Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended March 31, 2009
Commission File Number 1-5620
Safeguard Scientifics, Inc.
(Exact name of registrant as specified in its charter)
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Pennsylvania |
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23-1609753 |
(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer ID No.) |
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435 Devon Park Drive
Building 800
Wayne, PA
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19087 |
(Address of principal executive offices)
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(Zip Code) |
(610) 293-0600
Registrants telephone number, including area code
Indicate by check mark whether the
Registrant (1) has filed all reports
required to be filed by Section 13
or 15 (d) of the Securities and
Exchange Act of 1934 during the
preceding 12 months (or for such
shorter period that the registrant
was required to file such reports)
and (2) has been subject to such
filing requirements for the past 90
days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check
one):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the Registrant is a shell company (as defined in Exchange Act Rule 12b-2).
Yes o No þ
Number of shares outstanding as of May 8, 2009
Common Stock 122,029,312
6
SAFEGUARD SCIENTIFICS, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
2
SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED BALANCE SHEETS
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March 31, |
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December 31, |
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2009 |
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2008 |
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(In thousands except per share data) |
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(unaudited) |
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ASSETS |
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Current Assets: |
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Cash and cash equivalents |
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$ |
89,049 |
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$ |
75,051 |
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Cash held in escrow and restricted cash |
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7,747 |
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6,433 |
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Marketable securities |
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6,434 |
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14,701 |
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Restricted marketable securities |
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1,990 |
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Accounts receivable, less allowances ($7,173 2009; $8,045 2008) |
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25,486 |
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20,465 |
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Prepaid expenses and other current assets |
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3,345 |
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1,507 |
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Total current assets |
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132,061 |
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120,147 |
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Property and equipment, net |
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14,240 |
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12,369 |
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Ownership interests in and advances to companies |
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82,929 |
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85,561 |
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Goodwill |
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12,729 |
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12,729 |
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Cash held in escrow and restricted cash |
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1,976 |
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501 |
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Other |
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1,088 |
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1,095 |
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Total Assets |
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$ |
245,023 |
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$ |
232,402 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Current Liabilities: |
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Current portion of credit line borrowings |
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$ |
5,887 |
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$ |
14,104 |
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Current maturities of long-term debt |
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607 |
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263 |
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Accounts payable |
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4,098 |
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3,337 |
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Accrued compensation and benefits |
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4,334 |
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5,758 |
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Accrued expenses and other current liabilities |
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8,169 |
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8,285 |
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Total current liabilities |
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23,095 |
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31,747 |
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Long-term debt |
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1,152 |
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345 |
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Other long-term liabilities |
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9,302 |
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9,600 |
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Convertible senior debentures |
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86,000 |
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86,000 |
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Commitments and contingencies |
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Shareholders Equity: |
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Preferred stock, $0.10 par value; 1,000 shares authorized |
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Common stock, $0.10 par value; 500,000 shares authorized;
122,029 and 121,589 shares issued and outstanding in 2009 and
2008, respectively |
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12,203 |
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12,159 |
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Additional paid-in capital |
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777,357 |
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763,323 |
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Accumulated deficit |
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(678,952 |
) |
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(669,526 |
) |
Accumulated other comprehensive income (loss) |
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(28 |
) |
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(29 |
) |
Treasury stock, at cost |
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(1,217 |
) |
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Total Safeguard Scientifics, Inc. shareholders equity |
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110,580 |
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104,710 |
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Noncontrolling interest in subsidiary |
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14,894 |
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Total shareholders equity |
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125,474 |
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104,710 |
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Total Liabilities and Shareholders Equity |
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$ |
245,023 |
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$ |
232,402 |
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See Notes to Consolidated Financial Statements.
3
SAFEGUARD
SCIENTIFICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
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Three Months Ended March 31, |
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2009 |
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2008 |
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(In thousands except per share data) |
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(Unaudited) |
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Revenue |
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$ |
22,447 |
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$ |
15,886 |
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Operating Expenses: |
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Cost of sales |
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8,966 |
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7,397 |
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Selling, general and administrative |
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17,009 |
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13,956 |
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Total operating expenses |
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25,975 |
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21,353 |
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Operating loss |
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(3,528 |
) |
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(5,467 |
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Other income (loss), net |
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(245 |
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360 |
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Recovery related party |
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1 |
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Interest income |
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157 |
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929 |
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Interest expense |
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(926 |
) |
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(1,374 |
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Equity loss |
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(5,513 |
) |
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(6,614 |
) |
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Net loss from continuing operations before income taxes |
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(10,055 |
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(12,165 |
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Income tax (expense) benefit |
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Net loss from continuing operations |
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(10,055 |
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(12,165 |
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Income (loss) from discontinued operations, net of tax |
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1,500 |
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(7,078 |
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Net loss |
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(8,555 |
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(19,243 |
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Net (income) loss attributable to noncontrolling interest |
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(871 |
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389 |
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Net loss attributable to Safeguard Scientifics, Inc. |
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$ |
(9,426 |
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$ |
(18,854 |
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Basic and Diluted Income (Loss) Per Share: |
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Net loss from continuing operations attributable to Safeguard Scientifics, Inc. common shareholders |
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$ |
(0.08 |
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$ |
(0.10 |
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Net income (loss) from discontinued operations attributable to Safeguard Scientifics, Inc. common
shareholders |
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(0.05 |
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Net loss attributable to Safeguard Scientifics, Inc. common shareholders |
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$ |
(0.08 |
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$ |
(0.15 |
) |
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Shares used in computing basic and diluted income (loss) per share |
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121,645 |
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122,996 |
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Amounts attributable to Safeguard Scientifics, Inc. common shareholders: |
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Loss from continuing operations |
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$ |
(10,321 |
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$ |
(11,778 |
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Income (loss) from discontinued operations |
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895 |
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(7,076 |
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Net loss attributable to Safeguard Scientifics, Inc. |
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$ |
(9,426 |
) |
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$ |
(18,854 |
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See Notes to Consolidated Financial Statements.
4
SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
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Three Months Ended March 31, |
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2009 |
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2008 |
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(In thousands) (Unaudited) |
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Cash Flows from Operating Activities: |
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Cash flows from operating activities of continuing operations |
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$ |
(6,816 |
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$ |
(3,437 |
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Cash flows from operating activities of discontinued operations |
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(2,871 |
) |
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Net cash used in operating activities |
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(6,816 |
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(6,308 |
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Cash Flows from Investing Activities: |
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Advances to partner companies |
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(250 |
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Acquisitions of ownership interests in partner companies and funds, net of cash acquired |
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(3,268 |
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(2,841 |
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Repayment of note receivable-related party, net |
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1 |
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Increase in marketable securities |
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(5,783 |
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(2,224 |
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Decrease in marketable securities |
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14,050 |
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296 |
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Increase in restricted cash, net |
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(1,953 |
) |
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Capital expenditures |
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(1,783 |
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(1,550 |
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Cash flows from investing activities of discontinued operations |
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(2,091 |
) |
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Net cash provided by (used in) investing activities |
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1,013 |
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(8,409 |
) |
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Cash Flows from Financing Activities: |
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Borrowings on revolving credit facilities |
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15,945 |
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10,543 |
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Repayments on revolving credit facilities |
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(24,162 |
) |
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(15,540 |
) |
Borrowings on term debt |
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322 |
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Repayments on term debt |
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(64 |
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(2,419 |
) |
Issuance of subsidiary equity, net |
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28,082 |
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217 |
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Cash flows from financing activities of discontinued operations |
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(216 |
) |
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Net cash provided by (used in) financing activities |
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19,801 |
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(7,093 |
) |
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Net Increase (Decrease) in Cash and Cash Equivalents |
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13,998 |
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(21,810 |
) |
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Changes in Cash and Cash Equivalents from, and advances to Acsis, Alliance Consulting
and Laureate Pharma included in assets of discontinued operations |
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1,019 |
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13,998 |
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(20,791 |
) |
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Cash and Cash Equivalents at beginning of period |
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75,051 |
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96,201 |
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Cash and Cash Equivalents at end of period |
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$ |
89,049 |
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$ |
75,410 |
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See Notes to Consolidated Financial Statements.
5
SAFEGUARD
SCIENTIFICS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
(In
thousands)
(Unaudited)
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Safeguard Scientifics, Inc. Shareholders |
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Accumulated |
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Other |
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Comprehensive |
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Additional |
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Accumulated |
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Income |
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Common Stock |
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Paid-In |
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Treasury Stock |
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Noncontrolling |
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Total |
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Deficit |
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(Loss) |
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Shares |
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Amount |
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Capital |
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Shares |
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Amount |
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Interest |
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(In thousands) |
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Balance December 31, 2008 |
|
$ |
104,710 |
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|
$ |
(669,526 |
) |
|
$ |
(29 |
) |
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|
121,589 |
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|
$ |
12,159 |
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|
$ |
763,323 |
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|
929 |
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|
$ |
(1,217 |
) |
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$ |
|
|
Net income (loss) |
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(8,555 |
) |
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|
(9,426 |
) |
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|
871 |
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Impact of subsidiary equity
transactions |
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28,082 |
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|
14,059 |
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|
14,023 |
|
Issuance of restricted stock, net |
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|
71 |
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|
|
|
|
|
|
440 |
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|
44 |
|
|
|
(1,190 |
) |
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|
(929 |
) |
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|
1,217 |
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Stock-based compensation expense |
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|
1,165 |
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1,165 |
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Other comprehensive income |
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1 |
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1 |
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|
Balance March 31, 2009 |
|
$ |
125,474 |
|
|
$ |
(678,952 |
) |
|
$ |
(28 |
) |
|
|
122,029 |
|
|
$ |
12,203 |
|
|
$ |
777,357 |
|
|
|
|
|
|
$ |
|
|
|
$ |
14,894 |
|
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|
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|
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6
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The accompanying unaudited interim Consolidated Financial Statements of Safeguard Scientifics,
Inc. (the Company) were prepared in accordance with accounting principles generally accepted in
the United States of America and the interim financial statements rules and regulations of the SEC.
In the opinion of management, these statements include all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the Consolidated Financial Statements.
The interim operating results are not necessarily indicative of the results for a full year or for
any interim period. Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted in the United
States of America have been condensed or omitted pursuant to such rules and regulations relating to
interim financial statements. The Consolidated Financial Statements included in this Form 10-Q
should be read in conjunction with Managements Discussion and Analysis of Financial Condition and
Results of Operations included elsewhere in this Form 10-Q and included together with the Companys
Consolidated Financial Statements and Notes thereto included in the Companys 2008 Annual Report on
Form 10-K.
2. BASIS OF PRESENTATION
The Consolidated Financial Statements include the accounts of the Company and its partner
companies in which the Company owned more than 50% of the outstanding voting securities during the
periods presented.
During the three months ended March 31, 2009, the Companys voting interest in Cellumen, Inc.
(Cellumen) increased to 51.4%, on an as-converted basis, from 40.3%. Due to the substantive
participating rights of the minority shareholders in the significant operating decisions of
Cellumen, the Company continues to account for its holdings in Cellumen under the equity method.
See Note 15 for additional information.
The Companys Consolidated Statements of Operations and Cash Flows for the three months ended
March 31, 2009 and 2008 include Clarient, Inc. (Clarient) in continuing operations. During 2008,
certain consolidated partner companies were sold and are reported in discontinued operations. See
Note 3.
3. DISCONTINUED OPERATIONS
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. During
March 2009, Clarient received correspondence from Zeiss which acknowledged the satisfaction of the
post-closing conditions and the related $1.5 million payment due. In April 2009, Clarient received
$1.5 million from Zeiss which was recorded in income from discontinued operations within the
Consolidated Statement of Operations for the three months ended March 31, 2009.
Acsis, Alliance Consulting and Laureate Pharma
In May 2008, the Company consummated a transaction (the Bundle Sale) pursuant to which it
sold all of its equity and debt interests in Acsis, Inc. (Acsis), Alliance Consulting Group
Associates, Inc. (Alliance Consulting), Laureate Pharma, Inc. (Laureate Pharma), ProModel
Corporation (ProModel) and Neuronyx, Inc. (Neuronyx) (collectively, the Bundle Companies).
Of the companies included in the Bundle Sale, Acsis, Alliance Consulting and Laureate Pharma
were consolidated partner companies; Neuronyx and ProModel were minority-owned partner companies.
The Company has presented the results of operations of Acsis, Alliance Consulting and Laureate
Pharma as discontinued operations for all periods presented.
In the first quarter of 2008, the Company recognized an impairment loss of $3.6 million to
write down the aggregate carrying value of the Bundle Companies to the total anticipated proceeds,
less estimated costs to complete the Bundle Sale.
7
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The gross proceeds to the Company from the Bundle Sale were $74.5 million, of which $6.4
million was placed in escrow pending expiration of a claims period (see Note 16), plus amounts
advanced to certain of the Bundle Companies during the time between the signing of the Bundle Sale
agreement and its consummation. Guarantees of certain Bundle Company credit facilities by the
Company of $31.5 million were eliminated upon the closing of the Bundle Sale.
Results of all discontinued operations were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
|
|
(unaudited) |
|
Revenue |
|
$ |
|
|
|
$ |
33,697 |
|
Operating expenses |
|
|
|
|
|
|
(36,190 |
) |
Impairment of carrying value |
|
|
|
|
|
|
(3,634 |
) |
Other |
|
|
|
|
|
|
(493 |
) |
|
|
|
|
|
|
|
Loss from operations |
|
|
|
|
|
|
(6,620 |
) |
Gain (loss) on disposal, net of tax |
|
|
1,500 |
|
|
|
(458 |
) |
|
|
|
|
|
|
|
Income (loss) from discontinued operations |
|
$ |
1,500 |
|
|
$ |
(7,078 |
) |
|
|
|
|
|
|
|
4. SUBSIDIARY EQUITY TRANSACTION
On March 25, 2009, Clarient entered into a stock purchase agreement with Oak Investment
Partners XII (Oak), pursuant to which Clarient agreed to sell up to an aggregate of 6.6 million
shares of its Series A Convertible Preferred Stock in two or more tranches for aggregate
consideration of up to $50.0 million. Each preferred share is initially convertible, at any time,
into four shares of Clarients common stock, subject to adjustments. The initial closing of the
Oak private placement occurred on March 26, 2009, at which time Clarient issued an aggregate of 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. Upon the consummation of the initial closing, the Companys ownership of issued and
outstanding voting securities (on an as-converted basis) decreased to 50.2%.
Upon the second closing which is expected to occur in May 2009, Clarient will sell an
additional 1.4 million preferred shares for approximately $10.9 million. The second closing is
contingent upon Clarient complying with all of the conditions for closing as set forth in the
purchase agreement, including Clarients obligation to obtain stockholder approval of the issuance
of the preferred shares. Clarient expects to use a portion of the proceeds from the second closing
to repay in full and terminate the subordinated revolving credit line provided by the Company and
to use the remainder to support its working capital requirements.
The Company has accounted for the change in the Companys ownership interest in Clarient as an
equity transaction. As a result, the Company recorded a $14.1 million credit to additional paid-in
capital in the first quarter of 2009 which represents the Companys increase in its investment in
Clarient as a result of the Oak investment. In addition, the Company recorded an additional
noncontrolling interest of $14.0 million which represents the increase in noncontrolling interests
as a result of the Oak investment. Upon the second closing, the Companys ownership of issued and
outstanding voting securities, on an as-converted basis, is expected to decrease from 50.2% to
47.3% and the Company will deconsolidate its holdings in Clarient at the date.
8
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. MARKETABLE SECURITIES
Marketable securities included the following:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
|
|
(unaudited) |
|
|
|
|
|
Held-to-maturity: |
|
|
|
|
|
|
|
|
Commercial paper |
|
$ |
1,296 |
|
|
$ |
1,551 |
|
Restricted U.S. Treasury securities |
|
|
|
|
|
|
1,990 |
|
U.S. Treasury Bills |
|
|
1,992 |
|
|
|
499 |
|
Government agency bonds |
|
|
2,846 |
|
|
|
351 |
|
Certificates of deposit |
|
|
300 |
|
|
|
12,300 |
|
|
|
|
|
|
|
|
|
|
$ |
6,434 |
|
|
$ |
16,691 |
|
|
|
|
|
|
|
|
As of March 31, 2009, the contractual maturities of the marketable securities were less than
one year.
Held-to-maturity securities are carried at amortized cost, which, due to the short-term
maturity of these instruments, approximates fair value using quoted prices in active markets for
identical assets or liabilities, defined as Level 1 inputs under SFAS No. 157.
6. RECENT ACCOUNTING PRONOUNCEMENTS
In April 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position
(FSP) FAS 142-3, Determination of the Useful Life of Intangible Assets. FSP FAS 142-3 amends
the factors that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under Statement 142. FSP FAS 142-3 is
effective for fiscal years beginning after December 15, 2008. The adoption of FSP FAS 142-3 did
not have a material impact on the Companys Consolidated Financial Statements.
In November 2008, the FASBs Emerging Issues Task Force (EITF) reached a consensus on EITF
Issue No. 08-6, Equity Method Accounting Considerations. EITF 08-6 continues to follow the
accounting for the initial carrying value of equity method investments in APB Opinion No. 18, The
Equity Method of Accounting for Investments in Common Stock, which is based on a cost
accumulation model and generally excludes contingent consideration. EITF 08-6 also specifies that
other-than-temporary impairment testing by the investor should be performed at the investment
level and that a separate impairment assessment of the underlying assets is not required. An
impairment charge by the investee should result in an adjustment of the investors basis of the
impaired asset for the investors pro-rata share of such impairment. In addition, EITF 08-6
reached a consensus on how to account for an issuance of shares by an investee that reduces the
investors ownership share of the investee. An investor should account for such transactions as if
it had sold a proportionate share of its investment with any gains or losses recorded through
earnings. EITF 08-6 also addresses the accounting for a change in an investment from the equity
method to the cost method after adoption of Statement 160. EITF 08-6 affirms the existing guidance
in APB 18, which requires cessation of the equity method of accounting and application of SFAS No.
115, Accounting for Certain Investments in Debt and Equity Securities, or the cost method under
APB 18 as appropriate. EITF 08-6 is effective for fiscal years beginning on or after December 15,
2008. The adoption of EITF 08-6 did not have a material impact on the Companys Consolidated
Financial Statements.
In June 2008, the EITF ratified Issue No. 07-5, Determining Whether an Instrument (or
Embedded Feature) Is Indexed to an Entitys Own Stock (EITF 07-5). EITF 07-5 clarifies how to
determine whether certain instruments or features were indexed to an entitys own stock. The
consensus will replace EITF 01-6 as a critical component of the literature applied to evaluating
financial instruments for debt or equity classification and embedded features for bifurcation as
derivatives. EITF 07-5 is effective for financial statements issued for fiscal years beginning
after December 15, 2008, and interim periods within those fiscal years. The Company is currently
analyzing the impact on the Companys Consolidated Financial Statements.
9
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In May 2008, the FASB issued FSP No. APB 14-1, Accounting for Convertible Debt Instruments
That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (FSP APB 14-1).
FSP APB 14-1 requires the issuer of convertible debt instruments with cash settlement features to
separately account for the liability and equity components of the instrument. The debt is
recognized at the present value of its cash flows discounted using the issuers nonconvertible debt
borrowing rate. The equity component is recognized as the difference between the proceeds from the
issuance of the note and the fair value of the liability. FSP APB 14-1also requires an accretion of
the resultant debt discount over the expected life of the debt. The adoption of FSP APB 14-1 did
not have any impact on the Companys Consolidated Financial Statements because the convertible
senior debentures issued by the Company do not include any cash settlement features within the
scope of FSP APB 14-1.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS
141(R)). SFAS No. 141(R) significantly changes the accounting for business combinations. Under
SFAS No. 141(R), an acquiring entity will be required to recognize all the assets acquired and
liabilities assumed in a transaction at the acquisition-date at fair value with limited exceptions.
SFAS No. 141(R) further changes the accounting treatment for certain specific items, including:
|
|
|
Acquisition costs will be generally expensed as incurred; |
|
|
|
Noncontrolling interests (formerly known as minority interests see SFAS No. 160
discussion below) will be valued at fair value at the acquisition date; |
|
|
|
Acquired contingent liabilities will be recorded at fair value at the acquisition
date and subsequently measured at either the higher of such amount or the amount
determined under existing guidance for non-acquired contingencies; |
|
|
|
In-process research and development (IPR&D) will be recorded at fair value as an
indefinite-lived intangible asset at the acquisition date; |
|
|
|
Restructuring costs associated with a business combination will be generally
expensed subsequent to the acquisition date; and |
Changes in deferred tax asset valuation allowances and income tax uncertainties after the
acquisition date generally will affect income tax expense.
SFAS No. 141(R) includes a substantial number of new disclosure requirements. SFAS No. 141(R)
applies prospectively to business combinations for which the acquisition date is on or after
January 1, 2009.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements an amendment of ARB No. 51 (SFAS No. 160). SFAS No. 160 establishes new
accounting and reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. Specifically, this statement requires the recognition of
noncontrolling interests (minority interests) as equity in the consolidated financial statements
and separate from the parents equity. The amount of net income attributable to noncontrolling
interests will be included in consolidated net income on the face of the income statement. SFAS No.
160 clarifies that changes in a parents ownership interest in a subsidiary that does not result in
deconsolidation are treated as equity transactions if the parent retains its controlling financial
interest. In addition, this statement requires that a parent recognize a gain or loss in net
income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value
of the noncontrolling equity investment on the deconsolidation date. SFAS No. 160 also includes
expanded disclosure requirements regarding the interests of the parent and its noncontrolling
interest. SFAS No. 160 is effective for fiscal years beginning after November 15, 2008.
On January 1, 2009, the Company adopted the provisions of SFAS No. 160. As a result, the
Company now reflects the portion of equity (net assets) of its consolidated partner companies not
attributable, directly or indirectly, to the Company as a noncontrolling interest within equity,
separate from the equity of the Company. Losses attributable to the noncontrolling interest that
exceed its basis in the subsidiarys equity result in a deficit noncontrolling interest reflected
in the Consolidated Balance Sheet. Revenue, expenses, gains, losses, net income or loss are
reported in the Consolidated Statements of Operations at the consolidated amounts, which include
the amounts attributable to the owners of the parent and noncontrolling interest.
10
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
All changes in the Companys ownership interest while it retains control of its consolidated
partner companies are accounted for as equity transactions. Therefore, no gain or loss shall be
recognized in the Consolidated Statement of Operations. In addition, the carrying amount of the
noncontrolling interest shall be adjusted to reflect the change in ownership interest. Any
difference between the fair value of the amounts received and the amounts by which the
noncontrolling interest is adjusted is recognized by the Company as additional paid in capital.
See Note 4.
7. COMPREHENSIVE LOSS
Comprehensive loss is the change in equity of a business enterprise from transactions and
other events and circumstances from non-owner sources. Excluding net loss, the Companys sources
of comprehensive loss are from foreign currency translation adjustments.
The following summarizes the components of comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
|
|
(unaudited) |
|
Net loss |
|
$ |
(8,555 |
) |
|
$ |
(19,243 |
) |
Other comprehensive income (loss),
before taxes: |
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
|
(8,554 |
) |
|
|
(19,242 |
) |
Comprehensive (income) loss
attributable to the noncontrolling
interest |
|
|
(871 |
) |
|
|
389 |
|
|
|
|
|
|
|
|
Comprehensive loss attributable to the
Company |
|
$ |
(9,425 |
) |
|
$ |
(18,853 |
) |
|
|
|
|
|
|
|
8. LONG-TERM DEBT AND CREDIT ARRANGEMENTS
Consolidated long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
|
|
(unaudited) |
|
|
|
|
|
Consolidated partner company credit line
borrowings (guaranteed by the Company) |
|
$ |
|
|
|
$ |
9,000 |
|
Consolidated partner company credit line
borrowings (not guaranteed by the Company) |
|
|
5,887 |
|
|
|
5,104 |
|
|
|
|
|
|
|
|
|
|
|
5,887 |
|
|
|
14,104 |
|
Capital lease obligations and other borrowings |
|
|
1,759 |
|
|
|
608 |
|
|
|
|
|
|
|
|
|
|
|
7,646 |
|
|
|
14,712 |
|
Less current maturities |
|
|
(6,494 |
) |
|
|
(14,367 |
) |
|
|
|
|
|
|
|
Total long-term debt, less current portion |
|
$ |
1,152 |
|
|
$ |
345 |
|
|
|
|
|
|
|
|
11
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On February 6, 2009, the Company entered into a new loan agreement which provides the Company
with a revolving credit facility in the maximum aggregate amount of $50 million in the form of
borrowings, guarantees and issuances of letters of credit (subject to a $20 million sublimit).
Actual availability under the credit facility will be based on the amount of cash maintained at the
bank as well as the value of the Companys public and private partner company interests. This
credit facility bears interest at the prime rate for outstanding borrowings, subject to an increase
in certain circumstances. Other than for limited exceptions, the Company is required to maintain
all of its depository and operating accounts and not less than 75% of its investment and securities
accounts at the bank. The credit facility matures on December 31, 2010. In conjunction with the
execution of the loan agreement, the Company is terminating its prior revolving credit facility.
Availability under the Companys new revolving credit facility at March 31, 2009 was $50.0
million.
In connection with the sale of CompuCom Systems, Inc. (CompuCom) in 2004, the Company
provided a letter of credit to the landlord of CompuComs Dallas headquarters, which letter of
credit will expire on March 19, 2019, in an amount equal to $6.3 million. At March 31, 2009, the
required cash collateral, pursuant to the Companys prior revolving credit facility, was $6.3
million, which amount was included within Cash and cash equivalents on the Consolidated Balance
Sheet as of that date.
On March 26, 2009, Clarient fully repaid the $9.8 million outstanding balance under its $12.0
million revolving credit agreement with a bank, using a portion of the proceeds from a private
placement of its equity securities (see Note 4). The bank facility was terminated at such time.
Clarient continues to maintain a $2.3 million standby letter of credit with the bank which,
beginning March 26, 2009, was fully supported by a restricted cash account in the same amount. The
letter of credit is for the benefit of the landlord of Clarients leased facility in Aliso Viejo,
California.
On July 31, 2008, Clarient entered into a secured credit agreement with a finance company,
which was amended on February 27, 2009 to extend its maturity date to January 31, 2010. The
secured credit agreement is a revolving facility under which Clarient may borrow up to $8.0
million, secured by Clarients accounts receivable and related assets. The secured credit
agreements maturity date may be extended to January 31, 2011 upon the satisfaction of certain
conditions, including (i) the absence of any continuing event of
default and (ii) the extension or refinancing of the subordinated
revolving credit line Safeguard provides to Clarient under terms
which are satisfactory to the lender in its sole discretion.
During the three months ended March 31, 2009, our efforts continued
in addressing the material weaknesses in our internal control over
financial reporting. The steps we have undertaken in 2009 are
discussed in Item 9A in our Annual Report on Form 10-K for the year
ended December 31, 2008. We are in the process of evaluating the
design and operating effectiveness of our internal control over
financial reporting, which as a result of our remediation plan,
include certain enhanced controls within the accounts receivable,
revenue and billing processes.
Outstanding borrowings under the secured credit agreement were $5.9 million at March 31, 2009.
The amount which Clarient is entitled to borrow under the secured credit agreement at a particular
time is based on the amount of Clarients qualified accounts receivable and certain liquidity
factors. Clarient had no additional availability as of March 31, 2009. As a result of the
February 2009 amendment, borrowings under the secured credit agreement bear interest at annual rate
equal to 30-day LIBOR (subject to a minimum annual rate of 2.50% at all times) plus an applicable
margin of 6.0% during 2009 and 2010. Clarient is required to pay a commitment fee of 0.75% per
year on the daily average of unused credit availability and a collateral monitoring fee of 0.40%
per year on the daily average of outstanding borrowings.
The February 2009 amendment eliminated the previous minimum adjusted EBITDA covenant and
replaced it with a covenant that requires Clarient to maintain a fixed charge coverage ratio as
defined in the agreement on a cumulative annualized basis of 1.0 through June 30, 2009, 1.1 through
September 30, 2009, and 1.2 through December 31, 2009. The February 2009 amendment also increased
the capital expenditure limit to $7.5 million in each fiscal year and increased the minimum level
of excess liquidity as defined in the agreement, from $2.0 million to $3.0 million.
As of March 31, 2009, excluding the convertible senior debentures discussed in Note 9 below,
the Companys debt matures as follows:
|
|
|
|
|
|
|
Total |
|
|
|
(In thousands) |
|
Remainder of 2009 |
|
$ |
440 |
|
2010 |
|
|
6,560 |
|
2011 |
|
|
496 |
|
2012 |
|
|
150 |
|
2013 and thereafter |
|
|
|
|
|
|
|
|
|
|
$ |
7,646 |
|
|
|
|
|
12
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. CONVERTIBLE SENIOR DEBENTURES
In February 2004, the Company completed the sale of $150 million of 2.625% convertible senior
debentures with a stated maturity of March 15, 2024 (the 2024 Debentures). Interest on the 2024
Debentures is payable semi-annually. At the debentures holders option, the 2024 Debentures are
convertible into the Companys common stock through March 14, 2024, subject to certain conditions.
The conversion rate of the debentures is $7.2174 of principal amount per share. The closing price
of the Companys common stock at March 31, 2009 was $0.55. The 2024 Debentures holders have the
right to require the Company to repurchase the 2024 Debentures on March 21, 2011, March 20, 2014 or
March 20, 2019 at a repurchase price equal to 100% of their face amount, plus accrued and unpaid
interest. The 2024 Debentures holders also have the right to require repurchase of the 2024
Debentures upon certain events, including sale of all or substantially all of our common stock or
assets, liquidation, dissolution, a change in control or the delisting of the Companys common
stock from the New York Stock Exchange if the Company were unable to obtain a listing for its
common stock on another national or regional securities exchange. Subject to certain conditions,
the Company may redeem all or some of the 2024 Debentures commencing March 20, 2009. The Company
has repurchased $64.0 million in face value of the 2024 Debentures. At March 31, 2009, the market
value of the $86.0 million outstanding 2024 Debentures was approximately $63.6 million, based on
quoted market prices as of such date.
As required by the terms of the 2024 Debentures, after completing the sale of CompuCom in
October 2004, the Company escrowed $16.7 million for interest payments through March 15, 2009 on
the 2024 Debentures. Following the March 15, 2009 interest payment, the escrow account balance is
$0.0 million.
10. STOCK-BASED COMPENSATION
Classification of Stock-Based Compensation Expense
Stock-based compensation expense from continuing operations was recognized in the Consolidated
Statements of Operations as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
|
|
(unaudited) |
|
Cost of sales |
|
$ |
33 |
|
|
$ |
36 |
|
Selling, general and administrative |
|
|
1,132 |
|
|
|
761 |
|
|
|
|
|
|
|
|
|
|
$ |
1,165 |
|
|
$ |
797 |
|
|
|
|
|
|
|
|
The Company
The fair value of the Companys stock-based awards to employees was estimated at the date of
grant using the Black-Scholes option-pricing model. The risk-free rate was based on the U.S.
Treasury yield curve in effect at the end of the quarter in which the grant occurred. The expected
term of stock options granted was estimated using the historical exercise behavior of employees.
Expected volatility was based on historical volatility measured using weekly price observations of
the Companys common stock for a period equal to the stock options expected term.
13
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During the three months ended March 31, 2009, the Company issued 1.2 million restricted shares
to employees. The restricted shares were issued in lieu of cash for of a portion of the 2008
management incentive plan payment earned by certain senior employees. The restricted shares issued
vest 25% on the first anniversary of grant and the remaining 75% thereafter in 24 equal monthly
installments over the next two years.
The Company issued 109,000 and 36,000 deferred stock units during the three months ended
March 31, 2009 and 2008, respectively, to non-employee directors for fees earned during the
preceding quarter. For the three months ended March 31, 2009, all non-employee directors were
required to defer at least 25% of directors fees earned in the period and may have elected to
defer up to 100% of directors fees earned. For prior periods, certain directors elected to defer
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 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 in respect of the
deferred stock units are generally distributable following termination of employment or service,
death or permanent disability.
Total compensation expense for deferred stock units and restricted stock was approximately
$0.1 million, and $0.0 million for the three months ended March 31, 2009 and 2008, respectively.
The Company issued no stock option awards to employees during the three months ended March 31,
2009 and 2008, respectively.
At March 31, 2009, the Company had outstanding options that vest based on three different
types of vesting schedules:
|
1) |
|
market-based; |
|
|
2) |
|
performance-based; and |
|
|
3) |
|
service-based. |
Market-based awards entitle participants to vest in a number of options determined by
achievement by the Company of certain target market capitalization increases (measured by reference
to stock price increases on a specified number of outstanding shares) over an eight-year period.
The requisite service periods for the market-based awards are based on the Companys estimate of
the dates on which the market conditions will be met as determined using a Monte Carlo simulation
model. Compensation expense is recognized over the requisite service periods using the
straight-line method but is accelerated if market capitalization targets are achieved earlier than
estimated. During the three months ended March 31, 2009, no options vested based on achievement of
market capitalization targets. The Company recorded $0.2 million and $0.2 million of compensation
expense related to these awards during the three months ended March 31, 2009 and 2008,
respectively. Depending on the Companys stock performance, the maximum number of unvested shares
at March 31, 2009 attainable under these grants was 7.8 million shares.
Performance-based awards entitle participants to vest in a number of options 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 over
an eight-year period. Vesting may occur, if at all, once per year on the anniversary date of the
grant. The requisite service periods for the performance-based awards are based on the Companys
estimate of when the performance conditions will be met. Compensation expense is recognized for
performance-based awards for which the performance condition is considered probable of achievement.
Compensation expense is recognized over the requisite service periods using the straight-line
method but is accelerated if capital return targets are achieved earlier than estimated.
Compensation expense of $0.1 was recognized related to these awards during the three months ended
March 31, 2009. The maximum number of unvested shares at March 31, 2009 attainable under these
grants was 2.0 million 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. The Company recorded
$0.3 million and $0.3 million of compensation expense related to these awards during the three
months ended March 31, 2009 and 2008, respectively.
14
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Consolidated Partner Company
The fair value of the Companys consolidated partner company stock-based awards issued to
employees during the three months ended March 31, 2009 and 2008 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 for Clarient, the Companys publicly held consolidated partner company, was based on
historical price volatility measured using weekly price observations of Clarients common stock for
a period equal to the stock options expected term.
During the three months ended March 31, 2009, Clarient granted 1.1 million stock options. The
options have four-year vesting terms and ten-year contractual terms. The fair value of these
options at the date of grant was based on the following assumptions: a risk-free rate of 2.1%, an
expected stock option term of five years, a dividend yield of 0.0% and expected five year
volatility of 70%. Clarient estimates forfeitures of stock options using historical exercise
behavior of its employees. For purposes of this estimate, Clarient identified two groups of
employees and estimated the forfeiture rates for these groups to be 5% and 8% for the first three
months of 2009. Clarient recorded $0.6 million and $0.3 million of stock-based compensation
expense during the three months ended March 31, 2009 and 2008, respectively.
11. INCOME TAXES
The Companys consolidated income tax expense (benefit) was $0.0 million for both the three
months ended March 31, 2009 and 2008. The Company has recorded a valuation allowance to reduce its
net deferred tax asset to an amount that is more likely than not to be realized in future years.
Accordingly, the benefit of the net operating loss that would have been recognized in 2009 and 2008
was offset by a valuation allowance.
On January 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes- an Interpretation of FASB Statement No. 109 (FIN 48). During the
three months ended March 31, 2009, the Company had no material changes in uncertain tax positions.
12. NET LOSS PER SHARE
The calculations of net loss per share attributable to Safeguard Scientifics, Inc. common shareholders were:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands except per share data) |
|
|
|
(unaudited) |
|
Basic and Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
$ |
(10,321 |
) |
|
$ |
(11,778 |
) |
Income (loss) from discontinued operations |
|
|
895 |
|
|
|
(7,076 |
) |
|
|
|
|
|
|
|
Net loss attributable to Safeguard Scientifics, Inc. |
|
$ |
(9,426 |
) |
|
$ |
(18,854 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding |
|
|
121,645 |
|
|
|
122,996 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share from continuing operations |
|
$ |
(0.08 |
) |
|
$ |
(0.10 |
) |
Net income (loss) per share from discontinued
operations |
|
|
|
|
|
|
(0.05 |
) |
|
|
|
|
|
|
|
Net loss per share |
|
$ |
(0.08 |
) |
|
$ |
(0.15 |
) |
|
|
|
|
|
|
|
Basic and diluted average common shares outstanding for purposes of computing net loss per
share includes outstanding common shares and vested deferred stock units (DSUs).
15
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
If a consolidated or equity method partner company has dilutive stock options, unvested
restricted stock, DSUs, warrants or securities outstanding, diluted net loss per share is computed
by first deducting from net loss, the income attributable to the potential exercise of the dilutive
securities of the company. This impact is shown as an adjustment to net loss for purposes of
calculating diluted net loss per share.
The following potential shares of common stock and their effects on income were excluded from
the diluted net loss per share calculation because their effect would be anti-dilutive:
|
|
|
At March 31, 2009 and 2008 options to purchase 20.0 million and 21.4 million
shares of common stock, respectively, at prices ranging from $0.65 to $6.57 per share,
were excluded from the calculations. |
|
|
|
At March 31, 2009 and 2008, unvested restricted stock units and DSUs convertible
into 1.4 million and 0.1 million shares of stock, respectively, were excluded from the
calculations. |
|
|
|
At March 31, 2009 and 2008, a total of 11.9 million and 17.9 million shares
related to the Companys 2024 Debentures (see Note 9) representing the weighted average
effect of assumed conversion of the 2024 Debentures were excluded from the calculations. |
13. PARENT COMPANY FINANCIAL INFORMATION
Parent company financial information is provided to present the financial position and results
of operations of the Company as if its consolidated partner company, Clarient, (see Note 2) was
accounted for under the equity method of accounting for all periods presented during which the
Company owned its interest in Clarient.
Parent Company Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
|
|
(unaudited) |
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
84,346 |
|
|
$ |
73,213 |
|
Cash held in escrow current |
|
|
6,433 |
|
|
|
6,433 |
|
Marketable securities |
|
|
6,434 |
|
|
|
14,701 |
|
Restricted marketable securities |
|
|
|
|
|
|
1,990 |
|
Other current assets |
|
|
543 |
|
|
|
356 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
97,756 |
|
|
|
96,693 |
|
Ownership interests in and advances to companies |
|
|
109,553 |
|
|
|
105,955 |
|
Cash held in escrow long-term |
|
|
476 |
|
|
|
501 |
|
Other |
|
|
1,228 |
|
|
|
1,364 |
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
209,013 |
|
|
$ |
204,513 |
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity: |
|
|
|
|
|
|
|
|
Current liabilities |
|
$ |
6,992 |
|
|
$ |
8,173 |
|
Long-term liabilities |
|
|
5,441 |
|
|
|
5,630 |
|
Convertible senior debentures |
|
|
86,000 |
|
|
|
86,000 |
|
Total Safeguard Scientifics, Inc. shareholders equity |
|
|
110,580 |
|
|
|
104,710 |
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity |
|
$ |
209,013 |
|
|
$ |
204,513 |
|
|
|
|
|
|
|
|
16
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Parent Company Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
|
|
(unaudited) |
|
Operating expenses |
|
$ |
(4,362 |
) |
|
$ |
(5,297 |
) |
Other income (loss), net |
|
|
(245 |
) |
|
|
360 |
|
Recovery related party |
|
|
|
|
|
|
1 |
|
Interest income |
|
|
156 |
|
|
|
925 |
|
Interest expense |
|
|
(735 |
) |
|
|
(1,055 |
) |
Equity loss |
|
|
(5,135 |
) |
|
|
(6,712 |
) |
|
|
|
|
|
|
|
Net loss from continuing operations before income taxes |
|
|
(10,321 |
) |
|
|
(11,778 |
) |
Income tax benefit |
|
|
|
|
|
|
|
|
Equity income (loss) attributable to discontinued operations |
|
|
895 |
|
|
|
(7,076 |
) |
|
|
|
|
|
|
|
Net loss attributable to Safeguard Scientifics, Inc. |
|
$ |
(9,426 |
) |
|
$ |
(18,854 |
) |
|
|
|
|
|
|
|
Parent Company Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
|
|
(unaudited) |
|
Net cash used in operating activities |
|
$ |
(4,177 |
) |
|
$ |
(3,069 |
) |
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities |
|
|
|
|
|
|
|
|
Advances to partner companies |
|
|
(6,050 |
) |
|
|
(14,571 |
) |
Repayment of advances to partner companies |
|
|
15,500 |
|
|
|
|
|
Acquisitions of ownership interests in partner
companies and funds, net of cash acquired |
|
|
(3,268 |
) |
|
|
(2,841 |
) |
Repayment of note receivable-related party, net |
|
|
|
|
|
|
1 |
|
Increase in marketable securities |
|
|
(5,783 |
) |
|
|
(2,224 |
) |
Decrease in marketable securities |
|
|
14,050 |
|
|
|
296 |
|
Decrease in restricted cash |
|
|
861 |
|
|
|
|
|
Capital expenditures |
|
|
|
|
|
|
(6 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
15,310 |
|
|
|
(19,345 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash and Cash Equivalents |
|
|
11,133 |
|
|
|
(22,414 |
) |
Cash and Cash Equivalents at beginning of period |
|
|
73,213 |
|
|
|
94,685 |
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at end of period |
|
$ |
84,346 |
|
|
$ |
72,271 |
|
|
|
|
|
|
|
|
Parent Company cash and cash equivalents excludes marketable securities, which consist of
longer-term securities.
17
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. OPERATING SEGMENTS
As of March 31, 2009 the Company held an interest in one consolidated partner company,
Clarient, and 16 non-consolidated partner companies. The Companys reportable operating segments
are as follows: i) Clarient, its publicly traded consolidated partner company, ii) Life Sciences
and iii) Technology.
The Life Sciences segment included the following partner companies as of March 31, 2009:
Advanced BioHealing, Alverix, Avid Radiopharmaceuticals, Cellumen, Garnet BioTherapeutics,
Molecular Biometrics, NuPathe, Rubicor and Tengion.
The Technology segment included the following partner companies as of March 31, 2009:
Advantedge Healthcare Solutions, Authentium, Beyond.com, Bridgevine, GENBAND, Portico Systems and
Swaptree.
Results of the Life Sciences and Technology segments reflect the equity income (loss) of their
respective equity method partner companies, other income (loss) associated with cost method partner
companies and the gains or losses on the sale of their respective partner companies.
Management evaluates the Clarient segment performance based on revenue, operating income
(loss) and income (loss) before income taxes. Management evaluates the Life Sciences and
Technology segments performance based on net income (loss) which is based on the number of partner
companies accounted for under the equity method, the Companys voting ownership percentage in these
partner companies and the net results of operations of these partner companies and any impairment
charges or gain (loss) on sale of partner companies.
Other Items include certain expenses which are not identifiable to the operations of the
Companys operating business segments. Other Items primarily consist of general and administrative
expenses related to corporate operations, including employee compensation, insurance and
professional fees, including legal and finance, interest income, interest expense, other income
(loss) and equity income (loss) related to private equity fund holdings. Other Items also include
income taxes, which are reviewed by management independent of segment results.
The following tables reflect the Companys consolidated operating data by reportable segment.
Segment results include the results of Clarient, the Companys consolidated partner company,
impairment charges, gains or losses related to the disposition of partner companies (except those
reported in discontinued operations) and the Companys share of income or losses for entities
accounted for under the equity method. All significant intersegment activity has been eliminated in
consolidation. Accordingly, segment results reported by the Company exclude the effect of
transactions between the Company and its consolidated partner company.
Revenue is attributed to geographic areas based on where the services are performed or the
customers shipped to location. A majority of the Companys revenue is generated in the United
States.
As of March 31, 2009 and December 31, 2008, the Companys assets were primarily located in the
United States.
Segment assets in Other items included primarily cash, cash equivalents and marketable
securities of $90.8 million and $87.9 million at March 31, 2009 and December 31, 2008,
respectively.
18
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following represents segment data from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
Life |
|
|
|
|
|
|
Total |
|
|
Other |
|
|
Continuing |
|
|
|
Clarient |
|
|
Sciences |
|
|
Technology |
|
|
Segments |
|
|
Items |
|
|
Operations |
|
|
|
(In thousands) (unaudited) |
|
Revenue |
|
$ |
22,447 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
22,447 |
|
|
$ |
|
|
|
$ |
22,447 |
|
Operating income (loss) |
|
|
834 |
|
|
|
|
|
|
|
|
|
|
|
834 |
|
|
|
(4,362 |
) |
|
|
(3,528 |
) |
Net income (loss) from
continuing operations
before income taxes |
|
|
644 |
|
|
|
(3,424 |
) |
|
|
(2,079 |
) |
|
|
(4,859 |
) |
|
|
(5,196 |
) |
|
|
(10,055 |
) |
Segment Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
|
62,727 |
|
|
|
33,958 |
|
|
|
40,971 |
|
|
|
137,656 |
|
|
|
107,367 |
|
|
|
245,023 |
|
December 31, 2008 |
|
|
48,283 |
|
|
|
36,225 |
|
|
|
41,050 |
|
|
|
125,558 |
|
|
|
106,844 |
|
|
|
232,402 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
Life |
|
|
|
|
|
|
Total |
|
|
Other |
|
|
Continuing |
|
|
|
Clarient |
|
|
Sciences |
|
|
Technology |
|
|
Segments |
|
|
Items |
|
|
Operations |
|
|
|
(In thousands) (unaudited) |
|
Revenue |
|
$ |
15,886 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
15,886 |
|
|
$ |
|
|
|
$ |
15,886 |
|
Operating loss |
|
|
(170 |
) |
|
|
|
|
|
|
|
|
|
|
(170 |
) |
|
|
(5,297 |
) |
|
|
(5,467 |
) |
Net loss from
continuing
operations before
income taxes |
|
|
(485 |
) |
|
|
(4,386 |
) |
|
|
(2,114 |
) |
|
|
(6,985 |
) |
|
|
(5,180 |
) |
|
|
(12,165 |
) |
Other Items
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) (unaudited) |
|
Corporate operations |
|
$ |
(5,196 |
) |
|
$ |
(5,180 |
) |
Income tax benefit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(5,196 |
) |
|
$ |
(5,180 |
) |
|
|
|
|
|
|
|
15. BUSINESS COMBINATIONS
Acquisitions by the Company 2009
In March 2009, the Company increased its ownership interest in Bridgevine, Inc. (Bridgevine)
to 24.4% from 21.1% for $2.0 million in cash. The Company had previously acquired an interest in
Bridgevine in August 2007 for $8.0 million in cash. Bridgevine is an internet media company that
enables online consumers to shop for special offers as well as compare and purchase digital
services and products such as internet, phone, VoIP, TV, wireless, music, entertainment and more.
The Company accounts for its holdings in Bridgevine under the equity method. The difference between
the Companys cost and its interest in the underlying net assets of Bridgevine was allocated to
intangible assets and goodwill as reflected in the carrying value in Ownership interests in and
advances to companies on the Consolidated Balance Sheet.
19
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In February 2009, the Company provided additional funding to Cellumen as part of an up to $2.5
million convertible note financing to be funded in five tranches. As part of this financing, the
Company has agreed to provide Cellumen up to $1.0 million (subject to certain conditions), $0.3
million of which the Company funded at the initial closing. The Company previously acquired an
interest in Cellumen in June 2007, paying $6.0 million in cash for shares of Cellumens Series B
preferred stock. In conjunction with the convertible note financing, the Series B preferred stock
conversion price was adjusted, and will receive further adjustments upon the closing of future
tranches, increasing the economic and voting interest of the Series B preferred stock in Cellumen.
After the funding of the initial tranche of convertible notes, the Companys voting interest in
Cellumen increased to 51.4%, on an as-converted basis, from 40.3%. Due to the substantive
participating rights of the minority shareholders in the significant operating decisions of
Cellumen, the Company continues to account for its holdings in Cellumen under the equity method.
Cellumen delivers proprietary services and products to support drug discovery and development.
In February 2009, the Company deployed an additional $0.9 million in Molecular Biometrics,
Inc. (Molecular Biometrics), maintaining a 37.8% ownership interest. The Company had previously
acquired an interest in Molecular Biometrics in September and December 2008, for $3.5 million in
cash, including the conversion into equity interests of $1.9 million previously advanced to the
company. Molecular Biometrics is a metabolomics company developing novel clinical tools for
applications in personalized medicine to more accurately characterize biologic function in health
and disease. The Company accounts for its holdings in Molecular Biometrics under the equity
method.
16. COMMITMENTS AND CONTINGENCIES
The Company and its partner companies are involved in various claims and legal actions arising
in the ordinary course of business. While in the current opinion of the Company the ultimate
disposition of these matters will not have a material adverse effect on the Companys consolidated
financial position or results of operations, no assurance can be given as to the outcome of these
actions, and one or more adverse rulings could have a material adverse effect on the Companys
consolidated financial position and results of operations or that of its partner companies.
Not including the Laureate Lease Guaranty described below, the Company had outstanding
guarantees of $3.8 million at March 31, 2009.
The Company has committed capital of approximately $6.8 million, including conditional
commitments to provide non-consolidated partner companies with additional funding and commitments
made to various private equity funds in prior years. These commitments will be funded over the
next several years, including approximately $6.5 million which is 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 (the clawback).
The maximum clawback the Company could be required to return due to its general partner interest is
approximately $3.6 million of which $2.5 million was reflected in Accrued expenses and other
current liabilities and $1.1 million was reflected in Other long-term liabilities on the
Consolidated Balance Sheet at March 31, 2009.
The Companys ownership in the funds which have potential clawback liabilities ranges from
19-30%. The clawback liability is joint and several; such that the Company may be required to fund
the clawback for other general partners should they default. The funds have taken several steps to
reduce the potential liabilities should other general partners default, including withholding all
general partner distributions and placing them in escrow and adding rights of set-off among certain
funds. The Company believes its potential liability due to the possibility of default by other
general partners is remote.
Notwithstanding the closing of the Bundle Sale, the Company remains a guarantor of Laureate
Pharmas Princeton, New Jersey office facility lease (the Laureate Lease Guaranty). Such
guarantee may extend through the office lease expiration in 2016 under certain circumstances.
However, the Company is entitled to indemnification in connection with the continuation of such
guaranty. As of March 31, 2009, scheduled lease payments to be made by Laureate Pharma over the
remaining lease term equaled $8.6 million.
20
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As described in Note 3, in connection with the Bundle Sale, an aggregate of $6.4 million of
the gross proceeds of the sale were placed in escrow pending the expiration of a predetermined
notification period, subject to possible extension in the event of a claim against the escrowed
amounts. On April 25, 2009, the purchaser in the Bundle Sale notified the Company of claims being
asserted against the entire escrowed amounts. The Company does not believe that such claims are
valid. The proceeds being held in escrow will remain there until the dispute over the claims have
been settled or determined pursuant to legal process.
In October 2001, the Company entered into an agreement with Mr. Musser, its former Chairman
and Chief Executive Officer, to provide for annual payments of $0.7 million 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 the long-term portion of $3.3 million was included in Other long-term
liabilities on the Consolidated Balance Sheet at March 31, 2009.
21
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Note Concerning Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements that are based on
current expectations, estimates, forecasts and projections about Safeguard Scientifics, Inc.
(Safeguard or we), the industries in which we operate and other matters, as well as
managements beliefs and assumptions and other statements regarding matters that are not historical
facts. These statements include, in particular, statements about our plans, strategies and
prospects. For example, when we use words such as projects, expects, anticipates, intends,
plans, believes, seeks, estimates, should, would, could, will, opportunity,
potential or may, variations of such words or other words that convey uncertainty of future
events or outcomes, we are making forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Our
forward-looking statements are subject to risks and uncertainties. Factors that could cause actual
results to differ materially, include, among others, managing rapidly changing technologies,
limited access to capital, competition, the ability to attract and retain qualified employees, the
ability to execute our strategy, the uncertainty of the future performance of our partner
companies, acquisitions and dispositions of companies, the inability to manage growth, compliance
with government regulation and legal liabilities, additional financing requirements, labor disputes
and the effect of economic conditions in the business sectors in which our partner companies
operate, all of which are discussed in Item 1A. Risk Factors in Safeguards Annual Report on Form
10-K and updated, as applicable, in Item 1A. Risk Factors below. Many of these factors are
beyond our ability to predict or control. In addition, as a result of these and other factors, our
past financial performance should not be relied on as an indication of future performance. All
forward-looking statements attributable to us, or to persons acting on our behalf, are expressly
qualified in their entirety by this cautionary statement. We undertake no obligation to publicly
update or revise any forward-looking statements, whether as a result of new information, future
events or otherwise, except as required by law. In light of these risks and uncertainties, the
forward-looking events and circumstances discussed in this report might not occur.
Business Overview
Safeguards charter is to build value in growth-stage technology and life sciences businesses.
We provide capital as well as a range of strategic, operational and management resources to our
partner companies. Safeguard participates in expansion financings, corporate spin-outs, management
buy-outs, recapitalizations, industry consolidations and early-stage financings. Our vision is to
be the preferred catalyst for creating great technology and life sciences companies.
We strive to create long-term value for our shareholders by helping our partner companies in
their efforts to increase market penetration, grow revenue and improve cash flow in order to create
long-term value. We concentrate on companies that operate in two categories:
Life Sciences including companies focused on molecular and point-of-care diagnostics,
medical devices and regenerative medicine/specialty pharmaceuticals; and
Technology including companies focused on healthcare information technology, financial
services information technology and new media and internet-based businesses.
Principles of Accounting for Ownership Interests in Partner Companies
We account for our interests in our partner companies and private equity funds using three
methods: consolidation, equity or cost. The accounting method applied is generally determined by
the degree of our influence over the entity, primarily determined by our voting interest in the
entity.
Consolidation Method. We account for our partner companies in which we maintain a controlling
financial interest, generally those in which we directly or indirectly own more than 50% of the
outstanding voting securities, using the consolidation method of accounting. Upon consolidation of
our partner companies, we reflect the portion of equity (net assets) in a subsidiary not
attributable, directly or indirectly, to the Company as a noncontrolling interest in the
Consolidated Balance Sheet. The noncontrolling interest is presented within equity, separately
from the equity of the Company. Losses attributable to the Company and the noncontrolling interest
may exceed their interest in the subsidiarys equity. As a result, the noncontrolling interest
shall continue to be attributed its share of losses even if that attribution results in a deficit
noncontrolling interest balance as of each balance sheet date. Revenue, expenses, gains, losses,
net income or loss are reported in the Consolidated Statements of Operations at the consolidated
amounts, which include the amounts attributable to the Companys common shareholders and the
noncontrolling interest.
22
Equity Method. We account for partner companies whose results are not consolidated, but over
whom we exercise significant influence, using the equity method of accounting. We also account for
our interests in some private equity funds under the equity method of accounting,
depending on our respective general and limited partner interests. Under the equity method of
accounting, our share of the income or loss of the company is reflected in Equity Loss in the
Consolidated Statements of Operations. We report our share of the income or loss of the equity
method partner companies on a one quarter lag.
When the carrying value of our holding in an equity method partner company is reduced to zero,
no further losses are recorded in our Consolidated Statements of Operations unless we have
outstanding guarantee obligations or have committed additional funding to the equity method partner
company. When the equity method partner company subsequently reports income, we will not record our
share of such income until it equals the amount of our share of losses not previously recognized.
Cost Method. We account for partner companies which are not consolidated or accounted for
under the equity method using the cost method of accounting. Under the cost method, our share of
the income or losses of such partner companies is not included in our Consolidated Statements of
Operations. However, the effect of the change in market value of cost method partner company
holdings classified as trading securities is reflected in Other income (loss), net in the
Consolidated Statements of Operations.
Critical Accounting Policies and Estimates
Accounting policies, methods and estimates are an integral part of the Consolidated Financial
Statements prepared by management and are based upon managements current judgments. These
judgments are normally based on knowledge and experience with regard to past and current events and
assumptions about future events. Certain accounting policies, methods and estimates are
particularly important because of their significance to the financial statements and because of the
possibility that future events affecting them may differ from managements current judgments. While
there are a number of accounting policies, methods and estimates affecting our financial
statements, areas that are particularly significant include the following:
|
|
|
Revenue recognition; |
|
|
|
|
Allowance for doubtful accounts and bad debt expense; |
|
|
|
|
Impairment of long-lived assets; |
|
|
|
|
Goodwill impairment; |
|
|
|
|
Impairment of ownership interests in and advances to companies; |
|
|
|
|
Income taxes; |
|
|
|
|
Commitments and contingencies; and |
|
|
|
|
Stock-based compensation. |
Revenue Recognition
During the three months ended March 31, 2009 and 2008, our revenue from continuing operations
was attributable to Clarient.
Revenue for Clarients diagnostic testing and interpretive services is recognized at the time
of completion of such services. Clarients services are billed to various payors, including
Medicare, health insurance companies and other directly billed healthcare institutions and
patients. Clarient reports revenue from contracted payors, including certain health insurance
companies and healthcare institutions, based on the contracted rate or, in certain instances,
Clarients estimate of such rate. For billings to Medicare, Clarient utilizes the published fee
schedules, net of standard discounts commonly referred to as contractual allowances. Clarient
reports revenue from non-contracted payors, including certain insurance companies and patients,
based on the amount expected to be collected for services provided. Adjustments resulting from
actual collections compared to Clarients estimates are recognized in the period realized.
23
Allowance for Doubtful Accounts and Bad Debt Expense
An allowance for doubtful accounts is recorded for estimated uncollectible amounts due from
various payor groups such as Medicare and private health insurance companies. The process for
estimating the allowance for doubtful accounts associated with Clarients diagnostic services
involves significant assumptions and judgments. Specifically, the allowance for doubtful accounts
is adjusted periodically, based upon an evaluation of historical collection experience. Clarient
also reviews the age of receivables by payor class to assess its allowance at each period end. The
payment realization cycle for certain governmental and managed care payors can be lengthy;
involving denial, appeal and adjudication processes, and is subject to periodic adjustments that
may be significant. Accounts receivable are periodically written off when identified as
uncollectible and deducted from the allowance for doubtful accounts after appropriate collection
efforts have been exhausted. Additions to the allowance for doubtful accounts are charged to bad
debt expense with Selling, general and administrative expense in the Consolidated Statements of
Operations.
Impairment of Long-Lived Assets
We test long-lived assets, including property and equipment and amortizable intangible assets,
for recoverability whenever events or changes in circumstances indicate that we may not be able to
recover the assets carrying amount. We evaluate the recoverability of an asset by comparing its
carrying amount to the undiscounted cash flows expected to result from the use and eventual
disposition of that asset. If the undiscounted cash flows are not sufficient to recover the
carrying amount, we measure any impairment loss as the excess of the carrying amount of the asset
over its fair value.
The carrying value of net property and equipment at March 31, 2009 was $14.2 million.
Impairment of Goodwill
We conduct an annual review for impairment of goodwill as of December 1st and as
otherwise required by circumstances or events. Additionally, on an interim basis, we assess the
impairment of goodwill whenever events or changes in circumstances would more likely than not
reduce the fair value of a reporting unit below its carrying amount. Factors that we consider
important which could trigger an impairment review include significant underperformance relative to
historical or expected future operating results, significant changes in the manner or use of the
acquired assets or the strategy for the overall business, significant negative industry or economic
trends, or a decline in a companys stock price for a sustained period.
We test for impairment at a reporting unit level (which for us is the same as an operating
segment). If we determine that the fair value of a reporting unit is less than its carrying value,
we assess whether goodwill of the reporting unit is impaired. To determine fair value, we use a
number of valuation methods including quoted market prices, discounted cash flows, valuations of
comparable public companies and valuations of acquisitions of comparable companies. Depending on
the complexity of the valuation and the significance of the carrying value of the goodwill to the
Consolidated Financial Statements, we may engage an outside valuation firm to assist us in
determining fair value. As an overall check on the reasonableness of the fair values attributed to
our reporting units, we will consider comparing the aggregate fair values for all reporting units
with our average total market capitalization for a reasonable period of time.
The carrying value of goodwill at March 31, 2009 was $12.7 million and relates entirely to our
Clarient segment.
Our partner companies operate in industries which are rapidly evolving and extremely
competitive. It is reasonably possible that our accounting estimates with respect to the ultimate
recoverability of the carrying value of goodwill could change in the near term and that the effect
of such changes on our Consolidated Financial Statements could be material. While we believe that
the current recorded carrying value of our goodwill is not impaired, there can be no assurance that
a significant write-down or write-off will not be required in the future.
24
Impairment of Ownership Interests In and Advances to Companies
On a periodic basis (but no less frequently than at the end of each quarter) we evaluate the
carrying value of our equity and cost method partner companies for possible impairment based on
achievement of business plan objectives and milestones, the financial condition and prospects of
the company, market conditions, and other relevant factors. The business plan objectives and
milestones we consider include, among others, those related to financial performance, such as
achievement of planned financial results or completion of capital raising activities, and those
that are not primarily financial in nature, such as hiring of key employees or the establishment of
strategic relationships. We then determine whether there has been an other than temporary decline
in the value of our ownership interest in the company. Impairment to be recognized is measured as
the amount by which the carrying value of an asset exceeds its fair value.
The fair value of privately held partner companies is generally determined based on the value
at which independent third parties have invested or have committed to invest in these companies or
based on other valuation methods, including discounted cash flows, valuations of comparable public
companies and valuations of acquisitions of comparable companies. The fair value of our ownership
interests in private equity funds is generally determined based on the value of our pro rata
portion of the funds net assets and estimated future proceeds from sales of investments provided
by the funds managers.
The new carrying value of a partner company is not increased if circumstances suggest the
value of the partner company has subsequently recovered.
Our partner companies operate in industries which are rapidly evolving and extremely
competitive. It is reasonably possible that our accounting estimates with respect to the ultimate
recoverability of the carrying value of ownership interests in and advances to companies could
change in the near term and that the effect of such changes on our Consolidated Financial
Statements could be material. While we believe that the current recorded carrying values of our
equity and cost method companies are not impaired, there can be no assurance that our future
results will confirm this assessment or that a significant write-down or write-off will not be
required in the future.
Impairment charges related to equity method partner companies are included in Equity loss in
the Consolidated Statements of Operations. Impairment charges related to cost method partner
companies are included in Other income, net in the Consolidated Statements of Operations.
Income Taxes
We are required to estimate income taxes in each of the jurisdictions in which we operate.
This process involves estimating our actual current tax exposure together with assessing temporary
differences resulting from differing treatment of items for tax and accounting purposes. These
differences result in deferred tax assets and liabilities, which are included within our
Consolidated Balance Sheets. We must assess the likelihood that the deferred tax assets will be
recovered from future taxable income and to the extent that we believe recovery is not likely, we
must establish a valuation allowance. To the extent we establish a valuation allowance in a period;
we must include an expense within the tax provision in the Consolidated Statements of Operations.
We have recorded a valuation allowance to reduce our deferred tax assets to an amount that is more
likely than not to be realized in future years. If we determine in the future that it is more
likely than not that the net deferred tax assets would be realized, then the previously provided
valuation allowance would be reversed.
Commitments and Contingencies
From time to time, we are a defendant or plaintiff in various legal actions which arise in the
normal course of business. Additionally, we have received distributions as both a general partner
and a limited partner from certain private equity funds. In certain circumstances, we may be
required to return a portion or all the distributions we received as a general partner of a fund
for a further distribution to such funds limited partners (the clawback). We are also a
guarantor of various third-party obligations and commitments and are subject to the possibility of
various loss contingencies arising in the ordinary course of business (see Note 16). We are
required to assess the likelihood of any adverse outcomes to these matters as well as potential
ranges of probable losses. A determination of the amount of provision required for these
commitments and contingencies, if any, which would be charged to earnings, is made after careful
analysis of each matter. The provision may change in the future due to new developments or changes
in circumstances. Changes in the provision could increase or decrease our earnings in the period
the changes are made.
25
Stock-Based Compensation
We measure all employee stock-based compensation awards using a fair value method and record
such expense in our consolidated financial statements.
We estimate the grant date fair value of stock options using the Black-Scholes option-pricing
model which requires the input of highly subjective assumptions. These assumptions include
estimating the expected term of the award and the estimated volatility of our stock price over the
expected term. Changes in these assumptions and in the estimated forfeitures of stock option awards
can materially affect the amount of stock-based compensation recognized in the Consolidated
Statements of Operations. The requisite service periods for market-based stock option awards are
based on our estimate of the dates on which the market conditions will be met as determined using a
Monte Carlo simulation model. Changes in the derived requisite service period or achievement of
market capitalization targets earlier than estimated can materially affect the amount of
stock-based compensation recognized in the Consolidated Statements of Operations. The requisite
service periods for performance-based awards are based on our best estimate of when the performance
conditions will be met. Compensation expense is recognized for performance-based awards for which
the performance condition is considered probable of achievement. Changes in the requisite service
period or the estimated probability of achievement of performance conditions can materially affect
the amount of stock-based compensation recognized in the Consolidated Statements of Operations.
Results of Operations
We present Clarient, our publicly traded consolidated partner company, as a separate segment.
The results of operations of our other partner companies are reported in our Life Sciences and
Technology segments. The Life Sciences and Technology segments also include the gain or loss on
the sale of respective partner companies, except for gains and losses included in discontinued
operations.
Our management evaluates our Clarient segment performance based on revenue, operating income
(loss) and income (loss) before income taxes. Our management evaluates our Life Sciences and
Technology segments performance based on their equity income (loss) which is based on the number of
respective partner companies accounted for under the equity method, the Companys voting ownership
percentage in these partner companies and the net results of operations of these partner companies
and Other income or loss associated with cost method partner companies.
Other Items include certain expenses, which are not identifiable to the operations of the
Companys operating business segments. Other Items primarily consist of general and administrative
expenses related to corporate operations, including employee compensation, insurance and
professional fees, including legal and finance, interest income, interest expense, other income
(loss) and equity income (loss) related to private equity holdings. Other Items also include
income taxes, which are reviewed by management independent of segment results.
The following tables reflect our consolidated operating data by reportable segment. Segment
results include the results of Clarient, our consolidated partner company, and our share of income
or losses for entities accounted for under the equity method when applicable. Segment results also
include impairment charges, gains or losses related to the disposition of partner companies, except
for those reported in discontinued operations, and the mark-to-market of trading securities. All
significant inter-segment activity has been eliminated in consolidation. Accordingly, segment
results reported by us exclude the effect of transactions between us and our consolidated partner
company.
26
Our operating results including net income (loss) before income taxes by segment were as
follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Clarient |
|
$ |
644 |
|
|
$ |
(485 |
) |
Life Sciences |
|
|
(3,424 |
) |
|
|
(4,386 |
) |
Technology |
|
|
(2,079 |
) |
|
|
(2,114 |
) |
|
|
|
|
|
|
|
Total segments |
|
|
(4,859 |
) |
|
|
(6,985 |
) |
|
|
|
|
|
|
|
Other items: |
|
|
|
|
|
|
|
|
Corporate operations |
|
|
(5,196 |
) |
|
|
(5,180 |
) |
Income tax benefit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other items |
|
|
(5,196 |
) |
|
|
(5,180 |
) |
|
|
|
|
|
|
|
Net loss from continuing operations |
|
|
(10,055 |
) |
|
|
(12,165 |
) |
Income (loss) from discontinued
operations, net of tax |
|
|
1,500 |
|
|
|
(7,078 |
) |
|
|
|
|
|
|
|
Net loss |
|
|
(8,555 |
) |
|
|
(19,243 |
) |
Net (income) loss attributable to
noncontrolling interest |
|
|
(871 |
) |
|
|
389 |
|
|
|
|
|
|
|
|
Net loss attributable to the Company |
|
$ |
(9,426 |
) |
|
$ |
(18,854 |
) |
|
|
|
|
|
|
|
There is intense competition in the markets in which our partner companies operate, and we
expect competition to intensify in the future. Additionally, the markets in which these companies
operate are characterized by rapidly changing technology, evolving industry standards, frequent
introduction of new products and services, shifting distribution channels, evolving government
regulation, frequently changing intellectual property landscapes and changing customer demands.
Their future success depends on each companys ability to execute its business plan and to adapt to
its respective rapidly changing markets.
Clarient
The following table presents Clarients results of operations:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Revenue |
|
$ |
22,447 |
|
|
$ |
15,886 |
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
Cost of sales |
|
|
8,966 |
|
|
|
7,397 |
|
Selling, general and administrative |
|
|
12,647 |
|
|
|
8,659 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
21,613 |
|
|
|
16,056 |
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
834 |
|
|
|
(170 |
) |
Interest, net |
|
|
(190 |
) |
|
|
(315 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
644 |
|
|
|
(485 |
) |
Income from discontinued operations |
|
|
1,500 |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
2,144 |
|
|
$ |
(485 |
) |
|
|
|
|
|
|
|
Clarient operates primarily in one business, the delivery of critical oncology testing
services to community pathologists, biopharmaceutical companies and other researchers.
As of March 31, 2009, we owned a 50.2% voting interest in Clarient.
27
Three months ended March 31, 2009 versus the three months ended March 31, 2008
Revenue: Revenue of $22.4 million for the three months ended March 31, 2009 increased 41.3%,
or $6.6 million, from $15.9 million in the prior year period. Clarients increased revenue
resulted from increased cancer diagnostic services volume, increased Medicare reimbursement rates
and a favorable mix of higher value services performed in the current period. Clarient continues
to expand its client base which has increased to approximately 950 active clients at March 31, 2009
from approximately 900 active clients at December 31, 2008.
During the first quarter of 2008, Clarient expanded the breadth of its cancer diagnostic
testing services to include cancer markers for tumors of the colon, prostate and lung. Clarient
expects to steadily increase its menu of cancer diagnostic services to include markers for
additional tumor types and to deepen its market penetration for the diagnostic services that it
currently provides. A number of recently published clinical findings have promoted the use of
certain biomarkers to predict patient response to a class of colorectal cancer drugs that are
focused on blocking the epidermal growth factor receptor (EGFR) signaling pathway. Clarients
tests such as K-ras (a newly emerging biomarker) to outline alterations in the EGFR pathway are
therefore becoming a more recognized tool in the medical community for predicting an individuals
response to drug therapies for colorectal cancers.
Clarient has also steadily increased the depth of its diagnostic services for certain cancer
types that it has previously provided, including lymphoma/leukemia. Clarients expanding
capabilities in immunohistochemistry (IHC), flow cytometry, fluorescent in situ hybridization
(FISH), and molecular/PCR, and its marketing of such capabilities, have enabled its revenue growth
in the three months ended March 31, 2009 as compared to the prior year period. Clarient
anticipates that its revenue will continue to increase as it further executes its operational
strategy of expanding the breadth and depth of its cancer diagnostic services, and the means by
which its services are marketed and delivered to its customers.
In July 2008, the Medicare rate increase for Technical CPT codes under the Physician Fee
Schedule that retroactively took effect as of January 1, 2008 was extended eighteen months through
December 31, 2009. Effective January 1, 2009, numerous other CPT codes under the Physician Fee
Schedule and Clinical Fee Schedule for services Clarient performs generally increased through
December 31, 2009.
Cost of Sales. Cost of sales for the three months ended March 31, 2009 was $9.0 million
compared to $7.4 million in the prior year period, an increase of $1.6 million, or 21.2%. The $1.6
million increase was driven by the increase in volume as measured by the number of diagnostic tests
performed; and was primarily related to additional laboratory personnel costs of $0.4 million,
increased laboratory supplies expense of $0.6 million, increased cost of tests performed on
Clarients behalf by other laboratories of $0.5 million and an increase in shipping expense of $0.1
million.
Gross margin for the three months ended March 31, 2009 was 60.1% compared to 53.4% in the
prior year period. The increase in gross margin was primarily driven by an overall increase in
revenue, including higher value cancer diagnostic services. In addition, employee productivity
continues to improve based on Clarients metrics of specimens prepared and tested by month per full
time equivalent (FTE) employee. Clarient also realized greater economies of scale in operations
through its business growth as compared to the prior year.
Clarient anticipates that gross margins will improve as its testing volume increases.
Clarient continues to improve the efficiency and effectiveness of its laboratory operations. Gross
margins could be adversely affected, however, if the adjusted Medicare reimbursement rates
(effective January 1, 2009) are decreased after December 31, 2009.
Selling, General and Administrative. Selling, general and administrative expenses for the
three months ended March 31, 2009 were $12.6 million, an increase of approximately $4.0 million, or
46.1%, compared to $8.7 million in the prior year period. The increase was primarily related to
additional sales and marketing personnel costs of $1.6 million
(which included increased sales
commission expense of $0.7 million due to increased
revenue), higher corporate development expenses of $0.4 million, a
$0.3 million increase in stock-based compensation expense and a $1.2 million increase in bad debt expense.
The increase in bad debt expense is primarily related to Clarients increase in revenue as
compared to the prior year and the impact on cash collections of delays in Clarients internal
billing and collection efforts. Bad debt expense was also impacted by higher loss experience in
the second half of 2008 which increased the historical loss factor used in the bad debt calculation
for the three months ended March 31, 2009. Clarient expects that bad debt expense as a percentage
of revenue in 2009 will be less as compared to 2008 as Clarient further staffs its in house billing
and collection department, more effectively manages its billing and collection function and
improves the quality of its billing and collection processes.
Interest, Net. Interest expense, net, was $0.2 million and $0.3 million for the three months
ended March 31, 2009 and 2008, respectively. The decrease was due to lower outstanding borrowings
under Clarients third party financing facilities.
28
Life Sciences
The following partner companies were included in Life Sciences during the three months ended
March 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
Safeguard Ownership as of March 31, |
|
|
|
Partner Company |
|
2009 |
|
|
2008 |
|
|
Accounting Method |
Advanced BioHealing, Inc. |
|
|
28.3 |
% |
|
|
28.3 |
% |
|
Equity Method |
Alverix, Inc. |
|
|
50.0 |
% |
|
|
50.0 |
% |
|
Equity Method |
Avid Radiopharmaceuticals, Inc. |
|
|
13.9 |
% |
|
|
14.2 |
% |
|
Cost Method |
Cellumen, Inc. |
|
|
51.4 |
% |
|
|
40.3 |
% |
|
Equity Method (1) |
Garnet BioTherapeutics, Inc. |
|
|
31.1 |
% |
|
|
N /A |
|
|
Equity Method |
Molecular Biometrics, Inc. |
|
|
37.8 |
% |
|
|
N/A |
|
|
Equity Method |
NuPathe, Inc. |
|
|
23.5 |
% |
|
|
26.2 |
% |
|
Equity Method |
Rubicor Medical, Inc. |
|
|
44.6 |
% |
|
|
35.7 |
% |
|
Equity Method |
Tengion, Inc. |
|
|
4.5 |
% |
|
|
N/A |
|
|
Cost Method |
|
|
|
(1) |
|
During the three months ended March 31, 2009, the Companys voting interest
in Cellumen, Inc. increased to 51.4%, on an as-converted basis, from 40.3%.
Due to the substantive participating rights of the minority shareholders in the
significant operating decisions of Cellumen, the Company continues to account
for its holdings in Cellumen under the equity method. |
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Equity loss |
|
$ |
(3,424 |
) |
|
$ |
(4,386 |
) |
|
|
|
|
|
|
|
Equity Loss. Equity loss fluctuates with the number of Life Sciences partner companies
accounted for under the equity method, our voting ownership percentage in these partner companies
and the net results of operations of these partner companies. We recognize our share of losses to
the extent we have cost basis in the equity partner company or we have outstanding commitments or
guarantees. Certain amounts recorded to reflect our share of the income or losses of our partner
companies accounted for under the equity method are based on estimates and on unaudited results of
operations of those partner companies and may require adjustments in the future when audits of
these entities are made final. We report our share of the results of our equity method partner
companies on a one quarter lag basis. Equity loss for Life Sciences decreased $1.0 million in the
three months ended March 31, 2009 compared to the prior year period. The decrease in equity loss
was primarily due to smaller losses incurred at certain partner companies.
29
Technology
The following partner companies were included in Technology during the three months ended
March 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
Safeguard Ownership as of March 31, |
|
|
|
Partner Company |
|
2009 |
|
|
2008 |
|
|
Accounting Method |
Advantedge Healthcare Solutions, Inc. |
|
|
37.6 |
% |
|
|
35.1 |
% |
|
Equity Method |
Authentium, Inc. |
|
|
20.0 |
% |
|
|
19.9 |
% |
|
Equity Method (1) |
Beyond.com, Inc. |
|
|
37.1 |
% |
|
|
37.1 |
% |
|
Equity Method |
Bridgevine, Inc. |
|
|
24.4 |
% |
|
|
20.8 |
% |
|
Equity Method |
Kadoo,
Inc.(2) |
|
|
14.0 |
% |
|
|
14.0 |
% |
|
Cost Method |
GENBAND, Inc. |
|
|
2.2 |
% |
|
|
12.2 |
% |
|
Cost Method |
Portico Systems, Inc. |
|
|
46.0 |
% |
|
|
46.8 |
% |
|
Equity Method |
Swaptree, Inc. |
|
|
29.3 |
% |
|
|
N/A |
|
|
Equity Method |
|
|
|
(1) |
|
During the third quarter of 2008, we increased our ownership interest in
Authentium, Inc. to the 20.0% threshold at which we believe we exercise
significant influence. Accordingly, we adopted the equity method of accounting
for our holdings in Authentium. We have adjusted the financial statements for
all prior periods presented to retrospectively apply the equity method of
accounting for our holdings in Authentium since the initial date of acquisition
in April 2006 |
|
|
|
(2) |
|
In the fourth quarter of
2008, we impaired the entire carrying value of Kadoo, Inc. which has
since ceased operations. |
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Equity loss |
|
$ |
(2,079 |
) |
|
$ |
(2,114 |
) |
|
|
|
|
|
|
|
Equity Loss. Equity loss fluctuates with the number of Technology partner companies accounted
for under the equity method, our voting ownership percentage in these partner companies and the net
results of operations of these partner companies. We recognize our share of losses to the extent
we have cost basis in the equity partner company or we have outstanding commitments or guarantees.
Certain amounts recorded to reflect our share of the income or losses of our partner companies
accounted for under the equity method are based on estimates and on unaudited results of operations
of those partner companies and may require adjustments in the future when audits of these entities
are made final. We report our share of the results of our equity method partner companies on a one
quarter lag. Equity loss for Technology decreased $0.1 million in the three months ended March 31,
2009 compared to the prior year period. The decrease was due to smaller losses incurred at certain
partner companies.
30
Corporate Operations
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
General and administrative |
|
$ |
(3,730 |
) |
|
$ |
(4,733 |
) |
Stock-based compensation |
|
|
(595 |
) |
|
|
(518 |
) |
Depreciation |
|
|
(37 |
) |
|
|
(46 |
) |
Interest income |
|
|
156 |
|
|
|
925 |
|
Interest expense |
|
|
(735 |
) |
|
|
(1,055 |
) |
Other income (loss), net |
|
|
(245 |
) |
|
|
361 |
|
Equity loss |
|
|
(10 |
) |
|
|
(114 |
) |
|
|
|
|
|
|
|
|
|
$ |
(5,196 |
) |
|
$ |
(5,180 |
) |
|
|
|
|
|
|
|
Three months ended March 31, 2009 versus the three months ended March 31, 2008
General and Administrative Costs. Our general and administrative expenses consist primarily
of employee compensation, insurance, outside services such as legal, accounting and travel-related
costs. General and administrative costs decreased $1.0 million as compared to the prior year
period. The decrease is primarily attributable to a $0.2 million decrease in employee costs, $0.4
million decrease in professional fees and $0.1 million decrease in facility costs.
Stock-Based Compensation. Stock-based compensation consists primarily of expense related to
stock option grants and grants of restricted stock and deferred stock units to our employees. The
$0.1 million increase relates to recent grants of performance-based stock options and restricted
stock awards. Stock-based compensation expense related to corporate operations is included in
selling, general and administrative in the Consolidated Statements of Operations.
Interest Income. Interest income includes all interest earned on available cash and marketable
security balances. Interest income decreased $0.8 million in the first quarter of 2009 compared to
the prior year period due to a decrease in interest rates and a decrease in average invested cash
balances.
Interest Expense. Interest expense is primarily related to our 2.625% convertible senior
debentures with a stated maturity of 2024. Interest expense decreased $0.3 million in the first
quarter of 2009 as compared to the prior year period. The decline was attributable to the
repurchase of $43 million in face value of the 2024 Debentures in 2008.
Other income (loss), net. Other income (loss), net for the three months ended March 31, 2009
included an impairment charge related to a private equity fund of $0.3 million. Other income
(loss), net for the three months ended March 31, 2008 included a gain on sale of land of $0.3
million.
Equity loss. Equity loss for both periods presented related to our private equity holdings
accounted for under the equity method.
Income Tax Expense
Income tax expense (benefit) for the three months ended March 31, 2009 and 2008 was $0 for
both periods. We have recorded a valuation allowance to reduce our net deferred tax asset to an
amount that is more likely than not to be realized in future years. Accordingly, the benefit of
the net operating loss that would have been recognized in each period was offset by a valuation
allowance.
31
Discontinued Operations
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 ACIS
Sale) 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. During March 2009, Clarient received correspondence from Zeiss which acknowledged the
satisfaction of the post-closing conditions and the related $1.5 million payment due. In April
2009, Clarient received $1.5 million from Zeiss which was recorded in income from discontinued
operations within the Consolidated Statement of Operations for the three months ended March 31,
2009.
In May 2008, we consummated a transaction (the Bundle Sale) pursuant to which we sold all of
our equity and debt interests in Acsis, Inc. (Acsis), Alliance Consulting Group Associates, Inc.
(Alliance Consulting), Laureate Pharma, Inc. (Laureate Pharma), ProModel Corporation
(ProModel) and Neuronyx, Inc. (Neuronyx). Of the companies included in the Bundle Sale, Acsis,
Alliance Consulting and Laureate Pharma were consolidated partner companies and are reported in
discontinued operations for all periods presented. The loss from discontinued operations, net of
tax in the first quarter of 2008 of $7.1 million was primarily attributable to a $3.6 million
impairment loss related to the Bundle Sale and $3.0 million in losses resulting from the first
quarter operating results of Acsis, Alliance Consulting and Laureate Pharma.
Liquidity and Capital Resources
Parent Company
We fund our operations with cash on hand as well as proceeds from sales of and distributions
from partner companies, private equity funds and marketable securities. In prior periods, we have
also used sales of our equity and issuance of debt as sources of liquidity and may do so in the
future. Our ability to generate liquidity from sales of partner companies, sales of marketable
securities and from equity and debt issuances has been adversely affected from time to time by
adverse circumstances in the U.S. capital markets and other factors.
As of March 31, 2009, at the parent company level, we had $84.4 million of cash and cash
equivalents and $6.4 million of marketable securities for a total of $90.8 million. In addition, we
had $6.9 million of cash held in escrow, including accrued interest, related to the Bundle Sale and
the sale of Pacific Title and Art Studio. Clarient, our consolidated partner company, had cash and
cash equivalents of $4.7 million.
In connection with the Bundle Sale, an aggregate of $6.4 million of the gross proceeds of the
sale were placed in escrow pending the expiration of a predetermined notification period, subject
to possible extension in the event of a claim against the escrowed amounts. On April 25, 2009, the
purchaser in the Bundle Sale notified us of claims being asserted against the entire escrowed
amounts. We do not believe that such claims are valid. The proceeds being held in escrow will
remain there until the dispute over the claims have been settled or determined pursuant to legal
process.
In February 2004, we completed the sale of the 2024 Debentures. At March 31, 2009, we had
$86.0 million in face value of the 2024 Debentures outstanding. Interest on the 2024 Debentures is
payable semi-annually. At the holders option, the 2024 Debentures are convertible into our common
stock before the close of business on March 14, 2024 subject to certain conditions. The conversion
rate of the 2024 Debentures is $7.2174 of principal amount per share. The closing price of our
common stock on March 31, 2009 was $0.55. The 2024 Debentures holders have the right to require
repurchase of the 2024 Debentures on March 21, 2011, March 20, 2014 or March 20, 2019 at a
repurchase price equal to 100% of their respective face amount, plus accrued and unpaid interest.
The 2024 Debentures holders also have the right to require repurchase of the 2024 Debentures upon
certain events, including sale of all or substantially all of our common stock or assets,
liquidation, dissolution or a change in control. Subject to certain conditions, we have the right
to redeem all or some of the 2024 Debentures. None of these conditions are satisfied as of today.
During 2008, we repurchased $43.0 million in face value of the 2024 debentures for $33.5
million in cash, including accrued interest. During 2006, we repurchased $21.0 million in face
value of the 2024 Debentures for $16.4 million in cash, including accrued interest.
32
On May 2, 2008, our Board of Directors authorized us, from time to time and depending on
market conditions, to repurchase shares of our outstanding common stock, with up to an aggregate
value of $10.0 million, exclusive of fees and commissions. These repurchases, as well as any
repurchases of 2024 Debentures, have and will be made in open market or privately negotiated
transactions in compliance with the U.S. Securities and Exchange Commission and other applicable
legal requirements. The manner, timing and amount of any purchases have and will be determined by
us based upon an evaluation of market conditions, stock price and other factors. Our Board of
Directors authorizations regarding common stock and 2024 Debenture repurchases do not obligate us
to acquire any particular amount of common stock or 2024 Debentures and may be modified or
suspended at any time at our discretion. During the year ended December 31, 2008 we repurchased
approximately 975 thousand shares of common stock at a cost of $1.3 million.
On February 6, 2009, the Company entered into a new loan agreement which provides the Company
with a revolving credit facility in the maximum aggregate amount of $50 million in the form of
borrowings, guarantees and issuances of letters of credit (subject to a $20 million sublimit).
Actual availability under the credit facility will be based on the amount of cash maintained at the
bank as well as the value of the Companys public and private partner company interests. This
credit facility bears interest at the prime rate for outstanding borrowings, subject to an increase
in certain circumstances. Other than for limited exceptions, the Company is required to maintain
all of its depository and operating accounts and not less than 75% of its investment and securities
accounts at the bank. The credit facility matures on December 31, 2010. Availability under the
Companys new revolving credit facility at March 31, 2009 was $50.0 million.
In conjunction with the execution of the loan agreement, the Company is terminating its prior
revolving credit facility.
In connection with the sale of CompuCom Systems, Inc. (CompuCom) in 2004, the Company
provided a letter of credit to the landlord of CompuComs Dallas headquarters, which letter of
credit will expire on March 19, 2019, in an amount equal to $6.3 million. At March 31, 2009, the
required cash collateral, pursuant to the Companys prior revolving credit facility, was $6.3
million, which amount was included within Cash and cash equivalents on the Consolidated Balance
Sheet as of that date.
We have committed capital of approximately $6.8 million, including conditional commitments to
provide non-consolidated partner companies with additional funding and commitments made to various
private equity funds in prior years. These commitments will be funded over the next several years,
including approximately $6.5 million which is expected to be funded in the next 12 months. We may
seek to further reduce our current ownership interests in, and our existing commitments to, the
funds in which we hold interests.
The transactions we enter into in pursuit of our strategy could increase or decrease our
liquidity at any point in time. As we seek to acquire interests in technology and life sciences
companies or provide additional funding to existing partner companies, we may be required to expend
our cash or incur debt, which will decrease our liquidity. Conversely, as we dispose of our
interests in partner companies from time-to-time, we may receive proceeds from such sales which
could increase our liquidity. From time-to-time, we are engaged in discussions concerning
acquisitions and dispositions which, if consummated, could impact our liquidity, perhaps
significantly.
In May 2001, we entered into a $26.5 loan agreement with Warren V. Musser, our former Chairman
and Chief Executive Officer. In December 2006, we restructured the obligation to reduce the amount
outstanding to $14.8 million, bearing an interest rate of 5.0% per annum. Cash payments, when
received, are recognized as Recovery-related party in our Consolidated Statements of Operations.
Since 2001 and through March 31, 2009 we received a total of $16.3 million in cash payments on the
loan. The carrying value of the loan at March 31, 2009 was zero.
We have received distributions as both a general partner and a limited partner from certain
private equity funds. Under certain circumstances, we may be required to return a portion or all
the distributions we received as a general partner of a fund for further distribution to such
funds limited partners (the clawback). The maximum clawback we could be required to return for
our general partner interest is $3.6 million, of which $2.5 million was reflected in accrued
expenses and other current liabilities and $1.1 million was reflected in Other long-term
liabilities on the Consolidated Balance Sheet at March 31, 2009.
Our previous ownership in the general partners of the funds which have potential clawback
liabilities ranges from 19-30%. The clawback liability is joint and several, such that we may be
required to fund the clawback for other general partners should they default. The funds have taken
several steps to reduce the potential liabilities should other general partners default, including
withholding all general partner distributions and placing them in escrow and adding rights of
set-off among certain funds. We believe our potential liability due to the possibility of default
by other general partners is remote.
33
For the reasons we presented above, we believe our cash and cash equivalents at March 31,
2009, availability under our revolving credit facility and other internal sources of cash flow will
be sufficient to fund our cash requirements for at least the next 12 months, including commitments
to our existing companies and funds, possible additional funding of existing partner companies and
our general corporate requirements. Our acquisition of new partner company interests is always
contingent upon our availability of cash to fund such deployments, and our timing of monetization
events directly affects our availability of cash.
Consolidated Partner Company
On March 25, 2009 Clarient entered into a Stock Purchase Agreement with Oak Investment
Partners XII (Oak) pursuant to which Clarient agreed to sell and issue to Oak, 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. The initial closing occurred on March 26, 2009, at
which time Clarient issued and sold 3.8 million preferred shares for proceeds of $29.1 million.
After paying closing fees and legal expenses, Clarient used the remaining proceeds to repay in full
the outstanding balance of $9.8 million on its revolving credit agreement, deposit $2.3 million in
a restricted cash account to support a standby letter of credit and repay us $14.0 million of the
outstanding balance on the subordinated revolving credit line we provide to Clarient (the
Mezzanine Facility). In connection with the Oak Purchase Agreement, on March 26, 2009, the
Mezzanine Facility was amended to reduce the maximum principal amount from $30.0 million to $10.0
million.
On July 31, 2008, Clarient entered into a $8.0 million secured credit agreement with a finance
company which was amended and restated on February 27, 2009. The secured credit agreement expires
on January 31, 2010. Actual availability under the facility is limited by Clarients qualified
accounts receivable and certain liquidity factors. Clarient reduced indebtedness to us under the
Mezzanine Facility with a portion of the proceeds borrowed under the revolving credit facility.
In March 2007, we provided the Mezzanine Facility to Clarient. Under the Mezzanine Facility,
we committed to provide Clarient access to up to $12.0 million in working capital funding, which
was reduced to $6.0 million as a result of the ACIS Sale. On March 14, 2008, the Mezzanine
Facility was extended through April 15, 2009, and increased from $6.0 million to $21.0 million. In
connection with the extension and increase of the Mezzanine Facility, the Company received from
Clarient five-year warrants to purchase shares of Clarient common stock with an exercise price of
$0.01 per share. The Company received 1.6 million of these warrants at the time of the extension
of the Mezzanine Facility and the Company received an additional 1.7 million warrants through
September 2008, based on the amount of borrowings remaining outstanding under the Mezzanine
Facility at certain interim dates. On February 27, 2009 the Mezzanine Facility was further
refinanced, renewed and expanded to $30.0 million. In connection with such renewal, Clarient
issued us fully vested five-year warrants to purchase 500,000 shares of Clarient common stock at an
exercise price of $1.376 (Clarients 20-day trailing close price of its common stock as of February
6, 2009). The Mezzanine Facility as amended has a maturity date of April 1, 2010. Borrowings
under the Mezzanine Facility bear interest at an annual rate of 14.0%.
Clarient expects a second closing to occur under the Oak Purchase Agreement on or about May
14, 2009, which will result in the issuance and sale of an additional 1.4 million preferred shares
for proceeds of approximately $10.9 million (the Second Oak Closing). Clarient expects to use a
portion of the proceeds from the Second Oak Closing to repay in full and terminate the Mezzanine
Facility and to use the remainder to support its working capital requirements.
Clarient believes that the collective funds to be made available in the Second Oak Closing,
availability under its $8.0 million secured credit agreement and the cash generated from its
operations will be adequate to support its operations and growth through 2009 and into 2010.
Nonetheless, Clarient can provide no assurance of such expectation. The level of cash collections
by its billing and collection department during 2008 and the first quarter of 2009 have not
increased at the same rate as its revenue has increased. Clarient relies on cash collections to
support its general working capital needs, and therefore, if its cash collections in 2009 do not to
keep pace with revenue growth, Clarient may require additional financing.
34
Analysis of Parent Company Cash Flows
Cash flow activity for the Parent Company was as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Net cash used in operating activities |
|
$ |
(4,177 |
) |
|
$ |
(3,069 |
) |
Net cash provided by (used in) investing activities |
|
|
15,310 |
|
|
|
(19,345 |
) |
Net cash provided by financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
11,133 |
|
|
$ |
(22,414 |
) |
|
|
|
|
|
|
|
Cash Used In Operating Activities
Cash used in operating activities increased $1.1 million. The change was primarily related to
working capital changes.
Net Cash (Used in) Provided by Investing Activities
Net cash provided by investing activities increased by $34.7 million. The increase
primarily related to a $15.5 million increase in repayment of advances to partner companies, a
decrease of $8.5 million in advances to partner companies, a $10.2 million net increase in cash
from marketable securities and a $0.8 million decrease in restricted cash.
Consolidated Working Capital from Continuing Operations
Consolidated working capital from continuing operations was $109 million at March 31, 2009, an
increase of $20.6 million compared to December 31, 2008. The increase was primarily due to
Clarients sale of 3.8 million shares of preferred stock for $29.1 million in cash, partially
offset by Clarients repayment of the outstanding balance of $9.8 million on its revolving credit
agreement.
Analysis of Consolidated Company Cash Flows
Cash flow activity was as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Net cash used in operating activities |
|
$ |
(6,816 |
) |
|
$ |
(6,308 |
) |
Net cash provided by (used in) investing activities |
|
|
1,013 |
|
|
|
(8,409 |
) |
Net cash provided by (used in) financing activities |
|
|
19,801 |
|
|
|
(7,093 |
) |
|
|
|
|
|
|
|
|
|
$ |
13,998 |
|
|
$ |
(21,810 |
) |
|
|
|
|
|
|
|
Net Cash Used In Operating Activities
Cash used in operating activities increased $0.5 million. The change was primarily related to
working capital changes.
Net Cash Provided by Investing Activities
Net cash provided by investing activities increased by $9.4 million. The increase is
primarily related to a $10.2 million net increase in cash from marketable securities, a $2.1
million decrease in cash flows used in discontinued operations, partially offset by a $2.0
million net increase in restricted cash, a $0.4 million increase in cash used for acquisitions
of ownership interests in partner companies and funds, net of cash acquired, a $0.3 million
increase in advances to partner companies and a $0.2 million increase in capital expenditures.
35
Net Cash (Used In) Provided by Financing Activities
Net cash provided by financing activities increased by $26.9 million. The increase is
primarily related to a $27.9 million increase in proceeds from the issuance of subsidiary common
stock offset by $1.2 million net repayments on outstanding borrowings.
Contractual Cash Obligations and Other Commercial Commitments
The following table summarizes our contractual obligations and other commercial
commitments related to continuing operations as of March 31, 2009 by period due or expiration of
the commitment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
|
Remainder of |
|
|
2010 and |
|
|
2012 and |
|
|
Due after |
|
|
|
Total |
|
|
2009 |
|
|
2011 |
|
|
2013 |
|
|
2013 |
|
|
|
(In millions) |
|
Contractual Cash Obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lines of credit |
|
$ |
5.9 |
|
|
$ |
5.9 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Capital leases |
|
|
1.8 |
|
|
|
0.4 |
|
|
|
1.2 |
|
|
|
0.2 |
|
|
|
|
|
Convertible senior
debentures(a) |
|
|
86.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86.0 |
|
Operating leases |
|
|
14.4 |
|
|
|
1.6 |
|
|
|
4.5 |
|
|
|
4.6 |
|
|
|
3.7 |
|
Funding commitments(b) |
|
|
6.8 |
|
|
|
6.4 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
Potential clawback
liabilities(c) |
|
|
3.6 |
|
|
|
2.5 |
|
|
|
1.1 |
|
|
|
|
|
|
|
|
|
Other long-term obligations(d) |
|
|
4.0 |
|
|
|
0.6 |
|
|
|
1.5 |
|
|
|
1.5 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Contractual Cash
Obligations |
|
$ |
122.5 |
|
|
$ |
17.4 |
|
|
$ |
8.7 |
|
|
$ |
6.3 |
|
|
$ |
90.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
Amount of Commitment Expiration by Period |
|
|
|
|
|
|
|
Remainder of |
|
|
2010 and |
|
|
2012 and |
|
|
After |
|
|
|
Total |
|
|
2009 |
|
|
2011 |
|
|
2013 |
|
|
2013 |
|
|
|
(In millions) |
|
Other Commitments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Letters of credit(e) |
|
$ |
8.6 |
|
|
$ |
0.8 |
|
|
$ |
1.5 |
|
|
$ |
|
|
|
$ |
6.3 |
|
|
|
|
|
|
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(a) |
|
In February 2004, we completed the issuance of $150.0 million in face value
of the 2024 Debentures with a stated maturity of March 15, 2024. During
2008 and 2006, we repurchased $43.0 million and $21.0 million,
respectively, in face value of the 2024 Debentures. The 2024 Debenture
holders have the right to require us to repurchase the 2024 Debentures on
March 21, 2011, March 20, 2014 or March 20, 2019 at a repurchase price
equal to 100% of their respective face amount, plus accrued and unpaid
interest. |
|
(b) |
|
These amounts include funding commitments to private equity funds which
have been included in the respective years based on estimated timing of
capital calls provided to us by the funds management. Also included are
$5.9 million conditional commitments to provide non-consolidated partner
companies with additional funding. |
|
(c) |
|
We have received distributions as both a general partner and a limited
partner from certain private equity funds. Under certain circumstances, we
may be required to return a portion or all the distributions we received as
a general partner of a fund for a further distribution to such funds
limited partners (the clawback). The maximum clawback we could be
required to return is approximately $3.6 million, of which $2.5 million was
reflected in accrued expenses and other current liabilities and $1.1
million was reflected in other long-term liabilities on the Consolidated
Balance Sheets. |
|
(d) |
|
Reflects the amount payable to our former Chairman and CEO under a contract. |
|
(e) |
|
Letters of credit include a $6.3 million letter of credit provided to the
landlord of CompuComs Dallas headquarters lease in connection with the
sale of CompuCom in 2004 and a $2.3 million letter of credit issued by
Clarient supporting its office lease. |
36
We have employment agreements with certain executive officers that provide for severance
payments to the executive officer in the event the officer is terminated without cause or in the
event the officer terminates his employment for good reason. The maximum aggregate exposure
under the agreements was approximately $8.0 million at March 31, 2009.
We are involved in various claims and legal actions arising in the ordinary course of
business. In the opinion of management, the ultimate disposition of these matters will not have a
material adverse effect on the consolidated financial position or results of operations.
Recent Accounting Pronouncements
See Note 6 to the Consolidated Financial Statements.
Factors That May Affect Future Results
You should carefully consider the information set forth below. The following risk factors
describe situations in which our business, financial condition or results of operations could be
materially harmed, and the value of our securities may decline. You should also refer to other
information included or incorporated by reference in this report.
Risks Related to our Business
Our business depends upon our ability to make good decisions regarding the deployment of capital
into new or existing partner companies and, ultimately, the performance of our partner companies,
which is uncertain.
If we make poor decisions regarding the deployment of capital into new or existing partner
companies, our business model will not succeed. Our success as a company ultimately depends on our
ability to choose the right partner companies. If our partner companies do not succeed, the value
of our assets could be significantly reduced and require substantial impairments or write-offs and
our results of operations and the price of our common stock could decline. The risks relating to
our partner companies include:
|
|
|
most of our partner companies have a history of operating losses or a limited operating
history; |
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|
|
the intensifying competition affecting the products and services our partner companies
offer could adversely affect their businesses, financial condition, results of operations and
prospects for growth; |
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|
the inability to adapt to the rapidly changing marketplaces; |
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|
the inability to manage growth; |
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|
the need for additional capital to fund their operations, which we may not be able to fund
or which may not be available from third parties on acceptable terms, if at all; |
|
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|
the inability to protect their proprietary rights and/or infringing on the proprietary
rights of others; |
|
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|
|
the certain of our partner companies could face legal liabilities from claims made against
them based upon their operations, products or work; |
|
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|
the impact of economic downturns on their operations, results and growth prospects; |
|
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|
|
the inability to attract and retain qualified personnel; and |
|
|
|
|
the existence of government regulations and legal uncertainties may place financial burdens
on the businesses of our partner companies. |
These risks are discussed in greater detail under the caption Risks Related to Our Partner
Companies below.
37
Our partner companies (and the nature of our interests in them) could vary widely from period to
period.
As part of our strategy, we continually assess the value to our shareholders of our interests
in our partner companies. We also regularly evaluate alternative uses for our capital resources. As
a result, depending on market conditions, growth prospects and other key factors, we may at any
time:
|
|
|
change the partner companies on which we focus; |
|
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|
|
sell some or all of our interests in any of our partner companies; or |
|
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|
otherwise change the nature of our interests in our partner companies. |
Therefore, the nature of our holdings could vary significantly from period to period.
Our consolidated financial results also may vary significantly based upon which partner
companies are included in our financial statements. For example:
|
|
|
For the three months ended March 31, 2009 and year ended December 31, 2008, we consolidated
the results of operations of Clarient in continuing operations. |
Our business model does not rely, or plan, upon the receipt of operating cash flows from our
partner companies. Our partner companies currently provide us with no cash flow from their
operations. We rely on cash on hand, liquidity events and our ability to generate cash from capital
raising activities to finance our operations.
We need capital to develop new partner company relationships and to fund the capital needs of
our existing partner companies. We also need cash to service and repay our outstanding debt,
finance our corporate overhead and meet our existing funding commitments. As a result, we have
substantial cash requirements. Our partner companies currently provide us with no cash flow from
their operations. To the extent our partner companies generate any cash from operations; they
generally retain the funds to develop their own businesses. As a result, we must rely on cash on
hand, liquidity events and new capital raising activities to meet our cash needs. If we are unable
to find ways of monetizing our holdings or to raise additional capital on attractive terms, we may
face liquidity issues that will require us to curtail our new business efforts, constrain our
ability to execute our business strategy and limit our ability to provide financial support to our
existing partner companies.
Fluctuations in the price of the common stock of our publicly traded holdings may affect the price
of our common stock.
Fluctuations in the market prices of the common stock of our publicly traded holdings are
likely to affect the price of our common stock. The market prices of our publicly traded holdings
have been highly volatile and subject to fluctuations unrelated or disproportionate to operating
performance. For example, the aggregate market value of our holdings in Clarient (Nasdaq: CLRT),
our only public company holding, at March 31, 2009 was approximately $104.6 million and at
December 31, 2008 was approximately $75.8 million.
Intense competition from other acquirors of interests in companies could result in lower gains or
possibly losses on our partner companies.
We face intense competition from other capital providers as we acquire and develop interests
in our partner companies. Some of our competitors have more experience identifying, acquiring and
selling companies and have greater financial and management resources, brand name recognition or
industry contacts than we have. Despite making most of our acquisitions at a stage when our partner
companies are not publicly traded, we may still pay higher prices for those equity interests
because of higher valuations of similar public companies and competition from other acquirers and
capital providers, which could result in lower gains or possibly losses.
We may be unable to obtain maximum value for our holdings or sell our holdings on a timely basis.
We hold significant positions in our partner companies. Consequently, if we were to divest all
or part of our holdings in a partner company, we may have to sell our interests at a relative
discount to a price which may be received by a seller of a smaller portion. For partner companies
with publicly traded stock, we may be unable to sell our holdings at then-quoted market prices. The
trading volume and public float in the common stock of Clarient, our only publicly traded partner
company, are small relative to our holdings. As a result, any significant open-market divestiture
by us of our holdings in these partner companies, if possible at all, would likely have a material
adverse effect on the market price of their common stock and on our proceeds from such a
divestiture. Additionally, we may not be able to take our partner companies public as a means of
monetizing our position or creating shareholder value.
Registration and other requirements under applicable securities laws may adversely affect our
ability to dispose of our holdings on a timely basis.
38
Our success is dependent on our executive management.
Our success is dependent on our executive management teams ability to execute our strategy. A
loss of one or more of the members of our executive management team without adequate replacement
could have a material adverse effect on us.
Our business strategy may not be successful if valuations in the market sectors in which our
partner companies participate decline.
Our strategy involves creating value for our shareholders by helping our partner companies
build value and, if appropriate, accessing the public and private capital markets. Therefore, our
success is dependent on the value of our partner companies as determined by the public and private
capital markets. Many factors, including reduced market interest, may cause the market value of our
publicly traded partner companies to decline. If valuations in the market sectors in which our
partner companies participate decline, their access to the public and private capital markets on
terms acceptable to them may be limited.
Our partner companies could make business decisions that are not in our best interests or with
which we do not agree, which could impair the value of our holdings.
Although we may seek a controlling equity interest and participation in the management of our
partner companies, we may not be able to control the significant business decisions of our partner
companies. We may have shared control or no control over some of our partner companies. In
addition, although we currently own a controlling interest in some of our partner companies, we may
not maintain this controlling interest. Acquisitions of interests in partner companies in which we
share or have no control, and the dilution of our interests in or loss of control of partner
companies, will involve additional risks that could cause the performance of our interests and our
operating results to suffer, including:
|
|
|
the management of a partner company having economic or business interests or objectives
that are different than ours; and |
|
|
|
|
the partner companies not taking our advice with respect to the financial or operating
difficulties they may encounter. |
Our inability to control our partner companies also could prevent us from assisting them,
financially or otherwise, or could prevent us from liquidating our interests in them at a time or
at a price that is favorable to us. Additionally, our partner companies may not act in ways that
are consistent with our business strategy. These factors could hamper our ability to maximize
returns on our interests and cause us to recognize losses on our interests in these partner
companies.
We may have to buy, sell or retain assets when we would otherwise not wish to do so in order to
avoid registration under the Investment Company Act.
The Investment Company Act of 1940 regulates companies which are engaged primarily in the
business of investing, reinvesting, owning, holding or trading in securities. Under the Investment
Company Act, a company may be deemed to be an investment company if it owns investment securities
with a value exceeding 40% of the value of its total assets (excluding government securities and
cash items) on an unconsolidated basis, unless an exemption or safe harbor applies. We refer to
this test as the 40% Test. Securities issued by companies other than consolidated partner
companies are generally considered investment securities for purpose of the Investment Company
Act; unless other circumstances exist which actively involve the company holding such interests in
the management of the underlying company. We are a company that partners with growth-stage
technology and life sciences companies to build value; we are not engaged primarily in the business
of investing, reinvesting or trading in securities. We are in compliance with the 40% Test.
Consequently, we do not believe that we are an investment company under the Investment Company Act.
We monitor our compliance with the 40% Test and seek to conduct our business activities to
comply with this test. It is not feasible for us to be regulated as an investment company because
the Investment Company Act rules are inconsistent with our strategy of actively helping our partner
companies in their efforts to build value. In order to continue to comply with the 40% Test, we may
need to take various actions which we would otherwise not pursue. For example, we may need to
retain a controlling interest in a partner company that we no longer consider strategic, we may not
be able to acquire an interest in a company unless we are able to obtain a controlling ownership
interest in the company, or we may be limited in the manner or timing in which we sell our
interests in a partner company. Our ownership levels also may be affected if our partner companies
are acquired by third parties or if our partner companies issue stock which dilutes our controlling
ownership interest. The actions we may need to take to address these issues while maintaining
compliance with the 40% Test could adversely affect our ability to create and realize value at our
partner companies.
Recent economic disruptions and downturns may have negative repercussions for the Company.
Recent events in the United States and international capital markets, debt markets and
economies generally may negatively impact the Companys ability to pursue certain of its tactical
and strategic initiatives, such as: accessing additional public or private equity or debt
financing for itself or for its partner companies and selling the Companys interests in its
partner companies on terms acceptable to the Company and in time frames consistent with our
expectations.
39
We have material weaknesses in our internal control over financial reporting and cannot provide
assurance that additional material weaknesses will not be identified in the future. Our failure to
effectively maintain our internal control over financial reporting could result in material
misstatements in our financial statements which could require us to restate financial statements,
cause us to fail to meet our reporting obligations, cause investors to lose confidence in our
reported financial information and/or have a negative effect on our stock price.
We have determined that we had deficiencies in our internal control over financial reporting
as of December 31, 2008 that constituted material weaknesses as defined by the Public Company
Accounting Oversight Boards Audit Standard No. 5. These material weaknesses are identified in
Item 9A, Controls and Procedures within our Annual Report on Form 10-K for the year ended December 31, 2008.
We cannot assure that additional material weaknesses in our internal control over financial
reporting will not be identified in the future. Any failure to maintain or implement required new
or improved controls, or any difficulties we encounter in their implementation, could result in
additional material weaknesses, or could result in material misstatements in our financial
statements. These misstatements could result in a restatement of financial statements, cause us to
fail to meet our reporting obligations and/or cause investors to lose confidence in our reported
financial information, leading to a decline in our stock price.
If we do not meet the New York Stock Exchange continued listing requirements, our common stock may
be delisted.
The New York Stock Exchange (NYSE) listing standards require us, among other things, to
maintain an average closing price of at least $1.00 per share of common stock during any
consecutive 30-trading-day period. On November 4, 2008, we were notified by the NYSE that we were
not in compliance with the NYSE listing standard relating to minimum average share price. We have
notified the NYSE of our intent to cure the deficiency; and, if necessary, we will undertake a
reverse split of our common stock in order to do so. Based on currently applicable NYSE rules, we
must bring our share price and average share price back above $1.00 on or before September 1, 2009,
subject to possible extension, to regain compliance with the NYSEs price condition, or our common
stock will be subject to suspension and delisting procedures. During the cure period and subject to
compliance with NYSEs other continued listing standards; our common stock will continue to be
listed on the NYSE.
A delisting of our common stock from the NYSE would negatively impact us because it would,
unless we were able to obtain a listing for our common stock on another national or regional
securities exchange, trigger a situation where the holders of our currently outstanding convertible
debentures would have the right to cause us to redeem the convertible debentures held by such
holders at face value. It is uncertain whether the Company would be able to make such redemption,
based upon its available cash on hand, cash equivalents and other potential sources of funding. In
addition, any delisting by the NYSE could or would also: (i) reduce the liquidity and market price
of our common stock; (ii) reduce the number of investors willing to hold or acquire our common
stock, which could negatively impact our ability to raise equity financing; (iii) limit our ability
to use a registration statement to offer and sell freely tradable securities, thereby preventing us
from accessing the public capital markets, and (iv) impair our ability to provide equity incentives
to our employees.
There
could be negative effects if we do effect a reverse split of our Common Stock.
If we undertake a reverse split of our stock in order to address the NYSE compliance issue
described above, the immediate effect of a reverse stock split would be to reduce the number of
shares of our outstanding common stock and to increase the trading price of our common stock.
However, we cannot predict the specific effect of any reverse stock split upon the market price of
our common stock. Based on the data we have reviewed it appears that sometimes a reverse stock
split improves stock performance and sometimes it does not, and sometimes a reverse stock split
improves overall market capitalization and sometimes it does not. We cannot assure you that the
trading price of our common stock after the reverse stock split will rise in proportion to the
reduction in the number of shares of our common stock outstanding as a result of the reverse stock
split. Also, we cannot assure you that a reverse stock split would lead to a sustained increase in
the trading price of our common stock. The trading price of our common stock may change due to a
variety of factors, such as our operating results and other factors related to our business and
general market conditions. We also cannot predict other possible negative effects of a reduction in
the number of our common shares outstanding on the Company or on individual stockholders.
40
Risks Related to our Partner Companies
Most of our partner companies have a history of operating losses or limited operating history and
may never be profitable.
Most of our partner companies have a history of operating losses or limited operating history,
have significant historical losses and may never be profitable. Many have incurred substantial
costs to develop and market their products, have incurred net losses and cannot fund their
cash needs from operations. We expect that the operating expenses of certain of our partner
companies will increase substantially in the foreseeable future as they continue to develop
products and services, increase sales and marketing efforts, and expand operations.
Our partner companies face intense competition, which could adversely affect their business,
financial condition, results of operations and prospects for growth.
There is intense competition in the technology and life sciences marketplaces, and we expect
competition to intensify in the future. Our business, financial condition, results of operations
and prospects for growth will be materially adversely affected if our partner companies are not
able to compete successfully. Many of the present and potential competitors may have greater
financial, technical, marketing and other resources than those of our partner companies. This may
place our partner companies at a disadvantage in responding to the offerings of their competitors,
technological changes or changes in client requirements. Also, our partner companies may be at a
competitive disadvantage because many of their competitors have greater name recognition, more
extensive client bases and a broader range of product offerings. In addition, our partner companies
may compete against one another.
Our partner companies may fail if they do not adapt to the rapidly changing technology and life
sciences marketplaces.
If our partner companies fail to adapt to rapid changes in technology and customer and
supplier demands, they may not become or remain profitable. There is no assurance that the products
and services of our partner companies will achieve or maintain market penetration or commercial
success, or that the businesses of our partner companies will be successful.
The technology and life sciences marketplaces are characterized by:
|
|
|
rapidly changing technology; |
|
|
|
|
evolving industry standards; |
|
|
|
|
frequently introducing new products and services; |
|
|
|
|
shifting distribution channels; |
|
|
|
|
evolving government regulation; |
|
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|
|
frequently changing intellectual property landscapes; and |
|
|
|
|
changing customer demands. |
Our future success will depend on our partner companies ability to adapt to these rapidly
evolving marketplaces. They may not be able to adequately or economically adapt their products and
services, develop new products and services or establish and maintain effective distribution
channels for their products and services. If our partner companies are unable to offer competitive
products and services or maintain effective distribution channels, they will sell fewer products
and services and forego potential revenue, possibly causing them to lose money. In addition, we and
our partner companies may not be able to respond to the rapid technology changes in an economically
efficient manner, and our partner companies may become or remain unprofitable.
41
Our partner companies may grow rapidly and may be unable to manage their growth.
We expect some of our partner companies to grow rapidly. Rapid growth often places
considerable operational, managerial and financial strain on a business. To successfully manage
rapid growth, our partner companies must, among other things:
|
|
|
rapidly improve, upgrade and expand their business infrastructures; |
|
|
|
|
scale up production operations; |
|
|
|
|
develop appropriate financial reporting controls; |
|
|
|
|
attract and maintain qualified personnel; and |
|
|
|
|
maintain appropriate levels of liquidity. |
If our partner companies are unable to manage their growth successfully, their ability to
respond effectively to competition and to achieve or maintain profitability will be adversely
affected.
Based on our business model, some or all of our partner companies will need to raise additional
capital to fund their operations at any given time. We may not be able to fund some or all of such
amounts and such amounts may not be available from third parties on acceptable terms, if at all.
We cannot be certain that our partner companies will be able to obtain additional financing on
favorable terms, if at all. Because our resources and our ability to raise capital are limited, we
may not be able to provide our partner companies with sufficient capital resources to enable them
to reach a cash flow positive position. We also may fail to accurately project the capital needs of
our partner companies for purposes of our cash flow planning. If our partner companies need to but
are not able to raise capital from us or other outside sources, then they may need to cease or
scale back operations. In such event, our interest in any such partner company will become less
valuable.
Recent economic disruptions and downturns may negatively affect our partner companies plans and
their results of operations.
Many of our partner companies are largely dependant upon outside sources of capital to fund
their operations. Disruptions in the availability of capital from such sources will negatively
affect the ability of such partner companies to pursue their business models and will force such
companies to revise their growth and development plans accordingly. Any such changes will, in
turn, affect the ability of the Company to realize the value of its capital deployments in such
companies.
In addition, the downturn in the economy as well as possible governmental responses to such
downturn and/or to specific situations in the economy could affect the business prospects of
certain of our partner companies, including, but not limited to, in the following ways: weaknesses
in the financial services industries; reduced business and/or consumer spending; and/or systematic
changes in the ways the healthcare system operates in the United States.
Our partner companies are subject to independent audits and the results of such independent audits
could adversely impact our partner companies.
As reported in its Form 10-K for the year ended December 31, 2008, Clarients independent
auditors have determined that there is substantial doubt about Clarients ability to continue as a
going concern. The going concern explanatory paragraph in Clarients audit opinion could have a
negative impact on:
|
|
|
Clarients ability to extend, renew or refinance its bank credit facility or to secure
additional debt or equity financing in order to fund anticipated working capital needs and
capital expenditures and to execute its strategy; |
|
|
|
|
Clarients relationships with existing customers or potential new customers; and |
|
|
|
|
Clarients stock price. |
If any of such events were to occur, the value of our holdings in Clarient could be adversely
impacted.
42
Some of our partner companies may be unable to protect their proprietary rights and may infringe on
the proprietary rights of others.
Our partner companies assert various forms of intellectual property protection. Intellectual
property may constitute an important part of our partner companies assets and competitive
strengths. Federal law, most typically, copyright, patent, trademark and trade secret laws,
generally protects intellectual property rights. Although we expect that our partner companies will
take reasonable efforts to protect the rights to their intellectual property, the complexity of
international trade secret, copyright, trademark and patent law, coupled with the limited resources
of these partner companies and the demands of quick delivery of products and services to market,
create a risk that their efforts will prove inadequate to prevent misappropriation of our partner
companies technology, or third parties may develop similar technology independently.
Some of our partner companies also license intellectual property from third parties and it is
possible that they could become subject to infringement actions based upon their use of the
intellectual property licensed from those third parties. Our partner companies generally obtain
representations as to the origin and ownership of such licensed intellectual property; however,
this may not adequately protect them. Any claims against our partner companies proprietary rights,
with or without merit, could subject our partner companies to costly litigation and the diversion
of their technical and management personnel from other business concerns. If our partner companies
incur costly litigation and their personnel are not effectively deployed, the expenses and losses
incurred by our partner companies will increase and their profits, if any, will decrease.
Third parties have and may assert infringement or other intellectual property claims against
our partner companies based on their patents or other intellectual property claims. Even though we
believe our partner companies products do not infringe any third-partys patents, they may have to
pay substantial damages, possibly including treble damages, if it is ultimately determined that
they do. They may have to obtain a license to sell their products if it is determined that their
products infringe another persons intellectual property. Our partner companies might be prohibited
from selling their products before they obtain a license, which, if available at all, may require
them to pay substantial royalties. Even if infringement claims against our partner companies are
without merit, defending these types of lawsuits takes significant time, may be expensive and may
divert management attention from other business concerns.
Certain of our partner companies could face legal liabilities from claims made against their
operations, products or work.
The manufacture and sale of certain of our partner companies products entails an inherent
risk of product liability. Certain of our partner companies maintain product liability insurance.
Although none of our partner companies to date have experienced any material losses, there can be
no assurance that they will be able to maintain or acquire adequate product liability insurance in
the future and any product liability claim could have a material adverse effect on our partner
companies revenue and income. In addition, many of the engagements of our partner companies
involve projects that are critical to the operation of their clients businesses. If our partner
companies fail to meet their contractual obligations, they could be subject to legal liability,
which could adversely affect their business, operating results and financial condition. The
provisions our partner companies typically include in their contracts, which are designed to limit
their exposure to legal claims relating to their services and the applications they develop, may
not protect our partner companies or may not be enforceable. Also, as consultants, some of our
partner companies depend on their relationships with their clients and their reputation for
high-quality services and integrity to retain and attract clients. As a result, claims made against
our partner companies work may damage their reputation, which in turn could impact their ability
to compete for new work and negatively impact their revenue and profitability.
Our partner companies success depends on their ability to attract and retain qualified personnel.
Our partner companies are dependent upon their ability to attract and retain senior management
and key personnel, including trained technical and marketing personnel. Our partner companies also
will need to continue to hire additional personnel as they expand. At present, none of our partner
companies have employees represented by labor unions. Although our partner companies have not been
the subject of a work stoppage, any future work stoppage could have a material adverse effect on
their respective operations. A shortage in the availability of the requisite qualified personnel or
work stoppage would limit the ability of our partner companies to grow, to increase sales of their
existing products and services, and to launch new products and services.
43
Government regulations and legal uncertainties may place financial burdens on the businesses of our
partner companies.
Failure to comply with applicable requirements of the FDA or comparable regulation in foreign
countries can result in fines, recall or seizure of products, total or partial suspension of
production, withdrawal of existing product approvals or clearances, refusal to approve or clear new
applications or notices and criminal prosecution. Manufacturers of pharmaceuticals and medical
diagnostic devices and operators of laboratory facilities are subject to strict federal and state
regulation regarding validation and the quality of manufacturing and laboratory facilities. Failure
to comply with these quality regulation systems requirements could result in civil or criminal
penalties or enforcement proceedings, including the recall of a product or a cease distribution
order. The enactment of any additional laws or regulations that affect healthcare insurance policy
and reimbursement (including Medicare reimbursement) could negatively affect our partner companies.
If Medicare or private payors change the rates at which our partner companies or their customers
are reimbursed by insurance providers for their products, such changes could adversely impact our
partner companies.
Some of our partner companies are subject to significant environmental, health and safety
regulation.
Some of our partner companies are subject to licensing and regulation under federal, state and
local laws and regulations relating to the protection of the environment and human health and
safety, including laws and regulations relating to the handling, transportation and disposal of
medical specimens, infectious and hazardous waste and radioactive materials, as well as to the
safety and health of manufacturing and laboratory employees. In addition, the federal Occupational
Safety and Health Administration have established extensive requirements relating to workplace
safety.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to equity price risks on the marketable portion of our securities. At March
31, 2009, these securities included our equity position in Clarient, our publicly traded partner
company, which has experienced significant volatility in its stock price. Historically, we have
not attempted to reduce or eliminate our market exposure on publicly traded securities. Based on
closing market price at March 31, 2009, the fair market value of our holdings in Clarient was
approximately $104.6 million. A 20% decrease in Clarients stock price as of that date would
result in an approximate $20.9 million decrease in the fair value of our holdings in Clarient.
In February 2004, we completed the issuance of $150.0 million of our 2024 Debentures with a
stated maturity of March 15, 2024. During 2008 and 2006, we repurchased $43.0 million and $21.0
million, respectively, in face value of the 2024 Debentures. Interest payments of approximately
$1.1 million each are due March and September of each year. The holders of these 2024 Debentures
have the right to require repurchase of the 2024 Debentures on March 21, 2011, March 20, 2014 or
March 20, 2019 at a repurchase price equal to 100% of their face amount plus accrued and unpaid
interest.
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|
|
|
|
|
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|
|
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Fair |
|
|
|
Remainder of |
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|
|
|
|
|
|
|
|
|
After |
|
|
Value at |
|
Liabilities |
|
2009 |
|
|
2010 |
|
|
2011 |
|
|
2011 |
|
|
March 31, 2009 |
|
2024 Debentures due by year
(in millions) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
86.0 |
|
|
$ |
63.6 |
|
Fixed interest rate |
|
|
2.625 |
% |
|
|
2.625 |
% |
|
|
2.625 |
% |
|
|
2.625 |
% |
|
|
N/A |
|
Interest expense (in millions) |
|
$ |
1.7 |
|
|
$ |
2.3 |
|
|
$ |
2.3 |
|
|
$ |
27.6 |
|
|
|
N/A |
|
44
Item 4. Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial
Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the
period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that, because of material weaknesses in internal control over financial
reporting discussed in Managements Report on Internal Control Over Financial Reporting included in
our Annual Report on Form 10-K for the year ended December 31, 2008 that were not remediated as of
March 31, 2009, our disclosure controls and procedures were not effective to provide reasonable
assurance that the information required to be disclosed by us in reports filed under the Securities
Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods
specified in the SECs rules and forms and (ii) accumulated and communicated to our management,
including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding disclosure. A controls system cannot provide absolute assurance that the
objectives of the controls system are met, and no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, within a company have been
detected.
During
the three months ended March 31, 2009, our efforts continued in
addressing the material weaknesses in our internal control over
financial reporting. The steps we have undertaken in 2009 are
discussed in Item 9A in our Annual Report on Form 10-K for the year
ended December 31, 2008. We are in the process of evaluating the
design and operating effectiveness of our internal control over
financial reporting, which as a result of our remediation plan,
include certain enhanced controls within the accounts receivable,
revenue and billing processes.
In
light of our unremediated material weaknesses, we performed additional post-closing
procedures and analyses in order to prepare the Consolidated Financial Statements included in this
report. As a result of these procedures, we believe our Consolidated Financial Statements included
in this report present fairly, in all material respects, our financial condition, results of
operations and cash flows for the periods presented.
No change in our internal control over financial reporting occurred during our most recent
fiscal quarter that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting. Our business strategy involves the acquisition of new
businesses on an on-going basis, most of which are young, growing companies. Typically, these
companies have not historically had all of the controls and procedures they would need to comply
with the requirements of the Securities Exchange Act of 1934 and the rules promulgated there under.
These companies also frequently develop new products and services. Following an acquisition, or
the launch of a new product or service, we work with the companys management to implement all
necessary controls and procedures.
45
PART
II OTHER INFORMATION
Item 1A. Risk Factors
Except as set forth below, there have been no material changes in our risk factors from the
information set forth above under the heading Factors That May Affect Future Results and in our
Annual Report on Form 10-K for the year ended December 31, 2008.
Fluctuations in the price of the common stock of our publicly traded holdings may affect the price
of our common stock.
Fluctuations in the market prices of the common stock of our publicly traded holdings are
likely to affect the price of our common stock. The market prices of our publicly traded holdings
have been highly volatile and subject to fluctuations unrelated or disproportionate to operating
performance. For example, the aggregate market value of our holdings in Clarient (Nasdaq: CLRT) at
March 31, 2009 was approximately $104.6 million, and at December 31, 2008 was approximately $75.8
million.
In addition to the other information set forth in this report, you should carefully consider
the factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the
year ended December 31, 2008, which could materially affect our business, financial condition or
future results. The risks described in this report and in our Annual Report on Form 10-K are not
the only risks facing our Company. Additional risks and uncertainties not currently known to us or
that we currently deem to be immaterial also may materially adversely affect our business,
financial condition and/or operating results.
Our partner companies (and the nature of our interests in them) could vary widely from period to
period.
As part of our strategy, we continually assess the value to our shareholders of our interests
in our partner companies. We also regularly evaluate alternative uses for our capital resources.
As a result, depending on market conditions, growth prospects and other key factors, we may at any
time:
|
|
|
change the partner companies on which we focus; |
|
|
|
sell some or all of our interests in any of our partner companies; or |
|
|
|
otherwise change the nature of our interests in our partner companies. |
Therefore, the nature of our holdings could vary significantly from period to period. Our
consolidated financial results also may vary significantly based upon which partner companies are
included in our financial statements.
46
Item 6. Exhibits
(a) Exhibits.
The following is a list of exhibits required by Item 601 of Regulation S-K filed as part of
this Report. For exhibits that previously have been filed, the Registrant incorporates those
exhibits herein by reference. The exhibit table below includes the Form Type and Filing Date of
the previous filing and the location of the exhibit in the previous filing which is being
incorporated by reference herein. Documents which are incorporated by reference to filings by
parties other than the Registrant are identified in a footnote to this table.
|
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|
Incorporated Filing |
|
|
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|
|
Reference |
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|
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|
|
|
Original |
Exhibit |
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|
|
Form Type & |
|
Exhibit |
Number |
|
Description |
|
Filing Date |
|
Number |
|
10.1 |
* |
|
Safeguard Scientifics,
Inc. Executive Deferred
Compensation Plan (amended
and restated as of January
1, 2009)
|
|
Form 10-K
3/19/09
|
|
|
10.4 |
|
|
10.2 |
|
|
Loan and Security
Agreement dated as of
February 6, 2009, by and
among Silicon Valley Bank,
Safeguard Scientifics,
Inc., Safeguard Delaware,
Inc. and Safeguard
Scientifics (Delaware),
Inc.
|
|
Form 8-K
2/11/09
|
|
|
10.1 |
|
|
10.3 |
|
|
Fourth Amendment to
Amended and Restated Loan
Agreement, dated as of
January 27, 2009, by and
between Comerica Bank and
Clarient, Inc.
|
|
|
(1 |
) |
|
|
10.2 |
|
|
10.4 |
|
|
Fifth Amendment to Amended
and Restated Loan
Agreement dated
February 27, 2009, by and
between Clarient, Inc. and
Comerica Bank
|
|
|
(2 |
) |
|
|
10.2 |
|
|
10.5 |
|
|
Second Amended and
Restated Senior
Subordinated Revolving
Credit Agreement dated
February 27, 2009 by and
between Safeguard
Delaware, Inc. and
Clarient, Inc.
|
|
|
(2 |
) |
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|
10.3 |
|
|
10.6 |
|
|
Amended and Restated
Registration Rights
Agreement dated February
27, 2009 by and among
Safeguard Delaware, Inc.,
Safeguard Scientifics,
Inc., Safeguard
Scientifics (Delaware),
Inc. and Clarient, Inc.
|
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|
(2 |
) |
|
|
10.4 |
|
|
10.7 |
|
|
Amendment to Securities
Purchase Agreement dated
March 26, 2009, by and
between Clarient, Inc. and
Safeguard Delaware, Inc.
and its affiliates
|
|
|
(3 |
) |
|
|
10.4 |
|
|
10.8 |
|
|
First Amendment and
Consent to Second Amended
and Restated Senior
Subordinated Revolving
Credit Agreement dated
March 26, 2009 by and
between Safeguard
Delaware, Inc. and
Clarient, Inc.
|
|
|
(3 |
) |
|
|
10.5 |
|
|
10.9 |
|
|
Stockholders Agreement
dated March 26, 2009 by
and among Safeguard
Delaware, Inc., Safeguard
Scientifics, Inc.,
Safeguard Scientifics
(Delaware), Inc. and Oak
Investment Partners XII,
Limited Partnership
|
|
|
(3 |
) |
|
|
10.6 |
|
|
31.1 |
|
|
Certification of Peter J.
Boni pursuant to Rules
13a-15(e) and 15d-15(e) of
the Securities Exchange
Act of 1934
|
|
|
|
|
|
|
|
|
|
31.2 |
|
|
Certification of Stephen
T. Zarrilli pursuant to
Rules 13a-15(e) and
15d-15(e) of the
Securities Exchange Act of
1934
|
|
|
|
|
|
|
|
|
|
32.1 |
|
|
Certification of Peter J.
Boni pursuant to 18 U.S.C.
Section 1350, as Adopted
pursuant to Section 906 of
the Sarbanes-Oxley Act of
2002.
|
|
|
|
|
|
|
|
|
|
32.2 |
|
|
Certification of Stephen
T. Zarrilli pursuant to 18
U.S.C. Section 1350, as
Adopted pursuant to
Section 906 of the
Sarbanes-Oxley Act of
2002.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Filed herewith. |
|
* |
|
Management contracts or compensatory plans, contracts or arrangements in which directors
and/or executive officers of the Registrant may participate. |
|
(1) |
|
Incorporated by reference to the Current Report on Form 8-K filed on February 2, 2009 by
Clarient, Inc. (SEC File No. 000-22677). |
|
(2) |
|
Incorporated by reference to the Current Report on Form 8-K filed on March 2, 2009 by
Clarient, Inc. (SEC File No. 000-22677). |
|
(3) |
|
Incorporated by reference to the Current Report on Form 8-K filed on March 27, 2009 by
Clarient, Inc. (SEC File No. 000-22677). |
47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
|
|
|
|
SAFEGUARD SCIENTIFICS, INC.
|
|
Date: May 11, 2009 |
PETER J. BONI
|
|
|
Peter J. Boni |
|
|
President and Chief Executive Officer |
|
|
|
|
Date: May 11, 2009 |
STEPHEN T. ZARRILLI
|
|
|
Stephen T. Zarrilli |
|
|
Senior Vice President and Chief Financial Officer |
48
EXHIBIT INDEX
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated Filing |
|
|
|
|
|
|
Reference |
|
|
|
|
|
|
|
|
|
|
Original |
Exhibit |
|
|
|
Form Type & |
|
Exhibit |
Number |
|
Description |
|
Filing Date |
|
Number |
|
10.1 |
* |
|
Safeguard Scientifics,
Inc. Executive Deferred
Compensation Plan (amended
and restated as of January
1, 2009)
|
|
Form 10-K
3/19/09
|
|
|
10.4 |
|
|
10.2 |
|
|
Loan and Security
Agreement dated as of
February 6, 2009, by and
among Silicon Valley Bank,
Safeguard Scientifics,
Inc., Safeguard Delaware,
Inc. and Safeguard
Scientifics (Delaware),
Inc.
|
|
Form 8-K
2/11/09
|
|
|
10.1 |
|
|
10.3 |
|
|
Fourth Amendment to
Amended and Restated Loan
Agreement, dated as of
January 27, 2009, by and
between Comerica Bank and
Clarient, Inc.
|
|
|
(1 |
) |
|
|
10.2 |
|
|
10.4 |
|
|
Fifth Amendment to Amended
and Restated Loan
Agreement dated
February 27, 2009, by and
between Clarient, Inc. and
Comerica Bank
|
|
|
(2 |
) |
|
|
10.2 |
|
|
10.5 |
|
|
Second Amended and
Restated Senior
Subordinated Revolving
Credit Agreement dated
February 27, 2009 by and
between Safeguard
Delaware, Inc. and
Clarient, Inc.
|
|
|
(2 |
) |
|
|
10.3 |
|
|
10.6 |
|
|
Amended and Restated
Registration Rights
Agreement dated February
27, 2009 by and among
Safeguard Delaware, Inc.,
Safeguard Scientifics,
Inc., Safeguard
Scientifics (Delaware),
Inc. and Clarient, Inc.
|
|
|
(2 |
) |
|
|
10.4 |
|
|
10.7 |
|
|
Amendment to Securities
Purchase Agreement dated
March 26, 2009, by and
between Clarient, Inc. and
Safeguard Delaware, Inc.
and its affiliates
|
|
|
(3 |
) |
|
|
10.4 |
|
|
10.8 |
|
|
First Amendment and
Consent to Second Amended
and Restated Senior
Subordinated Revolving
Credit Agreement dated
March 26, 2009 by and
between Safeguard
Delaware, Inc. and
Clarient, Inc.
|
|
|
(3 |
) |
|
|
10.5 |
|
|
10.9 |
|
|
Stockholders Agreement
dated March 26, 2009 by
and among Safeguard
Delaware, Inc., Safeguard
Scientifics, Inc.,
Safeguard Scientifics
(Delaware), Inc. and Oak
Investment Partners XII,
Limited Partnership
|
|
|
(3 |
) |
|
|
10.6 |
|
|
31.1 |
|
|
Certification of Peter J.
Boni pursuant to Rules
13a-15(e) and 15d-15(e) of
the Securities Exchange
Act of 1934
|
|
|
|
|
|
|
|
|
|
31.2 |
|
|
Certification of Stephen
T. Zarrilli pursuant to
Rules 13a-15(e) and
15d-15(e) of the
Securities Exchange Act of
1934
|
|
|
|
|
|
|
|
|
|
32.1 |
|
|
Certification of Peter J.
Boni pursuant to 18 U.S.C.
Section 1350, as Adopted
pursuant to Section 906 of
the Sarbanes-Oxley Act of
2002.
|
|
|
|
|
|
|
|
|
|
32.2 |
|
|
Certification of Stephen
T. Zarrilli pursuant to 18
U.S.C. Section 1350, as
Adopted pursuant to
Section 906 of the
Sarbanes-Oxley Act of
2002.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Filed herewith. |
|
* |
|
Management contracts or compensatory plans, contracts or arrangements in which directors
and/or executive officers of the Registrant may participate. |
|
(1) |
|
Incorporated by reference to the Current Report on Form 8-K filed on February 2, 2009 by
Clarient, Inc. (SEC File No. 000-22677). |
|
(2) |
|
Incorporated by reference to the Current Report on Form 8-K filed on March 2, 2009 by
Clarient, Inc. (SEC File No. 000-22677). |
|
(3) |
|
Incorporated by reference to the Current Report on Form 8-K filed on March 27, 2009 by
Clarient, Inc. (SEC File No. 000-22677). |
49