SBIC Program Overview US Small Business Administration Investment

SBIC Program Overview US Small Business Administration Investment Division

What is the SBIC Program? n Created by Congress in 1958 to bridge the gap between entrepreneurs’ need for capital and traditional financing sources n Multi billion dollar, government-sponsored “fund of funds” n Invests long term capital in privately owned and managed investment firms (licensees) n Public-private partnership n Administered by the Investment Division, US Small Business Administration 2

What is the SBIC Program? Ø An institutional LP, managing $8. 1 billion in outstanding leverage and commitments Ø An investor in 311 private equity partnerships Ø Supported by roughly $8. 7 billion in capital resources from private partners Source: SBIC Data Management Branch, Weekly Report as of April 7, 2010. 3

What is the SBIC Program? An Engine for Growth in the US Economy In Fiscal Year 2009: ØSBIC financings totaled $1. 8 billion Ø 1, 477 companies benefited from SBIC financing Ø 361, or 24% of SBIC financings went to companies less than 2 years old Ø 11% of SBIC financings were made to “Competitive Opportunity Gap Businesses” Source: SBIC Data Management Branch, Weekly Report as of September 30, 2009. 4

What is the SBIC Program? A Source of Funding for Successful Companies A&W Brands Holding Co Actel Corporation Adaptec Airport Systems Int’l, Inc. America On. Line Amgen, Inc. Apple Computer Assembly Solutions, Inc. Beuti. Control Cosmetics, Inc. Build-a-Bear Workshop, Inc. Bright Start, Inc. CTC Distribution Services Callaway Golf Company Cardio Logic Systems, Inc Cerner Corporation Chesapeake Biological Labs Citation Computer Systems, Inc. Cognex Corporation Compaq, Inc. Comptek Research, Inc. Connecticut Culinary Institute Cooper Natural Resources, Inc. Costco Cray Research Cutter & Buck Data Stream Systems Devon Group, Inc. Digimark, Inc Kent Electronics Kentucky Kingdom, Inc. Kronos, Inc. Labor Ready, Inc. Lansinoh Laboratories, Inc. La. Madeleine, Inc. Lifeline Systems, Inc. Maxim Integrated Products Metrolina Outreach Mammography Microcom Micromodule Systems Microtouch Systems, Inc. Mother’s Work, Inc. Neoterik Health Tech, Inc. Net. Frame Systems, Inc. Newcomb Communications, Inc. New England Critical Care Nu. Co 2, Inc. Octel Communications Corp. Optical Data Systems Orbital Sciences Corp. Outback Steakhouse Peoplesoft, Inc. Performance Polymers Petstuff, Inc. Potomac Group, inc. (Medi. FAX) Protocol Systems RF Power Products Radio One Domain Furniture, Inc. Double. Click. com Douglas Machine, Inc. Duracraft Corporation Etak, Inc. Educational Development Encore Wire Corp. Envoy Corporation Evergreen Solar, inc. Federal Express FIserv Fusion Systems Corp. Gendex General Sciences Corp. Genicom Corp. Geotek Communications, Inc. Global Village Communications Gymboree Corporation Hanger Orthopedic Group, Inc. Harman International Ind. HS Resources, Inc. Healthcare Compare Corp. Healthcare Services Health. South Rehabilitation Industrial Training Corp. Information Analysis, Inc. Infotec Commercial Systems Intel Corp. Jenny Craig, Inc. 5 Read-Rite Restoration Hardware, Inc. Rock Bottom Restaurants Sage Software Seasafe, Inc Security Dynamics Technology Staples Steelweld Equip. Co. Sun Microsystems Symbol Technologies, inc. Synoptics Communications, Inc. Techne Corp. Telesis Corp. Teradata Corp. The Computer Group (TCG) The Last Best Place Catalog The Merchandising Group (TMG) The Systems Center Tricord Systems, Inc. Vertex Communications Vivid Technologies, Inc. Web. Methods Wellfleet Communications Wire Networks, Inc. Extreme Networks, Inc. Zydacron, Inc.

How Does the Program Work? Debenture Securities Program Ø Interest only, bullet with 10 year maturity Ø Coupon Rate = 4. 11% (as of 3/24/10) Ø Origination fee = 3. 0% (1. 0% at commitment; 2. 0% at draw) Ø Annual fee on leverage drawn =. 406%* Ø Other fees =. 425%** Ø Unsecured, non-recourse to General Partners Ø Leverage available up to 3 x private capital paid-in, but generally limited to 2 X Ø Leverage ceiling is $150 million per SBIC and $225 million for two or more licenses under common control Ø No prepayment penalty • The annual fee is fixed at time of leverage commitment. The current rate floats according to the SBIC Program’s required subsidy rate. • **Administrative and underwriting fees are adjusted annually, payable at time of draw, and not applicable to LMI debentures. 6

How Does the Program Work? SBICs invest in: Ø Loans, debt with equity features or equity Ø 100% “Small Business” n n Net worth < $18 M and average after-tax income for prior two years <$6 M Of which, 25% must be “Smaller Enterprise” (net worth < $6 M and average after-tax income for prior two years <$2 M) Ø Not more than 10% of the combined committed private capital and proposed leverage may be invested in a single company without prior SBA approval Ø Project financing is prohibited (real estate, single purpose projects) Ø SBICs may control small businesses for up to seven years which may be extended with SBA approval 7

How Does the Program Work? SBA requires management teams to have: Ø Senior-level decision making experience in a private equity / mezzanine fund relevant to proposed fund, Ø Evidence of strong deal flow in investment area for proposed fund, Ø Investment experience as a principal rather than an agent (i. e. investment banker, consultant, broker), Ø A realized track record of superior returns benchmarked against funds of same vintage year and style, Ø Hands-on experience adding value at the portfolio company level, Ø A cohesive team, with complementary skills, history and strong chemistry, Ø And, private capital comprised of diverse private LPs. 8

How Does the Program Work? The SBIC Application – A Two Step Process Step 1: Office of Program Development “Gatekeeper” n n n Management Assessment Questionnaire (“MAQ”) Track record evaluation and comprehensive due diligence Investment Committee 6 to 8 weeks Step 2: Office of Licensing n n Minimum of $5 million committed private capital to begin process Analyst review of application, business plan, financial projections, legal documentation and ownership diversity Divisional and Agency Licensing Committee approvals Final approval (Second close on private capital within 1 year of final approval) 5 to 6 months 9

How Does the Program Work? Portfolio Monitoring and Oversight Ø Analyze annual audited financial statements, portfolio valuation reports, and other supporting documentation Ø Analyze new commitment requests, review draw requests Ø Process examination reports to determine if regulatory violations occurred Ø Attend SBIC annual and other on-site meetings Ø Review regulatory issues requiring prior approval 10

How Does the Program Work? Customized structures fit managers’ & LPs’ needs Ø Standard structure n Ø Drop-down structure n n Ø At fund inception, 100% of private LPs participate in leveraged fund A portion of all private LP capital is used from the parent fund to capitalize the leveraged SBIC Best suited for existing funds, looking to expand capital under management without a full fundraising cycle Side-by-side structure n n A portion of certain LP’s capital is used from the parent fund to capitalize the leveraged SBIC Best suited for funds, looking to expand capital under management, when only a subset of LPs desire leverage **Additional costs and time required depend on complexity of the structure and private LP’s cooperation 11

Why Partner with the SBA? Pros Cons 10 yr Committed Capital Leverage Ceiling Attractive Pricing Regulated Environment Administrative Costs Time to Market 2/3 LP Political Risk SBIC Network 12

US Small Business Administration SBIC Program http: //www. sba. gov/INV 13