Ohio Working Capital Conference

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Barnaby Wilcox
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1 Ohio Working Capital Conference Venita E. Fields Sr. Managing Director Smith Whiley & Co. May 19, 2003 Page 1

2 SMITH WHILEY & COMPANY Page 2

3 SMITH WHILEY & COMPANY Registered Investment Advisor headquartered in Hartford, CT with an office in Evanston, IL General Partner of The SW Pelham Fund, L.P. ( Pelham I ), a $100 million special situations fund formed in 1998 funded and committed approximately $80 million in mezzanine and private equity in 15 portfolio companies; 3 investments made in Ohio market. Smith Whiley & Company is currently in the market with the SW Pelham Fund II, L.P., a $400 million special situations partnership making investments in companies throughout the U.S. Page 3

mezzanine and private equity in 15 portfolio companies; 3 investments made in Ohio market.

4 SMITH WHILEY & COMPANY Smith Whiley & Co. also manages the Bon Secours Community Investment Fund, L.P. a $28.0 million SBIC. The Fund seeks to stimulate economic activity in communities by making investments that provide market rate returns and economic benefits such as job creation and business development. The Fund seeks investment opportunities in low to moderate income (LMI) areas in the following markets: Baltimore, Maryland Detroit, Michigan Hampton Roads, Virginia Richmond, Virginia Page 4

economic benefits such as job creation and business development.

5 THE SMITH WHILEY INVESTMENT STRATEGY STRATEGY/OBJECTIVES: To make mezzanine debt and private equity investments in small- to- medium-sized companies Special situations investment strategy - Participation varies between debt-equity and quasi-equity securities, depending on relative value considerations and market conditions Investment range for Pelham Funds: $3.0 million to $15 million. Investment range for Bon Secours: $100,000 - $1.0 million. Page 5

debt-equity and quasi-equity securities, depending on relative value considerations and market conditions

6 SMITH WHILEY & COMPANY INVESTMENT CRITERIA A history of profitability Sustainable cash flow and demonstrated capacity to service and repay indebtedness Equity incentives for management that are tied to future performance Attractive financial prospects Strong, sustainable competitive positions, proprietary technologies/product Product life cycle that matches the Fund s investment horizon. Page 6

tied to future performance Attractive financial prospects Strong, sustainable competitive

7 INDUSTRY SECTOR FOCUS Food and Beverage: Specialty/ethnic foods Beverages Packaging Food processing Consumer Products & Services Specialty retailing Packaging & related products Personal care products Re-engineered and/or new products Leisure and recreation Health Care Products & Services Alternative delivery systems Equipment, systems & therapies Medical technology Professional business services Pharmaceuticals Industrial Products & Services Manufacturing Processing Parts and supplies Defense Distribution Consumer electronics Communications & Technology Television & radio Cable & direct television Telecommunications Software Cellular Other media Page 7

Equipment, systems & therapies Medical technology Professional business services Pharmaceuticals Industrial Products & Services Manufacturing Processing Parts and

8 MEZZANINE FINANCING DEFINED* Mezzanine: subordinated debt with equity participation or preferred stock. Equity participation ( kickers ): include Options (such as call or put rights) Rights to participate in cash flow or earnings Conversion features (allow debt to become common or preferred stock) Mezzanine is less expensive than new equity financing * Mezzanine Financing is also referred to as Subordinated Debt Page 8

cash flow or earnings Conversion features (allow debt to become common or preferred stock) Mezzanine is

9 MEZZANINE FINANCING DEFINED* More flexible than traditional bank financing. Allows companies to lower their overall cost of capital with less dilution. Mezzanine financing is attractive for companies who need capital for: growth acquisitions management buyouts product development consolidation recapitalization other uses where bank debt or equity is not appropriate or desired by the company. * Mezzanine Financing is also referred to as Subordinated Debt Page 9

Mezzanine financing is attractive for companies who need capital for: growth acquisitions management buyouts

10 CAPITAL PYRAMID Senior Debt Sub Debt Mezzanine Preferred Common Equity Page 10

11 SUBORDINATED DEBT STRUCTURE COMPANY S CAPITAL STRUCTURE Senior Debt Secured By A/R And Inventory Subordinated Debt Equity Secured By: Interest Rate: Equity Kicker: Term: Second lien on fixed assets (if available) Subordinated to Senior Debt Loaned against excess cash flow 11% - 14% (payable monthly/quarterly) plus an equity kicker, 18% to 22% overall rate of return Varies based on projected valuation and perceived risk 3 8 years (Matures after senior debt) Represents: 10% - 25% of total financing Page 11

against excess cash flow 11% - 14% (payable monthly/quarterly) plus an equity kicker, 18% to 22% overall rate of return Varies

12 Market Backdrop Conditions are very challenging in the senior debt markets. The consolidation of the banking industry has changed the landscape of senior banking perhaps permanently Approximately 60% of bank debt is owned by non-bank institutions Consolidation in the banking industry has reduced the universe of lenders Adverse selection consequences from excessive lending practices Leverage multiples for new transactions at a 10-year low Source: Portfolio Management Data Page 12

60% of bank debt is owned by non-bank institutions Consolidation in the banking industry has reduced the universe of

13 Market Backdrop Senior Lenders Dwindle Bank Consolidation dramatically reduces senior lender ranks Number of Active Non-Investment Grade Lenders st Half 2002 Active Lenders defined as those who made 10 or more commitments. Source: S&P/Portfolio management Data and Fleet Capital. Page 13

40 34 35 20 0 1996 1997 1998 1999 2000 2001 1st Half 2002 Active Lenders defined as those

14 Market Backdrop Source: Portfolio Management Data Page 14

15 Market Backdrop Page 15

16 Market Backdrop PROBLEM: Bank s middle market leveraged loans pressured by Comptroller of the Currency, because of rising defaults There is a disconnect between the Comptroller of the Currency (Bank Regulator) and Fed s monetary policy The Fed created liquidity, however liquidity flowed to mortgage borrowers not business borrowers SOLUTION: Companies need more patient capital (non-bank) to weather the current economic storm Need creative financing solutions: Second Lien lenders Stretch (cash-flow) lenders Lenders who can participate in the company s earnings stream Mezzanine for working capital growth Page 16

borrowers not business borrowers SOLUTION: Companies need more patient capital (non-bank) to weather the current economic storm Need creative financing

17 SMITH WHILEY & COMPANY Page 17

Use this section to learn more about business loans and specific financial products that might be right for your company.

Types of Financing Use this section to learn more about business loans and specific financial products that might be right for your company. Revolving Line Of Credit Revolving lines of credit are the most