Interview with: Peter J. Boni, President and CEO - featuring: their high-growth, revenue-stage information technology and life sciences businesses.

Safeguard Scientifics, Inc. (SFE-NYSE)

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Safeguard Scientifics’ one year report card shows them creating and realizing value with their IT and life sciences companies using their five part game plan of reposition, time, ignite, augment and execute

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Diversified Investments

Safeguard Scientifics, Inc.

435 Devon Park Drive, Building 800
Wayne, PA 19087
Phone: 610-293-0600

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Peter J. Boni
President and CEO

Interview conducted by:
Lynn Fosse, Senior Editor
October 26, 2006

Peter J. Boni
Chief Exec. Officer, Pres,

As President and Chief Executive Officer of Safeguard, Peter J. Boni draws on more than 20 years of experience as the CEO of technology companies in all stages of growth, as well as experience as an operating partner with a large global private equity firm. With both deal savvy and operating expertise culled from a successful career, Peter is responsible for developing and executing Safeguard's strategy. His goal is to build on the company’s heritage of identifying businesses in the Information Technology and Life Sciences sectors with superior growth potential, and applying Safeguard's capital and strategic, operational and management resources to enhance long-term value for shareholders, partner companies and employees.

Company Profile:
Safeguard is a holding company that builds value in high-growth, revenue-stage information technology and life sciences businesses. We provide growth capital as well as a range of strategic, operational and management resources to our partner companies. We participate in expansion financings, corporate spinouts, management buyouts, recapitalizations, industry consolidations and early-stage financings.

CEOCFO: Mr. Boni, what is your vision and what attracted you to the company?
Mr. Boni: “I was attracted to Safeguard Scientifics because it was a 50 year old company with a great history of building market leaders and providing capital to entrepreneurs. Today it is positioned as a holding company for information technology and life sciences businesses. We have a definitive comparative strategy and real differentiation, and an experienced management team. We have been at this game plan for about a year and we have a strong first year report card, where we have created value and realized that value. We have a very attractive exit that we just announced for one of our companies that produced a significant gain for us on top of that. We have a five-part game plan:  reposition, time, ignite, augment and execute. We are repositioning from an operating company to holding company mindset where operators hold and then harvest for the earnings that come in. Holding companies build value and then time their exits for a maximum risk adjusted gain. We have ignited our deal machinery and augmented our organization and we are executing our strategy boldly. Our vision, simply stated, is that we are a preferred catalyst. We build value and create great information technology and life sciences companies.”

CEOCFO: Why is this the time to change to a holding company?
Mr. Boni: “Safeguard has had many iterations, and it had a holding company mindset going back to its earlier days. Many people have made a great deal of gain with the Safeguard model. Back in the internet days, the company was positioned as an internet incubator and when the bubble was expanding, life was really good. But when the bubble burst, lots of companies that were positioned in that field really took a hit. Safeguard brought in a new chief executive who took an operating mindset that tried to rationalize all of the irrational exuberance at that time. The guy worked for a four-year period and did a wonderful job of rationalizing. He divested or closed 30 of the 40 holdings, put $200 million dollars and the balance sheet structured the depth and gave me a stable platform with which to formulate the going forward direction.”

CEOCFO: With all of the ideas out there, how do you decide what you want to take on?
Mr. Boni: “We have five strategic themes that we seek and these strategic themes we find in present in both the IT and the life sciences arena. If you remember your high school algebra, ‘M squared C cubed’ -- maturity, migration, convergence, compliance and cost containment. For example, the population is maturing, medicines have their patents expiring, the IT infrastructure is maturing, the industry is consolidating, and there is a migration of business models and technologies going from one place to the other, such as analog to digital. There is also the perpetual software-licensing model giving way to the on-demand ‘Software as a Service” model. There is a convergence of information technologies within life sciences. And within life sciences; you have diagnostics, devices and drug delivery, so that all converges as well. Regulatory compliance is driving buying behavior; the FDA, the Patriot Act, I can go on and on. Cost containment is the watchword of the day, whether it is spiraling healthcare costs, or the spiraling maintenance costs build into the IT infrastructure. Therefore, major strategic themes like this attract entrepreneurial activity and that’s Safeguard’s game plan and business plan. We are looking for entrepreneurs in IT and life sciences. We will partner with them to build the product and we will provide somewhere between $5million and $50 million per deal depending on whether it is expansion financing or a recapitalization, or M&A transaction, corporate spinout or management buyout or even early stage. There are target companies that we look for in IT and we have some targets that we have defined in life sciences. In the IT segment, we look for enterprise applications; things that are analytic or data driven and pieces of the IT infrastructure, which could be security or communication. We like newer business models that come with recurring revenue streams; it could be software, service, a technology enabled service, or a specific vertical software solution. A few vertical markets have more attraction than others, such as financial services, healthcare, life sciences and certain internet-based businesses. For life sciences, it is the four Ds -- devices, diagnostics, and drug delivery for specialty pharma. The verticals that we seek tend to mirror the life cycle of a life sciences product.

From a geography standpoint, Safeguard has a 50-year branded footprint in the mid-Atlantic region. That has spilled over to the Southeast, Midwest and even the southern provinces of central and eastern U.S., and that is where the outbound deal sourcing is very strong, but inbound deal sourcing could come from anywhere. We are looking for revenue stage companies needing $5 to $50 million in capital, where we could be the primary shareholder or a minority shareholder. This would be in a market that is sizable enough, where the competitive advantages of the firm are realized, and have a view of how we are going to realize value. That is the driver of this company’s economic engine.”

CEOCFO: Why are the companies that choose to go under your umbrella going with Safeguard?
Mr. Boni: “Safeguard has spawned a half a dozen or so venture capital firms over its 50-year heritage. Many people view Safeguard as a venture capital firm or a private equity firm. We are different in many respects. We do not play as early as the venture capital community, we do not play as late as the private equity; we are somewhat of a tweener. But Safeguard Scientifics is a public company, so from an investor vantage point you can put in a little or a lot, and they are immediately liquid. We offer transparency into the performance of the company so that you can actually see your progress. The venture capital and private equity communities cloak their portfolios in a great deal of secrecy. We are never forced to do a premature exit to return capital to limited partners. The business model is entirely different; the money on our balance sheet is protected from taxes, unlike the venture capital and private equity communities that have to raise funds every three years. Their exit strategy and timetables are different. Therefore, there is far more patience built into our model. We also have a C-level staff of people that have occupied the entrepreneurial seat in the past. We give not only strategic guidance, but also operational support services along the way to really help a company grow. This is opposed to having a bright group that is good at analyzing the return structure on a deal, but with no operational expertise.”

CEOCFO: Will you give us an example of one or two of the companies that best represent what you do?
Mr. Boni: “A good example now is Mantas, Inc.; Mantas was a spinout of a DoD related company that Safeguard acquired a 33% stake in back in 2001. The ownership grew from 33% to 88% over a couple of financings. It provided an analytical piece of software that enabled fraud detection and it was applied to the anti-money laundering application that was indicated by the Patriot Act. It has been recognized as the “best of breed’ solution. This business was built from scratch to a $35 million revenue base, now with over 20% EBITDA margins. We have accepted an offer to sell the difference to i-flex® solutions, which is a majority owned company of Oracle Corporation (NASDAQ: ORCL), for $122.6 million in cash plus the cash that is on their balance sheet. The valuation metrics on this are very positive.  The industry average financially related to software companies is 2.4 times revenue or 11.2 times EBITDA. We were able to negotiate a deal that was a 46% premium on the revenue model and an 88% premium on the EBITDA multiple. We know that Oracle/i-flex will find this a highly accretive transaction for them, given the leverage points that they have on their business. Oracle has set up i-flex® as their method of penetrating the financial services world. There is Mantas -- 100% focused in on anti-money laundering applications -- with all the big Kahunas in financial services as its customer base. It is highly leverageable for them and a wonderful exit at a premium valuation for us. We helped that company build itself from grassroots to where it is today. We trained their CEO and executive staff and gave them the operational support services to get to where they are. However, the CEO and management team ran that business; we did not run it for them.”

CEOCFO: Why should potential investors be interested in the company and why is now an appropriate time to consider Safeguard?
Mr. Boni: “Now is a great time when you look at the Safeguard business model and its balance sheet. It has an exceptionally strong balance sheet, and a very valuable group of partner companies. We have 16 companies that are holdings today, six are majority owned, the remainder are minority owned and three are public. Their performance is very visible and their improvement in their performance continues. We have had six consecutive quarters of double-digit revenue growth, anywhere from twenty-six to forty-plus percent revenue growth over the last six Quarters. We have a very distinct business model as a holding company. Reported revenues are from majority companies only, but we have another ten companies that are minority owned. So the way to really recognize value for Safeguard isn’t by the revenue and EBITDA model, it is the net asset value model. Our NAV has yet to be recognized in our shareholder value. On top of that, we have $370 million of net operating losses that will protect any exit from taxation. We have an example of using that with a very significant gain that we expect from the sale of Mantas, Inc., today. If you look at Safeguard from a valuation standpoint, we are selling at a substantial discount to what the market value might be for any of our holdings.”

CEOCFO: How do you get people to pay attention?
Mr. Boni: “I have been on board with the management team for about a year. I mentioned we had a phase I game plan -- reposition, time, ignite, augment and execute. We are at the point where we have some very demonstrable success to feature in the ‘execution’ portion of our game plan and we are making that visible. The gain that we will realize through the sale of Mantas really puts a proof point on the driver of our economic engine. We are continually providing tools to the financial community for them to realize or recognize the underlying NAV within the company. There are several ways that we have executed our five-point game plan; we are a holding company today with sixteen different firms. We have timed five different exits for maximum risk adjusted value. We have sold some private equity holdings that we had in Q4 of last year for $24 million along with an under-utilized facility at one of our companies. That enabled us to produce a small profit in Q4. This outfit that we recently sold to ORACLE is very focused on financial services and had a small unit that was telecom focused; we sold that earlier this year for a couple of million dollars to improve the operating performance of the firm and get it highly focused in its core market. One of our firms, Alliance Consulting sold a regional operation realized a small gain on that. Then we had the giant gain with Mantas, so we have had five different exits that were well timed to maximize risk-adjusted value. We have ignited our deal machinery; we have seven transactions that we have done since I have been onboard starting with the acquisition of a firm called Acsis, Inc., of Marlton, NJ, that does supply chain automation that we acquired in Q-4 of 2005, and then another six transactions this calendar year.

We acquired a 12% stake in a software security firm called Authentium, Inc. of West Palm Beach, FL, a 34% stake in a new-age medical devices company called Rubicor Medical, Inc. of Redwood City, CA. We acquired a 28% stake in NuPathe, Inc. of Conshohocken, Pennsylvania, which is a specialty pharma company, and a 46% stake in a company called Portico™ Systems (formerly FMG Technologies, Inc.) of Conshohocken, PA., that does healthcare IT. Healthcare IT itself is a business that is doubling in size over the next five years from $ 17 to $35 billion in size. Two of our companies have also acquired a couple of businesses. Therefore, in total we have had seven transactions igniting our deal machinery. We augment our organization both internally and externally. I have made a variety of executive appointments and promotions within Safeguard, including managers of our IT and life sciences group. We brought in a vice president, an M.D., and associates in our life sciences group. We have augmented our legal and financial staff to provide the support services that a larger group of holdings will require. We have also augmented the organization within some of our partner companies. We have upgraded two CEO and CFO positions and brought in a VP of product development, and VP of sales and marketing, and actually increased the independent board of directors in each of our holdings. We have augmented our organization externally with alliances, syndication, partnerships and IT and life sciences advisory boards. We have augmented our board of directors with an individual that has IT, life sciences, private equity and holding company executive experience. We have a strategy and we have executed boldly on that strategy. We have been delivering results. We are the catalyst to build IT and life sciences businesses.”


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“We have been at this game plan for about a year and we have a strong first year report card, where we have created value and realized that value. We have a very attractive exit that we just announced for one of our companies that produced a significant gain for us on top of that. We have a five-part game plan:  reposition, time, ignite, augment and execute. We are repositioning from an operating company to holding company mindset where operators hold and then harvest for the earnings that come in. Holding companies build value and then time their exits for a maximum risk adjusted gain. We have ignited our deal machinery and augmented our organization and we are executing our strategy boldly. Our vision, simply stated, is that we are a preferred catalyst. We build value and create great information technology and life sciences companies.” - Peter J. Boni does not purchase or make
recommendation on stocks based on the interviews published.