2009 conference presentations

Welcome to the 2009 Northwest Growth Financing Conference™

Conference Chairman Franz von Bradsky

President, Green Tree Capital

Tales From The Trenches – Financing Rapidly Growing Companies

• Emory Thomas, Jr. – Publisher, Puget Sound Business Journal• Douglas Brown – CEO, All Star Directories• Carla Corkern – CEO, Talyst• Peter Norman – CEO, Bellevue Healthcare

Publisher Emory Thomas interviews three CEO's from the Puget Sound Business Journal's 2008 list of the 100 Fastest Growing Private Companies to reveal the secrets of financing rapidly growing companies.

Cash Is King – The Frozen Credit Markets

• Stephen Lozano – Senior Vice President, Union Bank• Glenn Burroughs – Senior Vice President, PNC Business Credit• Thomas E. Cleveland – Managing Partner, Access Business Finance• Curt B. Fraser – President of Middle Market Banking, WA, JPMorgan Chase

The meltdown of the nation's credit markets during the past twelve months has left many "middle market" companies searching for answers on how to finance their growth as well as day to day operations. Panelist will discuss the latest trends and developments in the senior debt market and their impact on the availability of credit.

Bad Loans Are Mounting at BanksCharge-Off and Delinquency Rates

(All U.S. Banks)

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

03 04 05 06 07 08 09

Change-off Delinquency

As of the first quarter of 2009. Source: Board of Governors of the Federal Reserve System.

Bank Loan Growth Has Slowed

As of June 2009. Twelve-month percentage changes. Seasonally-adjusted data. Source: Board of

Governors of the Federal Reserve System. P Please consider the impact on the environment before printing this document.

12-Month U.S. Banks Loan Balance Change

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

04 05 06 07 08 09

All Loans C&I Real Estate Consumer

$0.0B

$1.0B

$2.0B

$3.0B

$4.0B

$5.0B

$6.0B

Jan-

96 (5

)

May

-96

(5)

Sep-9

6 (8

)

Jan-

97 (8

)

May

-97

(20)

Sep-9

7 (3

1)

Jan-

98 (2

1)

May

-98

(34)

Sep-9

8 (3

3)

Jan-

99 (3

0)

May

-99

(34)

Sep-9

9 (3

7)

Jan-

00 (2

9)

May

-00

(39)

Sep-0

0 (2

8)

Jan-

01 (1

4)

May

-01

(9)

Sep-0

1 (6

)

Jan-

02 (9

)

May

-02

(8)

Sep-0

2 (1

0)

Jan-

03 (1

0)

May

-03

(7)

Sep-0

3 (1

1)

Jan-

04 (1

6)

May

-04

(20)

Sep-0

4 (2

0)

Jan-

05 (1

6)

May

-05

(14)

Sep-0

5 (2

0)

Jan-

06 (1

8)

May

-06

(23)

Sep-0

6 (2

6)

Jan-

07 (2

2)

May

-07

(18)

Sep-0

7 (3

)

Jan-

08 (1

8)

May

-08

(0)

Sep-0

8 (3

)

Jan-

09 (0

)

May

-09

(1)

MIDDLE MARKET SLIDESTotal Volume For Issuers with $50M or less in EBITDA

Jan-96 – MTD 7/16/09

Things Heard at an ACG Conference

Things Heard at an ACG Conference Prior to the “Crash”

“They’ve done studies, you know. Sixty percent of the time, it works every time.”

- Anchorman


“Don’t you think that idea is a little half-baked?” “Oh no, Dad, it’s completely baked.”

- The Graduate


“That’s the cool thing, if you can’t afford it, freakin’ finance it!”

- Ruthless People

…After the “Crash”

“You seem somewhat familiar; have I threatened you before?”

- Captain Jack Sparrow Pirates of the Caribbean


“I’ll be taking these Huggies…and whatever cash ya got!”

- Raising Arizona


“There’s only two men I trust. One of ‘em’s me, the other’s not you.”

- Con Air


“I’ve got no where else to go”

- Officer and a Gentleman


“I’m going to give them an offer they can’t refuse.”

- Private Equity Fund

% of Total U.S. Loans Provided by Banks Prior to Credit Crisis?

A) 75%

B) 50%

C) 33%

Answer: C) 33%

$24 Trillion Loans (U.S.) – June 2007

– $10 Trillion in Marketable Securitizations– $5.5 Trillion in Bond Markets– $8.5 Trillion in Bank Loans

• Federal Reserve – Flow of Funds Accounts of the United States; Securities Industry and Financial Markets Association; Standard & Poors

Future State of the Debt Markets…Where will the markets go from here ?

More of the same until uncertainty subsides and liquidity returns….

• Economy- implication of higher government involvement• Default Rates• Bankruptcies / Bailouts• Housing Market • Consumer Sentiment and spending – unemployment and taxes• Bank regulatory environment• Credit market liquidity• Political environment- the new American capitalist market

“Stick to Basics”

•No magic pills•Results, results, results!•Maintain acceptable liquidity•Have a backup and exit financial institution.•Expect the unexpected•COMMUNICATION•Commitment to the business

Mezzanine/Subordinated Debt – Perhaps the Only Game In Town

• Jeffrey J. Holland – Managing Director, Seacoast Capital• Stephen W. Etter – Partner, Greyrock Capital Group• Michael Kane – Managing Director, Caltius Mezzanine• Steve R. Wilkins – Managing Director, Endeavour SEAM

The unprecedented collapse of the nation's credit markets and the crisis of confidence gripping financial markets has made mezzanine/subordinated debt financing one of the few viable options available to finance the growth of "middle market" companies. Panelist will discuss the latest deal structures, pricing and other pertinent terms.

“Perhaps the Only Game In Town”

Northwest Growth Financing Conference

Mezzanine/Subordinated Debt Panel


Moderator

Jeffrey Holland, Seacoast Capital

Panelists

Michael Kane, Caltius Mezzanine

Steven Wilkins, Endeavour Seam

Stephen Etter, Greyrock Capital

Caltius Mezzanine Fund History

Fund I

June 1997

$43 MM Capital

Committed

Fund II

January 2000

$172 MM Capital

Committed

Fund III

August 2004

$303 MM Capital

Committed

Fund IV

August 2008

$513 MM Capital

Committed

$1.0 billion of aggregate committed capital

Founded in 1997 and based in Los Angeles; 7 investment professionals

Invested over $600 million in 40 companies since inception

Fourth fund commenced in August 2008 with $513 million in commitments from a broad group of institutions and individuals

Provides subordinated debt (mezzanine) in amounts of $10 to $75 million for well established companies in a broad range of industries

Also provide senior debt and minority equity as part of a mezzanine deal

Experienced in supporting owner/operators in a broad range of transactions:

Growth Capital Acquisition Financing

Refinancing

Shareholder Dividend

Leveraged Buyout Equity Cash Out Invest in a broad range of industries, primarily non-capital intensive businesses with particular experience in business service companies: Business Services Specialty Healthcare

Consumer Products Food and Beverage

Education Light Manufacturing

Overview of Caltius Mezzanine

Caltius Investment Strategy

Moderate total leverage

Minimal senior debt ahead of Caltius

Non-sponsor focus; select sponsor transactions

One-stop financing solutions (control the capital structure)

Non-capital intensive businesses

Lead investor / active portfolio company involvement

Non-change of control transactions

Equity position in all transactions

OVERVIEW OF ENDEAVOUR SEAM FUND

Share same guiding principles of Endeavour Capital:

– Dedication to the region where we live and work

– Long-term focus and true partnerships with owners and managers Committed, long term capital from leading institutional investors

Uses of capital include: acquisition financing, management and leveraged buyouts, recapitalizations, re-financings, liquidity to existing shareholders, and employee stock ownership programs

Sponsored and Non-Sponsored Transactions

Highly experienced fund managers underwrite and directly oversee all investments

– Founders are long-time and senior level professionals from leading finance companies, both responsible for relationships throughout the Western US.

– Fund Managers place own capital in each investment

Endeavour Structured Equity And Mezzanine Fund (“Endeavour SEAM”) formed in 2009, as a sister fund to Endeavour Capital’s private equity funds. Endeavour SEAM’s focus is on middle market junior debt opportunities within the Western U.S.

OVERVIEW OF ENDEAVOUR SEAM FUND

Endeavour SEAM Offices

INVESTMENT CRITERIA

CURRENT FUND:

Endeavour SEAM Fund I: $100 million (initial close); $15-$25 million 2nd Close

Companies headquartered in the Western US with EBITDA of $5 to $25 million and larger

$5 to $20 million in capital per transaction, and more with co-investments from our LPs

Fixed current and accrued return; warrants

Acquisition financing, recapitalizations, management and leveraged buyouts, refinancings, liquidity to shareholders, ESOPs

Flexible; typically 3-7 year time horizon

Broad industry preference Avoid emerging technology, real

estate and gaming

TARGET COMPANIES:

USES OF CAPITAL:

MATURITY:

TARGET INDUSTRIES:

INVESTMENT SIZE:

CHARACTERISTICS:

WHY PARTNER WITH ENDEAVOUR SEAM?

MULTIPLE CAPITAL SOLUTIONS The Endeavour family of funds can provide growth capital both for today and

tomorrow Non dilutive, flexible debt capital solutions based on clients current financing

needs Equity capital for long term growth or liquidity to existing shareholders

EXPERIENCE Nearly two decades and six funds dedicated to the Western US middle market SEAM Fund managers have nearly 50 years of debt capital expertise through

many market cycles Deep and broad industry experience

SPEED AND CERTAINTY OF EXECUTION SEAM Fund Managers sit on both management and investment committees Investments directly underwritten and managed by SEAM Fund Managers Stable, regional LP base

REGIONAL AND LOCAL FOCUS Most all the Endeavour managers have made careers in the markets they

serve and have deep ties to their communities

In a time when many financial institutions are pulling back on their financing commitments, Endeavour Capital is expanding its capital solutions…

PHILOSOPHY-ENDEAVOUR SEAM

REPUTATION Our reputation is our greatest asset. It is built and preserved by

treating people fairly, being good partners, and delivering on the promises we make.

TRUE PARTNERSHIP True partnerships are defined by mutual respect, a common

commitment, and an open sharing of ideas. We believe that through an open sharing of ideas the best financing solution will consistently emerge.

LONG-TERM COMMITMENT SEAM has long term, committed capital from stable LP’s to support our

responsive and relationship-oriented approach to investing.

BUSINESS ETHICS Sound business ethics and equitable financing solutions are consistent

with the creation of long-term capital solution and business partnership.

RELATIONSHIP CAPITAL SEAM Fund Managers invest meaningful capital into each deal and

directly manage investments providing clients close access to decision makers.

• Overview Manage $350MM; 2nd Fund Junior Capital (80% Debt / 20% Equity) Offices in San Francisco, Chicago & Westport, CT Experienced Team Industry Agnostic Size – EBITDA $5MM-$15MM

• Recurring Cash Flows Strong Competitive Advantage Proven Management Team Excellent Transaction Dynamics

“Perhaps the Only Game In Town”



Dividend Recapitalization with Mezzanine

An attractive alternative to a sale transaction for business owners seeking personal liquidity and wealth diversification

Dividend Recap with Mezzanine Majority Sale

Can often cash out at least half of equity value

Cash out substantially all of total equity value

Maintain 80+% ownership Ownership reduced to 0%-20%

Keep upside and maximize long term value

New owner benefits from future growth

Maintain control over culture and strategy

New owner can change mgmt, culture, strategy

Flexible leverage with no required amortization

Heavy senior debt burden typical after buyouts

Transaction speed and minimal mgmt disruption

Long transaction process and mgmt distraction

Lower transaction costs and greater surety of close

Expensive transaction with lower surety of close

Provides for higher amounts of debt than banks are willing to lend

No personal guarantees

Can utilize “paid-in-kind” interest features to further reduce fixed charges

Institutional involvement can lead to increased enterprise at ultimate sale

Dividend Recap Case Study

Specialty staffing company primarily providing outsourced physical therapy to Medicare patients in skilled nursing facilities

Dedicated focus on therapy services results in a low-cost, value added solution, offering clients more efficient and higher margin therapy services

The company had grown rapidly over the prior three years

Revenue had increased from $26 million to over $70 million

EBITDA had increased from $3 million to over $10 million

The three senior managers owned 100% of the business and wanted to cash out some of their equity value without giving up control and further upside

Dividend Recap Case Study continued

Caltius provided $34.5 million to finance a shareholder dividend and finance a small acquisition

The sources and uses and pro forma capitalization are show below:

$(000's)

Sources of Funds Uses of Funds

Revolving Credit $4,000 Shareholder Dividends $35,500

Subordinated Notes $32,500 Fees & Expenses $1,000

Total Sources $36,500 Total Uses $36,500

Sources and Uses

X Pro Forma X Pro Forma$MM LTM EBITDA LTM OCF

(1)

Revolving Credit $9,000 0.77x 0.78xSubordinated Notes $32,500 3.56x 3.59x

$41,500 3.56x 3.59x(1) OCF represents EBITDA minus pro forma maintenance capex of approximately $100K.

Pro Forma Capitalization at Close


A summary of terms of Caltius’ investment is shown below:

Investment Amount: $34.5 million ($32.5 million at close plus $2.0 million to fund an acquisition)

Maturity: 5 years

Security Type: Senior Subordinated Notes with Warrants

Interest Rate: 12.5% cash

Equity Kicker: Warrants to purchase 5.0% of the fully diluted equity ownership

Prepayment: Non-call for the first two years and at a 103% premium in year three

Closing Fee: 2.0%

Security: Secured by a pledge of the company’s stock


Key investment considerations included: Strong financial performance evidenced value proposition and

service quality Attractive capital structure with minimal senior debt ahead of

Caltius Strong fixed charge coverage of 1.9x resulting from low

capital expenditure requirements (approximately $50,000 per year) and no debt amortization

Diversified customer base of 62 customers across over 200 discrete facilities

Experienced and motivated management team with over 90% ownership

Key risks included: Potential changes to Medicare/Medicaid reimbursement for

therapy services A/R collection and historical trends of increasing A/R days

outstanding Large distribution into pockets of key management

• Leading developer, manufacturer and marketer of branded and private label consumer products

• #1 market share (>50%) in niche segment

• Strong historical growth - Adj. EBITDA ‘06-’08 CAGR: 16%

• Attractive free cash flow characteristics – >20% EBITDA margins with limited maintenance capex

Case Study – Executive SummaryCompany Overview

Leveraged Recapitalization – Closed [7/31/09]– Company to repurchase ~40% minority stake– Consideration to include a combination of cash

and a seller note (subordinated to Mezzanine Note)

– Owners to contribute additional equity at close– $9m Revolver ($5m funded at close)– $30m Term Loan (1.7x senior leverage)– $15m Mezzanine Note (2.4x leverage thru

Mezzanine Note) funded by Endeavour Structured Equity and Mezzanine Fund

Transaction Overview

Investment Highlights

Strong track record of profitability and growth Industry leading market share and brands Unique, state-of-the-art manufacturing facility (completed in 2007) Recession resistant industry that continues to grow through the

economic downturn Significant free cash flow generation Low pro forma leverage and rapid deleveraging Strong management team Founding owners with significant capital and personal net worth invested

in the company

Case Study - Transaction Structure

Facility Cum. Mult. Adj.

EBITDA

Tenor

Pricing Amort.

Pre-payments

Other

Revolver ($9.0m line; $5.0m funded at close)

1.7x

3 years

L+400 (1.5% LIBOR floor) (stepdowns

based on total leverage)

None, bullet

at maturi

tyPar

- 50 bps unused line fee (based on total leverage)- First lien on property and assets

$30.0m First Lien Term Loan

5 years

5 year straight-line

- 50% excess cash flow sweep- First lien on all assets – stock pledge- Cash collateral guarantee from owner

$15.0m Mezzanine Note

2.4x 5.5 years

13% Cash / 1% PIK

None, bullet

at maturi

ty

NC 1, 105,

104, Par

- Closing fee- 3.5% warrants (10 year term); callable after later of (i) 36 months or (ii) repayment of notes- Unsecured

Outlined below are a few of the unique structuring issues from the deal• Call option on Warrants

– Owner wanted the ability to call Warrants in order to gain 100% control of the company at their option

– Callable after year 3 given repayment of the Note

– Minimum valuation of Warrants if called from month 36 through 66

• Cash/PIK payment option on Seller Paper

– Company wanted the ability to pay interest in cash to avoid compounding effect of PIK interest

– Pricing of Seller Paper is 13%; 100% PIK with up to 100% cash-pay based on the following:

• Minimum fixed charge coverage

• Minimum EBITDA

• Minimum liquidity (Revolver capacity plus Cash)

• Subject to availability of cash after the effect of the excess cash flow sweep on Senior Debt

– Required performance thresholds are tested annually upon receipt of audited financials

Case Study – Structuring Topics

Co-Sponsor Investment Example

2/3rds of revenue from replacement part sales

Low-cost, mission-critical parts

Management team staying in place and motivated by first time equity ownership

Unique recessionary dynamics ABC Company manufactures fuel pumps for industrial applications

and has close to 100% market share for new U.S.-manufactured locomotives

Capital Structure for ABC

Company

Greyrock Capital

Senior BankDebt2.0 x

$6.5MM

Mezzanine Debt3.0x

$3.5MM

Seller Note4.0x

$3.0MM

Equity5.0x$3.0MM

Co-Sponsor Relationship

• Leverage Capital• Earn Carry• PEG Duties• Control• Build Track Record

• Provide Capital• Knowledge Base and

CEO Relationships• Experience with

Senior Providers• Springing Control• Capital Return

before Carry

?? Questions ??



The Private Equity Landscape has Shifted

• Ed Drosdick – Business Assurance Partner, Moss Adams• Chris Britt – Managing Partner, Marwit Capital• Mark E. Morris – Partner, Blue Point Capital Partners• Bradaigh O. F. Wagner – Principal, Endeavour Capital• Robert A. Zielinski – General Partner, Riordan, Lewis & Haden

Market conditions have changed significantly at every level of the private equity marketplace. But with change comes opportunity, and this is particularly true for private equity investors. Our panelists represent some of the most active private equity investors in the Pacific Northwest marketplace. They will share their perspective on market activity, as well as the deal terms, structure, and valuations they are encountering in today's market.

Economy & Finance

2009 conference presentations