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By Norman Duffett November 11, 2008

Presentation to:. Capital Markets in Turmoil. By Norman Duffett November 11, 2008. Overview. Introduction to D.A. Davidson Debt Markets – Senior and Mezzanine Public and Private Equity Merger & Acquisition Activity Preparing for An Uncertain Future. Introduction to D.A. Davidson.

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By Norman Duffett November 11, 2008

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  1. Presentation to: Capital Markets in Turmoil By Norman DuffettNovember 11, 2008

  2. Overview • Introduction to D.A. Davidson • Debt Markets – Senior and Mezzanine • Public and Private Equity • Merger & Acquisition Activity • Preparing for An Uncertain Future

  3. Introduction to D.A. Davidson

  4. Davidson: Full Service Investment Bank Private Client Group Equity Capital Markets Fixed Income Capital Markets Institutional Sales & Trading Investment Banking Equity Research

  5. Davidson: Full Service Investment Banking Full Service Offering to Maximize Stakeholder Value & Liquidity Mergers & Acquisitions Public Offerings Private Financings Restructurings

  6. Technology Inc. has sold its interest in its affiliate Has been acquired by has been acquired by has been acquired by a portfolio company of A portfolio company of to SK Telecom Holdings $74 Million $37 Million A subsidiary of has been acquired by has been acquired by Initial Public Offering Secondary Offering has been acquired by Lead Manager Lead Manager D.A. Davidson Representative Transactions has been acquired by

  7. Debt Markets – Senior and Mezzanine

  8. Senior Debt • Banks increasingly cautious as defaults rise • Intense scrutiny on credit quality • Cash flow deals are out • “Story” credits problematic

  9. Tightening Standards for C&I Loans Net Percentage of Domestic Respondents Tightening Standards for C&I Loans Source: October 2008 Senior Loan Officer Opinion Survey on Bank Lending Practices

  10. Senior Debt, continued • Making loans typically where there are standing relationships • Much less senior leverage • Maturities and size of loans shortened • Collateral and guarantees increasingly required • Coupon and fees are way up

  11. Coupon and Fees are Way Up Source: Standard & Poor’s LCD, as of 9/11/2008 Average for B+/B Institutional Loans

  12. Mezzanine Debt • Increased importance in the capital structure • Permutations from senior subordinated debt to junior preferred • Very expensive with large fees and high coupons • Convertibility and warrant coverage way up

  13. Public and Private Equity

  14. Public Equity Markets • Market volatility has prevented many companies from completing planned public offerings • Initial public offerings have been declining since the end of 2007 • Secondary public offerings are limited to a few select sectors

  15. Public Equity Market Volatility S&P 500, NASDAQ, and Dow Jones Industrial Composites • Markets are down approximately 40% from 2007 highs • Huge daily volatility Source: Capital IQ

  16. IPOs Falling since the End of 2007 Domestic Initial Public Offerings (“IPOs”): January 2007 – October 2008 • No IPOs in U.S. since October 3rd Source: Dealogic

  17. Secondary Equity Offerings Limited Domestic Follow-on Offerings: January 2007 – October 2008 Source: Dealogic

  18. $750 million Not Disclosed $90 Million Secondary Offering & Convertible Debt Secondary Offering Secondary Offering Pending Pending Co-Manager Co-Manager Lead-Manager Secondaries Limited to Certain Sectors • Select sectors like Energy, Food, and Financial Services still able to get secondary offerings

  19. Private Equity • Contraction of senior and subordinated debt markets have really limited activity • More equity required in deals (average of 43% so far in 2008) • Still large amounts of capital to be deployed • Private equity groups looking at alternative investments like Private Investment in Public Equity (“PIPEs”) or taking public companies private

  20. Private Equity Fund Raising: 1996 – 3Q 2008 Source: Buyouts Magazine – October 6, 2008 (buyout fundraising reflects money raised by U.S. buyout firms)

  21. Valuation Multiples are Dropping Private Equity Valuations: 2000 – 3Q 2008 Source: Standard & Poor’s 3Q7 and 3Q8 Leveraged Buyout Reviews * Includes only transaction less than $250 million with stated EBITDA multiples

  22. Merger & Acquisition Activity

  23. Mergers & Acquisitions • M&A activity way down for both financial and strategic investors • LBO activity collapsed • Restricted debt markets continue to impede buyers from completing transactions

  24. M&A Activity by Financial Investors Total Deal Value ($in billions) LBO M&A Transactions per Quarter & Total Deal Value, Q4 2005 – Q3 2008 Number of Transactions • Financial investor M&A total deal values and number of transactions are at three year lows Source: Capital IQ - Figures based on transaction announcement dates Includes: North American transactions for 100% of the Company which required a substantial amount of leverage

  25. M&A Activity by Strategic Investors Total Deal Value ($in billions) Strategic M&A Transactions per Quarter & Total Deal Value, Q4 2005 – 2008YTD Number of Transactions • Strategic M&A volume is near three year lows Source: Capital IQ - Figures based on transaction announcement dates Includes: North American transactions for 100% of the Company

  26. Buyer Breakout – U.S. Middle Market Source: Mergerstat Flashwire U.S. Monthly – July 2008 (middle market is defined as deals valued between $1 million and $500 million, including deals with undisclosed values for the buyer breakouts)

  27. Middle Market U.S. Leveraged Buyout Volume 1998 – 3Q 2008 Source: Standard & Poor’s 3Q08 Leveraged Buyout Review Note: Middle market defined as issuers with EBITDA of $50 million or less

  28. Recent M&A Transaction Structure Recent Middle Market Merger Transaction of a Distribution Company • Total transaction leverage of 3.4x LTM EBITDA • 1.2x Senior • 1.8x Mezzanine • 0.3x Seller Note 5.0x LTM EBITDA

  29. Recent M&A Transaction Structure, continued Recent Middle Market Merger Transaction of a Metals Recycling Company • Total transaction leverage of 2.5x LTM EBITDA • 1.8x Senior • 0.8x Mezzanine 4.0x LTM EBITDA

  30. Preparing for An Uncertain Future

  31. Preparing for an Uncertain Future • Focus on what you can control (i.e. spending) • Drive cash flow • Keep ample liquidity • Lighten your debt load • Avoid amending loans as provides opportunity for lender to re-price your deal

  32. Conclusion • Debt markets still extremely tight • Volatile public equity markets are highly selective • Private equity continues to be constrained by debt markets • As a result M&A markets are way off • Don’t count on the capital markets to bail you out anytime soon

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