SAFEGUARD SCIENTIFICS INC - Quarter Report: 2011 September (Form 10-Q)

SAFEGUARD SCIENTIFICS, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX

		Page
PART I — FINANCIAL INFORMATION
Item 1 — Financial Statements:
Consolidated Balance Sheets (unaudited) — September 30, 2011 and December 31, 2010			3
Consolidated Statements of Operations (unaudited) — Three and Nine Months Ended September 30, 2011 and 2010			4
Consolidated Statements of Cash Flows (unaudited) — Nine Months Ended September 30, 2011 and 2010			5
Consolidated Statement of Changes in Equity (unaudited) — Nine Months Ended September 30, 2011			6
Notes to Consolidated Financial Statements (unaudited)			7-24
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations			25-41
Item 3 — Quantitative and Qualitative Disclosures About Market Risk			42
Item 4 — Controls and Procedures			43
PART II — OTHER INFORMATION
Item 1A — Risk Factors			44
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds			44
Item 6 — Exhibits			45
Signatures			46
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

SAFEGUARD SCIENTIFICS, INC.

		September 30,				December 31,
		2011				2010
						(As Revised, See
						Note 13)
		(In thousands except
		per share data)
		(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents		$	144,241			$	183,419
Cash held in escrow			6,433				6,434
Marketable securities			121,118				42,411
Restricted cash equivalents			5,137				4,893
Prepaid expenses and other current assets			1,253				785
Total current assets			278,182				237,942
Property and equipment, net			260				295
Ownership interests in and advances to partner companies			117,417				60,256
Available-for-sale securities			5,694				25,447
Long-term marketable securities			15,019				—
Long-term restricted cash equivalents			7,128				11,881
Other			585				724
Total Assets		$	424,285			$	336,545
LIABILITIES AND EQUITY
Current Liabilities:
Convertible senior debentures — current		$	—			$	31,289
Accounts payable			238				493
Accrued compensation and benefits			3,495				4,168
Accrued expenses and other current liabilities			4,033				4,223
Total current liabilities			7,766				40,173
Other long-term liabilities			4,133				5,311
Convertible senior debentures — non-current			45,531				44,630
Commitments and contingencies
Equity:
Preferred stock, $0.10 par value; 1,000 shares authorized			—				—
Common stock, $0.10 par value; 83,333 shares authorized; 20,728 and 20,630 shares
issued and outstanding in 2011 and 2010, respectively			2,073				2,063
Additional paid-in capital			810,404				806,859
Accumulated deficit			(440,171	)			(575,307	)
Accumulated other comprehensive income			(5,451	)			12,816
Total equity			366,855				246,431
Total Liabilities and Equity		$	424,285			$	336,545

See Notes to Consolidated Financial Statements.

SAFEGUARD SCIENTIFICS, INC.

		Three Months Ended September 30,								Nine Months Ended September 30,
		2011				2010				2011				2010
						(As Revised, See								(As Revised, See
						Note 13)								Note 13)
						(In thousands except per share data)
						(Unaudited)
General and administrative expense		$	5,100			$	4,256			$	15,554			$	13,999
Operating loss			(5,100	)			(4,256	)			(15,554	)			(13,999	)
Other income (loss), net			(324	)			8,144				(1,391	)			11,255
Interest income			278				180				969				516
Interest expense			(1,445	)			(1,674	)			(4,522	)			(4,061	)
Equity income (loss)			28,922				(1,798	)			155,634				(12,243	)
Net income (loss) before income taxes			22,331				596				135,136				(18,532	)
Income tax expense (benefit)			—				—				—				—
Net income (loss)		$	22,331			$	596			$	135,136			$	(18,532	)
Net income (loss) per share:
Basic		$	1.07			$	0.03			$	6.52			$	(0.90	)
Diluted		$	0.98			$	0.03			$	5.68			$	(0.90	)
Average shares used in computing income (loss) per share:
Basic			20,790				20,583				20,737				20,502
Diluted			24,291				21,403				24,573				20,502

See Notes to Consolidated Financial Statements.

SAFEGUARD SCIENTIFICS, INC.

		Nine Months Ended September 30,
		2011				2010
		(In thousands)
		(Unaudited)
Cash Flows from Operating Activities:
Net cash used in operating activities		$	(13,584	)		$	(12,276	)
Cash Flows from Investing Activities:
Proceeds from sales of and distributions from companies			171,167				2,760
and funds
Advances to partner companies			(3,150	)			(6,116	)
Repayment of advances to partner companies			5,000				1,300
Acquisitions of ownership interests in partner companies			(74,692	)			(18,584	)
and funds
Increase in marketable securities			(160,032	)			(33,294	)
Decrease in marketable securities			66,306				45,966
Investment in restricted cash equivalents for interest on convertible senior debentures			—				(18,864	)
Capital expenditures			(58	)			(57	)
Proceeds from sale of discontinued operations, net			1				477
Other, net			107				—
Net cash provided by (used in) investing activities			4,649				(26,412	)
Cash Flows from Financing Activities:
Repurchase of convertible senior debentures			(30,848	)			—
Issuance of Company common stock, net			605				1,013
Costs on exchange of convertible senior debentures			—				(866	)
Net cash provided by (used in) financing activities			(30,243	)			147
Net Decrease in Cash and Cash Equivalents			(39,178	)			(38,541	)
Cash and Cash Equivalents at beginning of period			183,419				67,347
Cash and Cash Equivalents at end of period		$	144,241			$	28,806

See Notes to Consolidated Financial Statements.

SAFEGUARD SCIENTIFICS, INC.

										Accumulated
										other
										comprehensive												Additional
						Accumulated				income				Common stock								paid-in
		Total				deficit				(loss)				Shares				Amount				capital
										(In thousands)
										(unaudited)
Balance — December 31, 2010 (As Revised, See Note 13)		$	246,431			$	(575,307	)		$	12,816				20,630			$	2,063			$	806,859
Net income			135,136				135,136				—				—				—				—
Stock options exercised, net			605				—				—				74				8				597
Issuance of restricted stock, net			105				—				—				24				2				103
Stock-based compensation expense			2,845				—				—				—				—				2,845
Other comprehensive loss			(18,267	)			—				(18,267	)			—				—				—
Balance — September 30, 2011		$	366,855			$	(440,171	)		$	(5,451	)			20,728			$	2,073			$	810,404

See Notes to Consolidated Financial Statements.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. GENERAL

The accompanying unaudited interim Consolidated Financial Statements of Safeguard Scientifics, Inc. (the “Company”) were prepared in accordance with accounting principles generally accepted in the United States of America and the interim financial statement rules and regulations of the SEC. In the opinion of management, these statements include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the Consolidated Financial Statements. The interim operating results are not necessarily indicative of the results for a full year or for any interim period. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations relating to interim financial statements. The Consolidated Financial Statements included in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Form 10-Q and included together with the Company’s Consolidated Financial Statements and Notes thereto included in the Company’s 2010 Annual Report on Form 10-K.

2. BASIS OF PRESENTATION

The Company’s Consolidated Financial Statements included the accounts of Clarient Inc. (“Clarient”) in continuing operations through May 14, 2009, the date of its deconsolidation. Clarient was acquired by GE Healthcare in December 2010. The Company had elected to apply the fair value option to account for its retained interest in Clarient upon deconsolidation. Unrealized gains and losses on the mark-to-market of its holdings in Clarient and realized gains and losses on the sale of any of its holdings in Clarient were recognized in Other income (loss), net in the Consolidated Statement of Operations for all periods subsequent to the date that Clarient was deconsolidated through the date of its disposition.

The Company’s ownership interests in Tengion, Inc. (“Tengion”) and NuPathe, Inc. (“NuPathe”) are accounted for as available-for-sale securities following Tengion’s and NuPathe’s completion of initial public offerings in April 2010 and August 2010, respectively. Available-for-sale securities are carried at fair value, based on quoted market prices, with the unrealized gains and losses, net of tax, reported as a separate component of equity. Unrealized losses are charged against net income (loss) when a decline in the fair value is determined to be other than temporary.

In February 2011, the Company increased its ownership interest in MediaMath, Inc. (“MediaMath”) to 22.4%, a threshold at which the Company believes it exercises significant influence. Accordingly, the Company adopted the equity method of accounting for its holdings in MediaMath. The Company has adjusted the financial statements for all prior periods presented to retrospectively apply the equity method of accounting for its holdings in MediaMath since the initial date of acquisition in July 2009 (see Note 13).

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. OWNERSHIP INTERESTS IN AND ADVANCES TO PARTNER COMPANIES

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

		September 30, 2011				December 31, 2010
		(In thousands)
		(Unaudited)
Equity Method:
Partner companies		$	105,359			$	50,561
Private equity funds			5,860				2,265
			111,219				52,826
Cost Method:
Private equity funds			2,984				2,908
Advances to partner companies			3,214				4,522
		$	117,417			$	60,256
Available-for-sale securities		$	5,694			$	25,447

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

In the second quarter of 2011, Advanced BioHealing, Inc. (“Advanced BioHealing”), formerly an equity method partner company, was acquired by Shire plc, resulting in net sale proceeds to the Company of $137.9 million, excluding cash held in escrow of $7.6 million. The Company recognized a gain on sale of $129.0 million which is reflected in Equity income (loss) in the Consolidated Statement of Operations.

The Company recognized an impairment charge of $1.4 million related to SafeCentral, Inc. in the first quarter of 2011 which is reflected in Equity income (loss) in the Consolidated Statement of Operations for the nine months ended September 30, 2011, due to modifications to the strategic direction of the business and changes in executive management at SafeCentral.

The Company recognized an impairment charge of $0.4 million in the third quarter of 2011 which is reflected in Other income (loss), net, in the Consolidated Statements of Operations, representing the unrealized loss on the mark-to-market of its ownership interest in Tengion, which was previously recorded as a separate component of equity. The Company had previously recognized impairment charges of $0.3 million and $0.8 million in the first and second quarters of 2011, respectively. Following the impairment charge, the Company’s adjusted cost basis in Tengion was $0.3 million. The Company determined that the decline in the value of its public holdings in Tengion was other than temporary. The Company also recognized impairment charges on its holdings in Tengion of $2.1 million and $1.1 million in the first and third quarters of 2010 respectively.

For the three and nine months ended September 30, 2010 the Company recognized unrealized gains of $9.2 million and $22.4 million, respectively, on the mark-to-market of its holdings in Clarient which is included in Other income (loss), net in the Consolidated Statements of Operations.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. ACQUISITION OF INTERESTS IN PARTNER COMPANIES AND FUNDS

In September 2011, the Company acquired a 30.1% ownership interest in Putney, Inc. (“Putney”) for $10.0 million. Putney is a specialty pharmaceutical company focused on providing generic medicines for pets. The Company accounts for its interest in Putney under the equity method. The difference between the Company’s cost and its interest in the underlying net assets of Putney was preliminarily allocated to intangible assets and goodwill as reflected in the carrying value in Ownership interests in and advances to partner companies on the Consolidated Balance Sheets.

In August 2011, the Company acquired a 36% ownership interest in Penn Mezzanine for $3.9 million. Penn Mezzanine is a mezzanine lender focused on lower middle-market, Mid-Atlantic companies. The Company expects to deploy up to $26.1 million over a several year period in lending opportunities that meet certain predefined criteria alongside existing and future Penn Mezzanine funds. The Company accounts for its interest in Penn Mezzanine under the equity method of accounting.

In August 2011, the Company funded $2.4 million of a convertible bridge loan to Swap.com. The Company had previously deployed an aggregate of $8.1 million in Swap.com and currently maintains a 45.6% ownership interest. Swap.com is an internet based business that enables users to trade books, music, movies, video games and fashion using its proprietary trade matching software. The Company accounts for its interest in Swap.com under the equity method. The difference between the Company’s cost and its interest in the underlying net assets of Swap.com was allocated to intangible assets and goodwill as reflected in the carrying value in Ownership interests in and advances to partner companies on the Consolidated Balance Sheets.

In July 2011, the Company purchased $1.2 million of common shares and maintains a 22.5% interest in MediaMath, Inc. (“MediaMath”). In February 2011, the Company deployed $9.0 million in MediaMath. In conjunction with this funding, the Company’s ownership interest in MediaMath increased from 17.3% to 22.4%, a threshold at which the Company believes it exercises significant influence. Accordingly, the Company adopted the equity method of accounting for its holdings in MediaMath. See Note 13 regarding the change in accounting treatment for the Company’s holdings in MediaMath from the cost method to the equity method. The Company previously had acquired an interest in MediaMath in July 2009 for $6.7 million. MediaMath is an online media trading company that enables advertising agencies and their advertisers to optimize their ad spending across various exchanges through its proprietary algorithmic bidding platform and data integration technology. The difference between the Company’s cost and its interest in the underlying net assets of MediaMath was preliminarily allocated to intangible assets and goodwill as reflected in the carrying value in Ownership interests in and advances to partner companies on the Consolidated Balance Sheets.

In June 2011, the Company acquired a 31.7% ownership interest in NovaSom, Inc. (“NovaSom”) for $20.0 million. NovaSom provides diagnostic devices and services for home testing and evaluation of sleep-disordered breathing, including obstructive sleep apnea. The Company accounts for its interest in NovaSom under the equity method. The difference between the Company’s cost and its interest in the underlying net assets of NovaSom was preliminarily allocated to intangible assets and goodwill as reflected in the carrying value in Ownership interests in and advances to partner companies on the Consolidated Balance Sheets.

In April 2011, the Company acquired a 24.7% ownership interest in PixelOptics Inc. (“PixelOptics”) for $25.0 million. PixelOptics provides electronic corrective eyeglasses designed to substantially reduce or eliminate the visual distortion and other limitations associated with multifocal lenses. The Company accounts for its interest in PixelOptics under the equity method. The difference between the Company’s cost and its interest in the underlying net assets of PixelOptics was preliminarily allocated to intangible assets and goodwill as reflected in the carrying value in Ownership interests in and advances to partner companies on the Consolidated Balance Sheets.

In April 2011, the Company funded $0.8 million of a convertible bridge loan to Alverix, Inc. (“Alverix”). The Company previously deployed an aggregate of $6.3 million in Alverix and currently maintains a 49.6% ownership interest. Alverix provides next-generation instrument and connectivity platforms for diagnostic Point-of-Care (POC) testing. The Company accounts for its holdings in Alverix under the equity method. The difference between the Company’s cost and its interest in the underlying net assets of Alverix was allocated to intangible assets and goodwill as reflected in the carrying value in Ownership interests in and advances to partner companies on the Consolidated Balance Sheets.

In February 2011, the Company acquired a 30.7% ownership interest in ThingWorx, Inc. (“ThingWorx”) for $5.0 million. ThingWorx offers a platform designed to accelerate the development of applications connecting people, systems and devices. The Company accounts for its holdings in ThingWorx under the equity method. The difference between the Company’s cost and its interest in the underlying net assets of ThingWorx was preliminarily allocated to intangible assets and goodwill as reflected in the carrying value in Ownership interests in and advances to partner companies on the Consolidated Balance Sheets.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. FAIR VALUE MEASUREMENTS

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

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

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

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

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

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table provides the assets and liabilities measured at fair value on a recurring basis as of September 30, 2011 and December 31, 2010:

		Carrying				Fair Value Measurement at September 30, 2011
		Value				Level 1				Level 2				Level 3
		(in thousands)
		(unaudited)
Cash and cash equivalents		$	144,241			$	144,241			$	—			$	—
Cash held in escrow		$	6,433			$	6,433			$	—			$	—
Restricted cash equivalents		$	12,265			$	12,265			$	—			$	—
Available-for-sale securities		$	5,694			$	5,694			$	—			$	—
Marketable securities - held-to-maturity:
Commercial paper		$	41,740			$	41,740			$	—			$	—
U.S. Treasury Bills			27,593				27,593				—				—
Government agency bonds			55,178				55,178				—				—
Certificates of deposit			11,626				11,626				—				—
		$	136,137			$	136,137			$	—			$	—

		Carrying				Fair Value Measurement at December 31, 2010
		Value				Level 1				Level 2				Level 3
		(in thousands)
		(unaudited)
Cash and cash equivalents		$	183,419			$	183,419			$	—			$	—
Cash held in escrow		$	6,434			$	6,434			$	—			$	—
Restricted cash equivalents		$	16,774			$	16,774			$	—			$	—
Available-for-sale securities		$	25,447			$	25,447			$	—			$	—
Marketable securities - held-to-maturity:
Commercial paper		$	27,362			$	27,362			$	—			$	—
U.S. Treasury Bills			12,053				12,053				—				—
Certificates of deposit			2,996				2,996				—				—
		$	42,411			$	42,411			$	—			$	—

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of September 30, 2011, $121.1 million of marketable securities had contractual maturities which were less than one year and $15.0 million of marketable securities had contractual maturities greater than one year. Held-to-maturity securities are carried at amortized cost, which, due to the short-term maturity of these instruments, approximates fair value using quoted prices in active markets for identical assets or liabilities defined as Level 1 inputs under the fair value hierarchy.

The Company’s holdings in Clarient during the three months and nine ended September 30, 2010 were measured at fair value using quoted prices for Clarient’s common stock as traded on the NASDAQ Capital Market, which is considered a Level 1 input under the valuation hierarchy.

The Company accounts for its holdings in Tengion as available-for-sale securities. The Company recognized impairment charges of $0.4 million, $0.3 million and $0.8 million in the third, second and first quarters of 2011, respectively, representing the unrealized losses on the mark-to-market of its ownership interest in Tengion which were previously recorded as a separate component of equity. As of September 30, 2011, the Company’s adjusted cost basis in available-for-sale securities of Tengion was $0.3 million. The value of the Company’s holdings in Tengion was measured by reference to quoted prices for Tengion’s common stock as traded on the NASDAQ Capital Market, which is considered a Level 1 input under the valuation hierarchy.

The Company recognized an impairment charge of $1.4 million related to SafeCentral in the first quarter of 2011 measured as the amount by which SafeCentral’s carrying value exceeded its estimated fair value. The fair market value of SafeCentral was determined based on Level 3 inputs as defined above.

The Company accounts for its holdings in NuPathe as available-for-sale securities. As of September 30, 2011, the Company’s adjusted cost basis in available-for-sale securities of NuPathe was $10.8 million. As of September 30, 2011 the Company’s holdings of available-for-sale securities in NuPathe had generated an unrealized loss of $5.5 million. The value of the Company’s holdings in NuPathe was measured by reference to quoted prices for NuPathe’s common stock as traded on the NASDAQ Capital Market, which is considered a Level 1 input under the valuation hierarchy.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) is the change in equity of a business enterprise from transactions and other events and circumstances from non-owner sources. Excluding net income (loss), the Company’s sources of comprehensive income (loss) were from changes in fair value of available-for-sale securities.

The following summarizes the components of comprehensive income (loss):

		Three Months ended September 30,								Nine Months ended September 30,
		2011				2010				2011				2010
						(In thousands)
						(unaudited)
Net income (loss)		$	22,331			$	596			$	135,136			$	(18,532	)
Other comprehensive income (loss), before taxes:
Unrealized net income (loss) on available-for-sale securities			(14,552	)			7,885				(19,787	)			7,131
Reclassification adjustment for other than temporary impairment of available-for-sale securities included in net income (loss)			389				1,108				1,520				1,108
Total comprehensive income (loss)		$	8,168			$	9,589			$	116,869			$	(10,293	)

The Company accounts for its holdings in NuPathe and Tengion as available-for-sale securities. The Company recorded unrealized net losses of $14.2 million and $18.3 million associated with available-for-sale securities as a separate component of equity in the three and nine months ended September 30, 2011, respectively. The Company reclassified $0.4 million and $1.5 million in unrealized losses associated with Tengion in the three and nine months ended September 30, 2011, respectively, as a result of management’s determination that the security was impaired on an other than temporary basis.

As of September 30, 2011, the Company had recorded a loss in other comprehensive income of $5.5 million associated with its holdings in NuPathe. During the quarter, NuPathe experienced a decline in its stock price below the Company’s adjusted basis. Such decline occurred after the receipt of a Complete Response Letter from the U.S. Food and Drug Administration (“FDA”) regarding the New Drug Application for its migraine patch in August 2011. NuPathe has scheduled an “end-of review” meeting with the FDA for November 2011 and has publicly stated that it believes it has or will shortly have sufficient data to answer the FDA’s questions at which time it will reestablish a timeline for launch of its migraine patch. Given the short period of time the stock price has been below the Company’s adjusted basis, and the Company’s expectations regarding NuPathe, management currently believes that the impairment associated with NuPathe is temporary.

7. CONVERTIBLE DEBENTURES AND CREDIT ARRANGEMENTS

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

		September 30, 2011				December 31, 2010
		(In thousands)
		(Unaudited)
Convertible senior debentures due 2014		$	45,090			$	44,630
Convertible senior debentures due 2024			441				31,289
			45,531				75,919
Less: current portion			—				(31,289	)
Convertible senior debentures — non-current		$	45,531			$	44,630

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Convertible Senior Debentures due 2024

In 2004, the Company issued an aggregate of $150 million in face value of convertible senior debentures with a stated maturity date of March 15, 2024 (the “2024 Debentures”). The Company has $0.4 million of the 2024 Debentures outstanding at September 30, 2011. On March 21, 2011, the Company repurchased $30.8 million of the 2024 Debentures as required by the 2024 Debenture holders. Interest on the 2024 Debentures is payable semi-annually. At the debentures holders’ option, the 2024 Debentures are convertible into the Company’s common stock through March 14, 2024, subject to certain conditions. The adjusted conversion rate of the debentures is $43.3044 of principal amount per share. The closing price of the Company’s common stock at September 30, 2011 was $15.00. The remaining 2024 Debentures holders have the right to require the Company to repurchase the 2024 Debentures on March 20, 2014 or March 20, 2019 at a repurchase price equal to 100% of their face amount, plus accrued and unpaid interest. In limited circumstances, the Company has the right to redeem all or some of the 2024 Debentures.

At September 30, 2011, the fair value of the $0.4 million outstanding 2024 Debentures approximated their carrying value based on quoted market prices as of such date.

Convertible Senior Debentures due 2014

In March 2010, the Company issued an aggregate of $46.9 million in face value of convertible senior debentures with a stated maturity of March 15, 2014 (the “2014 Debentures”). Interest on the 2014 Debentures is payable semi-annually on March 15 and September 15. In the first quarter of 2010, as required under the terms of the 2014 Debentures, the Company placed approximately $19.0 million in a restricted escrow account to make all scheduled interest payments on the 2014 Debentures through their maturity. In the first and third quarters of 2011, interest payments of $2.4 million were made out of the restricted escrow account and are considered non-cash investing activities. Including accrued interest, a total of $12.3 million was reflected in Restricted cash equivalents on the Consolidated Balance Sheet at September 30, 2011, of which $5.1 million was classified as a current asset.

At the debentures holders’ option, the 2014 Debentures are convertible into the Company’s common stock at anytime after March 15, 2013; and, prior to March 15, 2013, under any of the following conditions:

	•		during any fiscal quarter commencing after June 30, 2010 if the closing sale price per share of Company common stock is greater than or equal to 120% of the conversion price for at least 20 trading days during the period of 30 trading days ending on the last day of the preceding fiscal quarter;
	•		during the five day period immediately following any 10 consecutive trading day period in which the trading price per $1,000 principal amount of 2014 Debentures for each trading day of such period was less than 100% of the product of the closing sale price per share of Company common stock multiplied by the conversion rate on each such trading day;
	•		If a fundamental change (as defined) occurs, including sale of all or substantially all of the Company’s common stock or assets, liquidation, dissolution or a change in control.

The conversion price is $16.50 of principal amount per share, equivalent to a conversion rate of 60.6061 shares of Company common stock per $1,000 principal amount of the 2014 Debentures. The closing price of the Company’s common stock at September 30, 2011 was $15.00. The 2014 Debentures holders have the right to require repurchase of the 2014 Debentures upon a fundamental change, including sale of all or substantially all of the Company’s common stock or assets, liquidation, dissolution or a change in control or the delisting of the Company’s common stock from the New York Stock Exchange if the Company were unable to obtain a listing for its common stock on another national or regional securities exchange. None of the above conditions required for conversion were met as of September 30, 2011.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Company may mandatorily convert all or some of the 2014 Debentures at any time after March 15, 2012 if the closing sale price per share of Company common stock exceeds 130% of the conversion price for at least 20 trading days in a period of 30 consecutive trading days. If the Company elects to mandatorily convert any of the 2014 Debentures, the Company will be required to pay any interest that would have accrued and become payable on the debentures through their maturity. Upon a conversion of the 2014 Debentures, the Company has the right to settle the conversion in stock, cash or a combination thereof.

Because the 2014 Debentures may be settled in cash or partially in cash upon conversion, the Company separately accounts for the liability and equity components of the 2014 Debentures. The carrying amount of the liability component was determined at the exchange date by measuring the fair value of a similar liability that does not have an associated equity component. The carrying amount of the equity component represented by the embedded conversion option was determined by deducting the fair value of the liability component from the carrying value of the 2014 Debentures as a whole at the exchange date. The carrying value of the 2014 Debentures as a whole at the exchange date was equal to their fair value of $55.2 million determined using a convertible bond valuation model. At September 30, 2011, the fair value of the $46.9 million outstanding 2014 Debentures was approximately $58.2 million based on quoted market prices as of such date. At September 30, 2011, the carrying amount of the equity component was $10.8 million, the principal amount of the liability component was $46.9 million, the unamortized discount was $1.8 million and the net carrying value of the liability component was $45.1 million. The Company is amortizing the excess of the face value of the 2014 Debentures over their carrying value to interest expense over their term. The effective interest rate on the 2014 Debentures is 12.5%.

Credit Arrangements

The Company is party to a loan agreement which provides it with a revolving credit facility in the maximum aggregate amount of $50 million in the form of borrowings, guarantees and issuances of letters of credit (subject to a $20 million sublimit). Actual availability under the credit facility is based on the amount of cash maintained at the lending bank as well as the value of the Company’s public and private partner company interests. This credit facility bears interest at the prime rate for outstanding borrowings, subject to an increase in certain circumstances. Other than for limited exceptions, the Company is required to maintain all of its depository and operating accounts and the lesser of $80 million or 75% of its investment and securities accounts at the lending bank. The credit facility, as amended December 31, 2010, matures on December 31, 2012. Under the credit facility, the Company provided a $6.3 million letter of credit expiring on March 19, 2019 to the landlord of CompuCom Systems, Inc.’s Dallas headquarters which has been required in connection with the sale of CompuCom Systems in 2004. Availability under the Company’s revolving credit facility at September 30, 2011 was $43.7 million.

8. STOCK-BASED COMPENSATION

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

		Three Months Ended September 30,								Nine Months Ended September 30,
		2011				2010				2011				2010
		(In thousands)								(In thousands)
		(unaudited)								(unaudited)
General and administrative expense		$	844			$	775			$	2,845			$	2,592
		$	844			$	775			$	2,845			$	2,592

The fair value of the Company’s stock-based awards to employees was estimated at the date of grant using the Black-Scholes option-pricing model. The risk-free rate was based on the U.S. Treasury yield curve in effect at the end of the quarter in which the grant occurred. The expected term of stock options granted was estimated using the historical exercise behavior of employees. Expected volatility was based on historical volatility measured using weekly price observations of the Company’s common stock for a period equal to the stock option’s expected term.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

At September 30, 2011, the Company had outstanding options that vest based on three different types of vesting schedules:

	1)		Market-based;
	2)		performance-based; and
	3)		service-based.

Market-based awards entitle participants to vest in a number of options determined by achievement by the Company of certain target market capitalization increases (measured by reference to stock price increases on a specified number of outstanding shares) over an eight-year period. The requisite service periods for the market-based awards are based on the Company’s estimate of the dates on which the market conditions will be met as determined using a Monte Carlo simulation model. Compensation expense is recognized over the requisite service periods using the straight-line method but is accelerated if market capitalization targets are achieved earlier than estimated. During the nine months ended September 30, 2011 and 2010, respectively, the Company did not issue any market-based options to employees. During the nine months ended September 30, 2011 and 2010, respectively, 110 thousand and 11 thousand options vested based on achievement of market capitalization targets. The Company recorded compensation expense related to market-based options of $0.3 million and $0.4 million for the three months ended September 30, 2011 and 2010, respectively and $1.2 million for both the nine months ended September 30, 2011 and 2010. Depending on the Company’s stock performance, the maximum number of unvested shares at September 30, 2011 attainable under these option grants was 1.1 million shares.

Performance-based awards entitle participants to vest in a number of awards determined by achievement by the Company of target capital returns based on net cash proceeds received by the Company on the sale, merger or other exit transaction of certain identified partner companies. Vesting may occur, if at all, once per year. The requisite service periods for the performance-based awards are based on the Company’s estimate of when the performance conditions will be met. During the nine months ended September 30, 2011 and 2010, respectively, the Company issued 193 thousand and zero performance-based options to employees. During the nine months ended September 30, 2011 and 2010 respectively, 56 thousand and zero performance-based options vested. Compensation expense is recognized for performance-based awards for which the performance condition is considered probable of achievement. Compensation expense is recognized over the requisite service periods using the straight-line method but is accelerated if capital return targets are achieved earlier than estimated. The Company recorded compensation expense related to performance-based options of $0.1 million and $0.0 million for the three months ended September 30, 2011 and 2010, respectively and $0.3 million and $0.1 million for the nine months ended September 30, 2011 and 2010, respectively. The maximum number of unvested shares at September 30, 2011 attainable under these option grants was 756 thousand shares.

All other outstanding options are service-based awards that generally vest over four years after the date of grant and expire eight years after the date of grant. Compensation expense is recognized over the requisite service period using the straight-line method. The requisite service period for service-based awards is the period over which the award vests. During the nine months ended September 30, 2011 and 2010, respectively, the Company issued 121 thousand and 45 thousand service-based options to employees. The Company recorded compensation expense related to service-based options of $0.2 million for both the three months ended September 30, 2011 and 2010, and $0.7 million and $0.8 million for the nine months ended September 30, 2011 and 2010, respectively.

During the nine months ended September 30, 2011 and 2010, respectively, the Company issued 61 thousand and zero performance-based stock units to employees which vest based on achievement by the Company of target capital returns based on net cash proceeds received by the Company on the sale, merger or other exit transaction of certain identified partner companies, as described above related to performance-based option awards. Performance-based stock units represent the right to receive shares of the Company’s common stock, on a one-for-one basis. During the nine months ended September 30, 2011 and 2010, respectively, the Company issued 20 thousand and zero restricted shares to employees. The restricted shares issued vest 25% on the first anniversary of grant and the remaining 75% thereafter in equal monthly installments over the next two or three years, as applicable.

During the nine months ended September 30, 2011 and 2010, respectively, the Company issued 25 thousand and 29 thousand deferred stock units to non-employee directors for annual service grants or fees earned during the preceding quarter. Deferred stock units issued in lieu of directors fees are 100% vested at the grant date; matching deferred stock units equal to 25% of directors’ fees deferred vest one year following the grant date or, if earlier, upon reaching age 65. Deferred stock units are payable in stock on a one-for-one basis. Payments related to the deferred stock units are generally distributable following termination of employment or service, death or permanent disability.

Total compensation expense for deferred stock units, performance-based stock units and restricted stock was approximately $0.2 million and $0.1 million for the three months ended September 30, 2011 and 2010, respectively, and $0.6 million and $0.5 million for the nine months ended September 30, 2011 and 2010, respectively.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. INCOME TAXES

The Company’s consolidated income tax benefit (expense) was $0.0 million for both the three and nine months ended September 30, 2011 and 2010.

During the nine months ended September 30, 2011, the Company generated tax expense of $53.4 million on the sales of its holdings in Advanced BioHealing and Portico, which was entirely offset by capital loss carryforwards and net operating loss carryforwards which had been reduced by a full valuation allowance.

The Company has recorded a valuation allowance to reduce its net deferred tax asset to an amount that is more likely than not to be realized in future years. Accordingly, the income tax expense that would have been recognized in the nine months ended September 30, 2011 and the benefit of the net operating loss that would have been recognized in the nine months ended September 30, 2010 were offset by changes in the valuation allowance.

During the nine months ended September 30, 2011, the Company had no material changes in uncertain tax positions.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. NET INCOME (LOSS) PER SHARE

The calculations of net income (loss) per share were as follows:

		Three Months Ended September 30,								Nine Months Ended September 30,
		2011				2010				2011				2010
						(In thousands except per share data)
						(unaudited)
Basic:
Net income (loss)		$	22,331			$	596			$	135,136			$	(18,532	)
Average common shares outstanding			20,790				20,583				20,737				20,502
Net income (loss) per share		$	1.07			$	0.03			$	6.52			$	(0.90	)
Diluted:
Net income (loss)		$	22,331			$	596			$	135,136			$	(18,532	)
Interest on convertible senior debentures			1,391				—				4,353				—
Net income (loss) for dilutive share computation		$	23,722			$	596			$	139,489			$	(18,532	)
Number of shares used in basic per share computation			20,790				20,583				20,737				20,502
Effect of dilutive securities:
Convertible senior debentures			2,855				—				3,061				—
Unvested restricted stock and DSUs			46				96				68				—
Employee stock options			600				724				707				—
Average common shares outstanding			24,291				21,403				24,573				20,502
Net income (loss) per share		$	0.98			$	0.03			$	5.68			$	(0.90	)

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Basic and diluted average common shares outstanding for purposes of computing net income (loss) per share includes outstanding common shares and vested deferred stock units (DSUs).

If a consolidated or equity method partner company has dilutive stock options, unvested restricted stock, DSUs, warrants or other securities outstanding, diluted net income (loss) per share is computed by first deducting from net income (loss), the income attributable to the potential exercise of the dilutive securities of the company. This impact is shown as an adjustment to net income (loss) for purposes of calculating diluted net income (loss) per share.

The following potential shares of common stock and their effects on income were excluded from the diluted net income (loss) per share calculation for the three months ended September 30, 2011 and 2010 because their effect would be anti-dilutive:

	•		At September 30, 2011 and 2010 options to purchase 0.2 million and 0.7 million shares of common stock, respectively, at prices ranging from $10.10 to $21.36, were excluded from the calculations.
	•		At September 30, 2011 and 2010, unvested restricted stock units, performance stock units and DSUs convertible into 0.2 million and 0.1 million shares of stock, respectively, were excluded from the calculations.
	•		At September 30, 2010, 0.7 million shares related to the Company’s 2024 Debentures (see Note 7), representing the effect of assumed conversion of the 2024 Debentures, were excluded from the calculations.
	•		At September 30, 2010, 2.8 million shares related to the Company’s 2014 Debentures (see Note 7) representing the effect of assumed conversion of the 2014 Debentures, were excluded from the calculations.

The following potential shares of common stock and their effects on income were excluded from the diluted net income (loss) per share calculation for the nine months ended September 30, 2011 and 2010 because their effect would be anti-dilutive:

	•		At September 30, 2011 and 2010 options to purchase 0.1 million and 3.2 million shares of common stock at prices ranging from $10.10 to $21.36 per share, were excluded from the calculations.
	•		At September 30, 2011 and 2010, unvested restricted stock units, performance stock units and DSUs convertible into 0.1 million shares of stock, were excluded from the calculations.
	•		At September 30, 2010, 0.7 million shares related to the Company’s 2024 Debentures (see Note 7), representing the effect of assumed conversion of the 2024 Debentures, were excluded from the calculations.
	•		At September 30, 2010, 2.8 million shares related to the Company’s 2014 Debentures (see Note 7), representing the effect of assumed conversion of the 2014 Debentures, were excluded from the calculations.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11. OPERATING SEGMENTS

As discussed in Note 2, the Company’s Consolidated Financial Statements included the accounts of Clarient Inc. (“Clarient”) in continuing operations through May 14, 2009, the date of its deconsolidation. Clarient was acquired by GE Healthcare in December 2010. The Company had elected to apply the fair value option to account for its retained interest in Clarient upon deconsolidation. Unrealized gains and losses on the mark-to-market of its holdings in Clarient and realized gains and losses on the sale of any of its holdings in Clarient were recognized in Other income (loss), net in the Consolidated Statement of Operations for all periods subsequent to the date that Clarient was deconsolidated through the date of its disposition. The mark-to-market activity associated with Clarient was included in the Life Sciences segment through the date of its disposition.

As of September 30, 2011, the Company held an active interest in 13 non-consolidated partner companies. The Company’s reportable operating segments are Life Sciences and Technology.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Company’s active partner companies by segment were as follows as of September 30, 2011:

Life Sciences

		Safeguard Primary Ownership
Partner Company		as of September 30, 2011		Accounting Method
Alverix, Inc.		49.6%		Equity
Good Start Genetics, Inc.		26.3%		Equity
NovaSom, Inc.		31.7%		Equity
NuPathe, Inc.		17.9%		Available-for-sale (1)
PixelOptics, Inc.		24.7%		Equity
Putney, Inc.		30.1%		Equity
Tengion, Inc.		2.5%		Available-for-sale (2)

Technology

		Safeguard Primary Ownership
Partner Company		as of September 30, 2011		Accounting Method
Advantedge Healthcare Solutions, Inc.		40.2%		Equity
Beyond.com, Inc.		38.3%		Equity
Bridgevine, Inc.		22.8%		Equity
MediaMath, Inc.		22.5%		Equity (3)
Swap.com		45.6%		Equity
ThingWorx, Inc.		30.2%		Equity

Management evaluates its Life Sciences and Technology segments’ performance based on net income (loss) which is based on the number of partner companies accounted for under the equity method, the Company’s voting ownership percentage in these partner companies and the net results of operations of these partner companies, mark-to-market gains and losses for companies accounted for under the fair value method, any impairment charges and gains (losses) on the sale of partner companies.

Other Items include certain expenses which are not identifiable to the operations of the Company’s operating business segments. Other Items primarily consist of general and administrative expenses related to corporate operations, including employee compensation, insurance and professional fees, including legal and finance, interest income, interest expense, other income (loss) and equity income (loss) related to private equity fund holdings. Other Items also include income taxes, which are reviewed by management independent of segment results.

As of September 30, 2011 and December 31, 2010, all of the Company’s assets were located in the United States.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Segment assets in Other Items included primarily cash, cash equivalents, cash held in escrow, restricted cash equivalents and marketable securities of $299.1 million and $249.0 million, at September 30, 2011 and December 31, 2010, respectively.

						Three Months Ended September 30, 2011
																		Total
		Life								Total				Other				Continuing
		Sciences				Technology				Segments				Items				Operations
										(In thousands)
										(unaudited)
Operating loss		$	—			$	—			$	—			$	(5,100	)		$	(5,100	)
Net income (loss)			(4,188	)			32,896				28,708				(6,377	)			22,331
Segment Assets:
September 30, 2011			63,278				50,989				114,267				310,018				424,285
December 31, 2010			37,710				42,820				80,530				256,015				336,545

						Three Months Ended September 30, 2010
																		Total
		Life								Total				Other				Continuing
		Sciences				Technology				Segments				Items				Operations
										(In thousands)
										(unaudited)
Operating loss		$	—			$	—			$	—			$	(4,256	)		$	(4,256	)
Net income (loss)			7,311				(957	)			6,354				(5,758	)			596

						Nine Months Ended September 30, 2011
																		Total
		Life								Total				Other				Continuing
		Sciences				Technology				Segments				Items				Operations
										(In thousands)
										(unaudited)
Operating loss		$	—			$	—			$	—			$	(15,554	)		$	(15,554	)
Net income (loss)			126,238				28,149				154,387				(19,251	)			135,136

						Nine Months Ended September 30, 2010
																		Total
		Life								Total				Other				Continuing
		Sciences				Technology				Segments				Items				Operations
										(In thousands)
										(unaudited)
Operating loss		$	—			$	—			$	—			$	(13,999	)		$	(13,999	)
Net income (loss)			12,208				(5,259	)			6,949				(25,481	)			(18,532	)

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12. COMMITMENTS AND CONTINGENCIES

The Company and its partner companies are involved in various claims and legal actions arising in the ordinary course of business. While in the current opinion of the Company the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position or results of operations, no assurance can be given as to the outcome of these actions, and one or more adverse rulings could have a material adverse effect on the Company’s consolidated financial position and results of operations or that of its partner companies.

Not including the Laureate lease guaranty described below, the Company had outstanding guarantees of $3.8 million at September 30, 2011.

The Company has committed capital of approximately $0.2 million to various private equity funds. These commitments are expected to be funded during the next 12 months.

Under certain circumstances, the Company may be required to return a portion or all the distributions it received as a general partner of certain private equity funds (“clawback”). The maximum clawback the Company could be required to return due to our general partner interest is approximately $2.2 million, of which $1.9 million was reflected in Accrued expenses and other current liabilities and $0.3 million was reflected in Other long-term liabilities on the Consolidated Balance Sheet at September 30, 2011.

The Company’s ownership in the funds which have potential clawback liabilities ranges from 19-30%. The clawback liability is joint and several; such that the Company may be required to fund the clawback for other general partners should they default. The funds have taken several steps to reduce the potential liabilities should other general partners default, including withholding all general partner distributions and placing them in escrow and adding rights of set-off among certain funds. The Company believes its potential liability due to the possibility of default by other general partners is remote.

In connection with the Company’s May 2008 sale of its equity and debt interests in Acsis, Inc., Alliance Consulting Group Associates, Inc., Laureate Pharma, Inc., ProModel Corporation and Neuronyx, Inc. (the “Bundle Transaction”), an aggregate of $6.4 million of the gross proceeds of the sale were placed in escrow pending the expiration of a predetermined notification period, subject to possible extension in the event of a claim against the escrowed amounts. On April 25, 2009, the purchaser in the Bundle Transaction notified the Company of claims being asserted against the entire escrowed amounts. The Company does not believe that such claims are valid and has instituted legal action to obtain the release of such amounts from escrow. The proceeds being held in escrow will remain there until the dispute over the claims has been settled or determined pursuant to legal process.

The Company remains guarantor of Laureate Pharma’s Princeton, New Jersey facility lease. Such guarantee may extend through the lease expiration in 2016 under certain circumstances. However, the Company is entitled to indemnification in connection with the continuation of such guaranty. As of September 30, 2011, scheduled lease payments to be made by Laureate Pharma over the remaining lease term equaled $6.3 million.

In October 2001, the Company entered into an agreement with its former Chairman and Chief Executive Officer, to provide for annual payments of $650,000 per year and certain health care and other benefits for life. The related current liability of $0.8 million was included in Accrued expenses and other current liabilities and the long-term portion of $2.9 million was included in Other long-term liabilities on the Consolidated Balance Sheet at September 30, 2011.

The Company provided a $6.3 million letter of credit expiring on March 19, 2019 to the landlord of CompuCom Systems, Inc.’s Dallas headquarters as required in connection with the sale of CompuCom Systems in 2004.

The Company has agreements with certain employees that provide for severance payments to the employee in the event the employee is terminated without cause or an employee terminates his employment for “good reason.” The maximum aggregate exposure under the agreements was approximately $8 million at September 30, 2011.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

13. CHANGE IN ACCOUNTING PRINCIPLE

During first quarter of 2011, the Company increased its ownership interest in MediaMath to 22.4%, a threshold at which the Company believes it exercises significant influence. Accordingly, the Company adopted the equity method of accounting for its holdings in MediaMath. The Company has adjusted the financial statements for prior periods contained in this Form 10-Q to retrospectively apply the equity method of accounting for its holdings in MediaMath since the initial date of acquisition in July 2009. The effect of the change was to decrease Ownership interests in and advances to partner companies by $0.5 million as of December 31, 2010 and to increase Equity loss by $0.3 million for the nine months ended September 30, 2010, respectively. As revised, Equity loss for the three months ended September 30, 2010 was substantially consistent with amounts previously reported.

		December 31, 2010
		(in thousands)
		Previously				As
		Reported				Revised
Balance Sheet:
Ownership interests in and advances to		$	60,761			$	60,256
partner companies
Total Assets			337,050				336,545
Accumulated deficit			(574,802	)			(575,307	)
Equity			246,936				246,431

		Three Months Ended								Nine Months Ended
		September 30, 2010								September 30, 2010
		(In thousands except								(In thousands except
		per share data)								per share data)
		Previously				As				Previously				As
		Reported				Revised				Reported				Revised
Statement of Operations:
Equity loss		$	(1,801	)		$	(1,798	)		$	(11,965	)		$	(12,243	)
Net income (loss)			593				596				(18,254	)			(18,532	)
before income taxes
Basic loss per share			0.03				0.03				(0.89	)			(0.90	)
Diluted loss per share			0.03				0.03				(0.89	)			(0.90	)

Item 2. Management’s 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 management’s 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 Safeguard’s 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

Safeguard’s charter is to build value in growing businesses by providing capital and strategic, operational and management resources. Safeguard participates in expansion financings, corporate spin-outs, management buyouts, recapitalizations, industry consolidations, and early-stage financings. Our vision is to be the preferred catalyst to build great companies across diverse capital platforms. Throughout this document, we use the term “partner company” to generally refer to those companies that we have an economic interest in and that we are actively involved in influencing the development of, usually through board representation in addition to our equity ownership stake. From time to time, in addition to our partner companies, we also hold relatively small economic interests in other enterprises that we are not actively involved in the management of.

We strive to create long-term value for our shareholders by helping partner companies increase their market penetration, grow revenue and improve cash flow. We focus principally on companies in which we anticipate deploying up to $25 million and that operate in two sectors:

Life Sciences — including companies focused on molecular and point-of-care diagnostics, medical devices, regenerative medicine, specialty pharmaceuticals and selected healthcare services that have lower technological and regulatory risk; and

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

As we continue to develop and grow, we will consider partner companies in additional sectors; participating in different capital structures; other types of partner company relationships; and extensions to our business model which leverage our core capabilities.

Principles of Accounting for Ownership Interests in Partner Companies

We account for our interests in our partner companies and private equity funds using one of the following methods: consolidation, fair value, equity, cost or available-for-sale. The accounting method applied is generally determined by the degree of our influence over the entity, primarily determined by our voting interest in the entity.

Consolidation Method. We account for partner companies in which we maintain a controlling financial interest, generally those in which we directly or indirectly own more than 50% of the outstanding voting securities, using the consolidation method of accounting. Upon consolidation of our partner companies, we reflect the portion of equity (net assets) in a subsidiary not attributable, directly or indirectly, to the parent company as a noncontrolling interest in the Consolidated Balance Sheet. The noncontrolling interest is presented within equity, separately from the equity of the parent company. Losses attributable to the parent company and the noncontrolling interest may exceed their interest in the subsidiary’s equity. As a result, the noncontrolling interest shall continue to be attributed its share of losses even if that attribution results in a deficit noncontrolling interest balance as of each balance sheet date. Revenue, expenses, gains, losses, net income or loss are reported in the Consolidated Statements of Operations at the consolidated amounts, which include the amounts attributable to the parent company’s common shareholders and the noncontrolling interest. As of September 30, 2011, we did not hold a controlling interest in any of our partner companies.

Equity Method. We account for partner companies whose results are not consolidated, but over whom we exercise significant influence, using the equity method of accounting. We also account for our interests in some private equity funds under the equity method of accounting, based on our non-controlling general and limited partner interests. Under the equity method of accounting, our share of the income or loss of the company is reflected in Equity loss in the Consolidated Statements of Operations. We report our share of the income or loss of the equity method partner companies on a one quarter lag.

When the carrying value of our holdings in an equity method partner company is reduced to zero, no further losses are recorded in our Consolidated Statements of Operations unless we have outstanding guarantee obligations or have committed additional funding to the equity method partner company. When the equity method partner company subsequently reports income, we will not record our share of such income until it equals the amount of our share of losses not previously recognized.

Cost Method. We account for partner companies which are not consolidated or accounted for under the equity method or fair value method under the cost method of accounting. Under the cost method, our share of the income or losses of such partner companies is not included in the Company’s Consolidated Statements of Operations. The Company includes the carrying value of cost method partner companies in Ownership interests in and advances to partner companies on the Consolidated Balance Sheets.

Available-for-Sale Securities. We account for our ownership interests in Tengion and NuPathe, our publicly traded partner companies, as available-for-sale securities. Available-for-sale securities are carried at fair value, based on quoted market prices, with the unrealized gains and losses, net of tax, reported as a separate component of equity. Unrealized losses are charged against net loss when a decline in the fair value is determined to be other than temporary.

Fair Value Method. We accounted for our holdings in Clarient, formerly one of our publicly traded partner companies, under the fair value method following its deconsolidation on May 14, 2009 and through the date of the sale of the remainder of our interests in Clarient in December 2010. Unrealized gains and losses on the mark-to-market of our holdings in Clarient and realized gains and losses on the sale of any of our holdings in Clarient were recognized in Other income (loss) in the Consolidated Statements of Operations.

Critical Accounting Policies and Estimates

Accounting policies, methods and estimates are an integral part of the Consolidated Financial Statements prepared by management and are based upon management’s 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 management’s current judgments. While there are a number of accounting policies, methods and estimates affecting our financial statements, areas that are particularly significant include the following:

•

Impairment of ownership interests in and advances to partner companies;

•

Income taxes;

•

Commitments and contingencies; and

•

Stock-based compensation.

Impairment of Ownership Interests In and Advances to Partner Companies

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

The fair value of privately held partner companies is generally determined based on the value at which independent third parties have invested or have committed to invest in these companies or based on other valuation methods, including discounted cash flows, valuations of comparable public companies and valuations of acquisitions of comparable companies. The fair value of our ownership interests in private equity funds is generally determined based on the value of our pro rata portion of the funds’ net assets and estimated future proceeds from sales of investments provided by the funds’ managers. The fair value of our ownership interests in our publicly traded partner companies is determined by reference to quoted prices in an active market for the partner company’s publicly traded common stock.

The adjusted carrying value of a partner company is not increased if circumstances suggest the value of the partner company has subsequently recovered.

Our partner companies operate in industries which are rapidly evolving and extremely competitive. It is reasonably possible that our accounting estimates with respect to the ultimate recoverability of the carrying value of ownership interests in and advances to partner companies could change in the near term and that the effect of such changes on our Consolidated Financial Statements could be material. While we believe that the current recorded carrying values of our equity and cost method companies and available-for-sale securities are not impaired, there can be no assurance that our future results will confirm this assessment or that a significant write-down or write-off will not be required in the future.

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

Income Taxes

We are required to estimate income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our Consolidated Balance Sheets. We must assess the likelihood that the deferred tax assets will be recovered from future taxable income and to the extent that we believe recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance in a period; we must include an expense within the tax provision in the Consolidated Statements of Operations. We have recorded a valuation allowance to reduce our deferred tax assets to an amount that is more likely than not to be realized in future years. If we determine in the future that it is more likely than not that the net deferred tax assets would be realized, then the previously provided valuation allowance would be reversed.

Commitments and Contingencies

From time to time, we are a defendant or plaintiff in various legal actions which arise in the normal course of business. Additionally, we have received distributions as both a general partner and a limited partner from certain private equity funds. In certain circumstances, we may be required to return a portion or all the distributions we received as a general partner of a fund for a further distribution to such fund’s limited partners (the “clawback”). We are also a guarantor of various third-party obligations and commitments and are subject to the possibility of various loss contingencies arising in the ordinary course of business (see Note 12). We are required to assess the likelihood of any adverse outcomes to these matters as well as potential ranges of probable losses. A determination of the amount of provision required for these commitments and contingencies, if any, which would be charged to earnings, is made after careful analysis of each matter. The provision may change in the future due to new developments or changes in circumstances. Changes in the provision could increase or decrease our earnings in the period the changes are made.

Stock-Based Compensation

We measure all employee stock-based compensation awards using a fair value method and record such expense in our Consolidated Statements of Operations.

We estimate the grant date fair value of stock options using the Black-Scholes option-pricing model which requires the input of various assumptions. These assumptions include estimating the expected term of the award and the estimated volatility of our stock price over the expected term. Changes in these assumptions and in the estimated forfeitures of stock option awards can materially affect the amount of stock-based compensation recognized in the Consolidated Statements of Operations. The requisite service periods for market-based stock option awards are based on our estimate of the dates on which the market conditions will be met as determined using a Monte Carlo simulation model. Changes in the derived requisite service period or achievement of market capitalization targets earlier than estimated can materially affect the amount of stock-based compensation recognized in the Consolidated Statements of Operations. The requisite service periods for performance-based awards are based on our best estimate of when the performance conditions will be met. Compensation expense is recognized for performance-based awards for which the performance condition is considered probable of achievement. Changes in the requisite service period or the estimated probability of achievement of performance conditions can materially affect the amount of stock-based compensation recognized in the Consolidated Statements of Operations.

Results of Operations

Our management evaluates the Life Sciences and Technology segments’ performance based on net income (loss) which is based on the number of partner companies accounted for under the equity method, our voting ownership percentage in these partner companies and the net results of operations of these partner companies, mark-to-market gains and losses for companies accounted for under the fair value method, any impairment charges and gains (losses) on the sale of partner companies.

Other items include certain expenses, which are not identifiable to the operations of our operating business segments. Other items primarily consist of general and administrative expenses related to corporate operations, including employee compensation, insurance and professional fees, interest income, interest expense, other income (loss) and equity income (loss) related to private equity holdings. Other items also include income taxes, which are reviewed by management independent of segment results.

The following tables reflect our consolidated operating data by reportable segment. Segment results include our share of income or losses for entities accounted for under the equity method. Segment results also include impairment charges and gains or losses related to the disposition of partner companies, except for those reported in discontinued operations. All significant inter-segment activity has been eliminated in consolidation. Our operating results, including net income (loss) before income taxes by segment, were as follows:

		Three Months Ended September 30,								Nine Months Ended September 30,
		2011				2010				2011				2010
		(In thousands)								(In thousands)
Life Sciences		$	(4,188	)		$	7,311			$	126,238			$	12,208
Technology			32,896				(957	)			28,149				(5,259	)
Total segments			28,708				6,354				154,387				6,949
Other items:
Corporate operations			(6,377	)			(5,758	)			(19,251	)			(25,481	)
Income tax expense (benefit)			—				—				—				—
Total other items			(6,377	)			(5,758	)			(19,251	)			(25,481	)
Net income (loss)		$	22,331			$	596			$	135,136			$	(18,532	)

There is intense competition in the markets in which our partner companies operate, and we expect competition to intensify in the future. Additionally, the markets in which these companies operate are characterized by rapidly changing technology, evolving industry standards, frequent introduction of new products and services, shifting distribution channels, evolving government regulation, frequently changing intellectual property landscapes and changing customer demands. Their future success depends on each company’s ability to execute its business plan and to adapt to its respective rapidly changing markets.

As previously stated, throughout this document, we use the term “partner company” to generally refer to those companies that we have an economic interest in and that we are actively involved in influencing the development of, usually through board representation in addition to our equity ownership stake.

For purposes of the following listing of our Life Science and Technology partner companies, we omit from the listing companies which we have since sold our interest in or which we no longer consider to be active partner companies because we no longer actively influence the operations of such entities.

Life Sciences

The following active partner companies as of September 30, 2011 were included in Life Sciences:

		Safeguard Primary Ownership as of
		September 30,
		2011				2010				Accounting Method
Alverix, Inc.			49.6%				49.6%			Equity
Good Start Genetics, Inc.			26.3%				26.5%			Equity
NovaSom, Inc.			31.7%			NA				Equity
NuPathe, Inc.			17.9%				18.1%			Available -for-sale (1)
PixelOpics, Inc.			24.7%			NA				Equity
Putney, Inc.			30.1%			NA				Equity
Tengion, Inc.			2.5%				4.8%			Available -for-sale (2)

Results of operations for the Life Sciences segment were as follows:

		Three Months Ended September 30,								Nine Months Ended September 30,
		2011				2010				2011				2010
		(In thousands)								(In thousands)
Other income (loss), net		$	(374	)		$	8,139			$	(1,461	)		$	19,166
Equity income (loss)			(3,814	)			(828	)			127,699				(6,958	)
Net income (loss)		$	(4,188	)		$	7,311			$	126,238			$	12,208

Three months ended September 30, 2011 versus the three months ended September 30, 2010

Other Income (Loss), Net. Other income (loss), net decreased $8.5 million for the three months ended September 30, 2011, compared to the prior year period. Other income (loss), net for the three months ended September 30, 2011 reflected an impairment charge of $0.4 million on our holdings in Tengion. Other income (loss), net for the three months ended September 30, 2010 reflected a $9.2 million gain on the mark-to-market of our holdings in Clarient, partially offset by a $1.1 million impairment on our holdings in Tengion.

Equity income (loss). Equity income (loss) fluctuates with the number of Life Sciences partner companies accounted for under the equity method, our voting ownership percentage in these partner companies and the net results of operations of these partner companies. We recognize our share of losses to the extent we have cost basis in the equity partner company or we have outstanding commitments or guarantees. Certain amounts recorded to reflect our share of the income or losses of our partner companies accounted for under the equity method are based on estimates and on unaudited results of operations of those partner companies and may require adjustments in the future when audits of these entities are made final. We report our share of the results of our equity method partner companies on a one quarter lag basis. Equity loss for Life Sciences increased $3.0 million in the three months ended September 30, 2011 compared to the prior year period. The three months ended September 30, 2010 included a $5.8 million gain on the decrease of our ownership interest in NuPathe partially offset by a $1.1 million impairment charge related to our interest in Garnet BioTherapeutics, Inc., a former partner company, as well as a mark to market adjustment of $2.5 million associated with warrant liabilities at Advanced BioHealing, Inc., a former partner company. The remainder of the increase related to larger losses incurred at partner companies within the Life Sciences segment.

Nine months ended September 30, 2011 versus the nine months ended September 30, 2010

Other Income (Loss), Net. Other income (loss), net decreased $20.6 million for the nine months ended September 30, 2011, compared to the prior year period. Other income (loss), net for the nine months ended September 30, 2011 reflected impairment charges of $1.5 million on our holdings in Tengion. Other income (loss), net for the nine months ended September 30, 2010 reflected a $22.4 million gain on the mark-to-market of our holdings in Clarient, partially offset by impairment charges of $3.3 million related to our holdings in Tengion.

Equity income (loss). Equity income (loss) for Life Sciences increased $134.7 million in the nine months ended September 30, 2011 compared to the prior year period. In the second quarter of 2011, our former equity method partner company Advanced BioHealing was acquired by Shire plc. We recognized a gain of $129.0 million in connection with the transaction. The remainder of the increase was attributable to smaller losses incurred for partner companies in the Life Sciences segment as well as a reduction of the number of companies in the Life Sciences segment.

Technology

The following active partner companies as of September 30, 2011 were included in Technology:

		Safeguard Primary Ownership as of
		September 30,
Partner Company		2011				2010				Accounting Method
Advantedge Healthcare Solutions, Inc.			40.2	%			39.7	%		Equity
Beyond.com, Inc.			38.3	%			38.3	%		Equity
Bridgevine, Inc.			22.8	%			23.4	%		Equity
MediaMath, Inc.			22.5	%			17.3	%		Equity (1)
Swap.com			45.6	%			45.4	%		Equity
ThingWorx, Inc.			30.2	%		NA				Equity

Results of operations for the Technology segment were as follows:

		Three Months Ended September 30,								Nine Months Ended September 30,
		2011				2010				2011				2010
		(In thousands)								(In thousands)
Equity income (loss)		$	32,896			$	(957	)		$	28,149			$	(5,259	)
Net income (loss) from continuing operations before income taxes		$	32,896			$	(957	)		$	28,149			$	(5,259	)

Three and Nine months ended September 30, 2011 versus the three and nine months ended September 30, 2010

Equity Income (Loss). Equity loss fluctuates with the number of Technology partner companies accounted for under the equity method, our voting ownership percentage in these partner companies and the net results of operations of these partner companies. We recognize our share of losses to the extent we have cost basis in the equity partner company or we have outstanding commitments or guarantees. Certain amounts recorded to reflect our share of the income or losses of our partner companies accounted for under the equity method are based on estimates and on unaudited results of operations of those partner companies and may require adjustments in the future when audits of these entities are made final. We report our share of the results of our equity method partner companies on a one quarter lag. Equity income (loss) for Technology increased $33.8 million and $33.4 million in the three and nine months ended September 30, 2011, respectively, compared to the prior year periods. In the third quarter of 2011, our former equity method partner company Portico Systems, Inc. was acquired by McKesson. We recognized a gain of $35.4 million in connection with the transaction. The gain on the sale of Portico was partially offset by larger losses incurred at partner companies within the Technology segment.

Corporate Operations

		Three Months Ended September 30,								Nine Months Ended September 30,
		2011				2010				2011				2010
		(In thousands)								(In thousands)
General and administrative expense		$	(4,227	)		$	(3,453	)		$	(12,616	)		$	(11,323	)
Stock-based compensation			(844	)			(775	)			(2,845	)			(2,592	)
Depreciation			(29	)			(28	)			(93	)			(84	)
Interest income			278				180				969				516
Interest expense			(1,445	)			(1,674	)			(4,522	)			(4,061	)
Other income (loss), net			50				5				70				(7,911	)
Equity loss			(160	)			(13	)			(214	)			(26	)
		$	(6,377	)		$	(5,758	)		$	(19,251	)		$	(25,481	)

Three months ended September 30, 2011 versus the three months ended September 30, 2010

General and Administrative Expense. Our general and administrative expenses consist primarily of employee compensation, insurance, outside services such as legal, accounting and travel-related costs. General and administrative expense increased $0.8 million when compared to the prior year period. The increase was primarily attributable to an increase in employee costs of $0.3 million, an increase in insurance costs of $0.1 million, and an increase related to a legal settlement of $0.1 million.

Stock-Based Compensation. Stock-based compensation consists primarily of expense related to stock option grants and grants of restricted stock and deferred stock units to our employees. Stock-based compensation increased $0.1 million when compared to the prior year period. The increase was primarily attributable to higher expense related to performance-based stock option and stock unit awards.

Interest Income. Interest income includes all interest earned on available cash and marketable security balances. Interest income increased $0.1 million in the three months ended September 30, 2011 compared to the prior year period due to higher average invested cash balances.

Interest Expense. Interest expense is primarily related to our 2024 and 2014 Debentures. As discussed below under Liquidity and Capital Resources, we exchanged a portion of our convertible senior debentures effective March 26, 2010. In the first quarter of 2011, we repaid $30.8 million of our 2024 Debentures. The decrease in interest expense of $0.2 million in the three months ended September 30, 2011 compared to the prior year period is related to the repayment of the 2024 Debentures.

Other income (loss), net. Other income (loss), net for the three months ended September 30, 2011 was consistent with the prior year period.

Equity loss. Equity loss for both periods presented related to our private equity holdings accounted for under the equity method.

Nine months ended September 30, 2011 versus the nine months ended September 30, 2010

General and Administrative Expense. General and administrative expense increased $1.3 million when compared to the prior year period. The increase was primarily attributable to an increase in employee costs of $0.8 million, an increase in insurance costs of $0.1 million, and an increase related to a legal settlement of $0.1 million.

Stock-Based Compensation. Stock-based compensation increased $0.3 million when compared to the prior year period. The increase was primarily attributable to higher expense related to performance-based stock option and stock unit awards.

Interest Income. Interest income increased $0.5 million in the nine months ended September 30, 2011 compared to the prior year period due to higher average invested cash balances.

Interest Expense. The increase in interest expense of $0.5 million in the nine months ended September 30, 2011 compared to the prior year period is related to the higher coupon rate of 10.125% payable on our 2014 Debentures as compared to a 2.625% coupon rate on the 2024 Debentures and accretion of the discount and amortization of debt issuance costs in the amount of $0.2 million associated with our 2014 Debentures.

Other income (loss), net. Other income (loss), net increased $8.0 million for the nine months ended September 30, 2011 compared to the prior year. Other income (loss), net for the nine months ended September 30, 2010 included an $8.5 million loss on exchange of $46.9 million in face value of our convertible senior debentures, partially offset by $0.3 million gains on sales of legacy assets.

Equity loss. Equity loss for both periods presented related to our private equity holdings accounted for under the equity method.

Income Tax Expense (Benefit)

Income tax benefit (expense) was $0.0 million for both the three and nine months ended September 30, 2011 and 2010.

During the nine months ended September 30, 2011, we generated tax expense of $53.4 million on the sales of our holdings in Portico Systems, Inc. and Advanced BioHealing, which was entirely offset by capital loss carryforwards and net operating loss carryforwards which had been reduced by a full valuation allowance.

We have recorded a valuation allowance to reduce our net deferred tax asset to an amount that is more likely than not to be realized in future years. Accordingly, the income tax expense that would have been recognized in the nine months ended September 30, 2011 and the benefit of the net operating loss that would have been recognized in the nine months ended September 30, 2010 were offset by changes in the valuation allowance.

During the nine months ended September 30, 2011, we had no material changes in uncertain tax positions.

Liquidity and Capital Resources

We fund our operations with cash on hand as well as proceeds from sales of and distributions from partner companies, private equity funds and marketable securities. In prior periods, we have also used sales of our equity and issuance of debt as sources of liquidity and may do so in the future. Our ability to generate liquidity from sales of partner companies, sales of marketable securities and from equity and debt issuances has been adversely affected from time to time by adverse circumstances in the U.S. capital markets and other factors.

As of September 30, 2011, we had $144.2 million of cash and cash equivalents and $136.2 million of short-term and long-term marketable securities for a total of $280.4 million. In addition, we had $6.4 million of cash held in escrow, including accrued interest, related to our May 2008 sale of our equity and debt interests in Acsis, Inc., Alliance Consulting Group Associates, Inc., Laureate Pharma, Inc., ProModel Corporation and Neuronyx, Inc. (the “Bundle Transaction”) and $12.3 million was held in a restricted escrow account to service interest on the 2014 Debentures, as discussed below.

In August 2011, we acquired a 36% ownership interest in Penn Mezzanine for $3.9 million. We expect to deploy up to $26.1 million over a several year period in lending opportunities that meet certain predefined criteria alongside existing and future Penn Mezzanine funds.

Portico Systems was acquired by McKesson in July 2011 and we received cash proceeds in exchange for our equity interests of approximately $32.8 million, excluding $3.4 million which will be held in escrow for a period of one year. In addition, depending on the achievement of certain milestones, we may receive an additional $1.9 million after a period of one year. Portico also repaid its mezzanine loan facility with us in the principal amount of $5.0 million in connection with the transaction.

In the second quarter of 2011, Advanced BioHealing was acquired by Shire plc, resulting in net proceeds of $137.9 million. An additional $7.6 million was placed in escrow until March 2012.

In December 2010, Avid was acquired by Eli Lily and Company resulting in net proceeds to us of $32.3 million. We expect to receive an additional $3.4 million currently being held in escrow within one year. In addition, depending on the achievement of certain difficult milestones, we could receive additional proceeds of up to $58.0 million over an eight year period.

In December 2010, we received cash proceeds of $2.6 million related to the sale of Quinnova Pharmaceuticals, Inc, a former partner company. Depending on the achievement of certain milestones, we could receive additional proceeds of $1.9 million over the next two years.

In connection with the Bundle Transaction, an aggregate of $6.4 million of the gross proceeds of the sale were placed in escrow pending the expiration of a predetermined notification period, subject to possible extension in the event of a claim against the escrowed amounts. On April 25, 2009, the purchaser in the Bundle Transaction notified us of claims being asserted against the entire escrowed amounts. We do not believe that such claims are valid and have instituted legal action to obtain the release of such amounts from escrow. The proceeds being held in escrow will remain there until the dispute over the claims have been settled or determined pursuant to legal process.

In 2004, we issued an aggregate of $150 million in face value of convertible senior debentures with a stated maturity date of March 15, 2024 (the “2024 Debentures”). We had $0.4 million of the 2024 Debentures outstanding at September 30, 2011. On March 21, 2011, we repurchased $30.8 million of the 2024 Debentures as required by the Debenture holders. Interest on the 2024 Debentures is payable semi-annually. At the debentures holders’ option, the 2024 Debentures are convertible into our common stock through March 14, 2024, subject to certain conditions. The adjusted conversion rate of the debentures is $43.3044 of principal amount per share. The closing price of our common stock at September 30, 2011 was $15.00. The remaining 2024 Debentures holders have the right to require us to repurchase the 2024 Debentures on March 20, 2014 or March 20, 2019 at a repurchase price equal to 100% of their face amount, plus accrued and unpaid interest. In limited circumstances, we have the right to redeem all or some of the 2024 Debentures.

In March 2010, we issued $46.9 million in face value of our 10.125% senior convertible debentures, due 2014 (the “2014 Debentures”) in an exchange transaction for the same face amount of our 2024 Debentures. Interest on the 2014 Debentures is payable semi-annually. As required by the terms of the 2014 Debentures, at issuance we placed approximately $19.0 million in a restricted escrow account to service interest associated with the 2014 Debentures through their maturity. At the debentures holders’ option, the 2014 Debentures are convertible into our common stock prior to March 15, 2013 subject to certain conditions, and at anytime after March 15, 2013. The conversion rate of the 2014 Debentures is $16.50 of principal amount per share. The closing price of our common stock at September 30, 2011 was $15.00. The 2014 Debentures holders have the right to require repurchase of the 2014 Debentures upon certain events, including sale of all or substantially all of our common stock or assets, liquidation, dissolution, a change in control or the delisting of our common stock from the New York Stock Exchange if we were unable to obtain a listing for our common stock on another national or regional securities exchange. Subject to certain conditions, we may mandatorily convert all or some of the 2014 Debentures at any time after March 15, 2012. If we elect to mandatorily convert any of the 2014 Debentures, we will be required to pay any interest that would have accrued and become payable on the debentures through their maturity. Upon a conversion of the 2014 Debentures, we have the right to settle the conversion in stock, cash or a combination thereof.

Because the 2014 Debentures may be settled in cash or partially in cash upon conversion, we have separately accounted for the liability and equity components of the 2014 Debentures. The carrying amount of the liability component was determined at the exchange date by measuring the fair value of a similar liability that does not have an associated equity component. The carrying amount of the equity component represented by the embedded conversion option was determined by deducting the fair value of the liability component from the carrying value of the 2014 Debentures as a whole. The carrying value of the 2014 Debentures as a whole was equal to their fair value at the exchange date. We are amortizing the excess of the face value of the 2014 Debentures over their carrying value to interest expense over their term. At September 30, 2011, the fair value of the $46.9 million outstanding 2014 Debentures was approximately $58.2 million based on quoted market prices as of such date.

We are party to a loan agreement which provides us with a revolving credit facility in the maximum aggregate amount of $50 million in the form of borrowings, guarantees and issuances of letters of credit (subject to a $20 million sublimit). Actual availability under the credit facility is based on the amount of cash maintained at the lending bank as well as the value of our public and private partner company interests. This credit facility bears interest at the prime rate for outstanding borrowings, subject to an increase in certain circumstances. Other than for limited exceptions, we are required to maintain all of our depository and operating accounts and the lesser of $80 million or 75% of our investment and securities accounts at the lending bank. The credit facility matures on December 31, 2012. Under the credit facility, we provided a $6.3 million letter of credit expiring on March 19, 2019 to the landlord of CompuCom Systems, Inc.’s Dallas headquarters which has been required in connection with our sale of CompuCom Systems in 2004. Availability under our revolving credit facility at September 30, 2011 was $43.7 million.

At September 30, 2011, we had committed capital of approximately $0.2 million to various private equity funds. These commitments are expected to be funded in the next 12 months.

The transactions we enter into in pursuit of our strategy could increase or decrease our liquidity at any point in time. As we seek to acquire interests in technology and life sciences companies, provide additional funding to existing partner companies, or commit capital to other initiatives, we may be required to expend our cash or incur debt, which will decrease our liquidity. Conversely, as we dispose of our interests in partner companies from time to time, we may receive proceeds from such sales, which could increase our liquidity. From time to time, we are engaged in discussions concerning acquisitions and dispositions which, if consummated, could impact our liquidity, perhaps significantly.

In May 2001, we entered into a $26.5 million loan agreement with our former Chairman and Chief Executive Officer. In December 2006, we restructured the obligation to reduce the amount outstanding to $14.8 million, bearing interest at a rate of 5.0% per annum. Since 2001 and through September 30, 2011, we have received a total of $16.9 million in payments against the loan. The carrying value of the loan at September 30, 2011 was zero.

We have received distributions as both a general partner and a limited partner from certain private equity funds. Under certain circumstances, we may be required to return a portion or all the distributions we received as a general partner of a fund for further distribution to such fund’s limited partners (“clawback”). The maximum clawback we could be required to return related to our general partner interest is $2.2 million, of which $1.9 million was reflected in accrued expenses and other current liabilities and $0.3 million was reflected in Other long-term liabilities on the Consolidated Balance Sheet at September 30, 2011.

Our previous ownership in the general partners of the funds that have potential clawback liabilities ranges from 19-30%. The clawback liability is joint and several, such that we may be required to fund the clawback for other general partners should they default. The funds have taken several steps to reduce the potential liabilities should other general partners default, including withholding all general partner distributions and placing them in escrow and adding rights of set-off among certain funds. We believe our potential liability due to the possibility of default by other general partners is remote.

For the reasons we presented above, we believe our cash and cash equivalents at September 30, 2011, availability under our revolving credit facility and other internal sources of cash flow will be sufficient to fund our cash requirements for at least the next 12 months, including commitments to our existing companies and funds, possible additional funding of existing partner companies and our general corporate requirements. Our acquisition of new partner company interests is always contingent upon our availability of cash to fund such deployments, and our timing of monetization events directly affects our availability of cash.

Analysis of Consolidated Cash Flows

Cash flow activity was as follows:

		Nine Months Ended September 30,
		2011				2010
		(In thousands)
Net cash used in operating activities		$	(13,584	)		$	(12,276	)
Net cash provided by (used in) investing activities			4,649				(26,412	)
Net cash (used in) provided by financing activities			(30,243	)			147
		$	(39,178	)		$	(38,541	)

Net Cash Used In Operating Activities

Net cash used in operating activities increased by $1.3 million. The change primarily related to a $1.4 million increase in cash used for payments under our management incentive plan, higher employee compensation costs of $0.5 million and an increase in insurance costs of $0.1 million, partially offset by a $1.0 million decrease in cash used for the payment of interest on the 2024 Debentures.

Net Cash Provided by (Used In) Investing Activities

Net cash provided by (used in) investing activities increased by $31.1 million. The increase primarily related to $171.0 million in proceeds received on the sale of Advanced BioHealing and Portico Systems, a $3.0 million decrease in advances to partner companies, a $3.7 million increase in repayment of advances to partner companies and a $19.0 million increase related to cash transferred to escrow to service interest payments on the 2014 Debentures in the prior year, partially offset by a $56.1 million increase in cash paid to acquire ownership interests in partner companies and funds and a $106.4 million net increase in cash paid to acquire marketable securities.

Net Cash (Used in) Provided by Financing Activities

Net cash (used in) provided by financing activities increased by $30.4 million. The increase primarily related to the repurchase of $30.8 million of the 2024 Debentures in the nine months ended September 30, 2011.

Contractual Cash Obligations and Other Commercial Commitments

The following table summarizes our contractual obligations and other commercial commitments as of September 30, 2011 by period due or expiration of the commitment.

		Payments Due by Period
										2012 and				2014 and				Due after
		Total				Remainder of 2011				2013				2015				2015
		(In millions)
Contractual Cash Obligations:
Convertible senior debentures(a)		$	47.3			$	—			$	—			$	47.3			$	—
Operating leases			1.5				0.1				1.0				0.4				—
Funding commitments(b)			0.2				0.2				—				—				—
Potential clawback liabilities(c)			2.2				—				2.2				—				—
Other long-term obligations(d)			3.7				0.2				1.5				1.5				0.5
Total Contractual Cash Obligations		$	54.9			$	0.5			$	4.7			$	49.2			$	0.5

		Amount of Commitment Expiration by Period
										2012 and				2014 and				After
		Total				Remainder of 2011				2013				2015				2015
		(In millions)
Other Commitments:
Letters of credit(e)		$	6.3			$	—			$	—			$	—			$	6.3