SAFEGUARD SCIENTIFICS INC, 10-Q filed on 7/28/2011
Quarterly Report
Document and Entity Information (USD $)
6 Months Ended
Jun. 30, 2011
Jul. 27, 2011
Jun. 30, 2010
Document and Entity Information [Abstract]
 
 
 
Entity Registrant Name
Safeguard Scientifics Inc 
 
 
Entity Central Index Key
0000086115 
 
 
Document Type
10-Q 
 
 
Document Period End Date
Jun. 30, 2011 
 
 
Amendment Flag
FALSE 
 
 
Document Fiscal Year Focus
2011 
 
 
Document Fiscal Period Focus
Q2 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Well-known Seasoned Issuer
No 
 
 
Entity Voluntary Filers
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Filer Category
Accelerated Filer 
 
 
Entity Public Float
 
 
$ 213,153,252 
Entity Common Stock, Shares Outstanding
 
20,685,250 
 
Consolidated Balance Sheets (Unaudited) (USD $)
In Thousands
Jun. 30, 2011
Dec. 31, 2010
Current Assets:
 
 
Cash and cash equivalents
$ 203,437 
$ 183,419 
Cash held in escrow
6,433 
6,434 
Marketable securities
51,220 
42,411 
Restricted cash equivalents
5,023 
4,893 
Prepaid expenses and other current assets
1,060 
785 
Total current assets
267,173 
237,942 
Property and equipment, net
238 
295 
Ownership interests in and advances to partner companies
108,770 
60,256 
Available-for-sale securities
20,212 
25,447 
Long-term marketable securities
8,513 
Long-term restricted cash equivalents
9,505 
11,881 
Other
626 
724 
Total Assets
415,037 
336,545 
Current Liabilities:
 
 
Convertible senior debentures - current
31,289 
Accounts payable
287 
493 
Accrued compensation and benefits
2,594 
4,168 
Accrued expenses and other current liabilities
5,017 
4,223 
Total current liabilities
7,898 
40,173 
Other long-term liabilities
4,214 
5,311 
Convertible senior debentures - non-current
45,373 
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; 20,685 and 20,630 shares issued and outstanding in 2011 and 2010, respectively
2,068 
2,063 
Additional paid-in capital
809,274 
806,859 
Accumulated deficit
(462,502)
(575,307)
Accumulated other comprehensive income
8,712 
12,816 
Total equity
357,552 
246,431 
Total Liabilities and Equity
$ 415,037 
$ 336,545 
Consolidated Balance Sheets (Unaudited) (Parenthetical) (USD $)
In Thousands, except Per Share data
Jun. 30, 2011
Dec. 31, 2010
Equity:
 
 
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
20,685 
20,630 
Common stock, shares outstanding
20,685 
20,630 
Consolidated Statements of Operations (Unaudited) (USD $)
In Thousands, except Per Share data
3 Months Ended
Jun. 30,
6 Months Ended
Jun. 30,
2011
2010
2011
2010
Consolidated Statements of Operations [Abstract]
 
 
 
 
General and administrative expense
$ 5,570 
$ 4,910 
$ 10,454 
$ 9,743 
Operating loss
(5,570)
(4,910)
(10,454)
(9,743)
Other income (loss), net
(775)
14,408 
(1,067)
3,111 
Interest income
324 
239 
691 
336 
Interest expense
(1,441)
(1,657)
(3,077)
(2,387)
Equity income (loss)
129,277 
(5,357)
126,712 
(10,445)
Net income (loss) before income taxes
121,815 
2,723 
112,805 
(19,128)
Income tax expense (benefit)
 
 
 
 
Net income (loss)
$ 121,815 
$ 2,723 
$ 112,805 
$ (19,128)
Net income (loss) per share:
 
 
 
 
Basic
$ 5.87 
$ 0.13 
$ 5.45 
$ (0.93)
Diluted
$ 5.05 
$ 0.12 
$ 4.69 
$ (0.94)
Average shares used in computing income (loss) per share:
 
 
 
 
Basic
20,741 
20,529 
20,709 
20,461 
Diluted
24,374 
21,417 
24,660 
20,461 
Consolidated Statements of Cash Flows (Unaudited) (USD $)
In Thousands
6 Months Ended
Jun. 30,
2011
2010
Cash Flows from Operating Activities:
 
 
Net cash used in operating activities
$ (10,392)
$ (9,011)
Cash Flows from Investing Activities:
 
 
Investment in restricted cash equivalents for interest on convertible senior debentures
 
(19,009)
Proceeds from sales of and distributions from companies and funds
137,991 
2,755 
Advances to partner companies
(750)
(5,986)
Repayment of advances to partner companies
 
1,300 
Acquisitions of ownership interests in partner companies and funds
(59,108)
(7,546)
Increase in marketable securities
(70,389)
(20,791)
Decrease in marketable securities
53,067 
18,676 
Capital expenditures
(7)
 
Proceeds from sale of discontinued operations, net
477 
Other, net
107 
 
Net cash provided by (used in) investing activities
60,912 
(30,124)
Cash Flows from Financing Activities:
 
 
Costs on exchange of convertible senior debentures
 
(750)
Repurchase of convertible senior debentures
(30,848)
 
Issuance of Company common stock, net
346 
717 
Net cash used in financing activities
(30,502)
(33)
Net Increase (Decrease) in Cash and Cash Equivalents
20,018 
(39,168)
Cash and Cash Equivalents at beginning of period
183,419 
67,347 
Cash and Cash Equivalents at end of period
$ 203,437 
$ 28,179 
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, 2010
$ 246,431 
$ (575,307)
$ 12,816 
$ 2,063 
$ 806,859 
Beginning balance, shares at Dec. 31, 2010
 
 
 
20,630 
 
Net income
112,805 
112,805 
 
 
 
Stock options exercised, net
346 
 
 
341 
Stock options exercised, net, shares
 
 
 
51 
 
Issuance of restricted stock, net
73 
 
 
 
73 
Issuance of restricted stock, net, shares
 
 
 
 
Stock-based compensation expense
2,001 
 
 
 
2,001 
Other comprehensive loss
(4,104)
 
(4,104)
 
 
Ending balance at Jun. 30, 2011
$ 357,552 
$ (462,502)
$ 8,712 
$ 2,068 
$ 809,274 
Ending balance, shares at Jun. 30, 2011
 
 
 
20,685 
 
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 included together with the Company’s Consolidated Financial Statements and Notes thereto included in the Company’s 2010 Annual Report on Form 10-K.
Basis of Presentation
BASIS OF PRESENTATION
2. BASIS OF PRESENTATION
The Company’s 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 Company’s ownership interests in Tengion, Inc. (“Tengion”) and NuPathe, Inc. (“NuPathe”) are accounted for as available-for-sale securities following Tengion’s and NuPathe’s 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).
Ownership Interests in and Advances to Partner Companies
OWNERSHIP INTERESTS IN AND ADVANCES TO PARTNER COMPANIES
3. OWNERSHIP INTERESTS IN AND ADVANCES TO PARTNER COMPANIES
The following summarizes the carrying value of the Company’s ownership interests in and advances to partner companies and private equity funds.
                 
    June 30, 2011     December 31, 2010  
    (In thousands)  
    (Unaudited)  
Equity Method:
               
Partner companies
  $ 100,296     $ 50,561  
Private equity funds
    2,141       2,265  
 
           
 
    102,437       52,826  
Cost Method:
               
Private equity funds
    2,951       2,908  
 
           
 
               
Advances to partner companies
    3,382       4,522  
 
           
 
               
 
  $ 108,770     $ 60,256  
 
           
 
               
Available-for-sale securities
  $ 20,212     $ 25,447  
 
           
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 six months ended June 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 $0.8 million in the second 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 an impairment charge of $0.3 million in the first quarter of 2011. Following the impairment charge, the Company’s adjusted cost basis in Tengion was $0.7 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 six months ended June 30, 2010 the Company recognized unrealized gains of $14.1 million and $13.2 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.
In June 2011, Portico Systems, Inc. signed a definitive agreement to be acquired by McKesson. The transaction closed in July 2011 and 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 amount of $5.0 million in connection with the transaction.
Acquisition of Interests in Partner Companies
ACQUISITION OF INTERESTS IN PARTNER COMPANIES
4. ACQUISITION OF INTERESTS IN PARTNER COMPANIES
In June 2011, the Company acquired a 34.1% ownership interest in NovaSom, Inc. (“NovaSom”) for $20.0 million. NovaSom is a diagnostics company that enables home diagnosis of obstructive sleep apnea. The Company accounts for its interest in NovaSom under the equity method. The difference between the Company’s 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 Company’s 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 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 on the Consolidated Balance Sheets.
In February 2011, the Company deployed an additional $9.0 million in MediaMath. In conjunction with this funding, the Company’s 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 Company’s 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 Company’s 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 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 Company’s 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.
Fair Value Measurements
FAIR VALUE MEASUREMENTS
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 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 June 30, 2011 and December 31, 2010:
                                 
    Carrying     Fair Value Measurement at June 30, 2011  
    Value     Level 1     Level 2     Level 3  
    (in thousands)  
    (unaudited)  
Cash and cash equivalents
  $ 203,437     $ 203,437     $     $  
Cash held in escrow
  $ 6,433     $ 6,433     $     $  
Restricted cash equivalents
  $ 14,528     $ 14,528     $     $  
 
                               
Available-for-sale securities
  $ 20,212     $ 20,212     $     $  
 
                               
Marketable securities — held-to-maturity:
                               
Commercial paper
  $ 14,376     $ 14,376     $     $  
U.S. Treasury Bills
    27,593       27,593              
Government agency bonds
    11,051       11,051              
Certificates of deposit
    6,713       6,713              
 
                       
 
  $ 59,733     $ 59,733     $     $  
 
                       
                                 
    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     $     $  
 
                       
As of June 30, 2011, $51.2 million of marketable securities had contractual maturities which were less than one year and $8.5 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’s holdings in Clarient during the three months ended June 30, 2010 were measured at fair value using quoted prices for Clarient’s 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 $0.3 million and $0.8 million in the first and second quarters of 2011, respectively, 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. As of June 30, 2011, the Company’s adjusted cost basis in available-for-sale securities of Tengion was $0.7 million. The value of the Company’s holdings in Tengion was measured by reference to quoted prices for Tengion’s 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 SafeCentral’s carrying value exceeded its estimated fair value. The fair market value of SafeCentral was determined to be $0.8 million based on Level 3 inputs as defined above.
The Company accounts for its holdings in NuPathe as available-for-sale securities. As of June 30, 2011, the Company’s adjusted cost basis in available-for-sale securities of NuPathe was $10.8 million. As of June 30, 2011 the Company’s holdings of available-for-sale securities in NuPathe had generated an unrealized gain of $8.7 million. The value of the Company’s holdings in NuPathe was measured by reference to quoted prices for NuPathe’s common stock as traded on the NASDAQ Capital Market, which is considered a Level 1 input under the valuation hierarchy.
Comprehensive Income (Loss)
COMPREHENSIVE INCOME (LOSS)
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 Company’s 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 June 30,     Six Months ended June 30,  
    2011     2010     2011     2010  
    (In thousands)  
    (unaudited)  
Net income (loss)
  $ 121,815     $ 2,723     $ 112,805     $ (19,128 )
Other comprehensive income (loss), before taxes:
                               
Unrealized net loss on available-for-sale securities
    (1,939 )     (754 )     (5,235 )     (754 )
 
                               
Reclassification adjustment for other than temporary impairment of available-for-sale securities included in net income (loss)
    795             1,131        
 
                       
Total comprehensive income (loss)
  $ 120,671     $ 1,969     $ 108,701     $ (19,882 )
 
                       
The Company accounts for its holdings in NuPathe and Tengion as available-for-sale securities. The Company recorded unrealized net losses of $1.1 million and $4.1 million associated with available-for-sale securities as a separate component of equity in the three and six months ended June 30, 2011, respectively. The Company reclassified $0.8 million and $1.1 million in unrealized losses associated with Tengion in the three and six months ended June 30, 2011, respectively, as a result of management’s determination that the security was impaired on an other than temporary basis.
Convertible Debentures and Credit Arrangements
CONVERTIBLE DEBENTURES AND CREDIT ARRANGEMENTS
7. CONVERTIBLE DEBENTURES AND CREDIT ARRANGEMENTS
The carrying values of the Company’s convertible senior debentures were as follows:
                 
    June 30, 2011     December 31, 2010  
    (In thousands)  
    (Unaudited)  
Convertible senior debentures due 2014
  $ 44,932     $ 44,630  
Convertible senior debentures due 2024
    441       31,289  
 
           
 
    45,373       75,919  
Less: current portion
          (31,289 )
 
           
Convertible senior debentures — non-current
  $ 45,373     $ 44,630  
 
           
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 June 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 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 June 30, 2011 was $18.88. 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 June 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 quarter 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 $14.5 million was reflected in Restricted cash equivalents on the Consolidated Balance Sheet at June 30, 2011, of which $5.0 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 June 30, 2011 was $18.88. 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 June 30, 2011.
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 June 30, 2011, the fair value of the $46.9 million outstanding 2014 Debentures was approximately $67.7 million based on quoted market prices as of such date. At June 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 $2.0 million and the net carrying value of the liability component was $44.9 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 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, 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 Company’s revolving credit facility at June 30, 2011 was $43.7 million.
Stock-Based Compensation
STOCK-BASED COMPENSATION
8. STOCK-BASED COMPENSATION
Stock-based compensation expense was recognized in the Consolidated Statements of Operations as follows:
                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
    2011     2010     2011     2010  
    (In thousands)     (In thousands)  
    (unaudited)     (unaudited)  
General and administrative expense
  $ 1,274     $ 1,079     $ 2,001     $ 1,817  
 
                       
 
  $ 1,274     $ 1,079     $ 2,001     $ 1,817  
 
                       
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 June 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 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 six months ended June 30, 2011 and 2010, respectively, the Company did not issue any market-based option awards to employees. During the six months ended June 30, 2011 and 2010, respectively, 58 thousand and 11 thousand options vested based on achievement of market capitalization targets. The Company recorded compensation expense related to market-based option awards of $0.4 million and $0.4 million for the three months ended June 30, 2011 and 2010, respectively and $0.9 million and $0.8 million for the six months ended June 30, 2011 and 2010, respectively. Depending on the Company’s stock performance, the maximum number of unvested shares at June 30, 2011 attainable under these 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 Company’s estimate of when the performance conditions will be met. During the six months ended June 30, 2011 and 2010 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 six months ended June 30, 2011 and 2010, respectively, the Company issued 64 thousand and zero performance-based option awards to employees. The Company recorded compensation expense related to performance-based option awards of $0.2 million and $0.0 million for the three months ended June 30, 2011 and 2010, respectively and $0.2 million and $0.1 million for the six months ended June 30, 2011 and 2010, respectively. The maximum number of unvested shares at June 30, 2011 attainable under these grants was 683 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 six months ended June 30, 2011 and 2010, respectively, the Company issued 61 thousand and 45 thousand service-based option awards to employees. The Company recorded compensation expense related to service-based option awards of $0.3 million and $0.4 million for the three months ended June 30, 2011 and 2010, respectively and $0.4 million and $0.6 million for the six months ended June 30, 2011 and 2010, respectively.
During the six months ended June 30, 2011 and 2010, respectively, the Company issued 23 thousand and 26 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 $0.3 million and $0.2 million for the three months ended June 30, 2011 and 2010, respectively, and $0.5 million and $0.3 million for the six months ended June 30, 2011 and 2010, respectively.
Income Taxes
INCOME TAXES
9. INCOME TAXES
The Company’s consolidated income tax benefit (expense) was $0.0 million for both the three and six months ended June 30, 2011 and 2010.
During the three months ended June 30, 2011, the Company generated tax expense of $44.5 million on the sale of its holdings in Advanced BioHealing, 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 six months ended June 30, 2011 and the benefit of the net operating loss that would have been recognized in the six months ended June 30, 2010 were offset by changes in the valuation allowance.
During the six months ended June 30, 2011, the Company had no material changes in uncertain tax positions.
Net Income (Loss) Per Share
NET INCOME (LOSS) PER SHARE
10. NET INCOME (LOSS) PER SHARE
The calculations of net income (loss) per share were as follows:
                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
    2011     2010     2011     2010  
    (In thousands except per share data)  
    (unaudited)  
 
                               
Basic:
                               
 
                               
Net income (loss)
  $ 121,815     $ 2,723     $ 112,805     $ (19,128 )
 
                               
Average common shares outstanding
    20,741       20,529       20,709       20,461  
 
                       
 
                               
Net income (loss) per share
  $ 5.87     $ 0.13     $ 5.45     $ (0.93 )
 
                       
 
                               
Diluted:
                               
 
                               
Net income (loss)
  $ 121,815     $ 2,723     $ 112,805     $ (19,128 )
Interest on convertible senior debentures
    1,384             2,962     $  
Impact of partner company dilutive securities
          (189 )           (108 )
 
                       
Net income (loss) for dilutive share computation
  $ 123,199     $ 2,534     $ 115,767     $ (19,236 )
 
                               
Number of shares used in basic per share computation
    20,741       20,529       20,709       20,461  
Convertible senior debentures
    2,855             3,166        
Unvested restricted stock and DSUs
    69       104       78        
Employee stock options
    709       784       707        
 
                       
Average common shares outstanding
    24,374       21,417       24,660       20,461  
 
                               
Net income (loss) per share
  $ 5.05     $ 0.12     $ 4.69     $ (0.94 )
 
                       
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 June 30, 2011 and 2010 because their effect would be anti-dilutive:
    At June 30, 2010 options to purchase 0.6 million shares of common stock at prices ranging from $10.10 to $21.36, were excluded from the calculations.
    At June 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 June 30, 2010, 0.7 million shares related to the Company’s 2024 Debentures (see Note 7), representing the effect of assumed conversion of the 2024 Debentures, were excluded from the calculations.
    At June 30, 2010, 2.8 million shares related to the Company’s 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 six months ended June 30, 2011 and 2010 because their effect would be anti-dilutive:
    At June 30, 2010 options to purchase 3.2 million shares of common stock at prices ranging from $10.10 to $21.36 per share, were excluded from the calculations.
    At June 30, 2011 and 2010, unvested restricted stock units, performance stock units and DSUs convertible into 0.2 million shares of stock, were excluded from the calculations.
    At June 30, 2010, 0.7 million shares related to the Company’s 2024 Debentures (see Note 7), representing the effect of assumed conversion of the 2024 Debentures, were excluded from the calculations.
    At June 30, 2010, 2.8 million shares related to the Company’s 2014 Debentures (see Note 7), representing the effect of assumed conversion of the 2014 Debentures, were excluded from the calculations.
Operating Segments
OPERATING SEGMENTS
11. OPERATING SEGMENTS
As discussed in Note 2, the Company’s 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 June 30, 2011, the Company held an active interest in 15 non-consolidated partner companies. The Company’s reportable operating segments are Life Sciences and Technology.
The Company’s active partner companies by segment were as follows as of June 30, 2011:
Life Sciences
             
    Safeguard Primary Ownership      
Partner Company   as of June 30, 2011     Accounting Method
Alverix, Inc.
    49.6%   Equity
Good Start Genetics, Inc.
    26.3%   Equity
Molecular Biometrics, Inc.
    35.0%   Equity
NovaSom, Inc.
    34.1%   Equity
NuPathe, Inc.
    18.1%   Available-for-sale (1)
PixelOptics, Inc.
    24.7%   Equity
Tengion, Inc.
    2.5%   Available-for-sale (2)
     
(1)   The Company’s ownership interest in NuPathe is accounted for as available-for-sale securities following NuPathe’s completion of an initial public offering in August 2010.
 
(2)   The Company’s ownership interest in Tengion is accounted for as available-for-sale securities following Tengion’s completion of an initial public offering in April 2010.
Technology
             
    Safeguard Primary Ownership      
Partner Company   as of June 30, 2011     Accounting Method
 
           
Advantedge Healthcare Solutions, Inc.
    40.2%   Equity
Beyond.com, Inc.
    38.3%   Equity
Bridgevine, Inc.
    22.8%   Equity
MediaMath, Inc.
    22.6%   Equity (3)
Portico Systems, Inc.
    45.4%   Equity
SafeCentral, Inc.
    20.1%   Equity
Swap.com
    45.6%   Equity
ThingWorx, Inc.
    30.7%   Equity
     
(3)   In the first quarter of 2011, the Company’s 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 Company’s 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 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 June 30, 2011 and December 31, 2010, 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, restricted cash equivalents and marketable securities of $284.1 million and $249.0 million, at June 30, 2011 and December 31, 2010, respectively.
                                         
    Three Months Ended June 30, 2011  
                                    Total  
    Life             Total     Other     Continuing  
    Sciences     Technology     Segments     Items     Operations  
    (In thousands)  
    (unaudited)  
 
                                       
Operating loss
  $     $     $     $ (5,570 )   $ (5,570 )
Net income (loss)
    129,691       (1,179 )     128,512       (6,697 )     121,815  
 
                                       
Segment Assets:
                                       
June 30, 2011
    71,851       52,039       123,890       291,147       415,037  
December 31, 2010
    37,710       42,820       80,530       256,015       336,545  
                                         
    Three Months Ended June 30, 2010  
                                    Total  
    Life             Total     Other     Continuing  
    Sciences     Technology     Segments     Items     Operations  
    (In thousands)  
    (unaudited)  
Operating loss
  $     $     $     $ (4,910 )   $ (4,910 )
Net income (loss)
    11,302       (2,541 )     8,761       (6,038 )     2,723  
                                         
    Six Months Ended June 30, 2011  
                                    Total  
    Life             Total     Other     Continuing  
    Sciences     Technology     Segments     Items     Operations  
    (In thousands)  
    (unaudited)  
 
                                       
Operating loss
  $     $     $     $ (10,454 )   $ (10,454 )
Net income (loss)
    130,426       (4,747 )     125,679       (12,874 )     112,805  
                                         
    Six Months Ended June 30, 2010  
                                    Total  
    Life             Total     Other     Continuing  
    Sciences     Technology     Segments     Items     Operations  
    (In thousands)  
    (unaudited)  
Operating loss
  $     $     $     $ (9,743 )   $ (9,743 )
Net income (loss)
    4,897       (4,302 )     595       (19,723 )     (19,128 )
Commitments and Contingencies
COMMITMENTS AND CONTINGENCIES
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 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 lease guaranty described below, the Company had outstanding guarantees of $3.8 million at June 30, 2011.
The Company has committed capital of approximately $0.3 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 June 30, 2011.
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 June 30, 2011, scheduled lease payments to be made by Laureate Pharma over the remaining lease term equaled $6.6 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 June 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 June 30, 2011.
Change in Accounting Principle
CHANGE IN ACCOUNTING PRINCIPLE
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 $0.2 million and $0.3 million for the three and six months ended June 30, 2010, respectively.
                 
    December 31, 2010  
    (in thousands)  
    Previously        
    Reported     As Revised  
Balance Sheet:
               
Ownership interests in and advances to partner companies
  $ 60,761     $ 60,256  
Total Assets
    337,050       336,545  
Accumulated deficit
    (574,802 )     (575,307 )
Equity
  $ 246,936     $ 246,431  
                                 
    Three Months Ended     Six Months Ended  
    June 30, 2010     June 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
  $ (5,155 )   $ (5,357 )   $ (10,164 )   $ (10,445 )
Net income (loss) before income taxes
    2,925       2,723       (18,847 )     (19,128 )
Basic loss per share
  $ 0.14     $ 0.13     $ (0.92 )   $ (0.93 )
Diluted loss per share
  $ 0.13     $ 0.12     $ (0.93 )   $ (0.94 )