Safeguard Scientifics' CEO Discusses Q4 2013 Results - Earnings Call Transcript

Mar. 6.14 | About: Safeguard Scientifics, (SFE)

Safeguard Scientifics, Inc. (NYSE:SFE)

Q4 2013 Results Earnings Conference Call

March 06, 2014 09:00 AM ET

Executives

John Shave - SVP, IR and Corporate Communications

Steve Zarrilli - President and CEO

Jeff McGroarty - Senior Vice President and CFO

Analysts

Greg Mason - KBW

Bob Labick - CJS Securities

Jim MacDonald - First Analysis

Ed Woo - Ascendiant Capital

Paul Knight - Janney Capital Markets

Ross Taylor - Somerset Capital

Operator

Good morning and welcome to the Safeguard Scientifics Fourth Quarter and Year-End 2013 Financial Results Conference Call. All participants are in a listen-only mode. After the presentation, we will open up the call for questions. Instructions will be provided at that time. Please note that this call is being recorded today, Thursday March, 6, 2014 at 9 am Eastern Time.

I would now like to turn the meeting over to John Shave, Senior Vice President, Investor Relations and Corporate Communications. Please go ahead.

John Shave

Good morning and thank you for joining us today for Safeguard Scientifics fourth quarter and full year 2013 conference call and webcast. Joining me on today’s call are Steve Zarrilli, Safeguard’s President and Chief Executive Officer; and Jeff McGroarty, Safeguard’s Senior Vice President and Chief Financial Officer.

During today’s call, Steve will review highlights of the quarter and full year as well as other developments at Safeguard and our partner companies, then Jeff will discuss Safeguard’s financial results and strategies, and after that we will open up the line for questions.

Something to note for those of you who are attending this call via webcast, we have upgraded our capabilities to optimize the viewing experience. You will now be able to access our webcast from your smartphone, tablet or computer. We hope you enjoy this new user friendly experience and welcome any feedback you may have.

As always, I must remind you that today’s presentation includes forward-looking statements. Reliance on forward-looking statements involves certain risks and uncertainties, including but not limited to the uncertainty of future performance of our partner companies, the risks associated with our acquisition or disposition of interest in partner companies, risks associated with our decisions about the deployment of capital, and the effect of regulatory and economic conditions generally, as well as the development of the healthcare and technology markets and other uncertainties that are described in our SEC filings.

During the course of today’s call, words such as except, anticipate, believe and intend will be used in our discussion of goals or events in the future. Management cannot be certain that final outcomes will be as described today.

We encourage you to read our filings with the SEC including our Form 10-K, which describe in detail the risks and uncertainties associated with managing our business. The company does not assume any obligation to update any forward-looking statements made today.

Now here is Safeguard’s President and CEO, Steve Zarrilli.

Steve Zarrilli

Thank you, John and good morning. And thank you all for joining us today for an update on Safeguard and our partner companies. 2013 was a tremendous year of progress, strong growth and steadfast focus on our core business.

We deployed $34.1 million of capital in 6 new partner companies and in other early stage enterprises. In addition, we deployed $15.3 million of additional capital to support the growth of the partner companies in which we already had an interest at the beginning of the year.

We recently announced four completed exit transactions for Alverix, Crescendo, NuPathe and ThingWorx generating aggregate initial cash proceeds for Safeguard of $114 million with an aggregate cash-on-cash return of 2.1 times. For NuPathe and ThingWorx, we have the opportunity to realize an additional $24.2 million and $6.5 million respectively, based on certain milestones achieved over future periods.

Based in part on the cash which these assets have contributed to our balance sheet, in late February 2014, our Board of Directors approved an increase in our share repurchase program, bringing the total authorization to $25 million. Share repurchases will be made from time to time based on the capital needs of the business, the market price of our common stock and general market conditions. No time has been set for the completion of the repurchase program and the program may be suspended or discontinued at any time.

Thus far under the share repurchase program, we have repurchased 56,000 shares for a total of $1.1 million. As we continue into 2014 and plan for the years ahead, we anticipate that our momentum will continue to build and we will have further consistency in the amount of capital deployed and capital realized. We also continue to align our interest with the interest of our shareholders and our intended to create and maximize shareholder value.

At the beginning of 2013, Safeguard announced initial aggregate partner company revenue guidance of $250 million to $270 million for 2013. And at the end of the third quarter, we increased aggregate partner company revenue guidance to a range of $285 million to $295 million. 2013 actual partner company aggregate revenue was $292 million, up from $197 million in 2012 and $143 million in 2011.

For 2014, partner company aggregate revenue is projected to be between $345 million and $365 million. 2014 aggregate partner company revenue guidance includes revenue for partner companies in which Safeguard has an interest as of today. Aggregate revenue for the same partner companies for prior years was $288 million for 2013 and $202 million for 2012.

Aggregate revenue guidance for 2014 and prior years reflects revenue on a net basis. Revenue figures utilized for certain companies pertain to periods prior to Safeguard’s involvement with said companies and based solely on information provided to us by such companies. Safeguard reports the revenue of its equity and cost method partner companies on a one-quarter lag basis.

Safeguard remains well positioned for continued progress in growth. We are encouraged by the improvement in the broader domestic economy and we aren’t alone in this sentiment. A recent survey of capital providers with whom we compete indicates that there is a steady increased confidence in the macroeconomic environment, especially for exit transactions and IPOs. According to the Silicon Valley Venture Capitalist Confidence Index, confidence levels are at the highest levels since late 2007. This reading suggests a firmer foundation for the markets in which we participate in 2014 despite the volatility that has roiled capital markets early in the New Year.

We are encouraged and enthusiastic at this juncture about the improving business climate and Safeguard’s prospects for the rest of 2014 and beyond. And we remain disciplined and focused on our core business as the key driver for shareholder value.

At Safeguard, our focus is on finding promising opportunities in new companies, structuring appropriate financial and governance relationships, developing those partner companies usually over three to five years, and then monetizing our interest in those partner companies when the right opportunity presents itself. By adhering to the touchstone of disciplined execution, we believe that we will consistently create value over time. The nature of Safeguard’s evergreen business model allows for this patience.

Since December 2010, we have had eight exits to which our partners companies were acquired by highly respected global companies such Shire Pharmaceuticals, Eli Lilly, GE Healthcare, McKesson, Beckton Dickenson, Teva Pharmaceutical, PTC and Myriad Genetics.

Clearly, our partner companies are attracting the attention of leading global companies. We continue to build a robust pipeline of new opportunities. We are equally focused on identifying well timed exits to maximize value for our shareholders.

As a visionary for the development of growth stage healthcare and technology company, Safeguard is a proven partner for entrepreneurs looking to accelerate growth and build long-term value in their businesses. Leveraging Safeguard’s rich and colorful history of building market leaders, along with our team’s collective operational expertise and successful entrepreneurial endeavors, Safeguard has built a powerful and actionable platform of resources to support our partner companies with strategies and relationships that are vital for success. We provide value that extends beyond capital and we work as a team to [bolster] growth.

Our corporate staff of 30 employees is dedicated to creating long-term value for our shareholders by helping our partner companies build value organically and by acquisition activity. Our focus remains to deliver aggregate cash-on-cash returns of 2 times our cost at a minimum from a growing roster of partner companies in select verticals of the healthcare and technology sectors. Those verticals are medical diagnostics and devices, specialty pharmaceuticals and healthcare technology and digital media enterprise software and financial technology.

We are working every day to execute that strategy and to deliver meaningful results. It’s no secret our interests are closely in line with our shareholders. The company’s current investor slide deck concludes this slide outlining how equity incentive compensation is going to achieving certain thresholds and market capitalization growth and cash-on-cash returns. In short, the Safeguard team won’t take its eye off the ball.

We have grouped our current 19 partner companies into 4 stages based on revenue generation as their operational, financial and organizational maturity. A Safeguard partner company can be involved in a strategic or financial exit transaction at any stage of development as evidenced by our recent exit transactions, new [pathless] pre-revenue, our Barrington team works for initial revenue and Crescendo was expansion stage.

Here is a brief overview of four stages. Development stages of pre-revenue business that are proving their technology through prototype development or data product versions. We do not at this point have any partner companies in this stage. Initial revenue stage includes 9 of Safeguard’s partner companies. Businesses in this stage are building corporate infrastructure and management teams. They are beginning to penetrate target markets and have revenues of $5 million or less. Our expansion stage category currently has four partner companies with characteristics of commercial grade solutions, growing market penetration, complete infrastructure and management teams and revenue in the range of $5 million to $20 million.

Partner companies in our high traction stage are characterized by rapid growth, significant commercial success and revenues in excess of $20 million per year. Six of our partner companies are in this stage. Most recently Putney moved into this category since it surpassed the $20 million hurdle in 2013.

There are two high potential initial revenue stage partner companies that we deployed capital into in 2013 that I would like to focus on for this call. The first is Pneuron. Pneuron is led by a repeat successful Safeguard entrepreneur, Simon Moss who was previously CEO of Safeguard partner company [Mantas]. In 2006 [Mantas] was acquired by i-flex Solutions, a subsidiary of Oracle Corporation for $112 million resulting in a gain of approximately of $84 million for Safeguard. Pneuron enables organizations to rapidly solve business problems through a disruptive approach that [quest] across data, applications and processes.

By targeting the right information at the data source, companies are no longer faced with the complex integration and infrastructure requirements of traditional approaches. Pneuron continues to secure contracts with insurance companies, financial institutions and advisory firms. As the company heads into 2014, it will continue to focus on these sectors, as well as healthcare. Safeguard deployed $5 million in Pneuron in February 2013 and has a 28% primary ownership position.

Another exciting partner company in the initial revenue stage is Apprenda, a leading enterprise platform-as-a-service company that’s powering the next generation of enterprise software development in public, private and hybrid clouds. Apprenda reduces the complexities of building and delivering modern software applications enabling enterprises to turn ideas into innovations faster. 13 of the world’s top 20 financial institutions including J.P. Morgan have engaged Apprenda. In healthcare, AmerisourceBergen, McKesson, Memorial Sloan Kettering are using Apprenda to create new efficiencies in revenue streams.

Gartner recognized Apprenda as an early market leader from private cloud-enabled application platforms. According to Gartner, the category has the potential market opportunity of $4 billion; Safeguard led a $16 million Series C financing deploying $12.1 million in Apprenda in November 2013 for a 22% primary ownership position.

Now let me provide you with a brief update on one of our partner companies in the high traction stage, MediaMath. As a result of the few successful IPOs in the digital marketing technology category, MediaMath is attracting tremendous attention. The advertising technology community viewed the September IPO of MediaMath’s competitor Rocket Fuel as an important indicator of the growing value of sophisticated technologies that improve digital advertising performance.

MediaMath expects continued rapid revenue growth during 2014. Safeguard has deployed $18.5 million of capital in MediaMath since July 2009 and has a 23% primary ownership position. I’m certain that you will agree that despite four recent exit transactions, we have an exciting group of partner companies with tremendous value creation potential. We look forward to keeping you updated on future capital deployment and exit activity.

And with that I’m going to turn the call over to our CFO, Jeff McGroarty, who will focus on our financial performance and ongoing goals.

Jeff McGroarty

Thanks Steve. Let’s turn on to the review of key financial metrics for the quarter and year ended December 31, 2013. At year-end we had $183.6 million in cash, cash equivalents and marketable securities. The total carrying value of outstanding debt was $49.9 million, resulting in net cash of $133.7 million. It is important to note, that this cash balance does not include the proceeds from our recent exits Alverix, Crescendo and NuPathe.

During the quarter, primary uses of cash were $13.6 million of deployments in new companies including Apprenda and Dabo Health, a follow on deployment of $0.2 million in our partner company Hoopla, cash used in operations of $3.5 million and interest payments of $1.4 million.

For the full year, primary uses of cash were $34.1 million of deployments in new companies including Apprenda, Clutch Holdings, Dabo Health, Pneuron, Quantia and Sotera Wireless, follow on deployments of $15.3 million in seven partner companies, cash used in operations of $18.3 million, interest payments of $2.9 million and deployments in Penn Mezzanine loan participations of $2.3 million.

Safeguard has determined that we will not be making any further material capital deployment in connection with Penn Mezzanine lending. Instead as Steve mentioned earlier, we will be focusing on our core business as the key driver for building value in our partner companies and for our shareholders.

Consistent with Safeguard’s focus on the core business our primary intended uses of cash are as follows. Capital deployments into new partners companies, follow-on funding to support our existing partner companies, returning capital to shareholders in the form of stock repurchases and corporate operations.

Our roster of partner companies totaled 22 at year-end. The cost of our interest in these companies totaled $215 million. Carrying value of those partner companies was $144 million. And taking into account our recent exits, we now have 19 partner companies. The cost and carrying value of our interest in these companies was $171 million and $113 million respectively as of December 31, 2013. Safeguard’s financial strength, flexibility and liquidity are evidenced from the company’s balance sheet at year end.

Now it’s time for Steve to lead us through the question-and-answer segment of the call.

Steve Zarrilli

Thanks Jeff. And now operator let’s open the lines for any questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Greg Mason with KBW. Your line is open.

Greg Mason - KBW

Good morning gentlemen and congratulations on the recent exit activity, that’s great. Steve, I know you didn’t give specific guidance about share buyback and when you might use it. But could you just maybe frame the topic for us a little bit with just what’s your thought process in terms of what do you need to see from your balance sheet and cash flow to start utilizing the share buyback?

Steve Zarrilli

Good morning Greg. So a couple of key points, first I don’t think we would have increased the authorization, if we weren’t trying to meaningfully put some capital to work in that regard. The Board and management are actively evaluating on a go forward basis both excess cash as we define it and that’s defined in a manner that will allow us to have sufficient operating flexibility to pursue the goals that we’ve laid out.

As well as making sure that we have a proper understanding of what we believe the intrinsic value per share of stock is for Safeguard. And when there is a -- an amount of excess cash is redefined and the value of the shares as are traded are below intrinsic value then we will be utilizing the repurchase program to take advantage of that disparity if you will.

Greg Mason - KBW

And I am guessing you don’t want to make public what those numbers are for excess cash or level of stock price?

Steve Zarrilli

That would be correct.

Greg Mason - KBW

All right. Also can you talk about the pipeline for new deal activity, obviously the exit environment had everybody is talking about that what is the opportunity for putting capital to work in new opportunities?

Steve Zarrilli

So the good news is the opportunities for putting capital to work are as strong or stronger than we’ve seen in the past. Actually I think our successes have really put us on the mat in a certain number of circles that allow us to see even more deals in certain areas than we have been seeing in the past. And I think our pipeline in the past was pretty robust. So we are not going to be at a loss for opportunity to consider in 2014, where we do need to be careful and I think I have mentioned this in 2013 as well, the exit opportunities have also demonstrated that the valuation out there are fairly substantial as evidenced by such as an example the (inaudible) transaction. We need to be very careful that we do our homework and that we don’t overpay for opportunities and we’re being very diligent around that process and we will continue to look at these great opportunities but with a proper wins around valuation and whether or not we can get in at the right price.

Greg Mason - KBW

Great and then one last question and I will hope back in the queue. Last year you gave guidance of you are expecting two exits in 2013 obviously you are able to accomplish that, do you have any willingness or desire to give any exit expectations in 2014?

Steve Zarrilli

Yes, it almost gave me a coronary last year, Greg. And all honestly we believe that, we have been on a very nice pace with regard to exits with 2013 [seen too]. We count where it’s really as a ‘13 exit and we sold two already in 2014. So right now that pace seems pretty healthy to us. Will there be an opportunity for something else during 2014, we are going to continue to keep trying. And we have got a number of companies as you know that could potentially be poised for something that could result in an exit or a monetization, but we are going to continue to make sure that we pay attention to what is going on in the market place and look for those well timed risk adjusted exits.

Greg Mason - KBW

Right, great. Thanks guys.

Operator

Your next question comes from the line of Bob Labick with CJS Securities. Your line is open.

Bob Labick - CJS Securities

Good morning and congratulation on a very nice year and some good exits there.

Steve Zarrilli

Thanks Bob.

Bob Labick - CJS Securities

I wanted to start obviously with that and a question for Jeff. Jeff, do you have an approximate number for the pro forma cash once you get all the proceeds in from the announced exits and then can you give us a rough timing of when you would expect to get that cash?

Jeff McGroarty

Sure, Bob. We ended the year with $184 million in cash, the proceeds for the three exits since year end is about $77 million. So the combined -- that is our pro forma cash. As of today, all that cash has been received at this point in time, the initial cash proceeds from all the exits.

Bob Labick - CJS Securities

Okay, that’s great. And obviously that is a lot of cash and I know you don’t want to give your intrinsic value number, but I will say it certainly the stock is below our estimates for intrinsic value and I think there is real opportunity for you to enhance shareholder value with that excess cash. So, I think that’s great that you have [upped] your authorization of your share repurchase.

Steve Zarrilli

Thanks Bob, we agree.

Bob Labick - CJS Securities

And then you talked about this just a little bit, but maybe could you talk more about the expectations for the size of the portfolio and what you would target, not specifically but broadly for deployments for new companies this year or over the next several years?

Steve Zarrilli

Yes. Bob first of all we do recognize and still remain committed to the goal of having more than less partner companies, it provides stability in a whole number of ways, it provides opportunity and it helps us to provide diversification in the portfolio itself. But the team and I are working on putting hopefully 6 to 8 new names up this year. We are looking to target capital deployment in a manner similar to last year or in our guidance. We actually came in below the guidance last year, not because we didn’t find the opportunities, we actually were I think more efficient in the way that we’re putting capital to work.

So, you will see similar goals for this year, 6 to 8 new partner companies, capital that would be deployed on new opportunities in excess of $40 million follow on capital for existing partner companies that most likely would be in excess of $30 million. There are some of the guide flows that we are working around for 2014.

Bob Labick - CJS Securities

Okay. Great that’s very helpful. And then as you said, you had a few exits counting in this year, over the next -- without putting number to it, over the next 18 months or so, what you see as the roaster of potential opportunities and knowing that ThingWorx is not on a lot of people’s raiders as a potential exist, so they can come from anywhere. But how do you see the pipeline of potential exits over the next 12 to 24 months?

Steve Zarrilli

We have a lot of great companies that are doing a lot of great things. And I think one of the biggest difference is that we have today in ‘14 that didn’t exist necessarily in the second half of 2011 and 2012, when we had our last string of exists, was that we have near term the opportunity for some other opportunities for monetizations will it be six or 12 or 18 months that’s all going to be determined based upon a whole lot of facts and circumstances that some of which are in and many of which are out of our control.

But when I look across the 19 companies that we have today, I think that there is publicly some companies that many of you are looking as obvious potential exist opportunities and we don’t necessarily disagree, timing will be the matter there. I think that there is also of few that are probably like ThingWorx where they’re not necessarily getting the attention that some of the other companies are, but they also provide an opportunity for a potential exit at some point sooner rather than later in their lifecycles.

So as I look across the 19 companies today, I am feeling pretty comfortable that we’re going to continue to manage our business to provide a consistency that I’ve been striving to put into the day to day activities of our business and that we’ve been trying to communicate over the last 15 months.

Operator

Your next question comes from the line of Jim MacDonald with First Analysis. Your line is open.

Jim MacDonald - First Analysis

Yes. Good morning guys and congratulations on all the exits. I wanted to investigate the partner revenue guidance a little bit. Could you give some thoughts on that? I know you’ve been conservative in the past, but specifically MediaMath said that they might expect to double revenue this year which could almost account for 100% of the growth you’re expecting in partner revenue?

Jeff McGroarty

Sure Jim. We recognize that MediaMath has enormous potential compared to the numbers they might have provided to you, we tend to be a little bit more conservative in our early stages in the beginning of the year as far as our revenue guidance goes. So the range that we’ve given is 20% to 27% year-over-year growth compared to last year on an adjusted basis. And MediaMath is certainly a key driver of that growth. And could we exceed it? Yes, but for now that’s our view of what 2014 looks like. We’ve got other companies that are driving growth and we would expect that will be -- at this point our early indications would be, we’d be at least at the high-end of that range.

Jim MacDonald - First Analysis

Okay. And just a technical question, it looks like you lost a little money in Penn Mezzanine in the quarter, anything specific there?

Jeff McGroarty

Sure. Yes that impairment charge you’re referring to of $1.8 million per Penn Mezzanine that relates to our decision to no longer participate in future Penn Mezzanine loans. So, that’s an impairment of the investment we made initially in the platform, the entity itself Penn Mezzanine. We actually had a write-off in the quarter of about $1.2 million related to some of our participations in warrants that we acquired from Penn Mezzanine. So net-net, slight adjustment downward, but that also doesn’t reflect the interest income we continue generate from Penn Mezzanine, which was $1.5 million during the year and we would expect it will be similar in 2014.

Steve Zarrilli

So, Jim it’s also important to note that when we take all of those components and add them up over the what we consider to be the remaining life of our involvement with Penn Mezzanine, we expect that we will have a full recoupment of the capital that we had deployed against that initiative.

Jim MacDonald - First Analysis

Great, thanks for that color. And if I can sneak in one more, it’s good to see you initiating the repurchase program. Can you give some thoughts on why you are doing, returning money to shareholders that way rather than maybe special dividends or something like that?

Steve Zarrilli

We’ve looked at a number of alternatives, we had long and detailed conversations with our Board as you can imagine. And we ultimately came to the conclusion that at this moment in time that this is the most appropriate way from a capital allocation perspective to return capital to shareholders. I think for many shareholders, if not most, it’s probably the most tax efficient way. And for now, we believe that that’s the most appropriate thing for Safeguard to be doing.

Jim MacDonald - First Analysis

Okay. Thanks very much.

Operator

Your next question comes from the line of Ed Woo with Ascendiant Capital. Your line is now open.

Ed Woo - Ascendiant Capital

I want to give my congratulations again. I had a question, you guys obviously are [digging] a lot of cash near term and you guys (inaudible) and you mentioned that you guys are seeing maybe a little more deals and you guys are under radar more. Have you guys considered either expanding your team, making bigger investments for possibly going into new areas?

Steve Zarrilli

Great question and it’s actually an opportunity for me to reinforce some of the core tenants of our strategy. There is a couple of things that we’ve learned over the last couple of years, and that is we tend to succeed when we stay within our wheelhouse and wheelhouse today and for the forcible future is where we are able to put initial capital to work in the range of $5 million to $15 million where we might have an opportunity to follow on. But there is a certain side of the company or stage of evolution that we think we’re probably more skilled at than not. So we are not necessarily going to want to overreach and begin putting more capital to work in larger opportunities, because we just don’t believe that we succeed very well in those situations.

The team will continue to evolve. And in fact if we make any investments in the organizational structure of this business, that’s where it is going to be made and that’s where it is being made. We value a lot of the opportunity to continue to develop people internally for greater roles and responsibility but we also recognize that at times we are going to be able to bring in some other talented professionals to augment the skills that we currently have on the bench.

So it’s going to be a continual evolution of that team. We’ve got four strong leaders focused on four areas of the market that we believe we have a level of expertise and domain knowledge and depth. And we are building our teams around those four cornerstones, recognizing that we will continue to evaluate new areas of the market for opportunities for Safeguard. And we do that in a very deliberate fashion through a number of different strategic reviews that take place throughout the year including a strategic development process that we go through with our Board at the beginning of each year.

Ed Woo - Ascendiant Capital

Great. Thank you. And good luck.

Steve Zarrilli

Thanks.

Operator

(Operator Instructions). Your next question comes from the line of [Bruce Cowen] with (inaudible) Partners. Your line is open.

Unidentified Analyst

Hi, gentlemen. We are very happy with I guess what you guys have been doing with the exits. We have one question regarding the buybacks. The only thing that you’ve done we’ve been unhappy with is your new issue of the convertibles? Why wouldn’t you buyback the converts? Is there any restriction on buying back the converts? [You have any interest diluting] shareholders. And we didn’t feel you needed to, do have a convert when you [borrowed] money again and we are wondering why you wouldn’t buyback those instead of buying back common or (inaudible) as a part of it?

Jeff McGroarty

Yes. This is Jeff, I’ll take that question. We’ve looked at both buying back the convert as well as buying back shares. And the plan we have in place does not preclude us from buying back the convert. We cannot force redemption at this point in time on the convert, we’d have to make purchases in the open market. So, the price at which we could buy those back compared to the price at which we can buy back the stock today, we think our return is higher purchasing the stock.

Unidentified Analyst

Well, might be but can I ask you question, why were they issued in the first place? And the original converts that were issued; I understand that as years back the company was in the different financial position. If you issued these converts at a high interest rate, at the bottom of the interest rate market and when you had to, you had 150 million of net cash, what was the (inaudible) clauses in issuing them in first place?

Jeff McGroarty

So, let me help you try to understand the sequence of events. So back in 2004, the original converts were issued with the maturity of 2011. In 2008, we began to seriously reduce that obligation through some opportunistic repurchases at discounts. We riddled that balance down to about $80 million to $85 million.

We ultimately reduced that amount further to about $50 million and had the opportunity about two and half years ago to put a new convert in place which at the time, we did have some cash on the balance sheet, but again we were looking at the business in its totally. And one of the questions that we continually ask ourselves because what amount of leverage is appropriate for this balance sheet and $50 million was deemed to be not inappropriate. We went looking for traditional debt in order to refinance the remaining balance of those converts before entering into the new convert instrument. And we found that most of those commercial lending opportunities were going to be such that there were going to be covenants put in place that would potentially restrict some of our activities. The cost of that debt was substantially different and we ultimately made the decision to go down the route of these current converts to provide for a covenant free borrowing capacity at a market or at an interest rate that was very favorable in relationship to other market terms that were out there at that time.

We are comfortable with the way that we’ve structured these converts. They are -- if they are put to us, we have the option to meet that obligation either with stock or in cash and our preference would be in cash. And we continued to evaluate how much leverage we think is appropriate for this balance sheet and in what format leverage will be taken.

Operator

Your next question comes from line of Paul Knight with Janney Capital Markets. Your line is open.

Paul Knight - Janney Capital Markets

Hi Steve. Do you see the time from investment to liquidity of it shortening within the healthcare space?

Steve Zarrilli

I don’t know if I have enough information, Paul to suggest that. I know that we’ve had a couple of scenarios play out recently that would suggest that the time has shrunk substantially. But I think that we’re still planning around and viewing the market in that three to five year period time. Somewhere it’s going to take a little bit longer and somewhere it’s going to be a little less, but on average I think 3 to 3.5 seems to be the midpoint that we’re seeing across the board.

Paul Knight - Janney Capital Markets

Our deals -- is the diagnostic side pretty rich environment or is it too rich on valuation?

Steve Zarrilli

Valuation is always a concern and you know, as well as I that there is some really interesting things happening that are going to provide some real opportunity for value creation in the diagnostic space. As we can get in early enough which we are looking to do and you will see a little bit of us looking at some earlier stage opportunities if we think that they have a great right growth opportunity, but Crescendo is a good example where you might be able to get in late under the right terms and be able to turn those dollars within a meaningful and reasonable period of time with terrific returns. I think Gary Kurtzman has done a phenomenal job in looking at opportunities like Crescendo and even good start genetics and some of the other things that he and his team are currently looking at.

So valuations are creeping. We are doing a pretty job of kind of getting through that discussion and determining whether or not we are going to want to participate in some new opportunities based upon valuation parameters. And we’re also being very pragmatic about taking advantage of the market as it’s presenting itself today.

So there is no complete answer to the question. I think the right questions to be asking and we’re asking ourselves those questions all the time, but we are not necessarily seeing a trend yet developed, but we are seeing as you point out a lot of opportunity on both sides of the equation.

Paul Knight - Janney Capital Markets

Are you seeing more pre-IPO deals like 10 years ago? Are you getting a chance to invest in them?

Steve Zarrilli

You mean kind of like a crossover deal where you invest in the later stages with the acknowledgement that it’s going to go public sooner than later? Is that what you are referring to? If it is what you are referring to, we are not necessarily seeing more of those, maybe in the business we’re just not seeing those as much in our pipeline or we are seeing them the way, they are valued at a level that doesn’t make sense for us or at a size that doesn’t make sense.

Operator

Your next question comes from the line of Ross Taylor with Somerset Capital. Your line is open.

Ross Taylor - Somerset Capital

Is there anything in the convertible debentures and the like that precludes you from paying special dividend to the common shareholders?

Jeff McGroarty

No, there isn’t, but it would adjust the conversion price any dividend that we’re paying.

Ross Taylor - Somerset Capital

Okay. It seem to us that the problem that we see with the company right now at the stock is that, there is a wider substantial gap obviously between the underlying value of the business and the underlying share price. And we are not convinced honestly that the traditional buyback approach you’re using links those two together in any way to close the gap. And so we’ve had this conversation before, but I’d like to say that we’re disappointed that something more creative isn’t being put in place and instead you’re kind of just opting for the buyback overtime at your, effectively at your leisure because we think that you need to create an event linked scenario. So people start to see this more as a private capital fund as opposed to simply an ongoing business that will always trade at a substantial discount to its underlying value?

Steve Zarrilli

Ross, we appreciate the point of view, I’m not necessarily suggesting that you’re wrong in your point of view. I think what you need to do is acknowledge or at least understand that this is an evolutionary process for us. And we’re going to continued to have a conversation with our Board around a variety of different matters as we evolve. 2014 should provide a lot of opportunity for that conversation to continue to be had. And as we evolve in our thinking and as the business evolves, we’re not waited to any particular methodology. This is the one that we’ve chosen for now and we think it’s the appropriate one given the way that we’re looking at our resources, our opportunities and how we look at the value of the stock in relationship to what we think its intrinsic value is.

Ross Taylor - Somerset Capital

Okay, great. We look forward for the monetizations and see your development. Thanks Ross.

Steve Zarrilli

Thanks Ross.

Operator

(Operator Instructions). Your next question comes from the line of Jim MacDonald with First Analysis. Your line is open.

Jim MacDonald - First Analysis

Yes, just a couple of quick follow ups. Sometimes you give expense, corporate expense guidance any, can you give us some thoughts on what that is for 2014?

Jeff McGroarty

Sure Jim. We would expect that our corporate expense would be inline with what it’s been historically. Roughly $17 million on a gross basis, $16 million to $17 million on a growth basis excluding any interest income derived from Penn Mezzanine.

Steve Zarrilli

And Jim, there has been some organizational changes that were completed in ‘13 that still allow us to in ‘14 with the same budget dollars continue to build the deal team infrastructure.

Jim MacDonald - First Analysis

Right. And just other follow up, Steve you mentioned a couple of times, valuation, maybe, I’m trying to figure out, if is that mean that you’re seeing higher valuations in the market or you think maybe you overpaid for some deals previously or both or where is that comment coming from?

Steve Zarrilli

I don’t think we’ve overpaid for any deals. And I don’t see that lightly, I mean we’ve exercised a lot of discipline in a way that we’ve created or we have assessed valuation. What I’m suggesting is that we need to be careful that we don’t fall into the way that could be created with some of the other macroeconomic events that are stabilizing the economy and allowing for valuations to creep higher. And what we’re trying to do Jim is be very disciplined in the way that we assess value and determine whether or not we want to participate in a particular company based upon the valuation that’s being expressed.

There are some long conversations that take place with the existing investors and management teams of the targets that we’re talking to. And one of the things that we’ve gotten really good at quite honestly is walking away when we think that the opportunity is just too expensive. And walking away sooner rather than later in the process so that we don’t find ourselves spinning wheels or wasting time and therefore coming up during the year empty handed with regard to pursuing other opportunities that make sense.

Jim MacDonald - First Analysis

And just following up on that, any particular sectors that you’re referring to like maybe that what are you thoughts on the cloud sector, the SaaS sector?

Steve Zarrilli

I think it feel more and more in the (inaudible) that that sector you’ve got to be careful with. I think we’ve got to be careful around diagnostic sector. I think we also have to be a little careful around the AdTech sector. I think the all have -- when the economy begins to strengthen all of those tend to rise right. So valuations are going to rise naturally across all of these sectors, some are moving at a pace that’s a little bit quicker than the other.

And all we’re trying to do is suggest that, the only message that I’m trying to get across is that, we know that that’s occurring and we want to be very disciplined in the way that we’re looking at opportunities. So that we feel that when we cut that check to make our capital deployment that we’ve done everything in our power to rationalize valuation and not put ourselves in a position to fail in the future because as you know if I get in at a higher number then to be able to turn that to create the returns that you all expect of us is going to be just that much more difficult and that just becomes a [mass will] that we just not want to participate in.

Jim MacDonald - First Analysis

Okay, great. Thanks.

Operator

I would now like to turn the conference back over to our presenters.

Steve Zarrilli

Well thank you and thank you all for joining us today. And we look forward to keeping you appraised on the progress of Safeguard throughout 2014.

Operator

This concludes today’s conference call. You may now disconnect.

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Safeguard Scientifics, Inc. (SFE): Q4 EPS of $1.10