Private Alternatives to the Public Markets How to Survive and Grow in a Capital Constrained Environment A Private Conference on May 16, 2001 J. Richard Knop Windsor Group LLC

Agenda  Windsor Group Overview  Middle Market M&A Trends  Recent M&A Trends  Approach on Doing a Deal on the Best Price and Terms Today

3 Windsor Group Overview

 25-year old investment bank with 30 employees u Mergers and acquisitions (buy- and sell-side) u Private placements (debt & equity) u Leveraged buyouts & management buyouts  Industry Representation u Government Contracting u Commercial IT u Telecommunications u General Middle Market Corporate Finance  Locations u Headquartered in Middleburg, VA (Satellite office to open in Reston, VA, in 2001) u Windsor Group Securities in Southport, CT  Transactions u 50% of engagements $20M to $100M, with remainder $100M to $1B u Over 40 M&A transactions (aggregate value > $6 Billion) closed in past 5 years

Windsor Group Reputation  Reputation for closing almost every engagement on terms favorable to client  Capable of managing both middle and large market transactions  Strong reputation and network u Strong deal flow generated through banks and investment banks, law firms, “word of mouth”, marketing, industry participation, and previous clients  Seasoned client staff with blend of strong operational experience, industry knowledge, and financial expertise  Intense “hands-on” involvement of senior management

6 Middle Market M&A Trends

 M&A transaction volume in the $50-500MM value range grew consistently through the 1990’s, driven by: u Strong economic environment u Increasing stock market valuations u Globalization of business u Low cost of credit u Active private equity industry

8 Recent M&A Trends

Deterioration of Public and Private Capital Markets  Closing of IPO market leaves sale/merger as only liquidity path for many companies  Stock market decline reduces value of stock as currency  High yield market not available to fund acquisitions  Bank financing terms tightened - less leverage u x EBITDA v x one year ago u 40% Equity required from LBO funds v. 20% one year ago  Private equity groups more conservative in underwriting acquisitions due to dot.com fallout

Impact on M&A Transactions  Realignment of expectations (primarily seller)  Creative capital structures required  Good opportunities for buyers with capital

Consolidation trend continues in government and IT industries  Industry Factors u Acquisition reform u Outsourcing trend u Commodization of products and services u Competition stronger and larger  Internal Factors u “Build or buy” u “Glass ceiling” syndrome u “Bifurcated” shareholder issue u Personal issues

Current Environment: “ Kiss a lot of frogs until you find your Prince ”  Buyers filling voids in technologies & customers v. bulking up  Buyers seeking growth & margin improvement  “Back to basics” investor/buyer psychology  More focus on intangible issues u Management u Cultural fit u Integration issues

Trend toward consolidations (merger of multiple companies)  Efficiencies and synergies  More critical mass  Better access to capital markets  More complicated (corporate valuations and HR/management issues)

Impact of Recent Legal & Accounting Changes  Pooling accounting method eliminated effective July 2001 u Potential positive development for private & financial buyers v. public buyers  HSR threshold increased from $15 to $50 Million.  Use of installment note as part of consideration

Valuations  Commercial market valuations have softened more than government market valuations (“flight to safety”)  Highest valuations paid for: u Companies with high end skill sets and intellectual property u Companies with customers hard to break into u Good operating margins u Focused growth strategy u Strong senior and mid level management team that will transition u Past performance

16 Approach to Doing a Deal on Best Price and Terms Today

 Overall theme: exploring and developing all options will produce better results than discussion with a few competitors and colleagues u Emphasize EBITDA for current year u Books and records in good order u Resolve litigation u Hire experienced team of professionals u Don’t “reinvent the wheel.” Do only once in your lifetime u Allows you to manage company u Typically return is several times the cost Sellers: Use systematic approach

Investment banker services  Evaluates alternatives  Provides valuation range  Packages the company  Identifies, qualifies, initiates & contacts most qualified prospective purchasers  Creates competition among potential purchasers  Provides critical assistance in structuring and negotiating deal terms & guiding company through due diligence  Brings deal to closure

The Windsor Philosophy “Complete the transaction as soon as possible on the best financial terms and the best strategic and cultural fit for our client.”  Be patient  Be prepared to walk away  Continue to manage and move company forward during sales process

Buyers  Engage knowledgeable investment bank and other professional advisors who: u Know your industry u Have relationships and a track record  Identify financial resources to make acquisitions u Enables you to take advantage of opportunities that arise u Capital is key today  Develop a well thought out acquisition plan and criteria  “Kiss a lot of frogs until you find your Prince”

Buyers Cont’d  Be sensitive to cultural, management, and employee benefit issues  Develop before closing an integration program with the owners/managers of the acquired company  Follow the general “code of honor” in the M&A business u Don’t put a company under letter of intent expecting to renegotiate the terms irrespective of the results of due diligence u Deal openly and directly as opposed to “playing games” u Develop a reputation of being trustworthy and fair in your dealings

Backdrop to Current Environment  Slowing economy and Internet “bubble” are reducing the opportunities for IPO’s and secondary stock sales u Number of United States IPO’s are down to 429 in 2000 from 538 in 1999 (down 20%) u Only $8.1 billion of proceeds in fourth quarter 2000 versus $27.4 billion in fourth quarter 1999 u Performance very poor in 2000: u Rule “FD could make things worse, due to increasing uncertainty in minds of analysts and portfolio managers

Backdrop to Current Environment  Leveraged loan market has contracted to levels of the early 1990s u Proceeds of debt syndications of $1,175 MM in 200 versus $1,298 MM in 1999 (down 9.5%) u Bank debt multiples at a 10-year low u Bank examiners caused 60% of syndication buyers to exit the market since mid-2000 u Predicting a recession - and may be getting what they predicted!

Backdrop to Current Environment  High-yield bond market is no longer an option for most issuers u Assets more concentrated than in stock market, leading to larger minimum size thresholds (now $250MM+) u Returns under 5% annually since 1998 u Yields and spreads have increased, but liquidity has not returned u 2000 new issuance down to levels of

Backdrop to Current Environment cont’d Source: Venture Economics/NVCA  Significant amount of LBO capital has been raised but not invested yet

Backdrop to Current Environment  LBO funds are investing more equity in deals, despite high acquisition multiples implying a reduction in expected returns