
non-controlling 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 holdings 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 or fair value method under the cost method of accounting. Under the cost
method, our share of the income or losses of such partner companies is not included 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 partner companies on the
Consolidated Balance Sheets.
Available-for-Sale Securities. We account for our ownership interests in Tengion and NuPathe,
our publicly traded partner companies, as available-for-sale 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.
Fair Value Method. We accounted for our holdings in Clarient, formerly one of our publicly
traded partner companies, under the fair value method following its deconsolidation on May 14, 2009
and through the date of the sale of the remainder of our interests in Clarient in December 2010.
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 were recognized in Other income (loss) 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, areas that are particularly significant include the following:
| Impairment of ownership interests in and advances to partner companies; |
| Income taxes; |
| Commitments and contingencies; and |
| Stock-based compensation. |
Impairment of Ownership Interests In and Advances to Partner Companies
On a periodic basis, but no less frequently than at the end of each quarter, we evaluate the
carrying value of our equity and cost method partner companies and available-for-sale securities
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.
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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
interests in our publicly traded partner companies is determined by reference to quoted prices in
an active market for the partner companys publicly traded common stock.
The adjusted carrying value of a partner company is not increased if circumstances suggest the
value of the partner company has subsequently recovered.
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 partner 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 and available-for-sale securities 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.
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 and
available-for-sale 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 certain 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 (the 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 12). 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 various 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 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.
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Results of Operations
Our management evaluates the Life Sciences and Technology segments performance based on net
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, mark-to-market gains and losses for companies accounted for
under the fair value method, any impairment charges and gains (losses) on the sale of 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.
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.
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:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In thousands) | (In thousands) | |||||||||||||||
Life Sciences |
$ | (4,188 | ) | $ | 7,311 | $ | 126,238 | $ | 12,208 | |||||||
Technology |
32,896 | (957 | ) | 28,149 | (5,259 | ) | ||||||||||
Total segments |
28,708 | 6,354 | 154,387 | 6,949 | ||||||||||||
Other items: |
||||||||||||||||
Corporate operations |
(6,377 | ) | (5,758 | ) | (19,251 | ) | (25,481 | ) | ||||||||
Income tax expense
(benefit) |
| | | | ||||||||||||
Total other items |
(6,377 | ) | (5,758 | ) | (19,251 | ) | (25,481 | ) | ||||||||
Net income (loss) |
$ | 22,331 | $ | 596 | $ | 135,136 | $ | (18,532 | ) | |||||||
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.
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Life Sciences
The following active partner companies as of September 30, 2011 were included in Life
Sciences:
Safeguard Primary Ownership as of | ||||||||||
September 30, | ||||||||||
2011 | 2010 | Accounting Method | ||||||||
Alverix, Inc. |
49.6% | 49.6% | Equity | |||||||
Good Start
Genetics, Inc. |
26.3% | 26.5% | Equity | |||||||
NovaSom, Inc. |
31.7% | NA | Equity | |||||||
NuPathe, Inc. |
17.9% | 18.1% | Available -for-sale (1) | |||||||
PixelOpics, Inc. |
24.7% | NA | Equity | |||||||
Putney, Inc. |
30.1% | NA | Equity | |||||||
Tengion, Inc. |
2.5% | 4.8% | Available -for-sale (2) |
(1) | Our ownership interest in NuPathe is accounted for as available-for-sale securities following NuPathes completion of an initial public offering in August 2010. We previously accounted for NuPathe under the equity method. | |
(2) | Our ownership interest in Tengion is accounted for as available-for-sale securities following Tengions completion of an initial public offering in April 2010. We previously accounted for Tengion under the cost method. |
Results of operations for the Life Sciences segment were as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In thousands) | (In thousands) | |||||||||||||||
Other income
(loss), net |
$ | (374 | ) | $ | 8,139 | $ | (1,461 | ) | $ | 19,166 | ||||||
Equity income (loss) |
(3,814 | ) | (828 | ) | 127,699 | (6,958 | ) | |||||||||
Net income (loss) |
$ | (4,188 | ) | $ | 7,311 | $ | 126,238 | $ | 12,208 | |||||||
Three months ended September 30, 2011 versus the three months ended September 30, 2010
Other Income (Loss), Net. Other income (loss), net decreased $8.5 million for the three
months ended September 30, 2011, compared to the prior year period. Other income (loss), net for
the three months ended September 30, 2011 reflected an impairment charge of $0.4 million on our
holdings in Tengion. Other income (loss), net for the three months ended September 30, 2010
reflected a $9.2 million gain on the mark-to-market of our holdings in Clarient, partially offset
by a $1.1 million impairment on our holdings in Tengion.
Equity income (loss). Equity income (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 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
increased $3.0 million in the three months ended September 30, 2011 compared to the prior year
period. The three months ended September 30, 2010 included a $5.8 million gain on the decrease of
our ownership interest in NuPathe partially offset by a $1.1 million impairment charge related to
our interest in Garnet BioTherapeutics, Inc., a former partner company, as well as a mark to market
adjustment of $2.5 million associated with warrant liabilities at Advanced BioHealing, Inc., a
former partner company. The remainder of the increase related to larger losses incurred at partner
companies within the Life Sciences segment.
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Nine months ended September 30, 2011 versus the nine months ended September 30, 2010
Other Income (Loss), Net. Other income (loss), net decreased $20.6 million for the nine
months ended September 30, 2011, compared to the prior year period. Other income (loss), net for
the nine months ended September 30, 2011 reflected impairment charges of $1.5 million on our
holdings in Tengion. Other income (loss), net for the nine months ended September 30, 2010
reflected a $22.4 million gain on the mark-to-market of our holdings in Clarient, partially offset
by impairment charges of $3.3 million related to our holdings in Tengion.
Equity income (loss). Equity income (loss) for Life Sciences increased $134.7 million in the
nine months ended September 30, 2011 compared to the prior year period. In the second quarter of
2011, our former equity method partner company Advanced BioHealing was acquired by Shire plc. We
recognized a gain of $129.0 million in connection with the transaction. The remainder of the
increase was
attributable to smaller losses incurred for partner companies in the Life Sciences segment as
well as a reduction of the number of companies in the Life Sciences segment.
Technology
The following active partner companies as of September 30, 2011 were included in Technology:
Safeguard Primary Ownership as of | ||||||||||
September 30, | ||||||||||
Partner Company | 2011 | 2010 | Accounting Method | |||||||
Advantedge
Healthcare
Solutions, Inc. |
40.2 | % | 39.7 | % | Equity | |||||
Beyond.com, Inc. |
38.3 | % | 38.3 | % | Equity | |||||
Bridgevine, Inc. |
22.8 | % | 23.4 | % | Equity | |||||
MediaMath, Inc. |
22.5 | % | 17.3 | % | Equity (1) | |||||
Swap.com |
45.6 | % | 45.4 | % | Equity | |||||
ThingWorx, Inc. |
30.2 | % | NA | Equity |
(1) | In the first quarter of 2011, our ownership interest in MediaMath increased from 17.3% to 22.4%, a threshold at which we believe we exercise significant influence. Accordingly, we changed our method of accounting for MediaMath from the cost method to the equity method. |
Results of operations for the Technology segment were as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In thousands) | (In thousands) | |||||||||||||||
Equity income (loss) |
$ | 32,896 | $ | (957 | ) | $ | 28,149 | $ | (5,259 | ) | ||||||
Net income (loss) from
continuing
operations before income taxes |
$ | 32,896 | $ | (957 | ) | $ | 28,149 | $ | (5,259 | ) | ||||||
Three and Nine months ended September 30, 2011 versus the three and nine months ended September 30,
2010
Equity Income (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 income (loss) for Technology increased $33.8 million and
$33.4 million in the three and nine months ended September 30, 2011, respectively, compared to the
prior year periods. In the third quarter of 2011, our former equity method partner company Portico
Systems, Inc. was acquired by McKesson. We recognized a gain of $35.4 million in connection with
the transaction. The gain on the sale of Portico was partially offset by larger losses incurred at
partner companies within the Technology segment.
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Corporate Operations
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In thousands) | (In thousands) | |||||||||||||||
General and
administrative expense |
$ | (4,227 | ) | $ | (3,453 | ) | $ | (12,616 | ) | $ | (11,323 | ) | ||||
Stock-based compensation |
(844 | ) | (775 | ) | (2,845 | ) | (2,592 | ) | ||||||||
Depreciation |
(29 | ) | (28 | ) | (93 | ) | (84 | ) | ||||||||
Interest income |
278 | 180 | 969 | 516 | ||||||||||||
Interest expense |
(1,445 | ) | (1,674 | ) | (4,522 | ) | (4,061 | ) | ||||||||
Other income (loss), net |
50 | 5 | 70 | (7,911 | ) | |||||||||||
Equity loss |
(160 | ) | (13 | ) | (214 | ) | (26 | ) | ||||||||
$ | (6,377 | ) | $ | (5,758 | ) | $ | (19,251 | ) | $ | (25,481 | ) | |||||
Three months ended September 30, 2011 versus the three months ended September 30, 2010
General and Administrative Expense. Our general and administrative expenses consist primarily
of employee compensation, insurance, outside services such as legal, accounting and travel-related
costs. General and administrative expense increased $0.8 million when compared to the prior year
period. The increase was primarily attributable to an increase in employee costs of $0.3 million,
an increase in insurance costs of $0.1 million, and an increase related to a legal settlement of
$0.1 million.
Stock-Based Compensation. Stock-based compensation consists primarily of expense related to
stock option grants and grants of restricted stock and deferred stock units to our employees.
Stock-based compensation increased $0.1 million when compared to the prior year period. The
increase was primarily attributable to higher expense related to performance-based stock option and
stock unit awards.
Interest Income. Interest income includes all interest earned on available cash and marketable
security balances. Interest income increased $0.1 million in the three months ended September 30,
2011 compared to the prior year period due to higher average invested cash balances.
Interest Expense. Interest expense is primarily related to our 2024 and 2014 Debentures. As
discussed below under Liquidity and Capital Resources, we exchanged a portion of our convertible
senior debentures effective March 26, 2010. In the first quarter of 2011, we repaid $30.8 million
of our 2024 Debentures. The decrease in interest expense of $0.2 million in the three months ended
September 30, 2011 compared to the prior year period is related to the repayment of the 2024
Debentures.
Other income (loss), net. Other income (loss), net for the three months ended September 30,
2011 was consistent with the prior year period.
Equity loss. Equity loss for both periods presented related to our private equity holdings
accounted for under the equity method.
Nine months ended September 30, 2011 versus the nine months ended September 30, 2010
General and Administrative Expense. General and administrative expense increased $1.3 million
when compared to the prior year period. The increase was primarily attributable to an increase in
employee costs of $0.8 million, an increase in insurance costs of $0.1 million, and an increase
related to a legal settlement of $0.1 million.
Stock-Based Compensation. Stock-based compensation increased $0.3 million when compared to
the prior year period. The increase was primarily attributable to higher expense related to
performance-based stock option and stock unit awards.
Interest Income. Interest income increased $0.5 million in the nine months ended September 30,
2011 compared to the prior year period due to higher average invested cash balances.
Interest Expense. The increase in interest expense of $0.5 million in the nine months ended
September 30, 2011 compared to the prior year period is related to the higher coupon rate of
10.125% payable on our 2014 Debentures as compared to a 2.625% coupon rate on the 2024 Debentures
and accretion of the discount and amortization of debt issuance costs in the amount of $0.2 million
associated with our 2014 Debentures.
Other income (loss), net. Other income (loss), net increased $8.0 million for the nine months
ended September 30, 2011 compared to the prior year. Other income (loss), net for the nine months
ended September 30, 2010 included an $8.5 million loss on exchange of $46.9 million in face value
of our convertible senior debentures, partially offset by $0.3 million gains on sales of legacy
assets.
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Equity loss. Equity loss for both periods presented related to our private equity holdings
accounted for under the equity method.
Income Tax Expense (Benefit)
Income tax benefit (expense) was $0.0 million for both the three and nine months ended
September 30, 2011 and 2010.
During the nine months ended September 30, 2011, we generated tax expense of $53.4 million on
the sales of our holdings in Portico Systems, Inc. and Advanced BioHealing, which was entirely
offset by capital loss carryforwards and net operating loss carryforwards which had been reduced by
a full valuation allowance.
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 income tax expense that
would have been recognized in the nine months ended September 30, 2011 and the benefit of the net
operating loss that would have been recognized in the nine months ended September 30, 2010 were
offset by changes in the valuation allowance.
During the nine months ended September 30, 2011, we had no material changes in uncertain tax
positions.
Liquidity and Capital Resources
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 September 30, 2011, we had $144.2 million of cash and cash equivalents and $136.2
million of short-term and long-term marketable securities for a total of $280.4 million. In
addition, we had $6.4 million of cash held in escrow, including accrued interest, related to our
May 2008 sale of our equity and debt interests in Acsis, Inc., Alliance Consulting Group
Associates, Inc., Laureate Pharma, Inc., ProModel Corporation and Neuronyx, Inc. (the Bundle
Transaction) and $12.3 million was held in a restricted escrow account to service interest on the
2014 Debentures, as discussed below.
In August 2011, we acquired a 36% ownership interest in Penn Mezzanine for $3.9 million. We
expect to deploy up to $26.1 million over a several year period in lending opportunities that meet
certain predefined criteria alongside existing and future Penn Mezzanine funds.
Portico Systems was acquired by McKesson in July 2011 and we received cash proceeds in
exchange for our equity interests of approximately $32.8 million, excluding $3.4 million which will
be held in escrow for a period of one year. In addition, depending on the achievement of certain
milestones, we may receive an additional $1.9 million after a period of one year. Portico also
repaid its mezzanine loan facility with us in the principal amount of $5.0 million in connection
with the transaction.
In the second quarter of 2011, Advanced BioHealing was acquired by Shire plc, resulting in net
proceeds of $137.9 million. An additional $7.6 million was placed in escrow until March 2012.
In December 2010, Avid was acquired by Eli Lily and Company resulting in net proceeds to us of
$32.3 million. We expect to receive an additional $3.4 million currently being held in escrow
within one year. In addition, depending on the achievement of certain difficult milestones, we
could receive additional proceeds of up to $58.0 million over an eight year period.
In December 2010, we received cash proceeds of $2.6 million related to the sale of Quinnova
Pharmaceuticals, Inc, a former partner company. Depending on the achievement of certain
milestones, we could receive additional proceeds of $1.9 million over the next two years.
In connection with the Bundle Transaction, 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 Transaction 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 2004, we issued an aggregate of $150 million in face value of convertible senior debentures
with a stated maturity date of March 15, 2024 (the 2024 Debentures). We had $0.4 million of the
2024 Debentures outstanding at September 30, 2011. On March 21, 2011, we repurchased $30.8 million
of the 2024 Debentures as required by the Debenture holders. Interest on the 2024 Debentures is
payable semi-annually. At the debentures holders option, the 2024 Debentures are convertible into
our common stock through March 14, 2024, subject to certain conditions. The adjusted conversion
rate of the debentures is $43.3044 of principal amount per share. The closing price of our common
stock at September 30, 2011 was $15.00. The remaining 2024 Debentures holders have the right to
require us to repurchase the 2024 Debentures on March 20, 2014 or March 20, 2019 at a repurchase
price equal to 100% of their face amount, plus accrued and unpaid interest. In limited
circumstances, we have the right to redeem all or some of the 2024 Debentures.
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In March 2010, we issued $46.9 million in face value of our 10.125% senior convertible
debentures, due 2014 (the 2014 Debentures) in an exchange transaction for the same face amount of
our 2024 Debentures. Interest on the 2014 Debentures is payable semi-annually. As
required by the terms of the 2014 Debentures, at issuance we placed approximately $19.0 million in
a restricted escrow account to service interest associated with the 2014 Debentures through their
maturity. At the debentures holders option, the 2014 Debentures are convertible into our common
stock prior to March 15, 2013 subject to certain conditions, and at anytime after March 15, 2013.
The conversion rate of the 2014 Debentures is $16.50 of principal amount per share. The closing
price of our common stock at September 30, 2011 was $15.00. The 2014 Debentures holders have the
right to require repurchase of the 2014 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 New York Stock Exchange if we were unable to obtain a
listing for our common stock on another national or regional securities exchange. Subject to
certain conditions, we may mandatorily convert all or some of the 2014 Debentures at any time after
March 15, 2012. If we elect to mandatorily convert any of the 2014 Debentures, we will be required
to pay any interest that would have accrued and become payable on the debentures through their
maturity. Upon a conversion of the 2014 Debentures, we have the right to settle the conversion in
stock, cash or a combination thereof.
Because the 2014 Debentures may be settled in cash or partially in cash upon conversion, we
have separately accounted for the liability and equity components of the 2014 Debentures. The
carrying amount of the liability component was determined at the exchange date by measuring the
fair value of a similar liability that does not have an associated equity component. The carrying
amount of the equity component represented by the embedded conversion option was determined by
deducting the fair value of the liability component from the carrying value of the 2014 Debentures
as a whole. The carrying value of the 2014 Debentures as a whole was equal to their fair value at
the exchange date. We are amortizing the excess of the face value of the 2014 Debentures over
their carrying value to interest expense over their term. At September 30, 2011, the fair value of
the $46.9 million outstanding 2014 Debentures was approximately $58.2 million based on quoted
market prices as of such date.
We are party to 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 lending 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
the lesser of $80 million or 75% of our investment and securities accounts at the lending bank.
The credit facility matures on December 31, 2012. 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 September 30, 2011 was $43.7 million.
At September 30, 2011, we had committed capital of approximately $0.2 million to various
private equity funds. These commitments are 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 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. Since 2001 and through
September 30, 2011, we have received a total of $16.9 million in payments against the loan. The
carrying value of the loan at September 30, 2011 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 $2.2 million, of which $1.9 million was reflected in accrued
expenses and other current liabilities and $0.3 million was reflected in Other long-term
liabilities on the Consolidated Balance Sheet at September 30, 2011.
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 September 30,
2011, 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 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.
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Analysis of Consolidated Cash Flows
Cash flow activity was as follows:
Nine Months Ended September 30, | ||||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Net cash used in operating activities |
$ | (13,584 | ) | $ | (12,276 | ) | ||
Net cash provided by (used in) investing
activities |
4,649 | (26,412 | ) | |||||
Net cash (used in) provided by financing
activities |
(30,243 | ) | 147 | |||||
$ | (39,178 | ) | $ | (38,541 | ) | |||
Net Cash Used In Operating Activities
Net cash used in operating activities increased by $1.3 million. The change primarily
related to a $1.4 million increase in cash used for payments under our management incentive
plan, higher employee compensation costs of $0.5 million and an increase in insurance costs of
$0.1 million, partially offset by a $1.0 million decrease in cash used for the payment of
interest on the 2024 Debentures.
Net Cash Provided by (Used In) Investing Activities
Net cash provided by (used in) investing activities increased by $31.1 million. The
increase primarily related to $171.0 million in proceeds received on the sale of Advanced
BioHealing and Portico Systems, a $3.0 million decrease in advances to partner companies, a $3.7
million increase in repayment of advances to partner companies and a $19.0 million increase
related to cash transferred to escrow to service interest payments on the 2014 Debentures in the
prior year, partially offset by a $56.1 million increase in cash paid to acquire ownership
interests in partner companies and funds and a $106.4 million net increase in cash paid to
acquire marketable securities.
Net Cash (Used in) Provided by Financing Activities
Net cash (used in) provided by financing activities increased by $30.4 million. The
increase primarily related to the repurchase of $30.8 million of the 2024 Debentures in the nine
months ended September 30, 2011.
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Contractual Cash Obligations and Other Commercial Commitments
The following table summarizes our contractual obligations and other commercial commitments as
of September 30, 2011 by period due or expiration of the commitment.
Payments Due by Period | ||||||||||||||||||||
2012 and | 2014 and | Due after | ||||||||||||||||||
Total | Remainder of 2011 | 2013 | 2015 | 2015 | ||||||||||||||||
(In millions) | ||||||||||||||||||||
Contractual Cash Obligations: |
||||||||||||||||||||
Convertible senior debentures(a) |
$ | 47.3 | $ | | $ | | $ | 47.3 | $ | | ||||||||||
Operating leases |
1.5 | 0.1 | 1.0 | 0.4 | | |||||||||||||||
Funding commitments(b) |
0.2 | 0.2 | | | | |||||||||||||||
Potential clawback liabilities(c) |
2.2 | | 2.2 | | | |||||||||||||||
Other long-term obligations(d) |
3.7 | 0.2 | 1.5 | 1.5 | 0.5 | |||||||||||||||
Total Contractual Cash
Obligations |
$ | 54.9 | $ | 0.5 | $ | 4.7 | $ | 49.2 | $ | 0.5 | ||||||||||
Amount of Commitment Expiration by Period | ||||||||||||||||||||
2012 and | 2014 and | After | ||||||||||||||||||
Total | Remainder of 2011 | 2013 | 2015 | 2015 | ||||||||||||||||
(In millions) | ||||||||||||||||||||
Other Commitments: |
||||||||||||||||||||
Letters of credit(e) |
$ | 6.3 | $ | | $ | | $ | | $ | 6.3 | ||||||||||
(a) | We have outstanding $0.4 million of 2024 Debentures with a stated maturity of March 15, 2024. On March 21, 2011, we repurchased $30.8 million of the 2024 Debentures as required by the 2024 Debenture holders. The holders of the remaining 2024 Debentures have the right to require the Company to repurchase the remaining 2024 Debentures on March 20, 2014 or March 20, 2019 at a repurchase price equal to 100% of their respective face amount, plus accrued and unpaid interest. In March 2010, we issued $46.9 million in face value of our 10.125% senior convertible debentures, due 2014 (the 2014 Debentures) in an exchange transaction for the same face amount of our 2024 Debentures. | |
(b) | These amounts represent $0.2 million in 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 $2.2 million, of which $1.9 million was reflected in Accrued expenses and other current liabilities and $0.3 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. |
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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 September 30, 2011.
We remain guarantor of Laureate Pharmas Princeton, New Jersey facility lease. Such guarantee
may extend through the lease expiration in 2016 under certain circumstances. However, we are
entitled to indemnification in connection with the continuation of such guaranty. As of September
30, 2011, scheduled lease payments to be made by Laureate Pharma over the remaining lease term
equaled $6.3 million.
As of December 31, 2010, we had federal net operating and capital loss carryforwards totaling
approximately $266.5 million. During the nine month period ended September 30, 2011, we utilized
federal net operating and capital loss carryforwards totaling approximately $152.5 million to
offset the taxable gain on the sales of Advanced BioHealing and Portico Systems. Our remaining
loss carryforwards expire in various amounts from 2011 to 2030.
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.
Factors That May Affect Future Results
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 would be adversely affected. The risks
relating to our partner companies include:
| most of our partner companies have a history of operating losses and/or limited operating history; |
| the intense competition affecting the products and services our partner companies offer could adversely affect their businesses, financial condition, results of operations and prospects for growth; |
| the inability to adapt to changing marketplaces; |
| the inability to manage growth; |
| 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; |
| the inability to protect their proprietary rights and/or infringing on the proprietary rights of others; |
| certain of our partner companies could face legal liabilities from claims made against them based upon their operations, products or work; |
| the impact of economic downturns on their operations, results and growth prospects; |
| the inability to attract and retain qualified personnel; and |
| the existence of government regulations and legal uncertainties may place financial burdens on the businesses of our partner companies. |
These and other risks are discussed in detail under the caption Risks Related to Our Partner
Companies below.
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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:
| change the individual and/or types of partner companies on which we focus; |
| sell some or all of our interests in any of our partner companies; or |
| otherwise change the nature of our interests in our partner companies. |
Therefore, the nature of our holdings could vary significantly from period to period.
Our business model does not rely, or plan, upon the receipt of operating cash flows from our
partner companies. Our partner companies generally 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 generally 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, partner company 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 may affect the price
of our common stock.
Fluctuations in the market prices of the common stock of our publicly traded holdings may
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.
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. For
instance, the trading volume and public float in the common stock of NuPathe, one of our two
publicly traded partner companies, is 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.
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.
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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 or influential 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 significant, influential interest in
some of our partner companies, we do not maintain a controlling interest in any of our partner
companies. 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:
| the management of a partner company having economic or business interests or objectives that are different from ours; and |
| the partner companies not taking our advice with respect to the financial or operating issues they may encounter. |
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
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 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.
Economic disruptions and downturns may have negative repercussions for the Company.
Events in the United States and international capital markets, debt markets and economies 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 in the 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.
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Risks Related to our Partner Companies
Most of our partner companies have a history of operating losses and/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.
The success or failure of many of our partner companies is dependent upon the ultimate
effectiveness of newly-created information technologies, medical devices, healthcare diagnostics
etc.
Our partner companies business strategies are often highly dependent upon the successful
launch and commercialization of an innovative information technology, medical device, healthcare
diagnostic, etc. Despite all of our efforts to understand the research and development underlying
the innovation or creation of such technologies, etc. before we deploy capital to a partner
company, often-times the performance of the technology, device etc. never matches the expectations
of us or the partner company. In those situations, it is likely that we will incur a partial or
total loss of the capital which we deployed in such partner company.
Our partner companies may fail if they do not adapt to changing marketplaces.
If our partner companies fail to adapt to 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:
| rapidly changing technology; |
| evolving industry standards; |
| frequently introducing new products and services; |
| shifting distribution channels; |
| evolving government regulation; |
| frequently changing intellectual property landscapes; and |
| changing customer demands. |
Our future success will depend on our partner companies ability to adapt to these 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 marketplace changes in an economically efficient
manner, and our partner companies may become or remain unprofitable.
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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:
| improve, upgrade and expand their business infrastructures; |
| scale up production operations; |
| develop appropriate financial reporting controls; |
| attract and maintain qualified personnel; and |
| maintain appropriate levels of liquidity. |
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 not
unlimited, we may not be able to provide partner companies with sufficient capital resources to
enable them to reach a cash-flow positive position, even if we wish to do so. General economic
disruptions and downturns may also negatively affect 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, then they may need to cease or scale back
operations. In such event, our interest in any such partner company will become less valuable.
Economic disruptions and downturns may negatively affect our partner companies plans and their
results of operations.
Many of our partner companies are largely dependent 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, downturns in the economy as well as possible governmental responses to such
downturns 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.
Our 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 our partner companies will take reasonable
efforts to protect the rights to their intellectual property, third parties may develop similar
intellectual property independently. Moreover, the complexity of international trade secret,
copyright, trademark and patent law, coupled with the limited resources of our 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
legaland 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, is expensive and may
divert management attention from other business concerns.
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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 current partner companies have experienced any material losses in this regard, 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 on a partner companys
financial stability, revenues and results of operations. 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 products. 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 has established extensive requirements relating to workplace
safety.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to equity price risks on the marketable portion of our ownership interests in
our partner companies. At September 30, 2011, these interests included our equity positions in
NuPathe and Tengion, our publicly traded partner companies, which have experienced significant
volatility in their stock prices. Historically, we have not attempted to reduce or eliminate our
market exposure related to these interests. Based on closing market prices at September 30, 2011,
the aggregate fair market value of our holdings in NuPathe and Tengion were approximately $5.7
million. A 20% decrease in each of NuPathes and Tengions stock prices would result in an
approximate $1.1 million decrease in the fair value of our public company holdings.
We have outstanding $0.4 million of 2024 Debentures with a stated maturity of March 15, 2024.
On March 21, 2011, we repurchased $30.8 million of the 2024 Debentures as required by the Debenture
holders. The 2024 Debentures holders have the right to require the Company to repurchase the 2024
Debentures on March 20, 2014 or March 20, 2019 at a repurchase price equal to 100% of their
respective face amount, plus accrued and unpaid interest. In March 2010, we issued $46.9 million
in face value of our 10.125% senior convertible debentures, due 2014 (the 2014 Debentures) in an
exchange transaction for the same face amount of our 2024 Debentures.
Fair | ||||||||||||||||||||
After | Value at | |||||||||||||||||||
Liabilities | Remainder of 2011 | 2012 | 2013 | 2013 | September 30, 2011 | |||||||||||||||
2024 Debentures due by year (in
millions) |
$ | | $ | | $ | | $ | 0.4 | $ | 0.4 | ||||||||||
Fixed interest rate |
2.625 | % | 2.625 | % | 2.625 | % | 2.625 | % | N/A | |||||||||||
Interest expense (in
millions) |
$ | | $ | | $ | | $ | 0.1 | N/A | |||||||||||
2014 Debentures due by year (in
millions) |
$ | | $ | | $ | | $ | 46.9 | $ | 58.2 | ||||||||||
Fixed interest rate |
10.125 | % | 10.125 | % | 10.125 | % | 10.125 | % | N/A | |||||||||||
Interest expense (in
millions) |
$ | 1.2 | $ | 4.8 | $ | 4.8 | $ | 1.0 | N/A |
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Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial
Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30,
2011. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures as of September 30, 2011 are functioning effectively to
provide reasonable assurance that the information required to be disclosed by us in reports filed
under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported
within the time periods specified in the SECs rules and forms and (ii) accumulated and
communicated to our management, including the Chief Executive Officer and Chief Financial Officer,
as appropriate to allow timely decisions regarding disclosure. A controls system cannot provide
absolute assurance that the objectives of the controls system are met, and no evaluation of
controls can provide absolute assurance that all control issues and instances of fraud, if any,
within a company have been detected.
(b) Change in Internal Control over Financial Reporting
No change in our internal control over financial reporting occurred during our most recent
fiscal quarter that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
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PART II
OTHER INFORMATION
Item 1A. Risk Factors
There have been no material changes in our risk factors from the information set forth above
under the heading Factors That May Affect Future Results and in our Annual Report on Form 10-K
for the year ended December 31, 2010.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities by the Issuer and Affiliated Purchasers (1)
Total Number of Shares | Maximum Number of | |||||||||||||||
Average | Purchased as Part of | Shares that May Yet Be | ||||||||||||||
Total Number of | Price Paid | Publicly Announced Plans | Purchased Under the Plans | |||||||||||||
Period | Shares Purchased | Per Share | or Programs | or Programs | ||||||||||||
8/23/11 |
1,100 | $ | 14.6589 | N/A | N/A | |||||||||||
8/25/11 |
2,400 | $ | 14.9488 | N/A | N/A | |||||||||||
9/6/11 |
2,000 | $ | 13.9050 | N/A | N/A |
(1) | The purchases reported in this table were open market purchases made by individuals who may be considered affiliated purchasers of the Registrant under Rule 10b-18 of the Securities Exchange Act of 1934, as amended. |
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Item 6. Exhibits
(a) Exhibits.
The following is a list of exhibits required by Item 601 of Regulation S-K filed as part of
this Report. For exhibits that previously have been filed, the Registrant incorporates those
exhibits herein by reference. The exhibit table below includes the Form Type and Filing Date of
the previous filing and the location of the exhibit in the previous filing which is being
incorporated by reference herein. Documents which are incorporated by reference to filings by
parties other than the Registrant are identified in a footnote to this table.
Incorporated Filing | ||||||
Reference | ||||||
Original | ||||||
Exhibit | Form Type & | Exhibit | ||||
Number | Description | Filing Date | Number | |||
31.1 | Certification of Peter J. Boni
pursuant to Rules 13a-15(e) and
15d-15(e) of the Securities
Exchange Act of 1934
|
| | |||
31.2 | Certification of Stephen T.
Zarrilli pursuant to Rules
13a-15(e) and 15d-15(e) of the
Securities Exchange Act of 1934
|
| | |||
32.1 | Certification of Peter J. Boni
pursuant to 18 U.S.C. Section
1350, as Adopted pursuant to
Section 906 of the Sarbanes-Oxley
Act of 2002.
|
| | |||
32.2 | Certification of Stephen T.
Zarrilli pursuant to 18 U.S.C.
Section 1350, as Adopted pursuant
to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
| | |||
101 | The following materials from
Safeguard Scientifics, Inc.
Quarterly Report on Form 10-Q for
the quarter ended September 30,
2011, formatted in XBRL
(eXtensible Business Reporting
Language); (i) Consolidated
Balance Sheets September 30,
2011 (unaudited) and December 31,
2010; (ii) Consolidated
Statements of Operations
(unaudited) Three and nine
months ended September 30, 2011
and 2010; (iii) Condensed
Statements of Cash Flows
(unaudited) Nine months ended
September 30, 2011 and 2010; (iv)
Consolidated Statement of
Shareholders Equity Nine
months ended September 30,
2011;and (v) Notes to
Consolidated Financial Statements
(unaudited), tagged as blocks of
text*.
|
| |
| Filed herewith | |
* | Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
SAFEGUARD SCIENTIFICS, INC. | ||||
Date: October 28, 2011
|
PETER J. BONI
|
|||
President and Chief Executive Officer | ||||
Date:
October 28, 2011
|
STEPHEN T. ZARRILLI
|
|||
Senior Vice President and Chief Financial Officer |
46