TA ASSOCIATES

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TAAssociates
Perspectives on Recaps and Buyouts San Diego
Venture Group September 26, 2002
Presentation by Jamie McJunkin Vice
President jmcjunkin_at_ta.com
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TAAssociates
Overview of the Current Technology Environment
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Ratio of Market Value of Technology Sector to
Tech Spending
Source U.S. Bureau of Economic Analysis, ML
TechStrat Group
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Only One Third of US Tech Companies Profitable
Source Merrill Lynch Tech Strat 6/18/02
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Year-over-Year Tech Revenue Down 6 in Q2 02
Year-Over-Year Percentage Change
Q2 02 6 decline
PC Software/Internet Portals 13 Computer
Services 0 Software -7 Hardware -8 EMS -5 Semi
conductors -7 Wireline Networking -16
Q202 Sectors
Source Morgan Stanley, 8/02
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The Economy Matters
Slow Economy/Reduced Profits Main Reason for IT
Spending Cuts
Source IDC IT Manager Survey, July 2002, N999
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Venture Capital Investment Level by Quarter
Rate of Investment Continues to Fall
Billions
Off 81 in 8 Quarters
Up 334 in 4 Quarters
Deals 1,388 971 954 1,032 948 1,386 1,505 1,985
2,230 2,253 2,040 1,881 1,407 1,376 1,108 1,041 82
6 819
Source PricewaterhouseCoopers, 9/02
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TAAssociates
Overview of Recapitalizations and Buyouts
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TA Investment Positioning
Traditional LBOs
200
TA Associates
And 1 BMC Software Copley Pharmaceutical FTP
Software Hummingbird Comm. Invitrogen Corp. JDA
Software Network Associates
AIM (AMVESCAP) Apex PC Solutions Car
Toys Datek/Island ECN Finisar Lawson
Software MedQuest Assoc. SBA Comm.
Allegis Realty Altocom/Broadcom ANSYS Boron,
LePore Fargo Intl. Microcircuits Keystone
Group Martin Group PIMCO Advisors Ultratech
Stepper
80-
Total Equity Deal Size
20-
Leveraged Recaps
Growth Buyouts
Growth Equity
Venture Capital
10-
Stage
Start-up/Develop. Revenue
Profitable
0
Leveraged Recaps Moderate Leverage (Minority)
Growth Buyouts High Leverage (Control)
Traditional LBOs High Leverage (Control)
Venture Unleveraged (Minority)
Early Stage
Growth Equity Unleveraged (Minority)
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What is a Leveraged Recapitalization?

• Transaction where shareholder liquidity is
  financed with combination of equity and prudent
  levels (Typically less than 3x EBITDA) of debt.
• The outside investor takes either a minority or
  majority ownership position, depending on the
  amount of liquidity desired
• Structure is relatively simple
• Combination of equity and/or subordinated debt
  and third party senior debt used to finance a
  repurchase of existing shareholder stock
• Distribution to existing shareholders achieved in
  a tax-efficient structure
• Transaction structured to receive favorable
  accounting treatment
• Portion of the total capital raised often
  retained within the company to finance future
  growth

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When to Consider a Leveraged Recap? Most Recaps
Occur When Companies Reach a Crossroads

• For individual owners, a recap transaction can
• Address changing priorities (family, work
  balance, etc.)
• Diversify holdings
• Provide liquidity in tax efficient manner
• Enable owners to take two bites at the apple
• Add a partner who can help take company to next
  level or in new direction

• Recaps often used as to address differing
  shareholder objectives. Can be good
  solution when different shareholders
• Want different outcomes for the company
• Have different liquidity needs

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Other Advantages of the Recap Structure

• Price By using modest amount of leverage,
  investor can compete with public market values.
  As a result, a company can complete a private
  transaction that is not as dilutive as might be
  anticipated.
• Flexibility Management gains valuable
  flexibility on the timing of an eventual IPO or
  exit.
• Immediate liquidity Opportunity to diversify
  personal assets without being restricted by the
  disclosure and liquidity rules governing the
  public markets (very difficult for selling
  shareholders to receive much liquidity in an IPO
  or in the immediate aftermarket)

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Sample Scenario
Growing software company with 40MM in revenues,
30 pre-tax. Shareholder A Early angel
investor. Wants to cash out stake quickly to
invest in new ventures. Shareholder B Founding
partner. Wants some liquidity but also a piece
of companys future success. Shareholder C
Member of management. Believes value has yet to
be unlocked.
Modest 2.5x Leverage
Angel cashes out, realizes nice gain in tough
period. Founder takes 20MM of liquidity in
exchange for 16.5 (note the high 120M effective
price) Management increases ownership
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• Company Overview
• A leading manufacturer and global marketer of
  specialized printers and printer supplies
  principally for identification card applications

Eden Prairie, MN NASDAQ FRGO www.fargo.com

• TAs Role
• TA first approached Fargos founder about
  investing in 1992
• After building a relationship over many years, a
  buyout was completed in 1998
• This transaction offered substantial liquidity to
  Fargos founder, provided increased equity
  ownership to the companys operating management,
  and provided a platform for increased investment
  in Fargos product development, product quality,
  and marketing, resulting in accelerated growth
• Mike Child is a Director of Fargo Electronics

• Current Situation
• Fargo completed a successful IPO in February 2000
  and reduced its debt significantly
• The company has introduced industry leading
  products including its HDP (High Definition
  Printer) printer capable of printing on irregular
  card surfaces
• On July 31, 2001, Fargo entered into an agreement
  to be acquired by Zebra Technologies (NASDAQ
  ZBRA), a manufacturer and distributor of
  identification label printers, subject to
  regulatory review

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Outlook on Late Stage Financing Environment
Profitable Stage Growth Private Equity
1991-1996 1997-2001 2002-2006
Economy Strong Boom/Bust Recovering Competition L
imited Excessive (auctions) Lessening Valuation R
easonable Excessive High Sectors Growth
companies Faddish industries Solid
companies Strategies Growth capital Quick
flips Growth/Restructurings IPOs Profitable
co. Unproven concepts Selective Mergers Reasonable
prices Strategic values Selective IRRs Best
30-60 20-50 - Second to early VC Best
15-25 Multiples 3.75x 2.50x 2.25x Fundraising Eas
y Faxed in funds Challenging
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Outlook for LBOs
1991-1996 1997-2001 2002-2005
EEconomy Emerging from recession Strong/weak Recov
ering   CCompetition Orderly Auctions No
deals/lots of   PPricing Moderate Full Moderate
IInvest. Price High Moderate Low TTargets Underm
anaged co. Lean competitive Restructuring busi
nesses, Europe LLeverage 6/1 4/1 3/1      IIRRs
OK, 18 Poor, 12 - Venture envy 10-15 MMultiples
1.7x 1.3x ? Must get better   FFund
Raising Easy Moderate Challenging  
LBOs (especially large ones) have not produced
competitive IRR results since the late 80s Major
corporate restructuring from 02-04 should
produce opportunities to absorb capital overhang
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TAAssociates
Perspectives on Recaps and Buyouts San Diego
Venture Group September 26, 2002
Presentation by Jamie McJunkin Vice
President jmcjunkin_at_ta.com