Investment Trends With...
Mrs. Diane Rooney
Business Development Officer
CapitalSource, Inc. (NYSE: CSE)

SecurityStockWatch.com: Please give our audience an overview of your background and your role at CapitalSource.

Diane Rooney: For the past 19 years, my career has been dedicated to commercial finance. My background includes commercial lending and management experience within general middle market, asset based, and large corporate, with particular focus over much of that time on the security industry. I find that working with middle market sized businesses, particularly closely held, growing companies in niche sectors, the most rewarding.

I joined CapitalSource earlier this year and I am focused on developing and evaluating new investment opportunities within the security industry. This is an exciting experience because CapitalSource has established itself as a premier commercial finance company serving small and middle market businesses. As of September 30, 2005, we had over $8.3 billion in loan commitments. Commitments to our security business are approaching $400 million.

SecurityStockWatch.com: Your firm has done a number of deals in the security alarm monitoring sector. Why is there a focus on the physical security industry and how would you describe the positioning of CapitalSource in this sector? Any particular deals or success stories you care to mention?

Diane Rooney: We have a long history of success within the electronic security sector. Our early success financing the security alarm monitoring sector has led us to pursue lending opportunities with service, manufacturing, and technology companies in sectors such as audio and video surveillance, counterterrorism intelligence and investigations, biometrics, weapons and materials detection, etc. It is a natural extension of the business we know well. The focus on security is simple: we believe it is a capital intensive, growth sector and one that is underserved from an industry focused perspective. Through one of our strategic business units, the Security Lending Group, we provide senior secured and mezzanine financing from $3 million to $50 million as a sole provider and up to $100 million or more where we will arrange or underwrite and syndicate a transaction. We recently completed a $100 million financing for Interface Security Systems. Interface provides high-level, custom-designed and engineered security services and solutions to tens of thousands of customers, ranging from homeowners and small businesses to large multinational Fortune 100 corporations. On the other hand, we have provided several dozen other companies with smaller financing packages which meet their needs as well. We are in the process of closing several other transactions in high growth sectors within the security industry. We will announce these transactions shortly.

SecurityStockWatch.com: CapitalSource is also positioned in the Physical and Homeland Security sectors? Are there technologies and businesses within this sector you find more attractive than others? Biometrics? Access control and physical ID? Remote Video?

Diane Rooney: Within the Security Lending Group, we target businesses which protect life, property, and information. There are a lot of exciting technological developments today, particularly within the video, biometrics, and explosives and materials detection sectors. However, while many of the new applications are quite interesting, they may not be providing a reliable, functional solution for the end user. Because our primary product offering is debt financing, we look to companies that have turned cash flow positive and have growing revenue and earnings streams. We are monitoring a number of interesting companies. Those that are able to deliver a solutions oriented product or service to enterprise or government will ultimately survive, prosper and gain the interest of the investment community.

Are there any deals or success stories you can discuss? We are currently involved with several young, private companies who have recently turned cash flow positive. For example, one has a viable systems integration solution for both government and enterprise. Another company is producing a digital video surveillance product that is very well received by the market and whose revenues are doubling year over year.

SecurityStockWatch.com: What makes CapitalSource uniquely competitive?

Diane Rooney: To the best of our knowledge, no other commercial lender is focused on small and middle market security companies nationally. We have 15 professionals in 4 offices who are entirely dedicated to the sector. Most importantly, we are able to act very quickly and provide custom financing structures. For example, our financing solutions may be asset based or cash flow based, or many times, a combination of both. It is not unusual for us to refinance an existing $3 million asset based revolver for a closely held company still owned by its founder on one hand, to working with a large private equity sponsor on a $100 million buyout and acquisition facility on the other.

SecurityStockWatch.com: Generally speaking, what are the key market drivers affecting security companies at the present time?

Diane Rooney: The War on Terror, regulatory changes, and simply, both enterprise and governments’ continued quest for process improvement and efficiency. The attacks on 9/11 and the continuing acts of terror committed around the world have not created a new market for security. Rather, they have accelerated trends which had already been occurring in the growing and consolidating security industry up to 9/11. These events have had the dramatic effect of shifting the industry from a product and service “push” business to a services and solutions “pull” business. Security is seen now more than ever as a critical imperative by local, state, and the Federal governments, businesses, and individuals. While the surge in private and public sector spending following the events of 9/11 is generating numerous growth opportunities for our existing and target clients, it is our experience that the more immediate financing opportunities have been driven by the corporate sector. We haven’t seen the broad impact yet of DHS appropriation to sectors on a consistently applied basis, but it’s on the way.

SecurityStockWatch.com: We've seen some consolidation in the security
industry: GE / InVision, Marsh & McLennan / Kroll , and Armor Holdings / Simula just to name a few. Do you expect this trend to continue?

Diane Rooney: Absolutely. The growing technology companies require large amounts of capital to take their product development and revenues to the next level. In many cases, the best vehicle is a sale to a larger strategic partner. Not only are there consolidations within the larger public sector you mention, but it is also happening at the smaller private company level. Ultimately, firms are combining to offer more complete and intelligent solutions to the end user.

SecurityStockWatch.com: Diane, many thanks for your time today. Are there any other subjects you would like to talk about?

Diane Rooney: I believe that management teams and company owners really benefit from doing business with specialists in their respective industry. The security industry now has extremely knowledgeable investment bankers/advisors, private equity firms, legal counsel and financing sources. As a specialized security industry lender ourselves, we believe these focused resources can offer not only direct services, but also invaluable networking to hands on managerial and board talent.