SAFEGUARD SCIENTIFICS INC, 10-Q filed on 4/27/2012
Quarterly Report
Document and Entity Information
3 Months Ended
Mar. 31, 2012
Apr. 25, 2012
Document and Entity Information [Abstract]
 
 
Entity Registrant Name
SAFEGUARD SCIENTIFICS INC 
 
Entity Central Index Key
0000086115 
 
Document Type
10-Q 
 
Document Period End Date
Mar. 31, 2012 
 
Amendment Flag
false 
 
Document Fiscal Year Focus
2012 
 
Document Fiscal Period Focus
Q1 
 
Current Fiscal Year End Date
--12-31 
 
Entity Filer Category
Accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
20,792,346 
Consolidated Balance Sheets (Unaudited) (USD $)
In Thousands, unless otherwise specified
Mar. 31, 2012
Dec. 31, 2011
Current Assets:
 
 
Cash and cash equivalents
$ 90,148 
$ 83,187 
Cash held in escrow
6,433 
6,433 
Marketable securities
129,985 
158,098 
Restricted cash equivalents
5,232 
5,137 
Prepaid expenses and other current assets
4,628 
1,081 
Total current assets
236,426 
253,936 
Property and equipment, net
205 
228 
Ownership interests in and advances to partner companies and funds
122,976 
114,169 
Loan participations receivable
7,538 
7,587 
Available-for-sale securities
10,261 
5,184 
Long-term marketable securities
14,262 
16,287 
Long-term restricted cash equivalents
4,752 
7,128 
Other
2,249 
2,117 
Total Assets
398,669 
406,636 
Current Liabilities:
 
 
Accounts payable
277 
243 
Accrued compensation and benefits
1,745 
4,583 
Accrued expenses and other current liabilities
2,462 
3,690 
Total current liabilities
4,484 
8,516 
Other long-term liabilities
4,093 
4,146 
Convertible senior debentures--non-current
45,862 
45,694 
Commitments and contingencies
   
   
Equity:
 
 
Preferred stock, $0.10 par value; 1,000 shares authorized
   
   
Common stock, $0.10 par value; 83,333 shares authorized; 20,768 and 20,752 shares issued and outstanding in 2012 and 2011, respectively
2,077 
2,075 
Additional paid-in capital
811,498 
810,956 
Accumulated deficit
(474,370)
(464,710)
Accumulated other comprehensive income (loss)
5,025 
(41)
Total equity
344,230 
348,280 
Total Liabilities and Equity
$ 398,669 
$ 406,636 
Consolidated Balance Sheets (Unaudited) (Parenthetical) (USD $)
In Thousands, except Per Share data, unless otherwise specified
Mar. 31, 2012
Dec. 31, 2011
Consolidated Balance Sheets [Abstract]
 
 
Preferred stock, par value
$ 0.10 
$ 0.10 
Preferred stock, shares authorized
1,000 
1,000 
Common stock, par value
$ 0.10 
$ 0.10 
Common stock, shares authorized
83,333 
83,333 
Common stock, shares issued
20,768 
20,752 
Common stock, shares outstanding
20,768 
20,752 
Consolidated Statements of Operations (Unaudited) (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended
Mar. 31, 2012
Mar. 31, 2011
Consolidated Statements of Operations [Abstract]
 
 
General and administrative expense
$ 4,743 
$ 4,884 
Operating loss
(4,743)
(4,884)
Other income (loss), net
3,084 
(292)
Interest income
899 
367 
Interest expense
(1,452)
(1,636)
Equity loss
(7,448)
(2,565)
Net loss before income taxes
(9,660)
(9,010)
Income tax benefit
   
   
Net loss
$ (9,660)
$ (9,010)
Net loss per share:
 
 
Basic
$ (0.46)
$ (0.44)
Diluted
$ (0.46)
$ (0.46)
Average shares used in computing basic and diluted loss per share:
20,879 
20,678 
Consolidated Statements of Comprehensive Income (Loss) (Unaudited) (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2012
Mar. 31, 2011
Consolidated Statements of Comprehensive Income (Loss) [Abstract]
 
 
Net loss
$ (9,660)
$ (9,010)
Other comprehensive income (loss), before taxes:
 
 
Unrealized net income (loss) on available-for-sale securities
5,066 
(3,296)
Reclassification adjustment for other than temporary impairment of available-for-sale securities included in net loss
 
336 
Total comprehensive loss
$ (4,594)
$ (11,970)
Condensed Consolidated Statements of Cash Flows (Unaudited) (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2012
Mar. 31, 2011
Cash Flows from Operating Activities:
 
 
Net cash used in operating activities
$ (6,694)
$ (7,285)
Cash Flows from Investing Activities:
 
 
Proceeds from sales of and distributions from companies and funds
77 
95 
Advances and loans to companies
(3,071)
 
Origination fees on mezzanine loans
46 
 
Acquisitions of ownership interests in companies and funds
(16,061)
(14,073)
Increase in marketable securities
(45,480)
(55,635)
Decrease in marketable securities
75,618 
19,481 
Proceeds from sale of discontinued operations, net
 
Repayment of advances to companies
2,394 
 
Capital expenditures
(7)
 
Other, net
 
107 
Net cash provided by (used in) investing activities
13,516 
(50,024)
Cash Flows from Financing Activities:
 
 
Repurchase of convertible senior debentures
 
(30,848)
Issuance of Company common stock, net
139 
144 
Net cash provided by (used in) financing activities
139 
(30,704)
Net Increase (Decrease) in Cash and Cash Equivalents
6,961 
(88,013)
Cash and Cash Equivalents at beginning of period
83,187 
183,419 
Cash and Cash Equivalents at end of period
$ 90,148 
$ 95,406 
Consolidated Statement of Changes in Equity (Unaudited) (USD $)
In Thousands
Total
Accumulated Deficit
Accumulated Other Comprehensive Income (Loss)
Common Stock
Additional Paid-In Capital
Beginning balance at Dec. 31, 2011
$ 348,280 
$ (464,710)
$ (41)
$ 2,075 
$ 810,956 
Beginning balance, shares at Dec. 31, 2011
 
 
 
20,752 
 
Net loss
(9,660)
(9,660)
 
 
 
Stock options exercised, net
139 
 
 
137 
Stock options exercised, net, shares
 
 
 
12 
 
Issuance of restricted stock, net
22 
 
 
 
22 
Issuance of restricted stock, net, shares
 
 
 
 
Stock-based compensation expense
383 
 
 
 
383 
Other comprehensive income
5,066 
 
5,066 
 
 
Ending balance at Mar. 31, 2012
$ 344,230 
$ (474,370)
$ 5,025 
$ 2,077 
$ 811,498 
Ending balance, shares at Mar. 31, 2012
 
 
 
20,768 
 
General
General

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 Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Form 10-Q and with the Company’s Consolidated Financial Statements and Notes thereto included in the Company’s 2011 Annual Report on Form 10-K.

Ownership Interests in and Advances to Partner Companies and Funds
Ownership Interests in and Advances to Partner Companies and Funds

2. Ownership Interests in and Advances to Partner Companies and Funds

The following summarizes the carrying value of the Company’s ownership interests in and advances to partner companies and private equity funds.

 

                 
    March 31, 2012     December 31, 2011  
    (In thousands)  
    (Unaudited)  

Equity Method:

               

Partner companies

  $ 113,448     $ 104,545  

Private equity funds

    5,639       5,784  
   

 

 

   

 

 

 
      119,087       110,329  

Cost Method:

               

Private equity funds

    2,634       2,984  
   

 

 

   

 

 

 
      2,634       2,984  

Advances to partner companies

    1,255       856  
   

 

 

   

 

 

 
    $ 122,976     $ 114,169  
   

 

 

   

 

 

 

Loan participations receivable

  $ 7,538     $ 7,587  
   

 

 

   

 

 

 

Available-for-sale securities

  $ 10,261     $ 5,184  
   

 

 

   

 

 

 

The Company recognized an impairment charge of $0.4 million related to its interest in a legacy private equity fund, in the three months ended March 31, 2012 which is reflected in Other income (loss), net in the Consolidated Statement of Operations.

The Company accounts for its holdings in NuPathe, Inc. (“NuPathe”) and Tengion, Inc. (“Tengion”) as available-for-sale securities. The Company recorded an unrealized gain of $5.1 million associated with its holdings in NuPathe and Tengion as a separate component of equity in the three months ended March 31, 2012.

The following unaudited summarized results of operations for the three months ended December 31, 2011 for PixelOptics, Inc. (“PixelOptics”) have been compiled from the unaudited financial statements of PixelOptics. The results of PixelOptics are reported on a one quarter lag.

 

         
    Three Months Ended  
    December 31,  
    2011  
    (In thousands)  
    (Unaudited)  

Results of Operations:

       

Revenue

  $ 388  
   

 

 

 

Operating loss

  $ (9,897
   

 

 

 

Net loss

  $ (10,739
   

 

 

 
Acquisitions of Ownership Interests in Partner Companies and Funds
Acquisitions of Ownership Interests in Partner Companies and Funds

3. Acquisitions of Ownership Interests in Partner Companies and Funds

In March 2012, the Company deployed an additional $3.7 million in Good Start Genetics, Inc. (“Good Start”). The Company had previously acquired an interest in Good Start in 2010 for $6.8 million. Good Start has developed a pre-pregnancy genetic test, which utilizes an advanced DNA sequencing technology to screen for a panel of genetic disorders, including those recommended by the American Congress of Obstetricians and Gynecologists and the American College of Medical Genetics. The Company accounts for its interest in Good Start under the equity method. The difference between the Company’s cost and its interest in the underlying net assets of Good Start was allocated to intangible assets and goodwill as reflected in the carrying value in Ownership interests in and advances to partner companies and funds on the Consolidated Balance Sheets.

In February 2012, the Company acquired a 23.1% ownership interest in Spongecell, Inc. (“Spongecell”) for $10.0 million. Spongecell is a digital advertising technology company that enhances standard banner ads with rich interactive features. The Company accounts for its ownership interest in Spongecell under the equity method. The difference between the Company’s cost and its interest in the underlying net assets of Spongecell was preliminarily allocated to intangible assets and goodwill as reflected in the carrying value in Ownership interests in and advances to partner companies and funds on the Consolidated Balance Sheets.

In February 2012, the Company acquired a 31.6% ownership interest in Lumesis, Inc. (“Lumesis”) for $2.2 million. Lumesis is a financial technology company that is dedicated to delivering timely data and robust analytical tools for the fixed income marketplace. The Company accounts for its ownership interest in Lumesis under the equity method. The difference between the Company’s cost and its interest in the underlying net assets of Lumesis was preliminarily allocated to intangible assets and goodwill as reflected in the carrying value in Ownership interests in and advances to partner companies and funds on the Consolidated Balance Sheets.

In February 2012, the Company funded $0.8 million of a convertible bridge loan to Alverix, Inc. (“Alverix”). The Company previously deployed an aggregate of $7.6 million in Alverix. 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 Company’s 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 and funds on the Consolidated Balance Sheets.

In January 2012, the Company funded $2.5 million for participations in loan and equity interests initiated by Penn Mezzanine. Included in this funding was $2.3 million for participation in a loan and $0.2 million for participation in equity of the borrower acquired by Penn Mezzanine. The loan principal was repaid in March 2012.

Fair Value Measurements
Fair Value Measurements

4. Fair Value Measurements

The Company categorizes its financial instruments into a three-level fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the fair value measurement of the instrument. Financial assets recorded at fair value on the Company’s Consolidated Balance Sheets are categorized as follows:

Level 1—Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2—Include other inputs that are directly or indirectly observable in the marketplace.

Level 3—Unobservable inputs which are supported by little or no market activity.

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

 

The following table provides the assets and liabilities measured at fair value on a recurring basis as of March 31, 2012 and December 31, 2011:

 

                                 
    Carrying     Fair Value Measurement at March 31, 2012  
    Value     Level 1     Level 2     Level 3  
    (In thousands)  
    (Unaudited)  

Cash and cash equivalents

  $ 90,148     $ 90,148     $ —       $ —    

Cash held in escrow

  $ 6,433     $ 6,433     $ —       $ —    

Restricted cash equivalents

  $ 9,984     $ 9,984     $ —       $ —    
         

Available-for-sale securities

  $ 10,261     $ 10,261     $ —       $ —    
         

Warrant participations

  $ 276     $ —       $ —       $ 276  
         

Marketable securities—held-to-maturity:

                               

Commercial paper

  $ 55,478     $ 55,478     $ —       $ —    

U.S. Treasury Bills

    18,035       18,035       —         —    

Government agency bonds

    38,319       38,319       —         —    

Corporate bonds

    1,296       1,296       —         —    

Certificates of deposit

    31,119       31,119       —         —    
   

 

 

   

 

 

   

 

 

   

 

 

 
    $ 144,247     $ 144,247     $ —       $ —    
   

 

 

   

 

 

   

 

 

   

 

 

 
     
    Carrying     Fair Value Measurement at December 31, 2011  
    Value     Level 1     Level 2     Level 3  
    (In thousands)  
    (Unaudited)  

Cash and cash equivalents

  $ 83,187     $ 83,187     $ —       $ —    

Cash held in escrow

  $ 6,433     $ 6,433     $ —       $ —    

Restricted cash equivalents

  $ 12,265     $ 12,265     $ —       $ —    
         

Available-for-sale securities

  $ 5,184     $ 5,184     $ —       $ —    
         

Warrant participations

  $ 276     $ —       $ —       $ 276  
         

Marketable securities—held-to-maturity:

                               

Commercial paper

  $ 42,919     $ 42,919     $ —       $ —    

U.S. Treasury Bills

    17,555       17,555       —         —    

Government agency bonds

    80,712       80,712       —         —    

Corporate bonds

    1,296       1,296       —         —    

Certificates of deposit

    31,903       31,903       —         —    
   

 

 

   

 

 

   

 

 

   

 

 

 
    $ 174,385     $ 174,385     $ —       $ —    
   

 

 

   

 

 

   

 

 

   

 

 

 

 

As of March 31, 2012, $130.0 million of marketable securities had contractual maturities which were less than one year and $14.3 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 Company recognized an impairment charge of $0.4 million related to a legacy private equity fund, in the three months ended March 31, 2012 measured as the amount by which the carrying value of the Company's interest in the fund exceeded its estimated fair value. The fair market value of the Company's interest in the fund was determined to be $1.9 million at March 31, 2012 based on the value of the Company’s pro rata portion of the fair value of the funds net assets, which is a Level 3 input under the fair value hierarchy.

The Company accounts for its holdings in NuPathe and Tengion as available-for-sale securities. As of March 31, 2012, the Company’s adjusted cost basis in available-for-sale securities was $5.2 million. As of March 31, 2012 the Company’s holdings of available-for-sale securities had generated an unrealized gain of $5.1 million. The value of the Company’s available-for-sale securities was measured by reference to quoted prices for NuPathe and Tengion’s common stock as traded on the NASDAQ Capital Market, which is considered a Level 1 input under the valuation hierarchy.

Convertible Debentures and Credit Arrangements
Convertible Debentures and Credit Arrangements

5. Convertible Debentures and Credit Arrangements

The carrying values of the Company’s convertible senior debentures were as follows:

 

                 
    March 31, 2012     December 31, 2011  
    (In thousands)  
    (Unaudited)  

Convertible senior debentures due 2024

  $ 441     $ 441  

Convertible senior debentures due 2014

    45,421       45,253  
   

 

 

   

 

 

 
    $ 45,862     $ 45,694  
   

 

 

   

 

 

 

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 March 31, 2012. 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 Company’s 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 Company’s common stock at March 31, 2012 was $17.20. 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. Subject to certain conditions, the Company has the right to redeem all or some of the 2024 Debentures.

At March 31, 2012, 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 three months ended March 31, 2012, 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 $10.0 million was reflected in Restricted cash equivalents on the Consolidated Balance Sheet at March 31, 2012, of which $5.2 million was classified as a current asset.

At the debentures holders’ option, the 2014 Debentures are convertible into the Company’s 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 Company’s 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 Company’s common stock at March 31, 2012 was $17.20. 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 Company’s common stock or assets, liquidation, dissolution or a change in control or the delisting of the Company’s 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 March 31, 2012.

 

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 March 31, 2012, the fair value of the $46.9 million outstanding 2014 Debentures was approximately $63.4 million based on the midpoint of bid and ask prices as of such date. At March 31, 2012, 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 $1.5 million and the net carrying value of the liability component was $45.4 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 bank as well as the value of the Company’s 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 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 Company’s revolving credit facility at March 31, 2012 was $43.7 million.

Stock-Based Compensation
Stock-Based Compensation

6. Stock-Based Compensation

Stock-based compensation expense was recognized in the Consolidated Statements of Operations as follows:

 

                 
    Three Months Ended March 31,  
    2012     2011  
    (In thousands)  
    (Unaudited)  

General and administrative expense

  $ 383     $ 727  
   

 

 

   

 

 

 
    $ 383     $ 727  
   

 

 

   

 

 

 

The fair value of the Company’s 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 Company’s common stock for a period equal to the stock option’s expected term.

At March 31, 2012, 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 Company’s 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 three months ended March 31, 2012 and 2011, respectively, the Company did not issue any market-based option awards to employees. During the three months ended March 31, 2012 and 2011, respectively, 0 and 20 thousand options vested based on achievement of market capitalization targets. The Company recorded compensation expense related to market-based option awards of $0.1 million and $0.5 million for the three months ended March 31, 2012 and 2011, respectively. Depending on the Company’s stock performance, the maximum number of unvested shares at March 31, 2012 attainable under these grants was 962 thousand 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 Company’s estimate of when the performance conditions will be met. During the three months ended March 31, 2012 and 2011 respectively, no performance-based awards 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. During the three months ended March 31, 2012 and 2011, respectively, the Company did not issue any performance-based awards to employees. The Company recorded compensation expense related to performance-based option awards of $0.0 million for both the three months ended March 31, 2012 and 2011. The maximum number of unvested shares at March 31, 2012 attainable under these option grants was 648 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 three months ended March 31, 2012 and 2011, respectively, the Company issued no service based option awards to employees. The Company recorded compensation expense related to service-based option awards of $0.1 million for both the three months ended March 31, 2012 and 2011.

The Company issued three thousand deferred stock units during both the three months ended March 31, 2012 and 2011, to non-employee directors for fees earned during the preceding quarter. Deferred stock units issued to directors 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 $0.1 million for both the three months ended March 31, 2012 and 2011. During the three months ended March 31, 2012, the Company issued five thousand unrestricted shares to members of its advisory board, and recorded expense of $0.1 million related to these awards.

Income Taxes
Income Taxes

7. Income Taxes

The Company’s consolidated income tax benefit (expense) was $0.0 million for the three months ended March 31, 2012 and 2011. 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 benefit of the net operating losses that would have been recognized in the three months ended March 31, 2012 and 2011 were offset by changes in the valuation allowance.

During the three months ended March 31, 2012, the Company had no material changes in uncertain tax positions.

Net Loss Per Share
Net Loss Per Share

8. Net Loss Per Share

The calculations of net loss per share were as follows:

 

                 
    Three Months Ended March 31,  
    2012     2011  
    (In thousands except per share data)  
    (Unaudited)  

Basic:

               
     

Net loss

  $ (9,660   $ (9,010
     

Average common shares outstanding

    20,879       20,678  
   

 

 

   

 

 

 

Net loss per share

  $ (0.46   $ (0.44
   

 

 

   

 

 

 
     

Diluted:

               
     

Net loss

  $ (9,660   $ (9,010

Impact of partner company dilutive securities

    —         (469
   

 

 

   

 

 

 

Net loss for dilutive share computation

  $ (9,660   $ (9,479
     

Average common shares outstanding

    20,879       20,678  
   

 

 

   

 

 

 
     

Net loss per share

  $ (0.46   $ (0.46
   

 

 

   

 

 

 

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 partner 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 loss per share calculation for the three months ended March 31, 2012 and 2011 because their effect would be anti-dilutive:

 

   

At March 31, 2012 and 2011, options to purchase 3.2 million and 3.3 million shares of common stock, respectively, at prices ranging from $3.93 to $18.80 and $3.93 to $21.36, respectively, were excluded from the calculations.

 

   

At March 31, 2012 and 2011, unvested restricted stock units, performance stock units and DSUs convertible into 0.2 million and 0.3 million shares of stock, respectively, were excluded from the calculations.

 

   

At March 31, 2012 and 2011, 10 thousand shares related to the Company’s 2024 Debentures (see Note 5) representing the effect of assumed conversion of the 2024 Debentures were excluded from the calculations.

 

   

At March 31, 2012 and 2011, 2.8 million shares related to the Company’s 2014 Debentures (see Note 5) representing the effect of assumed conversion of the 2014 Debentures were excluded from the calculations.

 

 

Operating Segments
Operating Segments
9. Operating Segments

As of March 31, 2012, the Company held an interest in 16 non-consolidated partner companies which are included in either the Life Sciences or Technology segments. Included in the Penn Mezzanine segment are the Company’s interest in the Penn Mezzanine management company and general partner and the Company’s participations in mezzanine loans and equity interests initiated by Penn Mezzanine. The Company’s reportable operating segments are Life Sciences, Technology and Penn Mezzanine.

 

The Company’s active partner companies by segment were as follows as of March 31, 2012:

Life Sciences

 

         

Partner Company

  Safeguard Primary Ownership
as of March 31, 2012
  Accounting Method

Alverix, Inc.

  49.6%   Equity

Good Start Genetics, Inc.

  29.2%   Equity

Medivo, Inc.

  30.0%   Equity

NovaSom, Inc.

  30.3%   Equity

NuPathe, Inc.

  17.8%   Available-for-sale

PixelOptics, Inc.

  24.7%   Equity

Putney, Inc.

  27.6%   Equity

Technology

 

         

Partner Company

  Safeguard Primary Ownership
as of March 31, 2012
  Accounting Method

AdvantEdge Healthcare Solutions, Inc.

  40.2%   Equity                    

Beyond.com, Inc.

  38.3%   Equity

Bridgevine, Inc.

  22.8%   Equity

DriveFactor (formerly Crimson Informatics, Inc.)

  23.9%   Equity

Hoopla Software, Inc.

  25.3%   Equity

Lumesis, Inc.

  31.6%   Equity

MediaMath, Inc.

  22.4%   Equity (1)

Spongecell, Inc.

  23.1%   Equity

ThingWorx, Inc.

  30.2%   Equity

 

(1) In the first quarter of 2011, the Company's ownership interest in MediaMath increased from 17.3% to 22.4%, above the threshold at which the Company believes it exercises significant influence. Accordingly, the Company changed its method of 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 Company’s voting ownership percentage in these partner companies, the net results of operations of these partner companies, any impairment charges and gains (losses) on the sale of partner companies. Management evaluates the Penn Mezzanine segment performance based on the returns on the mezzanine interests in which the Company participates. This includes an evaluation of the future cash flows associated with interest and dividend payments as well as estimated losses based on evaluating known and inherent risks in the debt and equity interests in which the Company participates.

Other Items include certain expenses which are not identifiable to the operations of the Company’s 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 March 31, 2012 and December 31, 2011, all of the Company’s assets were located in the United States.

 

Segment assets in Other Items included primarily cash, cash equivalents, cash held in escrow, and marketable securities of $240.8 million and $264.0 million, at March 31, 2012 and December 31, 2011, respectively.

 

                                                 
    Three Months Ended March 31, 2012  
    Life           Penn     Total     Other        
    Sciences     Technology     Mezzanine     Segments     Items     Total  
    (In thousands)  

Operating loss

  $ —       $ —       $ (2 ) $      (2   $ (4,741   $ (4,743

Interest income

    —         —         571       571       328       899  

Equity loss

    (6,041     (1,287     (119     (7,447     (1     (7,448

Net income (loss)

    (2,612     (1,287     450       (3,449     (6,211     (9,660

Segment Assets:

                                               

March 31, 2012

    67,747       57,217       12,944       137,908       260,761       398,669  

December 31, 2011

    64,281       46,304       12,965       123,550       283,086       406,636  

 

                                         
    Three Months Ended March 31, 2011  
    Life           Total     Other        
    Sciences     Technology     Segments     Items     Total  
    (In thousands)  
    (unaudited)  

Operating loss

  $ —       $ —       $ —       $ (4,884   $ (4,884

Interest income

    —         —         —         367       367  

Equity income (loss)

    1,047       (3,568     (2,521     (44     (2,565

Net income (loss)

    735       (3,568     (2,833     (6,177     (9,010

 

 

Commitments and Contingencies
Commitments and Contingencies
10. 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 Company’s 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 Company’s consolidated financial position and results of operations or that of its partner companies.

Not including the Laureate Pharma, Inc. lease guaranty described below, the Company had outstanding guarantees of $3.8 million at March 31, 2012.

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 $1.3 million, of which $1.0 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 March 31, 2012.

The Company’s 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 Company’s 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 Pharma’s 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 March 31, 2012, scheduled lease payments to be made by Laureate Pharma over the remaining lease term equaled $5.7 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 $3.0 million was included in Other long-term liabilities on the Consolidated Balance Sheet at March 31, 2012.

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 March 31, 2012.