1.	Significant Accounting Policies

Description of the Company

Safeguard Scientifics, Inc. (“Safeguard” or the “Company”) seeks to build value in growing businesses by providing capital and strategic, operational and management resources. Safeguard participates in expansion financings, corporate spin-outs, management buyouts, recapitalizations, industry consolidations, and early-stage financings. The Company’s vision is to be the preferred catalyst to build great companies across diverse capital platforms.

The Company strives to create long-term value for our shareholders by helping partner companies increase their market penetration, grow revenue and improve cash flow. The Company focuses principally on companies that operate in two sectors and in which it anticipates deploying up to $25 million. The two sectors on which the Company presently focuses are:

Life Sciences — including companies focused on molecular and point-of-care diagnostics, medical devices, specialty pharmaceuticals and selected healthcare services that have lesser regulatory risk and have achieved or are near commercialization; and

Technology — including companies focused on Internet/new media, financial services IT, healthcare IT, enterprise software and selected business services that have transaction-enabling applications with a recurring revenue stream.

It is the Company’s stated intention to continue to develop, grow and extend our capital deployment and business building platform by leveraging its core capabilities. These initiatives may take the form of: i) considering partner companies in additional sectors; ii) making a concerted effort to deploy debt capital to its partner companies or to other borrowers; iii) managing the deployment of capital other than that which originates on its balance sheet; and/or iv) acquiring and maintaining ownership interests in other managers of capital.

Basis of Presentation

The Company’s Consolidated Financial Statements include 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 (see Note 3). The Company believes that accounting for its holdings in Clarient at fair value rather than applying the equity method of accounting provided a better measure of the value of its holdings, given the reliable evidence provided by quoted prices in an active market for Clarient’s publicly traded common stock. The Company has not elected the fair value option for its other partner company holdings, which are accounted for under the equity method or cost method, due to less readily determinable evidence of fair value for these privately held companies and due to the potential competitive disadvantage to the Company of such disclosure.

The 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.

In February 2011, the Company increased its ownership interest in MediaMath, Inc. (“MediaMath”) to 22.4%, above the 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 20).

 

Principles of Accounting for Ownership Interests in Companies

The Company’s ownership interests in its partner companies and private equity funds are accounted for using one of the following methods: consolidation, equity, cost, fair value and available-for-sale. The accounting method applied is generally determined by the degree of the Company’s influence over the entity, primarily determined by its voting interest in the entity.

In addition to holding voting and non-voting equity and debt securities, the Company also periodically makes advances to its partner companies in the form of promissory notes which are included in the Ownership interests in and advances to partner companies and funds line item in the Consolidated Balance Sheet.

Consolidation Method.    The Company generally accounts for partner companies in which it directly or indirectly owns more than 50% of the outstanding voting securities under the consolidation method of accounting. Under this method, the Company includes the partner companies’ financial statements within the Company’s Consolidated Financial Statements, and all significant intercompany accounts and transactions are eliminated. The Company reflects participation of other stockholders in the net assets and in the income or losses of these consolidated partner companies in Equity in the Consolidated Balance Sheets and in Net (income) loss attributable to noncontrolling interest in the Statements of Operations. Net (income) loss attributable to noncontrolling interest adjusts the Company’s consolidated operating results to reflect only the Company’s share of the earnings or losses of the consolidated partner company. The Company accounts for results of operations and cash flows of a consolidated partner company through the latest date in which it holds a controlling interest. If the Company subsequently relinquishes control but retains an interest in the partner company, the accounting method is adjusted to the equity, cost or fair value method of accounting, as appropriate. As of and for the year ended December 31, 2011, the Company did not hold a controlling interest in any of its partner companies.

Fair Value Method.    The Company accounted for its holdings in Clarient, formerly a publicly traded partner company, under the fair value method of accounting following its deconsolidation on May 14, 2009 and through the date of the sale of the Company’s remaining interest in Clarient in December 2010. Unrealized gains and losses on the mark-to-market of the Company’s holdings in Clarient and realized gains and losses on the sale of any holdings in Clarient were recognized in Other income (loss), net in the Consolidated Statements of Operations. As of and for the year ended December 31, 2011, the Company did not apply the fair value method to account for its holdings in any of its partner companies.

Equity Method.    The Company accounts for partner companies whose results are not consolidated, but over which it exercises significant influence, under the equity method of accounting. Whether or not the Company exercises significant influence with respect to a partner company depends on an evaluation of several factors including, among others, representation of the Company on the partner company’s board of directors and the Company’s ownership level, which is generally a 20% to 50% interest in the voting securities of a partner company, including voting rights associated with the Company’s holdings in common, preferred and other convertible instruments in the company. The Company also accounts for its interests in some private equity funds under the equity method of accounting based on its non-controlling general and limited partner interests in such funds. Under the equity method of accounting, the Company does not reflect a partner company’s financial statements within the Company’s Consolidated Financial Statements; however, the Company’s share of the income or loss of such partner company is reflected in Equity loss in the Consolidated Statements of Operations. The Company includes the carrying value of equity method partner companies in Ownership interests in and advances to partner companies and funds on the Consolidated Balance Sheets. The Company reflects its share of the income or loss of the equity method partner companies on a one quarter lag. This reporting lag could result in a delay in recognition of the impact of changes in the business or operations of these partner companies.

When the Company’s carrying value in an equity method partner company is reduced to zero, the Company records no further losses in its Consolidated Statements of Operations unless the Company has an outstanding guarantee obligation or has committed additional funding to such equity method partner company. When such equity method partner company subsequently reports income, the Company will not record its share of such income until it exceeds the amount of the Company’s share of losses not previously recognized.

Cost Method.    The Company accounts for partner companies not consolidated or accounted for under the equity method or fair value method under the cost method of accounting. Under the cost method, the Company does not include its share of the income or losses of partner companies in the Company’s Consolidated Statements of Operations. The Company includes the carrying value of cost method partner companies in Ownership interests in and advances to partner companies and funds on the Consolidated Balance Sheets.

Available-for-Sale Securities.    The Company accounts for its ownership interests in Tengion and NuPathe, both publicly traded entities at December 31, 2011, as available-for-sale securities. Available-for-sale securities are carried at fair value, based on quoted market prices, with the unrealized gains and losses, net of tax, reported as a separate component of equity. Unrealized losses are charged against net income (loss) when a decline in the fair value is determined to be other than temporary.

Accounting Estimates

The preparation of the Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and judgments that affect amounts reported in the financial statements and accompanying notes. Actual results may differ from these estimates. These estimates include the evaluation of the recoverability of the Company’s ownership interests in and advances to partner companies and funds and investments in marketable securities, income taxes, stock-based compensation and commitments and contingencies. Following the deconsolidation of Clarient on May 14, 2009, the Company no longer records goodwill, intangible assets or revenue in its consolidated financial statements. Management evaluates its estimates on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances.

Certain amounts recorded to reflect the Company’s share of income or losses of partner companies accounted for under the equity method are based on unaudited results of operations of those companies and may require adjustments in the future when audits of these entities’ financial statements are completed.

It is reasonably possible that the Company’s accounting estimates with respect to the ultimate recoverability of the carrying value of the Company’s ownership interests in and advances to partner companies and funds could change in the near term and that the effect of such changes on the financial statements could be material. At December 31, 2011, the Company believes the recorded amount of carrying value of the Company’s ownership interests in and advances to partner companies and funds is not impaired, although there can be no assurance that the Company’s future results will confirm this assessment, that a significant write-down or write-off will not be required in the future, or that a significant loss will not be recorded in the future upon the sale of a company.

Cash and Cash Equivalents and Marketable Securities

The Company considers all highly liquid instruments with an original maturity of 90 days or less at the time of purchase to be cash equivalents. Cash and cash equivalents consist of deposits that are readily convertible into cash. The Company determines the appropriate classification of marketable securities at the time of purchase and reevaluates such designation as of each balance sheet date. Held-to-maturity securities are carried at amortized cost, which approximates fair value. Marketable securities consist of held-to-maturity securities, primarily consisting of government agency bonds, commercial paper and certificates of deposits. Marketable securities with a maturity date greater than one year from the balance sheet date are considered long-term. The Company has not experienced any significant losses on cash equivalents and does not believe it is exposed to any significant credit risk on cash and cash equivalents.

 

Restricted Cash Equivalents

Restricted cash equivalents consist of certificates of deposit with various maturity dates. Pursuant to the terms of the 10.125% senior convertible debentures, due March 14, 2014, the Company placed funds in a restricted escrow account to make all scheduled interest payments on the 2014 Debentures through their maturity date (see Note 7).

Financial Instruments

The Company’s financial instruments (principally cash and cash equivalents, marketable securities, restricted cash equivalents, accounts receivable, notes receivable, accounts payable and accrued expenses) are carried at cost, which approximates fair value due to the short-term maturity of these instruments. The Company’s warrant participations are carried at fair value. The Company’s long-term debt is carried at cost. At December 31, 2011, the market value of the Company’s outstanding 2014 Debentures was approximately $61.0 million based on quoted market prices as of that date. At December 31, 2011, the market value of the Company’s outstanding 2024 Debentures approximated carrying value based on quoted market prices as of that date.

Accounting for Participating Interests in Mezzanine Loans Receivable and Related Equity Interests

In 2011, the Company acquired a 36% ownership interest in the management company and general partner of Penn Mezzanine L.P. Penn Mezzanine is a mezzanine lender focused on lower middle-market, Mid-Atlantic companies. Through its relationship with Penn Mezzanine, the Company may acquire participating interests in mezzanine loans and related equity interests of the borrowers. These interests may also include warrants to purchase common stock of the borrowers. The Company’s accounting policies for these participating interests are as follows:

Loan Participations Receivable

The Company’s participating interest in Penn Mezzanine loans are included in Loan Participations receivable on the Consolidated Balance Sheet. In connection with each financing transaction, Penn Mezzanine assesses the credit worthiness of the borrower through various standard industry metrics including leverage ratios, working capital metrics, cash flow projections and an overall evaluation of the borrower’s business model. The Company uses these analyses in making its determination to participate in any funding.

On a quarterly basis, the Company evaluates the carrying value of each loan participation receivable for impairment. A loan participation receivable is considered impaired when it is probable that the Company will be unable to collect all amounts (principal and interest) due according to the contractual terms of the participation agreement and related agreements with the borrowers. The Company maintains an allowance to provide for estimated loan losses based on evaluating known and inherent risks in the loans. The allowance is provided based upon management’s analysis of the pertinent factors underlying the quality of the loans. These factors include an analysis of the financial condition of the individual borrowers, delinquency levels, actual loan loss experience, current economic conditions and other relevant factors. The Company’s analysis includes methods to estimate the fair value of loan collateral and the existence of potential alternative sources of repayment. The Company does not accrue interest when a loan is considered impaired. All cash receipts from impaired loan are applied to reduce the original principal amount of such loan until the principal has been fully recovered and would be recognized as interest income thereafter. The allowance for loan losses at December 31, 2011 was $0.0 million.

Penn Mezzanine charges fees to borrowers for originating loans. The Company’s participating interest in these fees, net of any loan origination costs, are deferred and amortized to income using the effective interest method, over the term of the loan. If the loan is repaid prior to maturity, the remaining unamortized deferred loan origination fee is recognized in income at the time of repayment. Unamortized deferred loan origination fees are recorded as a contra asset against Loan participations receivable on the Consolidated Balance Sheets.

 

Equity Participations

The Company’s participation in equity interests acquired by Penn Mezzanine are accounted for under the cost method of accounting. On a quarterly basis, the Company evaluates the carrying value of its participation in these equity interests for possible impairment based on achievement of business plan objectives and milestones, the fair value of the equity interest relative to its carrying value, the financial condition and prospects of the underlying company and other relevant factors. The Company’s participating interests in equity interests acquired by Penn Mezzanine are included in Other assets on the Consolidated Balance Sheets.

Warrant Participations

The Company recognizes its participation in warrants acquired by Penn Mezzanine based on the fair value of the warrants at the balance sheet date. The fair values of warrant participations are bifurcated from the related loan participations receivable based on the relative fair value of the respective instruments at the acquisition date. The resulting discount is amortized to interest income over the term of the loan using the effective interest method. Any gain or loss associated with changes in the fair value of the warrants at the balance sheet date is recorded in Other income (loss), net in the Consolidated Statements of Operations. The fair value of the warrants is determined based on Level 3 inputs and is included in Other assets on the Consolidated Balance Sheets.

Property and Equipment

Property and equipment are stated at cost. Provision for depreciation and amortization is based on the lesser of the estimated useful lives of the assets or the remaining lease term (buildings and leasehold improvements, 5 to 15 years; machinery and equipment, 3 to 15 years) and is computed using the straight-line method.

Impairment of Ownership Interests In and Advances to Partner Companies and Funds

On a periodic basis, but no less frequently than quarterly, the Company evaluates the carrying value of its equity and cost method partner companies and available-for-sale securities for possible impairment based on achievement of business plan objectives and milestones, the fair value of each partner company relative to its carrying value, the financial condition and prospects of the partner company and other relevant factors. The business plan objectives and milestones the Company considers include, among others, those related to financial performance, such as achievement of planned financial results or completion of capital raising activities, and those that are not primarily financial in nature, such as hiring of key employees or the establishment of strategic relationships. Management then determines whether there has been an other than temporary decline in the value of its ownership interest in the company. Impairment is measured by the amount by which the carrying value of an asset exceeds its fair value.

The fair value of privately held companies is generally determined based on the value at which independent third parties have invested or have committed to invest in these companies or based on other valuation methods, including discounted cash flows, valuation of comparable public companies and the valuation of acquisitions of similar companies. The fair value of the Company’s ownership interests in private equity funds generally is determined based on the value of its pro rata portion of the fair value of the funds’ net assets.

Impairment charges related to equity method partner companies are included in Equity income (loss) in the Consolidated Statements of Operations. Impairment charges related to cost method partner companies and available-for-sale securities are included in Other income (loss), net in the Consolidated Statements of Operations.

The reduced cost basis of a previously impaired partner company is not written-up if circumstances suggest the value of the company has subsequently recovered.

 

Defined Contribution Plans

Defined contribution plans are contributory and cover eligible employees of the Company. The Company’s defined contribution plan allows eligible employees, as defined in the plan, to contribute to the plan up to 75% of their pre-tax compensation, subject to the maximum contributions allowed by the Internal Revenue Code. The Company makes matching contributions under the plan. Expense relating to defined contribution plans was $0.3 million in 2011, $0.3 million in 2010 and $0.4 million in 2009.

Income Taxes

The Company accounts for income taxes under the asset and liability method whereby deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The Company measures deferred tax assets and liabilities using enacted tax rates in effect for the year in which the temporary differences are expected to be recovered or settled. The Company recognizes the effect on deferred tax assets and liabilities of a change in tax rates in income in the period of the enactment date. The Company provides valuation allowances against the net deferred tax asset for amounts which are not considered more likely than not to be realized.

Net income (loss) per share attributable to Safeguard Scientifics, Inc.

The Company computes net income (loss) per share (“EPS”) using the weighted average number of common shares outstanding during each year. The Company includes in diluted EPS common stock equivalents (unless anti-dilutive) which would arise from the exercise of stock options and conversion of other convertible securities and is adjusted, if applicable, for the effect on net income (loss) of such transactions. Diluted EPS calculations adjust net income (loss) for the dilutive effect of common stock equivalents and convertible securities issued by the Company’s consolidated or equity method partner companies.

Comprehensive income (loss) attributable to Safeguard Scientifics, Inc.

Comprehensive income (loss) is the change in equity of a business enterprise during a period from non-owner sources. Excluding net income (loss), the Company’s sources of other comprehensive income (loss) are from net unrealized appreciation (depreciation) on available-for-sale securities and foreign currency translation adjustments. Reclassification adjustments result from the recognition in net income (loss) of unrealized gains or losses that were included in comprehensive income (loss) in prior periods.

Segment Information

The Company reports segment data based on the management approach which designates the internal reporting used by management for making operating decisions and assessing performance as the source of the Company’s reportable operating segments.

New Accounting Pronouncements

The Company will adopt the following new accounting standards as of January 1, 2012:

Amendment to Fair Value Measurement:    The guidance clarifies the Financial Accounting Standards Board’s (“FASB”) intent about the application of existing fair value measurements and requires enhanced disclosures, most significantly related to unobservable inputs used in a fair value measurement that is categorized within Level 3 of the fair value hierarchy. The guidance is effective prospectively during interim and annual periods beginning after December 15, 2011. The adoption of the amendment to fair value measurement is not expected to have a significant impact on the Company’s Consolidated Financial Statements.

 

Amendment to Comprehensive Income:    Under the FASB amended guidance, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income in a single continuous statement or in two separate but consecutive statements. The amended guidance eliminates the previously available option of presenting the components of other comprehensive income as part of the statement of changes in equity. The amendment is effective for fiscal years beginning after December 15, 2011 and will be applied retrospectively.

 

2.	Discontinued Operations

The following items are related to discontinued operations.

Acsis, Alliance Consulting and Laureate Pharma

In May 2008, the Company consummated a transaction (the “Bundle Transaction”) pursuant to which it sold all of its equity and debt interests in Acsis, Inc., Alliance Consulting Group Associates, Inc., Laureate Pharma, Inc., ProModel Corporation and Neuronyx, Inc. (collectively, the “Bundle Companies”).

Of the gross proceeds to the Company from the Bundle Transaction, $6.4 million was placed in escrow pending expiration of a claims period and remains in escrow as of December 31, 2011 (see Note 15).

Clarient Technology Business

In March 2007, Clarient sold its technology business and related intellectual property to Carl Zeiss MicroImaging, Inc. (“Zeiss”) for an aggregate purchase price of $12.5 million. The $12.5 million consisted of $11.0 million in cash and an additional $1.5 million in contingent purchase price, subject to the satisfaction of certain post-closing conditions through March 2009. Clarient received the contingent consideration and recorded the $1.5 million in income from discontinued operations in 2009.

Pacific Title & Art Studio

In March 2007, the Company sold Pacific Title & Art Studio for net cash proceeds of approximately $21.9 million, including $2.3 million in cash deposited into escrow. In the first quarter of 2010, the Company received the final $0.5 million in cash from the escrow account. This amount was recorded in income from discontinued operations in 2009.

 

3.	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.

 

		December 31, 2011				December 31, 2010
		(In thousands)
Equity Method:
Partner companies		$	104,545			$	50,561
Private equity funds			5,784				2,265
			110,329				52,826
Cost Method:
Private equity funds			2,984				2,908
Advances to partner companies			856				4,522
		$	114,169			$	60,256
Loan participations receivable		$	7,587			$	—
Available-for-sale securities		$	5,184			$	25,447

 

The Company recognized an impairment charge of $5.9 million in 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 in NuPathe which was previously recorded as a separate component of equity. The Company determined that the decline in value of its public holdings in NuPathe was other than temporary. Following the impairment charge, the Company’s adjusted cost basis in NuPathe was $4.9 million at December 31, 2011.

The Company recognized impairment charges totaling $1.5 million in 2011 which are 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 determined that the decline in the value of its public holdings in Tengion was other than temporary. The Company had previously recognized impairment charges of $1.1 million for the year ended December 31, 2010. Following the impairment charge, the Company’s adjusted cost basis in Tengion was $0.3 million at December 31, 2011.

There were no impairment charges related to cost method partner companies in 2011. Impairment charges related to cost method partner companies were $2.1 million and $10.1 million for the years ended December 31, 2010 and 2009, respectively. The charge in 2010 related to Tengion, prior to its classification as an available-for-sale security. The charges in 2009 included $5.8 million related to GENBAND, a former partner company, $3.9 million related to Tengion and $0.4 million related to a private equity fund.

Impairment charges related to equity method partner companies were $7.1 million, $4.8 million and $4.1 million for the years ended December 31, 2011, 2010 and 2009 respectively. The impairment charges in 2011 included $5.7 million related to Swap.com and $1.4 million related to SafeCentral, Inc. (“SafeCentral” formerly Authentium, Inc.). The impairment charges in 2010 included $1.8 million related to Molecular Biometrics, Inc. (“Molecular Biometrics”), $1.5 million related to SafeCentral, $1.1 million related to Garnet BioTherapeutics, Inc. (“Garnet”) and $0.4 million related to Acelerate, Inc. (“Acelerate”), formerly Cellumen, Inc.), a former partner company. The impairment charges in 2009 included $3.3 million related to Rubicor Medical, Inc. (“Rubicor”), a former partner company and $0.8 million related to Acelerate.

In July 2011, Portico Systems, Inc. (“Portico”), formerly an equity method partner company, was acquired by McKesson. The Company received cash proceeds in exchange for its equity interests of approximately $32.8 million, excluding $3.4 million which will be held in escrow for a period of one year. In addition, depending on the achievement of certain milestones, the Company may receive up to an additional $1.9 million after a period of one year. Portico also repaid its mezzanine loan facility with the Company in the principal amount of $5.0 million in connection with the transaction. The Company recorded a gain of $35.4 million on the transaction which is recorded in Equity income (loss) in the Consolidated Statement of Operations.

In June 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 $138.2 million, excluding cash held in escrow of $7.6 million. The Company recognized a gain on sale of $129.3 million which is reflected in Equity income (loss) in the Consolidated Statement of Operations.

In December 2010, Avid Radiopharmaceuticals, Inc. (“Avid”), formerly a cost method partner company, was acquired by Eli Lily and Company resulting in net sale proceeds to the Company of $32.3 million, excluding cash held in escrow of $3.4 million. The Company recognized a gain on the sale of $20.3 million. In addition, depending on the achievement of certain difficult milestones, the Company could receive additional proceeds of up to $58.0 million over an eight year period.

In December 2010, the Company sold its equity and debt interests in Quinnova Pharmaceuticals, Inc. (“Quinnova”) for $2.6 million, recognizing a loss on sale of $0.9 million, which is reflected in Equity income (loss) in the Consolidated Statement of Operations. The Company may realize additional proceeds of up to $1.9 million.

 

In March 2009, Clarient entered into a stock purchase agreement with Oak Investment Partners XII (“Oak”), pursuant to which Clarient agreed to sell up to an aggregate of 6.6 million shares of its Series A Convertible Preferred Stock in two or more tranches for aggregate consideration of up to $50.0 million. Each preferred share was initially convertible, at any time, into four shares of Clarient’s common stock, subject to certain adjustments. The initial closing of the Oak private placement occurred on March 26, 2009, at which time Clarient issued 3.8 million preferred shares for aggregate consideration of $29.1 million. After paying closing fees and legal expenses, Clarient used the proceeds to repay in full and terminate its revolving credit agreement with a bank and repay a portion of the outstanding balance of its credit facility with the Company.

Later during 2009, the Company publicly sold 18.4 million shares of common stock of Clarient for $61.3 million in net proceeds. The Company recognized a loss of $7.3 million on the sale, based on the net proceeds received compared to the fair value at the end of the previous quarter, which is included in Other income (loss), net in the Consolidated Statements of Operations for the year ended December 31, 2009.

In December 2010, Clarient was acquired by GE Healthcare. The Company received gross proceeds of $153.4 million in connection with the transaction and paid retention bonuses to Clarient management of $6.9 million, resulting in net proceeds of $146.5 million. The Company recognized a gain of $43.0 million on the transaction, based on the net proceeds received compared to the fair value at the end of the previous quarter which was included in Other income (loss), net in the Consolidated Statements of Operations.

For the period from January 1, 2010 through September 30, 2010, the Company recognized unrealized gains of $22.4 million on the mark-to-market of its holdings in Clarient which were included in Other income (loss), net in the Consolidated Statements of Operations. For the period from May 14, 2009 through December 31, 2009, the Company recognized unrealized gains of $19.5 million on the mark-to-market of its holdings in Clarient.

The following unaudited summarized balance sheet for Clarient at September 30, 2010 and the results of operations for the nine months ended September 30, 2010, have been compiled from the unaudited financial statements of Clarient. The results of Clarient are reported on a one quarter lag.

 

		September 30, 2010
		(In thousands)
		(unaudited)
Balance Sheet:
Current assets		$	42,758
Non-current assets			32,392
Total Assets		$	75,150
Current liabilities		$	14,241
Non-current liabilities			4,626
Redeemable preferred stock			38,586
Shareholders’ equity			17,697
Total liabilities and shareholders’equity		$	75,150

 

		Nine Months Ended September 30, 2010
		(In thousands)
		(unaudited)
Results of Operations:
Revenue		$	86,803
Operating income		$	3,564
Net income from continuing operations		$	2,914

 

The following unaudited summarized financial information for partner companies and funds accounted for under the equity method at December 31, 2011 and 2010 and for the three years ended December 31, 2011, has been compiled from the unaudited financial statements of our respective partner companies and funds and reflects certain historical adjustments. Results of operations of the partner companies and funds are excluded for periods prior to their acquisition and subsequent to their disposition. The unaudited financial information below does not include information pertaining to Clarient.

 

		As of December 31,
		2011				2010
		(In thousands)
		(unaudited)
Balance Sheets:
Current assets		$	156,497			$	131,733
Non-current assets			72,911				61,867
Total Assets		$	229,408			$	193,600
Current liabilities		$	64,568			$	64,763
Non-current liabilities			33,856				29,676
Shareholders’ equity			130,984				99,161
Total liabilities and shareholders’ equity		$	229,408			$	193,600

As of December 31, 2011, the Company’s carrying value in equity method partner companies, in the aggregate, exceeded the Company’s share of the net assets of such companies by approximately $69.3 million. Of this excess, $35.5 million was allocated to goodwill and $33.8 million was allocated to intangible assets.

 

		Year Ended December 31,
		2011				2010				2009
		(In thousands)
		(unaudited)
Results of Operations:
Revenue		$	114,264			$	238,477			$	146,291
Gross profit		$	63,009			$	162,820			$	98,626
Net loss		$	(35,563	)		$	(22,934	)		$	(50,505	)

 

4.	Acquisitions of Ownership Interests in Partner Companies and Funds

In August 2011, the Company acquired a 36% ownership interest in the management company and general partner of Penn Mezzanine for $3.9 million. Penn Mezzanine is a mezzanine lender focused on lower middle-market, Mid-Atlantic companies. The Company accounts for its interest in Penn Mezzanine under the equity method of accounting. The Company expects to deploy up to $26.1 million (including $9.7 million deployed in the fourth quarter of 2011 as described below) in additional capital over a several year period in mezzanine opportunities alongside existing and future Penn Mezzanine funds.

In December and November 2011, the Company funded an aggregate of $9.7 million for participations in certain loans and equity interests initiated by Penn Mezzanine. Included in this funding was $8.1 million for participation in loans and $1.3 million for participations in equity interests acquired by Penn Mezzanine. The Company also participated in warrants to acquire common stock of certain borrowers. The fair value of the warrants at December 31, 2011 was determined to be $0.3 million. The Company accounts for the loan portion of the participation as a loan receivable and reports these amounts as Loan participations receivable on the Consolidated Balance Sheets. The Company accounts for its participation in equity interests under the cost method and reports these amounts in Other assets on the Consolidated Balance Sheets. The Company accounts for its participation in warrants to acquire common stock at fair value and reports these amounts in Other assets on the Consolidated Balance Sheets. During the year, the Company received $0.2 million in loan origination fees. The unamortized deferred loan origination fee balance as of December 31, 2011 was $0.2 million. In addition, at December 31, 2011 the Company had recorded $0.3 million in original issue discount associated with its participation in the loans which is recorded net of Loan participations receivable in the Consolidated Balance Sheets.

In December 2011, the Company acquired a 23.9% ownership interest in Crimson Informatics, Inc. (“Crimson”) for $1.7 million. Crimson is a provider of telematics technology and statistical analysis of driving data. The Company accounts for its interest in Crimson under the equity method. The difference between the Company’s cost and its interest in the underlying net assets of Crimson was preliminarily allocated to goodwill as reflected in the carrying value in Ownership interests in and advances to partner companies and funds on the Consolidated Balance Sheets.

In December 2011, the Company acquired a 28.0% ownership interest in Hoopla Software, Inc. for $1.3 million. Hoopla helps organizations create high performance sales cultures through SaaS solutions that integrate with CRM systems. The Company accounts for its interest in Hoopla under the equity method. The difference between the Company’s cost and its interest in the underlying net assets of Hoopla was preliminarily allocated to goodwill as reflected in the carrying value in Ownership interests in and advances to partner companies and funds on the Consolidated Balance Sheets.

In November 2011, the Company acquired a 30.0% ownership interest in Medivo, Inc. (“Medivo”) for $6.3 million. Medivo is a healthcare IT company that connects patients to a nationwide network of physicians, lab service centers and home testing services. The Company accounts for its interest in Medivo under the equity method. The difference between the Company’s cost and its interest in the underlying net assets of Medivo 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 September 2011, the Company acquired a 30.1% ownership interest in Putney, Inc. (“Putney”) for $10.0 million. Putney is a specialty pharmaceutical company focused on providing generic medicines for pets. The Company accounts for its interest in Putney under the equity method. The difference between the Company’s cost and its interest in the underlying net assets of Putney was preliminarily allocated to intangible assets and goodwill as reflected in the carrying value in Ownership interests in and advances to partner companies and funds on the Consolidated Balance Sheets.

In August 2011, the Company funded $2.4 million of a convertible bridge loan to Swap.com. The Company had previously deployed an aggregate of $8.1 million in Swap.com. Swap.com is an internet based business that enables users to trade books, music, movies, video games and fashion using its proprietary trade matching software. The Company accounts for its interest in Swap.com under the equity method.

In July 2011, the Company deployed $1.2 million in MediaMath, Inc. (“MediaMath”). In February 2011, the Company deployed $9.0 million in MediaMath. In conjunction with this funding, 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 adopted the equity method of accounting for its holdings in MediaMath. See Note 20 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 and funds on the Consolidated Balance Sheets.

In June 2011, the Company acquired a 31.7% ownership interest in NovaSom, Inc. (“NovaSom”) for $20.0 million. NovaSom provides diagnostic devices and services for home testing and evaluation of sleep-disordered breathing, including obstructive sleep apnea. The Company accounts for its interest in NovaSom under the equity method. The difference between the 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 and funds 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 and funds on the Consolidated Balance Sheets.

In October and April 2011, the Company funded an aggregate of $1.4 million of a convertible bridge loan to Alverix, Inc. (“Alverix”). The Company previously deployed an aggregate of $6.3 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 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 and funds on the Consolidated Balance Sheets.

In December 2010, the Company funded a $5.0 million mezzanine debt financing to Portico Systems, Inc. (“Portico”). The Company previously deployed an aggregate of $9.3 million in cash in Portico from August 2006 through April 2009. In July 2011, Portico was acquired by McKesson resulting in net sale proceeds to the Company of $32.8 million, excluding cash held in escrow of $3.4 million. The Company accounted for its holdings in Portico under the equity method.

In December 2010, the Company deployed an additional $1.8 million in Advantedge Healthcare Solutions, Inc. (“AHS”). In March 2010, the Company funded a $1.3 million short-term loan to AHS which was repaid in May 2010. The Company previously deployed a total of $13.5 million into AHS. AHS is a provider of physician billing and practice management services and software to hospital-based physician groups, large office-based physician practices, and ambulatory surgery centers. The Company accounts for its holdings in AHS under the equity method. The difference between the Company’s cost and its interest in the underlying net assets of AHS was allocated to intangible assets and goodwill as reflected in the carrying value in Ownership interests in and advances to partner companies and funds on the Consolidated Balance Sheets.

In September 2010, the Company exercised a total of $0.6 million of warrants in Clarient. The Company sold its remaining interest in Clarient in December 2010 for net proceeds of $146.5 million, recognizing a gain on sale of $43.0 million.

In September 2010, the Company acquired a 26.5% ownership interest in Good Start Genetics, Inc. (“Good Start”) 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 September and June 2010, the Company funded an aggregate of $0.7 million in convertible bridge loans to Quinnova. The Company previously deployed $5.0 million in Quinnova in October 2009. The Company sold its equity and debt interests in Quinnova in December 2010 for $2.6 million, recognizing a loss on sale of $0.9 million. The Company accounted for its interest in Quinnova under the equity method.

In August 2010, in conjunction with NuPathe’s initial public offering, the Company deployed an additional $3.5 million in NuPathe. In April 2010, the Company funded a $2.7 million convertible bridge loan to NuPathe, which was converted to common shares in conjunction with the initial public offering. The Company previously deployed $12.0 million in NuPathe from August 2006 through August 2009. NuPathe is a specialty pharmaceutical company focused on the development and commercialization of branded therapeutics for diseases of the central nervous system, including neurological and psychiatric disorders. Following NuPathe’s initial public offering, the Company accounts for its holdings in NuPathe as available-for-sale securities and holds a 17.8% ownership interest.

In April 2010, in conjunction with Tengion’s initial public offering, the Company deployed an additional $1.5 million in Tengion. The Company previously deployed $7.5 million in Tengion in 2008. Tengion is a clinical-stage biotechnology company. It has pioneered the Organ Regeneration Platform ^TM that enables the Company to create proprietary product candidates that are intended to harness the intrinsic regenerative pathways of the body to produce a range of native-like organs and tissues. Following Tengion’s initial public offering, the Company accounts for its holdings in Tengion as available-for-sale securities and holds a 2.5% ownership interest.

In December, May and February 2009, the Company deployed an aggregate of $6.5 million in Molecular Biometrics. The Company had previously acquired an interest in Molecular Biometrics in 2008, for $3.5 million in cash, including the conversion into equity interests of $1.9 million previously advanced to the company. The Company impaired all of the carrying value of Molecular Biometrics in 2010 and no longer holds an active interest in the company. The Company accounted for its holdings in Molecular Biometrics under the equity method.

In October, May and February, 2009 the Company provided additional funding of $0.8 million to Acelerate, Inc., as part of an up to $2.5 million convertible note financing to be funded in five tranches. The Company previously acquired an interest in Acelerate in 2007, deploying $6.0 million in cash. During 2010, the assets of Acelerate, Inc. were sold to a third party for cash and future consideration based on sales milestones. The Company received no proceeds from this transaction and does not expect to receive any proceeds related to future milestones. The Company accounted for its interest in Acelerate under the equity method.

In 2009 and 2008, the Company deployed an aggregate of $4.0 million in Garnet. The Company accounted for its holdings in Garnet under the equity method. In the third quarter of 2010, the Company impaired the carrying value of Garnet to zero.

In 2009 and 2007, the Company deployed an aggregate of $12.0 million in Avid for a 13.7% ownership interest. In December 2010, Avid was acquired by Eli Lily and Company resulting in net sale proceeds to the Company of $32.3 million, excluding cash held in escrow of $3.4 million. The Company accounted for its holdings in Avid under the cost method.

In March 2009, the Company deployed an additional $2.0 million in Bridgevine, Inc. (“Bridgevine”). The Company had previously acquired an interest in Bridgevine in 2007 for $8.0 million. Bridgevine is an internet marketing company that enables online consumers to compare and purchase digital services, including internet, phone, VoIP, TV, wireless, music, and entertainment. The Company accounts for its holdings in Bridgevine under the equity method. The difference between the Company’s cost and its interest in the underlying net assets of Bridgevine was allocated to intangible assets and goodwill as reflected in the carrying value in Ownership interests in and advances to partner companies and funds on the Consolidated Balance Sheets.

 

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 December 31, 2011 and 2010:

 

						Fair Value Measurement at
		Carrying Value				December 30, 2011
						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
Marketable securities — held-to-maturity:
Commercial paper		$	42,919			$	42,919			$	—			$	—
U.S. Treasury Bills			17,555				17,555				—				—
Government agency bonds			66,422				66,422				—				—
Corporate bonds			1,015				1,015
Certificates of deposit			30,187				30,187				—				—
		$	158,098			$	158,098			$	—			$	—

 

 

						Fair Value Measurement at
		Carrying Value				December 31, 2010
						Level 1				Level 2				Level 3
		(in thousands)
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				—				—
Government agency bonds			2,996				2,996				—				—
		$	42,411			$	42,411			$	—			$	—

As of December 31, 2011, $158.1 million of marketable securities had contractual maturities which were less than one year and $16.3 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’s warrant participations are carried at fair value. The value of the Company’s holdings in warrant participations is measured by reference to Level 3 inputs. The inputs and valuation techniques used include discounted cash flows and valuation of comparable public companies.

The Company recorded an impairment charge of $5.7 million related to Swap.com in 2011 measured as the amount by which Swap.com’s carrying value exceeded its estimated fair value. The fair market value of the Company’s interest in Swap.com was determined to be zero based on Level 3 inputs as defined above. The inputs and valuation techniques used include discounted cash flows and valuation of comparable public companies.

Following NuPathe’s initial public offering, the Company accounts for its holdings in NuPathe as available-for-sale securities. The Company recognized an impairment charge of $5.9 million in 2011 representing the unrealized loss on the mark-to-market of its ownership in NuPathe which was previously recorded as a separate component of equity. 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.

The Company recorded an impairment charge of $1.4 million related to SafeCentral in 2011 measured as the amount by which SafeCentral’s carrying value exceed its estimated fair value. The fair market value of the Company’s interest in SafeCentral was determined to be $0.8 million based on Level 3 inputs as defined above. The inputs and valuation techniques used include discounted cash flows and valuation of comparable public companies.

Following Tengion’s initial public offering, the Company accounts for its holdings in Tengion as available-for-sale securities. The Company recognized impairment charges of $1.5 million in 2011, 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 recognized impairment charges of $1.1 million related to Tengion in 2010. In each case, 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.

 

Prior to its sale in December 2010, the Company’s holdings in Clarient 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.

As described in Note 7, in 2010, the Company recognized a loss on exchange of its convertible senior debentures. The fair value of the newly issued 10.125% convertible senior debentures was determined at the exchange date based on Level 3 inputs using a convertible bond valuation model.

As described in Note 3, the Company recognized impairment charges of $2.1 million related to a cost method partner company and $4.8 million related to equity method partner companies during the year ended December 31, 2010 measured as the amount by which the partner companies’ carrying values exceeded their respective estimated fair values. The inputs and valuation techniques used include discounted cash flows and valuation of comparable public companies.

 

6.	Property and Equipment

Property and equipment consisted of the following:

 

		As of December 31,
		2011				2010
		(In thousands)
Building and improvements		$	547			$	503
Machinery and equipment			997				985
			1,544				1,488
Accumulated depreciation			(1,316	)			(1,193	)
		$	228			$	295

 

7.	Convertible Debentures and Credit Arrangements

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

 

		As of December 31,
		2011				2010
		(In thousands)
Convertible senior debentures due 2024		$	441			$	31,289
Convertible senior debentures due 2014			45,253				44,630
			45,694				75,919
Less: current portion			—				(31,289	)
Convertible senior debentures — non-current		$	45,694			$	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 December 31, 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 December 31, 2011 was $15.79. 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 December 31, 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. At the time of issuance, 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. During 2011 and 2010, interest payments of $4.8 million and $2.2 million, respectively, were made out of the restricted escrow account and are considered non-cash investing activities. Including accrued interest, a total of $12.3 million was reflected in Restricted cash equivalents on the Consolidated Balance Sheet at December 31, 2011, of which $5.1 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:

 

Ÿ

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;

 

Ÿ

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;

 

Ÿ

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 December 31, 2011 was $15.79. 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 December 31, 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 December 31, 2011, the fair value of the $46.9 million outstanding 2014 Debentures was approximately $61.0 million based on quoted market prices as of such date. At December 31, 2011, the carrying amount of the equity component was $10.8 million, the principal amount of the liability component was $46.9 million, the unamortized discount was $1.7 million and the net carrying value of the liability component was $45.2 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 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 December 31, 2011 was $43.7 million.

 

8.	Accrued Expenses and Other Current Liabilities

Accrued expenses consisted of the following:

 

		As of December 31,
		2011				2010
		(In thousands)
Accrued interest		$	1,403			$	1,640
Other			2,287				2,583
		$	3,690			$	4,223

 

9.

Equity

Preferred Stock

Shares of preferred stock, par value $0.10 per share, are voting and are issuable in one or more series with rights and preferences as to dividends, redemption, liquidation, sinking funds and conversion determined by the Board of Directors. At December 31, 2011 and 2010, there were one million shares authorized and none outstanding.

Shareholders’ Rights Plan

In February 2000, the Company adopted a shareholders’ rights plan. Under the plan, each shareholder of record on March 24, 2000 received the right to purchase 1/1000 of a share of the Company’s Series A Junior Participating Preferred Stock at the rate of one right for each share of the Company’s common stock then held of record. Each 1/1000 of a share of the Company’s Series A Junior Participating Preferred Stock is designed to be equivalent in voting and dividend rights to one share of the Company’s common stock. The rights would have become exercisable only if a person or group acquired beneficial ownership of 15% or more of the Company’s common stock or commenced a tender or exchange offer that would have resulted in such a person or group owning 15% or more of the Company’s common stock. This plan expired on March 1, 2010.

 

10.	Stock-Based Compensation

Equity Compensation Plans

Under the amended and restated 2004 Equity Compensation Plan, employees, executive officers, directors and consultants are eligible for grants of stock options, restricted stock awards, stock appreciation rights, stock units, performance units and other stock-based awards. The 2004 Equity Compensation Plan has 2.2 million shares authorized for issuance. The 2001 Associates Equity Compensation Plan, with 0.9 million shares authorized for issuance, and the 1999 Equity Compensation Plan, with 1.5 million shares authorized for issuance, expired by their terms and no further grants may be made under those plans. During 2011, the Company issued 85 thousand options outside of existing plans as inducement awards in accordance with New York Stock Exchange rules.

To the extent allowable, service-based awards are incentive stock options. Options granted under the plans are at prices equal to or greater than the fair market value at the date of grant. Upon exercise of stock options, the Company issues shares first from treasury stock, if available, then from authorized but unissued shares. At December 31, 2011, the Company had reserved 4.3 million shares of common stock for possible future issuance under its equity compensation plans.

Classification of Stock-Based Compensation Expense

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

 

		Year Ended December 31,
		2011				2010				2009
						(In thousands)
Cost of sales		$	—			$	—			$	49
Selling, general and administrative			3,052				3,777				3,776
		$	3,052			$	3,777			$	3,825

At December 31, 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 years ended December 31, 2011, 2010 and 2009, the Company did not issue any market-based option awards to employees. During the years ended December 31, 2011, 2010 and 2009, respectively, 110 thousand, 21 thousand and 16 thousand market-based options vested based on achievement of market capitalization targets. During the years ended December 31, 2011, 2010 and 2009, respectively, 125 thousand, 10 thousand and 67 thousand market-based options were cancelled or forfeited. The Company recorded compensation expense related to these awards of $1.2 million, $1.7 million and $1.5 million during the years ended December 31, 2011, 2010 and 2009, respectively. Depending on the Company’s stock performance, the maximum number of unvested shares at December 31, 2011 attainable under these grants was 1.0 million shares.

Performance-based awards entitle participants to vest in a number of awards determined by achievement by the Company of target capital returns based on net cash proceeds received by the Company upon the sale, merger or other exit transaction of certain identified partner companies. Vesting may occur, if at all, once per year. The requisite service periods for the performance-based awards are based on the Company’s estimate of when the performance conditions will be met. Compensation expense is recognized for performance-based awards for which the performance condition is considered probable of achievement. Compensation expense is recognized over the requisite service periods using the straight-line method but is accelerated if capital return targets are achieved earlier than estimated. During the years ended December 31, 2011, 2010 and 2009, respectively, the Company issued 193 thousand, 130 thousand and 155 thousand performance-based option awards to employees. During the year ended December 31, 2011, 56 thousand options vested based on the achievement of capital return targets. During the years ended December 31, 2010 and 2009, no options vested based on the achievement of capital returns targets. During the years ended December 31, 2011 and 2010, respectively, 108 thousand and six thousand performance-based option awards were canceled or forfeited. The Company recorded compensation expense related to these option awards of $0.3 million, $0.1 million and $0.1 million for the years ended December 31, 2011, 2010 and 2009, respectively. The maximum number of unvested shares at December 31, 2011 attainable under these 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 years ended December 31, 2011, 2010 and 2009, respectively, the Company issued 121 thousand, 95 thousand and 113 thousand service-based option awards to employees. During the years ended December 31, 2011, 2010 and 2009, respectively, 60 thousand, nine thousand and 231 thousand service-based options were canceled or forfeited. The Company recorded compensation expense related to these awards of $0.8 million, $1.2 million and $1.0 million during the years ended December 31, 2011, 2010 and 2009, respectively.

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 is 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. Assumptions used in the valuation of options granted in each period were as follows:

 

		Year Ended December 31,
		2011		2010		2009
Service-Based Awards
Dividend yield		0%		0%		0%
Expected volatility		57%		58%		59%
Average expected option life		5 years		5 years		5 years
Risk-free interest rate		1.4%		2.0%		2.7%

 

 

		Year Ended December 31,
		2011		2010		2009
Performance-Based Awards
Dividend yield		0%		0%		0%
Expected volatility		57%		58%		59%
Average expected option life		5.8 years		4.9 years		4.9 years
Risk-free interest rate		0.9%		2.0%		2.7%

The weighted-average grant date fair value of options issued by the Company during the years ended December 31, 2011, 2010 and 2009 was $8.28, $7.42 and $5.22 per share, respectively.

Option activity of the Company is summarized below:

 

		Shares				Weighted Average Exercise Price				Weighted Average Remaining Contractual Life				Aggregate Intrinsic Value
		(In thousands)								(In years)				(In thousands)
Outstanding at December 31, 2008			3,336			$	10.05
Options granted			267				9.99
Options exercised			(34	)			7.77
Options canceled/forfeited			(301	)			16.21
Outstanding at December 31, 2009			3,268				9.51
Options granted			224				14.65
Options exercised			(121	)			9.16
Options canceled/forfeited			(50	)			12.13
Outstanding at December 31, 2010			3,321				9.83
Options granted			314				16.55
Options exercised			(124	)			11.32
Options canceled/forfeited			(293	)			11.03
Outstanding at December 31, 2011			3,218				10.32				3.9			$	17,480
Options exercisable at December 31, 2011			1,403				9.65				2.8				8,379
Options vested and expected to vest at December 31, 2011			2,720				10.03				3.4				15,454
Shares available for future grant			680

The total intrinsic value of options exercised for the years ended December 31, 2011, 2010 and 2009 was $0.9 million, $0.4 million and $0.1 million, respectively.

At December 31, 2011, total unrecognized compensation cost related to non-vested stock options granted under the plans for service-based awards was $0.8 million. That cost is expected to be recognized over a weighted-average period of 2.5 years.

At December 31, 2011, total unrecognized compensation cost related to non-vested stock options granted under the plans for market-based awards was $0.4 million. That cost is expected to be recognized over a weighted-average period of 1.6 years, but would be accelerated if market capitalization targets are achieved earlier than estimated.

At December 31, 2011, total unrecognized compensation cost related to non-vested stock options granted under the plans for performance-based awards was $2.5 million. That cost is expected to be recognized over a weighted-average period of 2.0 years but would be accelerated if stock price targets are achieved earlier than estimated.

 

During the years ended December 31, 2011, 2010 and 2009, respectively, the Company issued 61 thousand, 74 thousand and 103 thousand performance-based stock units to employees which vest based on achievement by the Company of target capital returns based on net cash proceeds received by the Company on the sale, merger or other exit transaction of certain identified partner companies, as described above related to performance-based option awards. Performance-based stock units represent the right to receive shares of the Company’s common stock, on a one-for-one basis. During the years ended December 31, 2011, 2010 and 2009, respectively, the Company issued 20 thousand, 25 thousand and 197 thousand restricted shares to employees. The restricted shares issued vest 25% on the first anniversary of grant and the remaining 75% thereafter in equal monthly installments over the next two or three years, as applicable. During the year ended December 31, 2010, the Company issued 53 thousand unrestricted shares to employees in connection with the 2009 management incentive plan payments earned by certain senior employees.

The Company issued deferred stock units during the years ended December 31, 2011, 2010 and 2009, to all non-employee directors as annual service grants and to directors who deferred all or a portion of directors’ fees earned. 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 generally vest one year following the grant date. Deferred stock units represent the right to receive shares of the Company’s common stock, on a one-for-one basis, following termination of employment or service, death or permanent disability. During the years ended December 31, 2011, 2010 and 2009, respectively, the Company issued 28 thousand, 32 thousand and 70 thousand deferred stock units to directors.

During the years ended December 31, 2010, and 2009, respectively, the Company granted two thousand restricted shares and 12 thousand stock options to members of its advisory boards, which comprise non-employees. Such awards generally vest within one year following grant.

Total compensation expense for deferred stock units, performance-based stock units and restricted stock was approximately $0.7 million, $0.8 million and $0.4 million for the years ended December 31, 2011, 2010 and 2009, respectively. Unrecognized compensation expense related to deferred stock units, performance stock units and restricted stock at December 31, 2011 was $2.5 million. The total fair value of deferred stock units, performance stock units and restricted stock vested during the years ended December 31, 2011, 2010 and 2009 was $2.0 million, $1.8 million and $0.5 million, respectively.

Deferred stock unit, performance-based stock unit and restricted stock activity is summarized below:

 

		Shares				Weighted Average Grant Date Fair Value
		(In thousands)
Unvested at December 31, 2009			317			$	5.95
Granted			133				14.80
Vested			(147	)			5.80
Forfeited			(5	)			7.73
Unvested at December 31, 2010			298				10.09
Granted			109				15.93
Vested			(116	)			8.16
Forfeited			(38	)			12.73
Unvested at December 31, 2011			253				13.10

Stock based compensation expense for Clarient prior to its deconsolidation was included in the Company’s consolidated results of operations. During the period from January 1, 2009 through May 14, 2009, the Company recognized stock-based compensation related to Clarient of $0.8 million.

 

11.    Other

Income (Loss), Net

 

		Year Ended December 31,
		2011				2010				2009
						(In thousands)
Loss on exchange of convertible debentures		$	—			$	(8,289	)		$	—
Gain on repurchase of convertible debentures, net			—				—				457
Gain (loss) on sale of companies and funds, net			—				20,291				(7,338	)
Gain on distributions from private equity funds			—				—				30
Gain on deconsolidation of Clarient			—				—				105,991
Gain on sale of Clarient			—				42,956				—
Gain on mark-to-market of holdings in Clarient			—				22,394				19,502
Impairment charges on cost method partner companies			—				(2,146	)			(10,079	)
Other than temporary impairment on available-for-sale securities			(7,451	)			(1,108	)			—
Other			1,306				711				318
		$	(6,145	)		$	74,809			$	108,881