Private Equity: Due Diligence

T.J. Jubeir
April 8, 2013

AGENDA
Overview of Capitol Partners

Deal: Due Diligence

Questions and Answers

Capitol Partners: Objectives

We aim to realize superior mediumterm capital gains by investing in consolidating, fragmented industries in partnership with strong management teams to build companies through acquisitions and internal growth

We pursue a platform investment strategy through which a company and its management team will serve as the platform--both in terms of industry expertise and management talent--for significant further investment in that industry We provide value-added services to our portfolio firms:

Formulating strategy Optimizing the capital structures of portfolio companies Originating, analyzing, structuring, negotiating, and financing acquisitions

Recruiting additional talented management

Raising additional financing

Capitol Partners: Investment Preferences

The combination of fragmentation, high operating leverage, and strong growth create a unique investment opportunity wherein a wellcapitalized 'platform' company, led by a seasoned team can reap significant upside

Moderate-to-high growth, enabling properly capitalized and well-positioned firms to benefit from both operational improvements as well as industry growth High operating leverage, providing an opportunity for significant cash flow generation through incremental operational improvements as well as support for greater debt-leverage for added equity returns Large and fragmented industry, affording an opportunity for target companies to act as platforms and enhance their internal growth with acquisitions and ultimately create significant economies of scale

Capitol Partners: Company Focus

The investment in privately-held firms with a proven management team, deep customer base, and wellrecognized brand equity, coupled with Capitol Partners financial and managerial support, create significant value for sellers, management, and investors

Strong management team with both a clear vision and a successful performance record to pursue platform strategy

Well-established, yet diversified, customer base to mitigate risk of customer hold-up and consequent appropriation of value
Well-recognized brand equity to minimize the cost of acquiring and maintaining customers and to afford the opportunity to grow the business incrementally by leveraging off the brand Privately-held to allow for the pursuit of private-public enterprise valuation differentials, greater impact to leverage financial and managerial capabilities on targets, and more timely closing of transaction

Capitol Partners: Transaction Structure

Consistent with the strategy of backing superior management, the firm does not interfere in the day-to-day operations of its portfolio companies but instead provides proactive governance through the board of directors

The firm provides equity capital to support financing including:

Recapitalizations Management-led buy-outs Liquidity for existing shareholders Mergers and acquisitions Capital investments

Capitol Partners: Transaction Characteristics

Our platform investment strategy relies on leveraging not only the capital structure but also management in a context of a wellexecuted transaction

The transactions undertaken by Capitol Partners typically include the following basic characteristics:

Continued participation by existing management

Continued equity participation by seller Debt leverage

Negotiated exclusive transaction

Capitol Partners: Investment Focus

Our investment focus is on assetintensive, debtand operationsleverageable knowledgeable subsegments of industries

In particular, we focus on technology, scale, and infrastructure-intensive assets in health care, Internet, communications, energy, & basic industries:

Health care Internet Telecommunications

Energy and Basic Industries

AGENDA
Overview of Capitol Partners

Deal: Due Diligence

Questions and Answers

DUE DILIGENCE
Regulatory Review IT Review Personnel Review Insurance Review Legal Review Tax Review Industry Analysis Competitor Analysis Marketing Review Sales Review Operational Analysis Accounting Financial Review Analysis

Strategy

Target Company

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STRATEGIC REVIEW
Corporate Strategy Mission statement, core values, and culture (social responsibility, community involvement, team approach, etc.) Selection of and entry into market segments Allocation of resources Evolution over time

Competitive Strategy Market focus (niche, low cost, quality) Product/service offerings Comprehensive operational model
Competitive Advantage Current and future Sustainability
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INDUSTRY ANALYSIS
Segmentation, growth drivers, historical and projected growth Competitors by segment (concentration, differentiation, relative size, etc). Cost structure and operating leverage Barriers to entry/exit Leverage relative to suppliers and buyers

Substitutes (current and potential)

Regulations

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COMPETITOR ANALYSIS
Existing and potential competitors and markets

Competitors strategy
Dynamic market share Comparison of current and potential competitors strengths and weaknesses Competitors plans for growth Evolving market conditions and their impact on the current and future competitive landscape

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MARKETING REVIEW
Organizational structure, and a description of the responsibilities of the various marketing positions Leadership and experience Current marketing strategy and effectiveness 5Ps (product, promotion, price, place, people) 4Cs (customer, cost, communication, convenience) Major planned marketing initiatives in each existing and potential market segments to date, and effectiveness Strategic partnerships Marketing collateral
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SALES REVIEW
Organizational structure, and a description of the responsibilities of the various sales positions Leadership and experience Current sales strategy and effectiveness

Projected strategy for growing the business in each existing and potential market segments
Existing and planned sales personnel

Commission structures and other incentive programs

Performance metrics

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OPERATIONAL ANALYSIS
Varies significantly by what you acquire Product and/or service offerings (including delivery/service) Process flow analysis Minimum efficient scale Operations metrics (throughput and cycle times, utilization, operating leverage, shifts, unit cost, inventory including WIP, leakage/obsolescence, etc.) Continuous improvement programs/philosophies

Sourcing and stability of inputs/supply chain management

Strategic partnerships and outsourcing Security (access control, physical security, disaster recovery, etc.)
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FINANCIAL ANALYSIS
Current and three year projections by business segments Audited annual and unaudited monthly financial statements as well as any other internal reports (including management, dash) Debt instruments, guarantees and letters of credit, leases, liens on assets, or capital stock transactions Cash flow analysis (cost margin, working capital, CapEx, etc). Sustainable margin analysis by product/service line Financial modeling secondary analyses Discounted cash flow analysis Comparables analysis Financial statement analysis (profitability, leverage and liquidity, efficiency, etc.) Sensitivity analysis Option analysis (growth and abandonment)
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ACCOUNTING REVIEW
Accounting manual, audit work papers, and summary of significant accounting policies Accountants management letters Accountants communications with their attorneys

Management representation letters to accountants

Revenue recognition policy, bad debt expenses, and non-recurring charges for each business segment

Accountants tenure and reputation

Our accountants assessment of their accountants approach and degree of aggressiveness
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TAX REVIEW
Filed Tax Returns (3 years) Federal, state, and local Property, sales, and use Payroll Correspondences with taxing authority and the results of audits or revenue adjustments, pending audits, or appeals Tax opinion letters (accountants or legal counsel)

Changes in tax treatment

Net operating loses (NOLs) Tax implication of our transaction
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LEGAL REVIEW
Structure of company, subsidiaries, and affiliated entities Charter, articles of incorporation, bylaws Board of Directors minutes Purchase, partnership, joint venture, shareholder, and trust agreements Filings, notices, correspondences, consents, decrees, disputes, judgments, and litigations (past, pending, and anticipated) Constraining agreements (non-solicitation, non-compete, etc.)

Intellectual property rights, trademarks, and copyrights

Regulatory permits, licenses, and approvals Material contracts, leases, and license agreements
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INSURANCE REVIEW
Insurance policies (real and personal property, liability, D&O, etc.) Premiums, deductibles, limits, and caps Claims history Quality of carrier Length of relationship with carrier Workers compensation policies Detailed loss runs for three years Premiums, deductibles, limits, and caps Quality of carrier Length of relationship with carrier
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PERSONNEL REVIEW
Organizational chart (turnover rate)

Profile of management (integrity/reputation, education, professional background, areas expertise, etc.)

Management effectiveness (Jim Collins analogy)

Hiring and employment policy (employment contracts and unionization)

Performance review/appraisal process, policies, compensation, and benefits (including pension plans) Key recent resignations or terminations either actual or anticipated Severance and retention arrangements
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IT REVIEW
IT department strategy and effectiveness

Network configuration (LAN/WAN/Internet)

Hardware (servers, databases, PCs, tablets, etc.) Software (billing and collections, CRM, accounting, inventory and asset management, operations, etc.) Licenses, leases, and contracts Vendors (phone, internet, and database)

Network security, IT policies and procedures (e.g., disaster recovery plan)

IT capital investment plan
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REGULATORY REVIEW
Effect of regulations targeted at all industries (e.g., environmental, safety, personnel) Effect of regulations focused on specific industry segments such as: Regulations restricting pricing/reimbursement (e.g., utilities) Regulations requiring special licenses (e.g., restaurants with alcohol licenses, healthcare, airlines) Corporate compliance program Compliance history
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DUE DILIGENCE
Regulatory Review IT Review Personnel Review Insurance Review Legal Review Tax Review Industry Analysis Competitor Analysis

Strategy

Target Company

Marketing Review
Sales Review

Operational Analysis Accounting Financial Review Analysis

The opportunity pursued must be a longer-term proposition in which the company has a fundamental sustainable competitive advantage

QUESTIONS & ANSWERS

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