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The presentations content includes an update on the IPO market; legal and accounting best practices in preparing for an IPO, and insights from finance professionals who have executed successful IPOs along with firms that assist companies in optimizing their IPO opportunities.
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© 2011 Proformative. Proprietary and confidential
Event Sponsors
© 2011 Proformative. Proprietary and confidential
Welcome to Proformative
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senior level corporate finance, treasury, and accounting professionals.
An ad-free, noise-free community of more than 400,000 CFOs,
Controllers, Treasurers and related professionals
A resource where corporate finance and related professionals excel in
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Check it out at www.proformative.com
THE RESOURCE FOR CORPORATE FINANCE, ACCOUNTING & TREASURY PROFESSIONALS
Patrick Garrett
Managing Director, Equity Capital Markets
Wells Fargo Securities
IPO Markets Update & the Banker’s
Perspective for CFOs
© 2011 Proformative. Proprietary and confidential
Offer Date Issuer
Base Deal
Size
Offer/
1 Day
Offer/
Current Why Attractive to Investors?
05/18/11 LinkedIn Corp $352.8 109.4% 93.8% First public offering opportunity to invest in the social media growth story
04/07/11 307.2 9.7% 60.1% Variable rate MLP structure with high payout
03/31/11 GNC Holdings Inc 360.0 4.7% 56.8% Nutritional supplement market leader with 61% net after tax profit growth over three years
07/19/11 Zillow Inc 69.2 78.9% 53.9% Market leading internet home-value and rent estimate website with robust revenue growth
07/26/11 Dunkin' Brands Group Inc 422.8 46.6% 47.9% Profitable retail franchise that is expected to double its U.S. locations within 20 years
07/27/11 Teavana Holdings Inc 121.4 63.5% 40.4% Innovative and profitable retail-growth business focused on tea consumption
06/28/11 HomeAway Inc 216.0 48.9% 38.2% Internet growth story with increasing revenues and profitable operating model
04/13/11 Arcos Dorados Holdings Inc 1,249.2 24.7% 34.4% Alternative way to invest in Latin America growth prospects of McDonald's Corporation
03/24/11 ServiceSource International Inc 119.4 21.8% 33.3% Pure-play cloud computing and IT services company with strong revenue growth
05/04/11 Thermon Group Holdings Inc 120.0 2.3% 32.4% Established global leader in industrial electric heat tracing with 2011 revenue growth of 23%
11/03/11 Groupon Inc 700.0 30.6% 21.3% Market leading internet-based consumer discount service provider
Total: $4,038.1
Median: $307.2 30.6% 40.4%
Average: $367.1 40.1% 46.6%
Several Successful IPOs Have Priced This
Year
CVR Partners LP
Arcos Dorados Holdings
Thermon Holding Corp.
Teavana Holdings
Source: FactSet, Dealogic as of 11/11/11
© 2011 Proformative. Proprietary and confidential
IPO Market Generally Stable, but Subject
to Market Volatility
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IPO
0
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Vola
tility In
dex
IPO Volume CBOE Market Volatility IndexSource: FactSet, Dealogic as of 11/11/11
© 2011 Proformative. Proprietary and confidential
IPO Backlog Continues to Build
$37.1 $37.0 $36.5$34.6$34.3
$31.1$29.3
$28.8
$23.3$23.4$27.2
$21.8
151
189
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143124
104111110
$0
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Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11
Volu
me (
$B)
0
20
40
60
80
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# o
f D
eals
Dollar Volume ($B) # of Deals
LTM Monthly IPO Backlog
1211
12
28
31
29
2324
17
1312
7
14
7
16 16
9
15
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0
7
28
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Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11
New Filings
Pricings
Ten Largest IPOs in Backlog
Monthly Filing and Pricing Activity
Source: Dealogic of 11/11/11
Issuer Name
Amount
Filed ($MM)
Initial Filing
Date
Days in
Registration Industry
Sponsor
Backed?
FTS International Inc $1,150 09/09/11 49 Energy & Power
Zynga Inc 1,000 07/01/11 119 Tech & Svcs
Avaya Holdings Corp 1,000 06/09/11 141 Tech & Svcs
Momentive Performance Materials Holdings LLC 863 04/21/11 190 Industrials
Morgan Properties Trust 800 07/27/11 93 Real Estate
Toys R Us Inc 800 05/28/10 518 Consumer & Retail
Allison Transmission Holdings Inc 750 03/18/11 224 Industrials
Rexnord Corp 700 05/26/11 155 Industrials
PetroLogistics LP 600 06/21/11 129 Industrials
PIMCO REIT Inc 600 04/05/11 206 Financial Institution
© 2011 Proformative. Proprietary and confidential
Investment Highlights
Positioning Your Story with Investors
Properly Drives Valuation and Demand
Growth Potential
Competitive Position
Predictable & Understandable Business Model
Proprietary Technology
Credible Management Team
© 2011 Proformative. Proprietary and confidential
Driving to a Premium Valuation
Valuation vs. Peers: Three Select 2011 IPOs
Comparables 2012 Price / Earnings
Peet's Coffee & Tea Inc. 33.5x
Starbucks Corporation 28.7x
The Wendy's Company 23.5x
Krispy Kreme Doughnuts, Inc. 22.2x
Sonic Corp. 21.8x
Tim Hortons Inc. 17.9x
McDonald's Corp. 17.1x
Yum! Brands, Inc. 16.8x
Domino's Pizza, Inc. 14.9x
AFC Enterprises Inc. 13.9x
Papa John's International Inc. 13.3x
Jack in the Box Inc. 13.3x
Median 17.5x
Average 19.7x
Comparables 2011 EV / EBITDA
Universal Health Services Inc. 7.8x
HMA Inc. 7.3x
Community Health Systems, Inc. 6.9x
Tenet Healthcare Corp. 6.5x
Lifepoint Hospitals Inc. 6.5x
Median 6.9x
Average 7.0x
Comparables 2011 EV / EBITDA
Solera Holdings Inc. 13.9x
IHS Inc. 13.8x
MSCI Inc. 13.5x
Verisk Analytics, Inc. 12.2x
Thomson Reuters Corporation 10.4x
Experian plc 10.2x
Reed Elsevier plc 9.0x
Equifax Inc. 8.4x
Alliance Data Systems Corporation 8.0x
Acxiom Corporation 6.1x
Median 10.3x
Average 10.6x
15.0x
16.5x
24.1x
17.5x
16.0x
Dunkin Donuts
6.6x
6.9x
7.0x6.9x
6.9x
HCA Holdings
9.2x
9.8x
10.5x10.3x
9.6x
Nielsen
Filing Multiple Range At Offer Multiple Multiple at 1-week Peer Median
© 2011 Proformative. Proprietary and confidential
IPO Valuation Methodologies
Valuation Ranges
($ in Millions) Valuation Summary
Implied Enterprise Value
Net Debt
Equity Value
EV / Revenue Multiple
3.0x - 4.0x 2012E Revenue ($180.0 mm)
EV / EBITDA Multiple
7.0x - 8.0x 2012E EBITDA ($75.0 mm)
Price / Earnings Multiple
11.0x - 13.0x 2012E Earnings ($30.0 mm)
Discounted Cash Flow Analysis
Sum-of-the-Parts Analysis
Implied 2012E EV / Revenue Multiple ($180.0 mm)
Implied 2012E EV / EBITDA Multiple ($75.0 mm)
Implied 2012E P / E Multiple ($30.0 mm)
$800$600 $650 $700 $750$400 $450 $500 $550
$580$380 $430 $480 $530$180 $230 $280 $330
$220$220 $220 $220 $220$220 $220 $220 $220
17.7x 19.3x11.0x 12.7x 14.3x 16.0x6.0x 7.7x 9.3x
10.7x5.3x 6.0x 6.7x 7.3x 8.0x 8.7x 10.0x
4.2x 4.4x3.3x 3.6x 3.9x
9.3x
2.2x 2.5x 2.8x 3.1x
© 2011 Proformative. Proprietary and confidential
Financial Adjustments – What Do
Investors Accept?
Often companies adjust financials with certain add-backs accepted by
the investor community
Amortization
Non-controlling Interests
M&A Costs
Add back on-going Swap Amortization
Add back Customer Intangible Amortization
Add back of net income attributable to non-controlling interests in hospital joint ventures
Add back of M&A cost amortization
Examples
Stock-based Compensation
Add back Stock-based Compensation to derive Adj. EBITDA and “cash earnings”
© 2011 Proformative. Proprietary and confidential
IPO Process Overview
Initial SEC Review Period
Phase 2:
30 Day Review Period
Roadshow preparation and practice
Receive SEC comments
Respond to comments
File amended S-1
File Add’l Amendments and Finalize S-1
Phase 3:
Subject to SEC Review
File amended S-1
Add valuation range to S-1
Finalize roadshow presentation
Conduct management “dry runs”
Print preliminary prospectus
Roadshow and Pricing
Phase 4:
2 Week Roadshow
Research analyst teach-ins to sales forces
Management presentations to sales forces
Management presentations:
1 x 1 meetings
Group lunches
Price IPO
S-1 and Preparation of Marketing Materials
Select banks
Organizational meeting
Due diligence (banker & analyst)
Draft S-1
Draft Management Presentation
4 – 6 Weeks
Phase 1:
Pre bake-off stage
Governance / BOD & Committees
Foster analyst relationships
Broaden banker relationships
Private company forums & conferences
Bolster capital base
12-24 mos. prior to selecting bankers
Initial Phase:
The IPO Process Begins Well Before The Bake-Off
© 2011 Proformative. Proprietary and confidential
Thoughtful Investor Targeting Drives
Success
Targeting Targeted Investor Community
Where Are the Investors?
Identify Strong Institutional Investors – Anchor Orders
Plan Roadshow Around Top Investor Locations
Top Holders of Primary Peers
Top Buyers of Primary Peers
Top Holders of Secondary Peers
Top Buyers of Secondary Peers
Retail
Target Mid-Market Buyers – “the next 100 investors”
Include Retail Demand – “sticky/price insensitive”
$4,935,650
$3,375,551$3,180,881
$2,778,225
$2,362,344
$2,002,155
$1,294,652
$951,690
$-
$1,000,000
$2,000,000
$3,000,000
$4,000,000
$5,000,000
London/Paris/
Frankfurt/Milan
New York West Coast Boston Mid-Atlantic/
Southeast
Midwest Asia Pacific Canada/
Americas
Assets
Un
der M
an
ag
em
en
t ($
MM
)
© 2011 Proformative. Proprietary and confidential
The Roadshow Schedule
7:30am Prep w/ underwriters
8:00am 1x1 meeting
9:15am 1x1 meeting
10:30am 1x1 meeting
12:00pm Group lunch
1:45pm 1x1 meeting
3:00pm 1x1 meeting
4:15pm 1x1 meeting
6:00pm Private dinner
The Overall Marketing Plan A Day on the Road
Baltimore
Boston London
Paris Frankfurt
Milan
San Francisco Chicago
Texas
Denver
Los Angeles San Diego
Kansas City
New York
Milwaukee Minneapolis
Start with presentation to salesforces
Roughly 50-60 1x1 meetings and 3-4 group lunches
Maximize demand by targeting key cities
© 2011 Proformative. Proprietary and confidential
10 Overriding Themes for IPO Process
1 Recognize up front the time commitment of the IPO process and plan accordingly (personnel, other commitments,
etc.)
2
3
4
5
6
7
8
9
10
Management credibility is THE key variable (historical performance, achievable business plan)
Must convey differentiated strategy relative to comps
No shortcuts – intense scrutiny on disclosure (financials airtight, S-1 disclosure perfect, IPO disclosure and financial presentation sets standard for future disclosure as a public company)
Keep it simple (projections must show logical growth, don’t over-optimize – complexity discount)
Do not put out projections you cannot achieve (gear back “stretch targets” by 20%)
Research analysts/sales force/investors must be carefully guided
Do not file unless you would buy the stock yourself
Valuation walk: file realistic valuation; build a strong book; price at the high end/above range; exercise the green shoe
Convey roadshow story in 30 slides/30 minutes
© 2011 Proformative. Proprietary and confidential
Thank You
THE RESOURCE FOR CORPORATE FINANCE, ACCOUNTING & TREASURY PROFESSIONALS
Michael Poirier, Transaction Services Partner
PwC
Executing a Successful IPO: PwC's Perspective
© 2011 Proformative. Proprietary and confidential
• The Phases of Preparing for an IPO
• The Cross-functional, Multi-disciplinary approach to Preparation
• Anticipating the Accounting and Financial Reporting Requirements of the Form S-1
• Internal Control Considerations
• CFO Responsibilities Post-IPO
• Keys to Success
Overview
17
© 2011 Proformative. Proprietary and confidential
Taking control of your IPO process
IPO effective
Phase 1 Phase 2 Phase 3
Initial planning
and
preparation
Readiness
assessment
“Going Public”
• Execution of the registration
process
“Being Public”
• Changing the organization to enable it to operate as a
public company
Pre-effective time Post-effective
An IPO is a long journey – being prepared is key to maximizing value.
Not being ready can lead to massive value leakage.
18
© 2011 Proformative. Proprietary and confidential
Foundations for success in the
IPO process
Corporate
strategy
&
develop-
ment
Accounting,
reporting,
&
finance
effective-
ness
Governance
&
leadership
Internal
controls
Media
&
Investor
relations
Treasury
&
financial
risk
manage-
ment
Human
resources Tax Legal
Technology
Project management, change management, and communications
A comprehensive IPO Readiness Assessment requires a thorough evaluation of all areas of the company.
19
© 2011 Proformative. Proprietary and confidential
Illustrative high-level IPO project plan O
THER
Initial filing date
Effective date
20
Post Filing Pre Filing
Prepare 10-Q in 40 days and 10-K in 75 days. Continue to enhance And procedures, budgeting and
forecasting .
Execute Sarbanes Oxley 404 Readiness and 302 certification
-
Ensure adequate resources and administer new plans
Perform incremental improvements / enhancements
Perform incremental improvements / enhancements
Execute tax strategic plan and enhancements
Perform incremental improvements / enhancements
Manage the post filing activities
Operate under new legal guidelines
Remediate required governance requirements , including : * Board/Audit Committee (independence) gaps * Internal Audit Function * Governance Guidelines
Support recruiting and reorganization efforts or workstreams throughout the organization pre - filing
Create appropriate compensation, benefit plans and agreements for public company .
Remediate personnel and process gaps pre - filing
Create appropriate tax structure and strategy for public company
Modify or enhance technology capabilities to support financial reporting requirements and to support effort to workstreams throughout the organization
Recruit additional finance talent and improve departments
Continue to remediate governance requirements. Perform incremental
compliance and transparency enhancements
Perform financial statement risk assessment
Assess HR and benefit needs
Assess media investor Relations needs
Assess treasury needs
Assess tax needs
Assess IT needs
Establish project governance structures
and processes
Assess legal needs
Assess corporate governance gaps
Assess acct / finance gaps and needs
Retain securities counsel. Retain underwriters .
Create appropriate legal entity structure . Obtain required regulatory approvals .
Remediate personnel and process gaps pre - filing
Remediate personnel and process gaps pre filing ( in conjunction with reporting needs )
Establish process for earnings releases and earning calls
Determine sustainable plan for maintaining effective internal control
Create Sarbanes 404/302 compliance plan Begin execution of Sarbanes 404 readiness
Accelerate financial close and reporting timelines. Enhance policies and procedures to support accelerated timeline and Certifications. Enhance management reporting including budgeting and forecasting .
Evaluate and resolve complex accounting issues and SEC reporting issues Prepare financial statements and other S-1 information with auditor reviews .
Review SEC Comments and revise S-1
Perform Road Show
4. Media & Investor Relations
5. Treasury & Risk Management
6. Legal
7. Tax
8. Human Resources
9. Information Technology
10. Project Management
3. Internal Controls
2. Governance & Leadership
1. Accounting, Reporting, & Finance Effectiveness
Define and develop project management capabilities. Note: These capabilities may need to be developed in parallel with the actual projects to meet Day One.
© 2011 Proformative. Proprietary and confidential
• Public company GAAP and
disclosures vs. private company
requirements (segments, EPS, etc.)
• 3 years of audited financial information
• 2 additional years of selected financial
data (may be unaudited)
• Interim financial statements
(comparative), and additional interim
data may be required later in the
process
• Predecessor/successor financial
statements (change in control)
• Pro forma financial information
• Capitalization and dilution financial
information
• Additional audited financial
statements for “significant” acquired
companies prior to date of acquisition
• Additional financial information for
guarantees and collateral
• Tax, legal and financial reporting
implications of reorganizations and
structures in advance of an IPO
• Non-GAAP measures
• Cheap stock
• Segments
• EPS
• Financial information in MD&A
Preparing for the accounting and financial
reporting requirements of the S-1
21
© 2011 Proformative. Proprietary and confidential
Internal Control Considerations
Section
409
Section
404
Section 906
Section
302
Various representations by certifying officers, similar to Section 906 plus additional representations related to disclosure controls and procedures, internal controls, and fraud
Perform annual assessment of the effectiveness of internal controls over financial reporting and obtain attestation from external auditors
Disclosure made to the public on a “rapid and current basis” of material changes to financial condition or results of operations
The periodic report states
that financial information
complies with the
Exchange Act and fairly
presents the financial
condition and results of the
operations
22
© 2011 Proformative. Proprietary and confidential
Sample CFO Responsibilities: Post-IPO
CFO
Controller FP&A
General Ledger
Revenue / AR
Purchasing / AP
SEC Reporting Director
Taxation Director
Internal Audit / SOX Director
Treasury Director
Team Team Team
International Operations
Team
Investor Relations
23
© 2011 Proformative. Proprietary and confidential
• Start with strong IPO leadership
• Support the effort with effective
project management
• Perform a thorough IPO Readiness
Assessment in advance to:
• Identify critical-path issues
• Establish a realistic timeline
and plan that prioritizes tasks
and stages key work streams
• Establish parallel Going Public and
Being Public work streams
• Build a finance organization that
can meet the needs of a public
company
• Use a multidisciplinary approach
• Strike the right balance between
internal and external resources
• Don’t try to do too much at once
• Set the IPO structure early
• Consider all the options including
dual track IPOs
Keys to Success
24
© 2011 Proformative. Proprietary and confidential
Final thoughts
Preparing for an IPO can be a long and complex process.
With the right planning and approach, however, companies can ensure
resources and incremental costs are appropriately managed and incurred only
when necessary.
25
Being prepared is key to maximizing value.
Not being ready can lead to massive value leakage.
© 2011 Proformative. Proprietary and confidential
Thank You
THE RESOURCE FOR CORPORATE FINANCE, ACCOUNTING & TREASURY PROFESSIONALS
The Legal Ins and Outs of the IPO Paul Broude, Partner, Foley & Lardner LLP
© 2011 Proformative. Proprietary and confidential
Settle on your Management Team
• If you plan to upgrade your management team
or add outside directors, do it now
• “Upgrades” right after the IPO create potential
liability
• Will management’s experience engender
confidence in the investor community?
• Will the road show presenters convince
institutional investors?
• Underwriters will conduct detailed background
checks before the S-1 is filed
© 2011 Proformative. Proprietary and confidential
Become SOX compliant
• Independent board committees; audit committee
financial expert
• Many rules apply to “filing date” rather than
effective date
• Eliminate loans to officers and directors
• Prepare for section 404 compliance
• CEO and CFO need to provide certification in
10-Qs and 10-Ks
© 2011 Proformative. Proprietary and confidential
Review all business contracts
for IPO obstacles
• Make sure key contracts can be disclosed in the
S-1
• You may need 3rd party consents
• Fix contracts now, before you lose leverage
• For non-disclosure provisions, include carve out
“as required by law, including any governmental
filings”
© 2011 Proformative. Proprietary and confidential
Review all equity contracts
for IPO obstacles
• Do you have the votes to amend your charter?
• Are there preferred blocking rights?
• Need to waive any IPO participation rights? Note one year integration concern
• Do warrants exercise on IPO? Are loans due on IPO?
• Review registration rights provisions
© 2011 Proformative. Proprietary and confidential
Think about confidentiality
treatment requests
• Key contracts need to be filed as exhibits to the
S-1
• The SEC permits “limited” provisions to be
redacted, typically pricing and milestone
payments
© 2011 Proformative. Proprietary and confidential
Make sure all equity and debt
issuances are documented
• Stock issuances, option and warrant grants, and
loans must be documented
• Need to be disclosed in detail in the S-1
• Lawyers will need to issue opinion
• Accountants will need for financial statements
© 2011 Proformative. Proprietary and confidential
Address IP Issues
• Do you own your Intellectual Property?
– Do you have assignments of inventions from all
current and former employees, consultants, and
contractors?
– Review your patent and trademark portfolio
– Review your domain name strategy
– If you have any doubt, clean up title now, as claims
will come out of the woodwork once your plans to go
public are known
© 2011 Proformative. Proprietary and confidential
Address IP Issues
• Do you use any Open Source software?
– Conduct a Black Duck review of your code to identify
any open source components
– Verify that you have any required licenses
– Revise code as necessary to avoid disclosure/
licensing requirements
© 2011 Proformative. Proprietary and confidential
Address IP Issues
• Do you license any Intellectual Property?
– Review your license agreements to make sure they
are valid
– Consider amending/revising/extending agreements
before you lose leverage
– Make sure the agreements allow you to disclose
them in your registration statement
© 2011 Proformative. Proprietary and confidential
Address IP Issues
• Can you sell or license your Intellectual Property?
– Review export control issues
– Obtain any necessary licenses
– Review technology transfer limitations related to
sensitive technology for both offshore sales and
offshore developers
© 2011 Proformative. Proprietary and confidential
Clean up your web site
• Scrutinized by the SEC and public
• Make sure statements are true and supportable
• Eliminate links to third party sites
• Have legal counsel review website
• Continuously revise as your S-1 changes
• Prepare investor relations section of website for
launch upon IPO
© 2011 Proformative. Proprietary and confidential
Develop a practice of issuing
press releases
• “Quiet period” press releases will be scrutinized for gun jumping
• Gun jumping can delay IPO and create liability
• Quiet period releases must: – be consistent with past practice
– contain factual information about the business (and not the offering)
– be intended for customers and suppliers
• Issue releases now when you sign key contracts or hire key employees
• Limit number of spokespersons for the company
• Have legal counsel review press releases and public relations campaigns
© 2011 Proformative. Proprietary and confidential
Address Stock Compensation Issues
• SEC comments on stock compensation issues
are universal
– Be able to demonstrate that shares and options
granted were at fair market value on the date of grant
– Be prepared to defend the company’s valuation
methodology
– Goal is to avoid restating financial statements due to
revised compensation charges
– Complex analysis which has the ability to delay an
IPO while issues are resolved
© 2011 Proformative. Proprietary and confidential
Address Stock Compensation Issues
• Engage an independent valuation firm
• Perform contemporaneous valuations on a
quarterly basis
• Establish a pattern of quarterly option grants
using valuations
© 2011 Proformative. Proprietary and confidential
Address Stock Compensation Issues
• Impact of comparable company group
• Impact of stock sales by the company
• Impact of secondary sales by shareholders
• Impact of IPO process
• SEC will require complete disclosure in S-1
• Be prepared to provide date for prior 18 months
• Articulate reasons for officer and director grants
© 2011 Proformative. Proprietary and confidential
Look into D&O insurance
• Board members of public companies will insist
on it
• Engage an experienced Insurance Broker with
a book of clients in your industry
• Review current D&O coverage; determine
additional coverage needs
• Allow time for multiple quotations and the
underwriting process
© 2011 Proformative. Proprietary and confidential
Do you have enough $$ if the IPO
takes longer than expected
• Process can take a year or longer from filing the
S-1 through effectiveness
• Know your burn rate
• Consider a financing before you file the S-1
• After filing, financing options are more limited
© 2011 Proformative. Proprietary and confidential
Begin preparing now for
Post-IPO SEC filings
• Identify your “Named Executive Officers” and understand the heightened transparency applicable to these individuals
• Understanding Form 3s, Form 4s and 13Ds and 13Gs
• Have processes in place immediately after the IPO regarding insider trading and proper reporting
• Understand what happens to outstanding stock options after the IPO; when can they be exercised; how is this processed
• Prepare a calendar of post-IPO SEC filing obligations and identify responsible parties
© 2011 Proformative. Proprietary and confidential
Thank You
THE RESOURCE FOR CORPORATE FINANCE, ACCOUNTING & TREASURY PROFESSIONALS
Michael P. Rodgers
Managing Director, Institutional Fixed Income,
Wells Capital Management
Short Duration Investment Strategy &
Guideline Development
© 2011 Proformative. Proprietary and confidential
Investment options summary:
• Deposit proceeds with a bank
• Invest in a money market mutual fund
• Invest a portion in a short duration fixed income mutual fund
• Outsource to an investment professional money manager to
customize an investment portfolio
• Direct a broker to purchase individual fixed income instruments
• No matter which approach you follow, start by building a proper
investment policy
Investment Solutions for IPO Proceeds
© 2011 Proformative. Proprietary and confidential
An Investment Policy Statement Is Good
Corporate Governance
Every organization with funds to manage should have in place
a formal written investment policy statement. The benefits of
having an investment policy statement are:
• The first and most important step in the investment process
• Satisfies an important fiduciary duty
• Guides the asset management process – no surprises
• Provides discipline to the process
• Effective risk management
• Designed to endure the ups and downs of market cycles
• Structured with a long-term focus that evolves over time
• Meets documentation requirements under SOX 404
© 2011 Proformative. Proprietary and confidential
What are some unique investment guideline drivers:
• Asset/Liability Matching
• Liquidity Needs
• Cash Flow Schedule
• Gain/Loss Sensitivity
• Accounting/Financial Statement Implications
• Accounting Classification: FAS 115 » Hold-to-Maturity
» Available For Sale
• Credit Rating Sensitivity
• Shareholder Sensitivities and Expectations
• Unique Business Risks and Biases
Understanding Your Organization
© 2011 Proformative. Proprietary and confidential
Regulatory Constraints:
• Investment Company Act of 1940
• State and Local Government Statutes
• Offshore
• Foreign Withholding
• US Real Property Issues
• Qualified Institutional Buyer (QIB)
• Rule 144A Offerings
• Industry Specific Regulations
• Banks
• Insurance Companies
Understanding Your Organization
© 2011 Proformative. Proprietary and confidential
Investment Objectives for Corporate Cash are always the same:
• Preservation of Principal (primary)
• Providing Liquidity (secondary)
• Maximizing Return (tertiary)
Investment Objectives
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1994-2010 Rolling 12-Month Returns At Each Quarter-End
Maturity Risk-Return
Source: Merrill Lynch and Bloomberg
3.50%
4.00%
4.50%
5.00%
5.50%
6.00%
0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00%
Merrill Lynch 6-Month T-Bill Index
Merrill Lynch 1 Year Treasury Index
Merrill Lynch 1-3 Year Treasury Index
Merrill Lynch 1-5 Year Treasury Index
Merrill Lynch 1-10 Year Treasury Index
Standard Deviation
Av
era
ge R
oll
ing
12
-Mo
nth
Retu
rn
Greater duration is typically accompanied by higher expected return and higher volatility
© 2011 Proformative. Proprietary and confidential
Maturity Constraints
*Maximum individual maturity
Po
rtfo
lio
Eff
ecti
ve A
vera
ge M
atu
rity
(M
on
ths)
6-Month 1-Year 1-2 Year 1-3 Year 1-5 Year
Benchmark Benchmark Benchmark Benchmark Benchmark
(after-tax objective)
0
6
12
18
24
30
Maximum
1-Year
Maximum
1.75-Years
Maximum
2-Years
Minimum
12-Months
Minimum
6-Months
Minimum
3-Months
Maximum
2.25-Years
Minimum
15-Months
36
2 Years* 3 Years* 5 Years* 5 Years* 7 Years*
Maximum
3.1-Years
Minimum
18-Months
© 2011 Proformative. Proprietary and confidential
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
1 U.S.
Corporates,
1-3 Years
9.59%
Mortgages
0-3 Years
WAL
7.50%
U.S.
Corporates,
1-3 Years
5.33%
Municipals
1-3 Years
3.41%
Municipals
1-3 Years
3.79%
Municipals
1-3 Years
5.81%
Municipals
1-3 Years
7.45%
Municipals
1-3 Years
7.93%
U.S.
Corporates,
1-3 Years
14.69%
Mortgages
0-3 Years
WAL
5.42%
2 Municipals
1-3 Years
8.87%
Municipals
1-3 Years
7.40%
Municipals
1-3 Years
4.28%
Mortgages
0-3 Years
WAL
2.80%
Asset
Backed
Securities,
0-3 Years
2.60%
Asset
Backed
Securities,
0-3 Years
4.73%
U.S.
Treasuries,
1-3 Years
7.32%
U.S.
Agencies,
1-3 Years
7.05%
Asset
Backed
Securities,
0-3 Years
13.80%
U.S.
Corporates,
1-3 Years
4.86%
3 U.S.
Agencies,
1-3 Years
8.64%
U.S.
Corporates,
1-3 Years
6.53%
Asset
Backed
Securities,
0-3 Years
2.74%
Asset
Backed
Securities,
0-3 Years
2.16%
Mortgages
0-3 Years
WAL
2.15%
U.S.
Corporates,
1-3 Years
4.71%
Mortgages
0-3 Years
WAL
6.95%
U.S.
Treasuries,
1-3 Years
6.61%
Municipals
1-3 Years
6.77%
Municipals
1-3 Years
3.53%
4 U.S.
Treasuries,
1-3 Years
8.30%
U.S.
Agencies,
1-3 Years
6.11%
U.S.
Agencies,
1-3 Years
2.18%
U.S.
Corporates,
1-3 Years
1.82%
U.S.
Corporates,
1-3 Years
1.89%
Mortgages
0-3 Years
WAL
4.64%
U.S.
Agencies,
1-3 Years
6.74%
Mortgages
0-3 Years
WAL
5.27%
Mortgages
0-3 Years
WAL
5.98%
Asset
Backed
Securities,
0-3 Years
3.35%
5 Asset
Backed
Securities,
0-3 Years
8.16%
Asset
Backed
Securities,
0-3 Years
5.95%
U.S.
Treasuries,
1-3 Years
1.90%
U.S.
Agencies,
1-3 Years
1.18%
U.S.
Agencies,
1-3 Years
1.77%
U.S.
Agencies,
1-3 Years
4.52%
U.S.
Corporates,
1-3 Years
5.67%
Asset
Backed
Securities,
0-3 Years
-1.22%
U.S.
Agencies,
1-3 Years
2.17%
U.S.
Treasuries,
1-3 Years
2.35%
6
Mortgages
0-3 Years
WAL
7.79%
U.S.
Treasuries,
1-3 Years
5.76%
Mortgages
0-3 Years
WAL
1.83%
U.S.
Treasuries,
1-3 Years
0.91%
U.S.
Treasuries,
1-3 Years
1.67%
U.S.
Treasuries,
1-3 Years
3.96%
Asset
Backed
Securities,
0-3 Years
4.84%
U.S.
Corporates,
1-3 Years
-2.68%
U.S.
Treasuries,
1-3 Years
0.79%
U.S.
Agencies,
1-3 Years
2.32%
Annual Returns for Key Sector Indices – Taxable Equivalent
Table of Short Duration Returns: A Case
For Diversification
Source: Bloomberg
Returns shown are the annual total returns of select Merrill Lynch indices. This Periodic Table of Sector Returns is a comprehensive representation of relative sector performance for a
10-year period through 12/31/2010. Municipal index returns are presented as taxable equivalent returns, assuming a 35% tax rate . This material is offered compliments of Wells
Capital Management to its clients. It is for your own personal information and we are not soliciting an action based upon it. Past performance is not indicative of future results.
© 2011 Proformative. Proprietary and confidential
A performance benchmark should reflect:
• Organization’s goals and objectives
• Risk tolerance
• Return expectations over the long run
Performance benchmark should be:
• Representative of the portfolio’s duration/time horizon
• A meaningful measurement of investment performance vs. the
market and/or alternative solutions
• Consistent across all managers with similar mandates
• Consistently calculated and obtained from a third party
Performance Benchmark
© 2011 Proformative. Proprietary and confidential
Source: Standard & Poor’s
AAA
AA+ AA A-1+
AA- A+ A-1
A A-
BBB+ A-2
BBB BBB- A-3
BB+ BB B
BB-
The Link Between Short-Term and Long-Term Ratings
Taxable Ratings
Standard and Poor’s Ratings
© 2011 Proformative. Proprietary and confidential
Rating Definition
AAA Highest rating; extremely strong
capacity to pay interest and repay
principal.
AA Very strong capacity; differs from
AAA in only a small degree.
A Strong capacity but more
susceptible to adverse economic
effects than higher-rated
categories.
BBB Adequate capacity, but adverse
economic conditions more likely to
weaken capacity.
BB Lowest degree of speculation; risk
exposure.
B Speculative; risk exposure.
CCC Vulnerable to nonpayment;
Speculative; major risk exposure.
CC Highly vulnerable to nonpayment;
Speculative.
C Highly vulnerable to nonpayment,
but currently paying interest.
D Bonds in default with interest and/or
repayment of principal in arrears.
Credit Quality – Standard & Poor’s
Long-Term Ratings Short-Term Taxable Ratings
Rating Definition
A-1+ Highest degree of safety.
A-1 Strong degree of safety.
A-2 Satisfactory degree of safety.
A-3 Adequate degree of safety.
Short-Term Municipal Ratings
Rating Definition
SP-1 Very strong capacity to pay
principal and interest; those
issues determined to possess
over-whelming safety
characteristics will be given a
plus (+) designation.
SP-2 Satisfactory capacity to pay
principal and interest.
SP-3 Speculative capacity to pay
principal and interest.
The ratings from “AA” to “B” may be modified by the addition of a plus or
minus sign to show relative standings within the major rating categories.
© 2011 Proformative. Proprietary and confidential
Investment Policy Statement
Investment Objectives
• Preservation of principal
• High degree of liquidity
• Maximum Book Return
Acceptable Investments (U.S. Dollar-Denominated Only)1,2
Benchmark: Lipper Institutional Money Market Fund Index
Maturity Parameters
• Maximum Maturity/Demand Feature/Average Life: 2 years
• Maximum Average Maturity Deviation From Benchmark: 1 Year
Concentration and Diversification
• No more than 5% in any single issue/issuer at the time of purchase (except U.S. Treasury and Agency securities).
Minimum Acceptable Credit Quality
• The obligor must be rated in the rating category as indicated below by at least two of the Nationally Recognized Statistical Rating
Organizations (NRSRO).
•U.S. Treasury Securities •Money Market Funds/Sweep Vehicle •Municipal Notes/Bonds
•Federal Agency Securities (GSEs) •Mortgage-Backed Securities •Municipal Variable Rate Securities
•FDIC-Guaranteed Securities •Collateralized Mortgage Obligations •Pre-refunded bonds
•Repurchase Agreements •Commercial Mortgage-Backed Securities •Tax-Exempt Commercial Paper
•Commercial Paper (foreign and domestic issues) •Foreign Government Related Securities •Asset-Backed Securities
•Corporate Notes/Bonds •Taxable Short-Term Municipal Debt •Tax-Exempt Commercial Paper
•Covered Bonds •Certificates of Deposit (incl. Yankee, Euro) •Master Notes
S&P Moody’s Fitch
Minimum Short-Term Rating A-1 P-1 F-1
Minimum Long-Term Rating A- A3 A-
1Non-rated and non-rerated, pre-refunded issues may be purchased (collateralized by U.S. Treasuries and Agencies). 2Tax Status: 35% Federal Tax Rate; Securities subject to the Alternative Minimum Tax (AMT) may be purchased.
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Thank You
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Panel Discussion and Q&A
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Proformative Contact John Kogan
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additional questions you may have and to continue
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you heard from today.
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