IPO for Finance Executives: Learning from Experts

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IPO Markets Update & the Banker’s
Perspective for CFOs
Patrick Garrett
Managing Director, Equity Capital Markets
Wells Fargo Securities

Several Successful IPOs Have Priced This
Year Base Deal Offer/ Offer/
Offer Date Issuer Size 1 Day 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 CVR Partners LP 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
Teavana Holdings 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 Dorados Inc
Arcos Holdings Holdings 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 Holding Corp.
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%
Source: FactSet, Dealogic as of 11/11/11 Average: $367.1 40.1% 46.6%


Volatility Index
90

80

70

60

50

40

30

20

10

0
7

Nov-11
Oct-11
2

Sep-11
0

Aug-11
3
14

Jul-11
Jun-11
9
16

May-11
17

Apr-11
Mar-11
7
IPO Market Generally Stable, but Subject

13

Feb-11
Jan-11
7
13 13

Dec-10
Nov-10
12

Oct-10
Sep-10
5

Aug-10
9

Jul-10
9

Jun-10
9

May-10
9

CBOE Market Volatility Index
15

Apr-10
13

Mar-10
Feb-10
7

Jan-10
4
Dec-09
5
10

Nov-09
11

Oct-09
8 Sep-09

IPO Volume
Aug-09

4

Jul-09

1
Jun-09

5
to Market Volatility

May-09

3
Apr-09

2
Mar-09

0
Feb-09

1
Jan-09

0
Dec-08

0
Nov-08

1
Oct-08

0
Sep-08

0
Aug-08

1
Jul-08

2

Source: FactSet, Dealogic as of 11/11/11
Jun-08

3
May-08

6
Apr-08

5
Mar-08

3
Feb-08

2
Jan-08

4
20

18

16

14

12

10

8

6

4

2

0
IPO

IPO Backlog Continues to Build
Monthly Filing and Pricing Activity LTM Monthly IPO Backlog
New Filings
31 $50 182 185
172
29 166
189 180
Pricings 28 28 $45
151 160
24 $40
153 $37.1 $37.0 $36.5
23 140
143 $34.3 $34.6
$35 124
111 $31.1 120
110 $29.3
$30

Volume ($B)
104 $28.8
17

# of Deals
16 16 100
15 $25 $27.2
$23.4 $23.3
14 $21.8
13
12 12 12 $20
80
11
9 $15 60
7 7 7
5 $10 40

3
2 $5 20
0
$0 0
Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11
Dollar Volume ($B) # of Deals

Ten Largest IPOs in Backlog
Amount Initial Filing Days in Sponsor
Issuer Name Filed ($MM) Date Registration Industry Backed?
FTS International Inc $1,150 09/09/11 49 Energy & Power
Zynga Inc 1,000 07/01/11 119 Tech & Svcs 
Avaya Holdings C orp 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 C onsumer & Retail 
Allison Transmission Holdings Inc 750 03/18/11 224 Industrials 
Rexnord C orp 700 05/26/11 155 Industrials 
PetroLogistics LP 600 06/21/11 129 Industrials 
PIMC O REIT Inc 600 04/05/11 206 Financial Institution

Source: Dealogic of 11/11/11


Positioning Your Story with Investors
Properly Drives Valuation and Demand

Growth Potential

Proprietary Technology
Competitive Position

Investment Highlights

Predictable & Understandable Credible Management Team
Business Model


Driving to a Premium Valuation
Valuation vs. Peers: Three Select 2011 IPOs

Filing Multiple Range At Offer Multiple Peer Median Multiple at 1-week

24.1x

10.5x
10.3x

9.6x 9.8x

7.0x
6.9x
6.9x
17.5x
6.9x
16.0x 16.5x 9.2x
6.6x
15.0x

Dunkin Donuts HC A Holdings Nielsen

Comparables 2012 Price / Earnings Comparables 2011 EV / EBITDA Comparables 2011 EV / EBITDA

Peet's C offee & Tea Inc. 33.5x Universal Health Services Inc. 7.8x Solera Holdings Inc. 13.9x
Starbucks C orporation 28.7x HMA Inc. 7.3x IHS Inc. 13.8x
The Wendy's C ompany 23.5x C ommunity Health Systems, Inc. 6.9x MSC I Inc. 13.5x
Krispy Kreme Doughnuts, Inc. 22.2x Tenet Healthcare C orp. 6.5x Verisk Analytics, Inc. 12.2x
Sonic C orp. 21.8x Lifepoint Hospitals Inc. 6.5x Thomson Reuters C orporation 10.4x
Tim Hortons Inc. 17.9x Experian plc 10.2x
McDonald's C orp. 17.1x Median 6.9x Reed Elsevier plc 9.0x
Yum! Brands, Inc. 16.8x Average 7.0x Equifax Inc. 8.4x
Domino's Pizza, Inc. 14.9x Alliance Data Systems C orporation 8.0x
AFC Enterprises Inc. 13.9x Acxiom C orporation 6.1x
Papa John's International Inc. 13.3x
Jack in the Box Inc. 13.3x Median 10.3x
Average 10.6x
Median 17.5x
Average 19.7x


IPO Valuation Methodologies
Valuation Ranges
Valuation Summary
($ in Millions)
Implied Enterprise Value $400 $450 $500 $550 $600 $650 $700 $750 $800
Net Debt $220 $220 $220 $220 $220 $220 $220 $220 $220
Equity Value $180 $230 $280 $330 $380 $430 $480 $530 $580

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 C ash Flow Analysis

Sum-of-the-Parts Analysis

Implied 2012E EV / Revenue Multiple ($180.0 mm) 2.2x 2.5x 2.8x 3.1x 3.3x 3.6x 3.9x 4.2x 4.4x

Implied 2012E EV / EBITDA Multiple ($75.0 mm) 5.3x 6.0x 6.7x 7.3x 8.0x 8.7x 9.3x 10.0x 10.7x

Implied 2012E P / E Multiple ($30.0 mm) 6.0x 7.7x 9.3x 11.0x 12.7x 14.3x 16.0x 17.7x 19.3x


Financial Adjustments – What Do
Investors Accept?
Examples
 Add back on-going Swap
Amortization
Amortization
 Add back Customer Intangible
Amortization

Non-controlling  Add back of net income attributable
Often companies Interests to non-controlling interests in
adjust financials hospital joint ventures

with certain add-
backs accepted by
the investor  Add back of M&A cost amortization
community M&A Costs

Stock-based
 Add back Stock-based
Compensation Compensation to derive Adj.
EBITDA and “cash earnings”


IPO Process Overview
The IPO Process Begins Well Before The Bake-Off

Initial Phase: Phase 1: Phase 2:
S-1 and Preparation of Initial SEC Review Period
Pre bake-off stage
Marketing Materials
12-24 mos. prior to selecting bankers 4 – 6 Weeks 30 Day Review Period

 Governance / BOD & Committees  Select banks  Roadshow preparation and practice
 Foster analyst relationships  Organizational meeting  Receive SEC comments
 Broaden banker relationships  Due diligence (banker & analyst)
 Private company forums &  Respond to comments
conferences  Draft S-1
 Bolster capital base  Draft Management Presentation  File amended S-1

Phase 3: Phase 4:
File Add’l Amendments and Roadshow and Pricing
Finalize S-1
2 Week Roadshow
Subject to SEC Review
 Research analyst teach-ins to sales
 File amended S-1 forces
 Management presentations to sales
 Add valuation range to S-1
forces
 Finalize roadshow presentation  Management presentations:
 1 x 1 meetings
 Conduct management “dry runs”
 Group lunches
 Print preliminary prospectus  Price IPO


Thoughtful Investor Targeting Drives
Success
Targeting Targeted Investor Community

Identify Strong Institutional Investors – Anchor Orders
Top Holders of Top Buyers of
Primary Peers Primary Peers
Plan Roadshow Around Top Investor Locations
Retail

Target Mid-Market Buyers – “the next 100 investors”
Top Holders of Top Buyers of
Secondary Peers Secondary Peers
Include Retail Demand – “sticky/price insensitive”

Where Are the Investors?
$4,935,650
$5,000,000
Assets Under Management ($MM)

$4,000,000

$3,375,551
$3,180,881
$3,000,000 $2,778,225

$2,362,344
$2,002,155
$2,000,000

$1,294,652
$951,690
$1,000,000

$-
London/Paris/ New York West Coast Boston Mid-Atlantic/ Midwest Asia Pacific Canada/
Frankfurt/Milan Southeast Americas


The Roadshow Schedule
The Overall Marketing Plan A Day on the Road
7:30am Prep w/ underwriters
Start with presentation to salesforces 8:00am 1x1 meeting
9:15am 1x1 meeting
Roughly 50-60 1x1 meetings and 3-4 group lunches 10:30am 1x1 meeting
12:00pm Group lunch
1:45pm 1x1 meeting
Maximize demand by targeting key cities
3:00pm 1x1 meeting
4:15pm 1x1 meeting
6:00pm Private dinner

Milwaukee
London
Minneapolis Boston

San Francisco Chicago New York
Paris
Denver Frankfurt
Baltimore
Milan
Los Angeles Kansas City
San Diego

Texas


10 Overriding Themes for IPO Process
 Recognize up front the time commitment of the IPO process and plan accordingly (personnel, other commitments,
1
etc.)

 Management credibility is THE key variable (historical performance, achievable business plan)
2

3  Must convey differentiated strategy relative to comps

4
 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)

5  Keep it simple (projections must show logical growth, don’t over-optimize – complexity discount)

6
 Do not put out projections you cannot achieve (gear back “stretch targets” by 20%)

7
 Research analysts/sales force/investors must be carefully guided

 Do not file unless you would buy the stock yourself
8

 Valuation walk: file realistic valuation; build a strong book; price at the high end/above range; exercise the green
9
shoe

10
 Convey roadshow story in 30 slides/30 minutes


Thank You



Executing a Successful IPO: PwC's Perspective
Michael Poirier, Transaction Services Partner
PwC

Overview

• 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

17 © 2011 Proformative. Proprietary and confidential

Taking control of your IPO process
IPO effective

Pre-effective time Post-effective

Phase 1 Phase 2 Phase 3

“Going Public”
Initial planning • Execution of the registration
and process
preparation

Readiness “Being Public”
assessment • Changing the organization to enable it to operate as a
public company

An IPO is a long journey – being prepared is key to maximizing value.
Not being ready can lead to massive value leakage.


Foundations for success in the
IPO process

Accounting, Treasury
Corporate
reporting, Media &
strategy Governance
& Internal & financial Human
& & Tax Legal
finance controls Investor risk resources
develop- leadership
effective- relations manage-
ment
ness ment

Technology

Project management, change management, and communications

A comprehensive IPO Readiness Assessment requires a thorough evaluation of all areas of the company.


Illustrative high-level IPO project plan
Initial
filing Effective
Pre Filing date Post Filing
date

Evaluate and resolve complex accounting issues and SEC reporting issues Review SEC Comments Perform Road
.
Prepare financial statements and other S-1 information with auditor reviews and revise S-1 Show
1. Accounting,
Prepare 10-Q in 40 days and 10-K in
Reporting, Accelerate financial close and reporting timelines. Enhance policies and procedures to support accelerated timeline and 75 days. Continue to enhance
& Finance .
Certifications. Enhance management reporting including budgeting and forecasting And procedures, budgeting and
Effectiveness .
forecasting
Assess acct /finance Recruit additional finance talent and improve departments
gaps and needs
Remediate required governance requirements , including: Continue to remediate governance
2. Governance & Assess corporate * Board/Audit Committee (independence) gaps requirements. Perform incremental
Leadership governance gaps * Internal Audit Function compliance and transparency
* Governance Guidelines enhancements

Perform financial Create Sarbanes 404/302 compliance plan Begin execution of Sarbanes 404 readiness
3. Internal Controls statement risk Execute Sarbanes Oxley 404
-
assessment Determine sustainable plan for maintaining effective internal control Readiness and 302 certification

4. Media & Investor Establish process for earnings releases and earning calls Perform incremental improvements/
Assess media investor
Relations Relations needs Remediate personnel and process gaps pre filing (in conjunction with reporting needs) enhancements

5. Treasury & Risk Perform incremental improvements/
Assess treasury needs Remediate personnel and process gaps pre -filing enhancements
Management

Create appropriate legal entity structure. Obtain required regulatory approvals
.
6. Legal Assess legal needs Operate under new legal guidelines
Retain securities counsel. Retain underwriters
.

Create appropriate tax structure and strategy for public company Execute tax strategic plan and
7. Tax Assess tax needs
Support recruiting and reorganization efforts or workstreams throughout the organization prefiling
- enhancements

Assess HR and benefit Create appropriate compensation, benefit plans and agreements for public company
. Ensure adequate resources and
8. Human Resources needs administer new plans
Remediate personnel and process gaps pre -filing

9. Information Modify or enhance technology capabilities to support financial reporting requirements and to support Perform incremental improvements/
Assess IT needs
Technology effort to workstreams throughout the organization enhancements

10. Project Establish project
governance structures Define and develop project management capabilities. Note: These capabilities may need to be
Manage the post filing activities
Management and processes developed in parallel with the actual projects to meet Day One.
OTHER


Preparing for the accounting and financial
reporting requirements of the S-1

• Public company GAAP and • Additional audited financial
disclosures vs. private company statements for “significant” acquired
requirements (segments, EPS, etc.) companies prior to date of acquisition
• 3 years of audited financial information • Additional financial information for
guarantees and collateral
• 2 additional years of selected financial
data (may be unaudited) • Tax, legal and financial reporting
implications of reorganizations and
• Interim financial statements
structures in advance of an IPO
(comparative), and additional interim
data may be required later in the • Non-GAAP measures
process
• Cheap stock
• Predecessor/successor financial
• Segments
statements (change in control)
• EPS
• Pro forma financial information
• Financial information in MD&A
• Capitalization and dilution financial
information


Internal Control Considerations

The periodic report states
that financial information Disclosure made to the
complies with the public on a “rapid and
current basis” of material
Exchange Act and fairly changes to financial
presents the financial Section
condition or results of
condition and results of the 409 operations
Section 906
operations

Various representations by Section Section Perform annual
certifying officers, similar to 302 404 assessment of the
Section 906 plus additional effectiveness of internal
representations related to controls over financial
disclosure controls and reporting and obtain
procedures, internal attestation from external
controls, and fraud auditors


Sample CFO Responsibilities: Post-IPO

CFO

Taxation Internal Audit Treasury International Investor
Controller FP&A
Director / SOX Director Director Operations Relations

General Revenue
Team Team Team Team
Ledger / AR

SEC
Purchasing
Reporting
/ AP
Director


Keys to Success

• Start with strong IPO leadership • Build a finance organization that
can meet the needs of a public
• Support the effort with effective company
project management
• Use a multidisciplinary approach
• Perform a thorough IPO Readiness
Assessment in advance to: • Strike the right balance between
internal and external resources
• Identify critical-path issues
• Establish a realistic timeline • Don’t try to do too much at once
and plan that prioritizes tasks
• Set the IPO structure early
and stages key work streams
• Consider all the options including
• Establish parallel Going Public and
dual track IPOs
Being Public work streams


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.

Being prepared is key to maximizing value.
Not being ready can lead to massive value leakage.



The Legal Ins and Outs of the IPO
Paul Broude, Partner, Foley & Lardner LLP

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


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


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”


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


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


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


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


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


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


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


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


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


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



• Engage an independent valuation firm
• Perform contemporaneous valuations on a
quarterly basis
• Establish a pattern of quarterly option grants
using valuations



• 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


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


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


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



Short Duration Investment Strategy &
Guideline Development
Michael P. Rodgers
Managing Director, Institutional Fixed Income,
Wells Capital Management

Investment Solutions for IPO Proceeds

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


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


Understanding Your Organization
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

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


Investment Objectives

Investment Objectives for Corporate Cash are always the same:
• Preservation of Principal (primary)
• Providing Liquidity (secondary)
• Maximizing Return (tertiary)


Maturity Risk-Return
1994-2010 Rolling 12-Month Returns At Each Quarter-End
6.00%
Merrill Lynch 1-10 Year Treasury Index
Greater duration is typically accompanied by
higher expected return and higher volatility
5.50%
Average Rolling 12-Month Return

5.00%

4.50%

Merrill Lynch 1 Year Treasury Index

4.00% Merrill Lynch 6-Month T-Bill Index

3.50%
0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00%

Source: Merrill Lynch and Bloomberg Standard Deviation


Maturity Constraints
2 Years* 3 Years* 5 Years* 5 Years* 7 Years*

Maximum
3.1-Years
36
Portfolio Effective Average Maturity (Months)

30 Maximum
2.25-Years
Maximum
2-Years
24 Maximum
1.75-Years

18
Minimum
18-Months
Maximum
1-Year Minimum
12
15-Months
Minimum
12-Months

6
Minimum
6-Months
Minimum
3-Months
0
6-Month 1-Year 1-2 Year 1-3 Year 1-5 Year
Benchmark Benchmark Benchmark Benchmark Benchmark
(after-tax objective)
*Maximum individual maturity


Table of Short Duration Returns: A Case
For Diversification
Annual Returns for Key Sector Indices – Taxable Equivalent
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

1 U.S. Mortgages U.S. Municipals Municipals Municipals Municipals Municipals U.S. Mortgages
Corporates, 0-3 Years Corporates, 1-3 Years 1-3 Years 1-3 Years 1-3 Years 1-3 Years Corporates, 0-3 Years
1-3 Years WAL 1-3 Years 3.41% 3.79% 5.81% 7.45% 7.93% 1-3 Years WAL
9.59% 7.50% 5.33% 14.69% 5.42%

2 Municipals Municipals Municipals Mortgages Asset Asset U.S. U.S. Asset U.S.
1-3 Years 1-3 Years 1-3 Years 0-3 Years Backed Backed Treasuries, Agencies, Backed Corporates,
8.87% 7.40% 4.28% WAL Securities, Securities, 1-3 Years 1-3 Years Securities, 1-3 Years
2.80% 0-3 Years 0-3 Years 7.32% 7.05% 0-3 Years 4.86%
2.60% 4.73% 13.80%

3 U.S. U.S. Asset Asset Mortgages U.S. Mortgages U.S. Municipals Municipals
Agencies, Corporates, Backed Backed 0-3 Years Corporates, 0-3 Years Treasuries, 1-3 Years 1-3 Years
1-3 Years 1-3 Years Securities, Securities, WAL 1-3 Years WAL 1-3 Years 6.77% 3.53%
8.64% 6.53% 0-3 Years 0-3 Years 2.15% 4.71% 6.95% 6.61%
2.74% 2.16%

4 U.S. U.S. U.S. U.S. U.S. Mortgages U.S. Mortgages Mortgages Asset
Treasuries, Agencies, Agencies, Corporates, Corporates, 0-3 Years Agencies, 0-3 Years 0-3 Years Backed
1-3 Years 1-3 Years 1-3 Years 1-3 Years 1-3 Years WAL 1-3 Years WAL WAL Securities,
8.30% 6.11% 2.18% 1.82% 1.89% 4.64% 6.74% 5.27% 5.98% 0-3 Years
3.35%

5 Asset Asset U.S. U.S. U.S. U.S. U.S. Asset U.S. U.S.
Backed Backed Treasuries, Agencies, Agencies, Agencies, Corporates, Backed Agencies, Treasuries,
Securities, Securities, 1-3 Years 1-3 Years 1-3 Years 1-3 Years 1-3 Years Securities, 1-3 Years 1-3 Years
0-3 Years 0-3 Years 1.90% 1.18% 1.77% 4.52% 5.67% 0-3 Years 2.17% 2.35%
8.16% 5.95% -1.22%

6 Mortgages U.S. Mortgages U.S. U.S. U.S. Asset U.S. U.S. U.S.
0-3 Years Treasuries, 0-3 Years Treasuries, Treasuries, Treasuries, Backed Corporates, Treasuries, Agencies,
WAL 1-3 Years WAL 1-3 Years 1-3 Years 1-3 Years Securities, 1-3 Years 1-3 Years 1-3 Years
7.79% 5.76% 1.83% 0.91% 1.67% 3.96% 0-3 Years -2.68% 0.79% 2.32%
4.84%

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.


Performance Benchmark

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


Standard and Poor’s Ratings

The Link Between Short-Term and Long-Term Ratings
Taxable Ratings

AAA
AA+
AA A-1+
AA-
A+ A-1
A
A-
BBB+ A-2
BBB
BBB- A-3
BB+
BB B
BB-

Source: Standard & Poor’s


Credit Quality – Standard & Poor’s
Long-Term Ratings Short-Term Taxable Ratings
Rating Definition Rating Definition
AAA Highest rating; extremely strong A-1+ Highest degree of safety.
capacity to pay interest and repay
principal. A-1 Strong degree of safety.
AA Very strong capacity; differs from A-2 Satisfactory degree of safety.
AAA in only a small degree. A-3 Adequate degree of safety.
A Strong capacity but more
susceptible to adverse economic
effects than higher-rated Short-Term Municipal Ratings
categories.
BBB Adequate capacity, but adverse Rating Definition
economic conditions more likely to
weaken capacity. SP-1 Very strong capacity to pay
BB Lowest degree of speculation; risk principal and interest; those
exposure. issues determined to possess
B Speculative; risk exposure. over-whelming safety
characteristics will be given a
CCC Vulnerable to nonpayment; plus (+) designation.
Speculative; major risk exposure.
CC Highly vulnerable to nonpayment; SP-2 Satisfactory capacity to pay
Speculative. principal and interest.
C Highly vulnerable to nonpayment, SP-3 Speculative capacity to pay
but currently paying interest. principal and interest.
D Bonds in default with interest and/or
The ratings from “AA” to “B” may be modified by the addition of a plus or
repayment of principal in arrears.
minus sign to show relative standings within the major rating categories.


Investment Policy Statement
Investment Objectives
• Preservation of principal
• High degree of liquidity
• Maximum Book Return
Acceptable Investments (U.S. Dollar-Denominated Only)1,2
•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

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).
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.


Panel Discussion and Q&A


We will send you a follow-up survey and would
appreciate your feedback.

Please join us at www.proformative.com to ask any
additional questions you may have and to continue
this conversation with your peers and the experts
you heard from today.
Proformative Contact
John Kogan
CEO
jkogan@proformative.com


IPO for Finance Executives: Learning from Experts

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