SBIC Program Overview: SBIC Program Overview US Small Business Administration Investment Division Updated as of 11-21-2005


What is the SBIC Program?: What is the SBIC Program?


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


What is the SBIC Program?: What is the SBIC Program? A large institutional investor, managing over $11 billion in outstanding leverage and commitments An investor or creditor in over 400 private equity partnerships Supported by diverse private partners providing roughly $12.3 billion in capital resources to small businesses nationwide Source: SBIC Data Management Branch, Weekly Report as of 2005 Fiscal Year-end 9/30/2005


Slide5: What is the SBIC Program? An Engine for Growth in the US Economy In Fiscal Year 2005: SBIC financings totaled $2.9 billion 2,299 companies benefited from SBIC financing $984 million, or 34% of SBIC financing dollars were invested in companies less than 2 years old $172 million of SBIC financings were made to women and minority owned businesses


What is the SBIC Program?: Domain Furniture, Inc. DoubleClick.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 HealthSouth Rehabilitation Industrial Training Corp. Information Analysis, Inc. Infotec Commercial Systems Intel Corp. Jenny Craig, Inc. What is the SBIC Program? A source of funding for many successful companies A&W Brands Holding Co Actel Corporation Adaptec Airport Systems Int’l, Inc. America OnLine Amgen, Inc. Apple Computer Assembly Solutions, Inc. BeutiControl Cosmetics, 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. Lam Research LaMadeleine, Inc. Lifeline Systems, Inc. Maxim Integrated Products Metrolina Outreach Mammography Microcom Micromodule Systems Microtouch Systems, Inc. Mother’s Work, Inc. Neoterik Health Tech, Inc. NetFrame Systems, Inc. Newcomb Communications, Inc. New England Critical Care NuCo2, Inc. Octel Communications Corp. Optical Data Systems Orbital Sciences Corp. Outback Steakhouse Peoplesoft, Inc. Performance Polymers Petstuff, Inc. Potomac Group, inc. (MediFAX) Protocol Systems RF Power Products Radio One 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. WebMethods Wellfleet Communications Wire Networks, Inc. Extreme Networks, Inc. Zydacron, Inc.


How does the program work?: How does the program work?


How does the program work?: How does the program work? SBIC Program Debentures: Principal Interest Fees (Commitment, Disbursement & Annual) 6


How does the program work?: How does the program work? What can SBICs invest in? Loans, debt with equity features or equity 100% “Small Business” Net worth < $18M and average after-tax income for prior two years <$6M Of which, 20% must be “Smaller Enterprise” Net worth < $6M and average after-tax income for prior two years <$2M Not more than 20% of “regulatory” capital can be invested in a small business and its affiliates without prior SBA approval SBICs are prohibited from investing in project finance projects (real estate, motion pictures, etc.), foreign or passive investments, re-lenders/ re-investors and businesses whose activities are deemed contrary to the public interest. SBICs may control small businesses for up to seven years which may be extended with SBA approval


How does the program work?: How does the program work? Customized structures fit managers’ & LPs’ needs Standard structure At fund inception, private partners participate directly in SBIC Drop-down fund All private partners desire full or blended participation in SBIC structure Best suited for existing funds, looking to expand capital under management without full fundraising cycle Side-by-side fund Only a portion of private partners desire participation in SBIC structure Extract portion of partners from traditional structure to organize SBIC structure Best suited for funds when only a portion of private partners desire SBIC leverage Side-by-side fund with drop-down feature Same as side by side but with blended participation Best suited for funds when only a portion of private partners desire blend of leveraged and unleveraged investment.


How does the program work?: How does the program work? Debenture Securities Best suited for mezzanine / later stage investors focused primarily on debt and debt with equity features Interest only, bullet with 10 year maturity Interest payments are semi-annual, priced at a spread over 10 Year Treasuries. Unsecured, generally non-recourse to General Partners Leverage available up to 3x private capital paid-in, although generally capped at 2x Leverage ceiling is $124 million (adjusted annually for CPI) Diminishing prepayment penalty in first five years (5,4,3,2,1%) 3% origination / commitment fee plus .855% annual fee on leverage drawn* * The annual fee is fixed at time of leverage commitment. The current rate floats according to the SBIC Program’s required subsidy rate.


Slide12: How does the program work? Experienced Managers SBICs must meet rigorous requirements to be funded: Substantive and analogous principal investment experience Realized track record of superior returns Evidence of strong deal flow in investment area for proposed fund Cohesive management team, with complementary skills and a history of working together Managerial, operational or technical expertise that can add value at the portfolio company level Demonstrated ability to manage fund cash flows so as to provide assurance the SBA will be repaid on a timely basis


How does the program work?: How does the program work? Step 1: Office of Program Development “Gatekeeper” Management Assessment Questionnaire (“MAQ”) Analyst review & preliminary due diligence Investment Committee “Go Forth” Letter Step 2: Office of Licensing In order to apply, applicant must have a minimum of $5 million committed “regulatory” capital Analyst in-depth review of application, business plan, financial projections, legal documentation, management ownership diversity and final due diligence on management team Divisional and Agency Licensing Committee Final approval The Licensing Process


How does the program work?: How does the program work? Step 3: Office of SBIC Operations (Post-License) Responsible for monitoring the operations, financial condition and regulatory compliance of licensed SBICs Approval of leverage and draw requests Review of annual examination reports Initial review of requests for over-line investments, conflicts of interest, GP change of ownership, etc. Portfolio valuation analysis Maintenance of good working relationship Attendance at annual fund meetings and visits to small business concerns The Licensing Process (cont’d.)


How does the program work?: How does the program work? Monitoring and Oversight New Licensee: Review licensing file (fund organization, investment strategy, due diligence methodology, etc.) Read and review investment memoranda for quality of analysis Track investments for adherence to investment plan and partners' expertise Have initial visit, if possible at the licensee's office On-going: Analyze annual audited financial statements, portfolio valuation reports, and other supporting documentation Review quarterly financial statements and portfolio valuation report Analyze new commitment requests, review draw requests Review examination reports to determine if regulatory violations occurred Attend SBIC annual and other on-site meetings, and visit small business concerns Review regulatory issues requiring prior approval such as overline requests Monitor current macroeconomic trends, capital markets, bank lending environment, and key industry drivers to assess impact on SBICs and portfolio investments


What is the program’s impact?: What is the program’s impact?


Slide17: SBA can be a large investor in a small fund. SBA’s financial assistance allows smaller funds to pursue smaller transactions which: Are less competitive than larger deals Often occur in niche/specialized markets Allow equity sponsors to add most value to portfolio companies Are less reliant on public market sentiment What is the program’s impact? Facilitating smaller than average transactions


Slide18: Source: Venture Industry data from VentureExpert database. SBIC data from Form 1031, SBIC Program Data Management. Financings based on when financings/disbursals took place. Only equity financings included. SIC or NAIC industry codes were used, but VentureExpert data had to be re-categorized, in some cases, according to category definitions. What is the program’s impact? Providing capital to a wide range of industries


Slide19: SBIC financing dollars distribution by state for FY2004 $5 million to $25 million (16 states & DC) Less than $5 million (9 states plus HI & AK not shown) Over $25 million (26 states) Source: SBIC Data Management Branch, All SBIC Program Licensees, Financing to Small Business by State, Reported for FY 2004 as of 06/2005. Total Financing = $2.837 billion What is the program’s impact? Serving entrepreneurs nationwide


Slide20: Source: SBIC Data Management Branch, SBIC Licensees by state 2004. What is the program’s impact? Funding geographically diverse investment teams


Slide21: sbic@sba.gov US Small Business Administration SBIC Program http://www.sba.gov/INV