Financial World

1. Financial Framework

2. Execution of Capital Structure Plan

3. Funding Start Ups

Financial Framework

1. Financial Institutions

2. Regulatory Framework

3. Profile of Investment Bank

Financial Institutions1. Commercial Banks

2. Investment Banks

3. Private Equity Firms

4. Institutional Investors• Mutual Funds• Insurance Companies• Units of Banks• Pension Funds

5. Credit Agencies

6. Financial Relations Firms

Large Investment Banks• Credit Suisse First Boston• Solomon Smith Barney• Goldman Sachs• Morgan Stanley• Bank of America• JP Morgan Chase• Deutsche Bank• Merrill Lynch• Lehman Brothers• UBS Warburg

Regulatory Framework

1. Securities and Exchange Commission

2. Federal Reserve

3. Treasury Department

4. Federal Trade Commission

5. Financial Accounting Standards Board

Profile of Investment Bank Senior Management Specific Industry Groups

• Corporate Finance—US/Europe/Asia• Mergers and Acquisitions

Leveraged Finance Senior Debt Capital Markets Public Debt Capital Markets

• High Yield• Investment Grade

Equity Capital Markets Specific Industry

• Equity Research• Debt Research

Rating Advisory Group

Capital Structure Plan

1. Selection of Investment Bank

2. Acquisition

3. Funding of Acquisition

4. Refinancing of Debt

5. Toward Future Equity Financing

Capital Structure PlanSelection of Investment Bank

1. Initial Group Selected for Interview

2. Investment Bank Presentation/Interview

3. Criteria for Selection

4. Engagement Letter

Capital Structure PlanInvestment Bank Presentation

1. Investment Bank Attendees2. Presentation – Why They Are Best

Suited• Organization• Rankings/Awards• Experience in Industry – Situational Analysis• Analysis of Company• Mergers – Acquisition Expertise• Financing Alternatives

• Overview• Recommendation

3. Company Attendees

Capital Structure PlanCriteria For Selection

1. Chemistry2. Knowledge of Company and its Markets3. Well Thought Out Strategy4. Specific Deals within Industry5. Global Strength6. Statistics

• # Transactions – Debt/M & A• Total Underwriting – Global Equity/Debt Issues• Ranking of Research Analysts

7. Commercial Bank In House8. Strength/Reach of Sales Force9. Cost

AcquisitionSteps

1. Initial Contact2. Preliminary Information3. Letter of Intent4. Hart-Scott-Rodino Filing5. Due Diligence6. Subsequent Negotiations7. Finalize Deal Structure/Purchase Agreement8. Develop Organization Structure

• Legal• Operational

9. Develop/Execute Strategic Plan10. Develop/Execute Integration Plan11. Public Announcements/SEC Filings12. Other Government Filings13. Communicate/Communicate/Communicate14. Evaluation of Process

AcquisitionDue Diligence

1. Corporate/Legal/Compliance2. Financial

• Historical/Projected Statement• Testing of Accounts/Physical Assets• Financial Commitments• Sales/Customer Data

3. Contractual Arrangements4. Organization/Personnel5. Employee Benefits6. Environmental Issues7. Taxes8. Systems/Procedures9. Acquisition Data Base

AcquisitionImportance of Due Diligence

1. Adjustments to Purchase Price

2. Discovery of Unstated Liabilities

3. Discovery of Compliance Issues

4. Confirmation of Financial Statements

5. Assists in Establishing Representations and Warranties

6. Helpful in Evaluation of Personnel

7. Establish Responsibility for Employee Benefits

8. Essential for Integration Plan

9. Essential for Establishing Legal/Organizational Structure

10. Essential for Determining Synergies

11. Financial Data Needed for Financing Documents/Statements

AcquisitionDeal Structure/Purchase Agreements

1. Representations and Warranties

2. Purchase Price

3. Identification of Business/Assets in Deal

4. Liabilities/Responsibilities

5. Resolution of Contested Matters – Remedies

AcquisitionIntegration Plan

1. Communicate/Communicate/Communicate

2. Act Quickly

3. Establish Integrated Team Prior Completion of Acquisition

4. Establish New Operating Organization Prior to Acquisition Completion

5. Clearly Define Synergy Opportunities and Establish Detail Plans

6. Establish Detailed Timetable of Events/Responsibilities

7. All Necessary Filings Ready to go at Closing

8. Insurance, Benefits and Other Programs in Place at Closing

9. Establish System for Timely/Accurate Financial Reporting

10. DON’T DISRUPT CUSTOMERS!!

AcquisitionInvestment Bank

1. Lead Negotiator – Buffer

2. Aids in Due Diligence and Interviews

3. Migrates Due Diligence Data to Offering Memorandum

4. Helps Arrange Schedule of Interaction Between Buyer and Seller

5. Recommends Purchase Price

6. Helps Frame Deal Structure

Funding of AcquisitionOverview of Process

1. Commitment Letter/Terms/Fees

2. Preparation of Credit Facility

3. Preparation of Offering Memorandum

4. Preparation of Presentation to Credit Agencies

5. Meetings with Credit Agencies

6. Meetings with Core Banks

7. Negotiations with Core Banks—Bank Commitments

8. Meeting with Banks/Institutional Investors

9. Syndication Process

10. Finalize Credit Facility

Funding of AcquisitionInitial Documents

1. Commitment Letter• Lead Arranger/Syndication Agent• Underwrite Credit Facility• Various Terms/Conditions of Process

2. Summary of Terms and Conditions• Credit Facility• Guarantors• Security—Conditions of Fall Off (Credit Rating)• Maturity/Amortization• Affirmative Covenants• Negative Covenants (Maintenance Covenants)• Use of Proceeds

3. Fee Letter• Fee• Fee Sharing

Funding of AcquisitionSummary of Debt

1. Revolving Credit Facility (Banks)• Multiple Currency

• Swing Line Facility for Short Term Borrowing

• Letters of Credit

2. Term Loans• Dollar Term A – Five Year Maturity (Banks)

• Euro Term A – Five Year Maturity (Banks)

• Term Loan B – Seven Year Maturity (Institutional Investors)

3. Interest Rates• LIBOR + (50 bps higher for Term Loan B)

• Decreases as Leverage Ratio Decreases

Funding of AcquisitionFinancial Maintenance Covenants

1. Interest Coverage

2. Fixed Charge Coverage

3. Leverage Ratio

4. Net Worth

Funding of AcquisitionKey Components of Offering Memorandum

1. Summary – Business/Terms

2. Risk Factors

3. Capitalization

4. Management’s Discussion and Analysis of Operating Results/Financial Condition

5. Business in Detail

6. Description of the Notes

7. Exchange Offer/Registration Rights

8. Financial Statements

Funding of AcquisitionCredit Agencies

• Agencies• Moody’s• Standard & Poors• Fitch

• Issuer Rating• Moody’s – B1• Standard & Poors – BB –• Outlook – Positive

• Importance of Rating• Impact on Execution and Price• Security Fallaway Provision• Equity Crossover

Funding of AcquisitionCredit Agencies

Key Drivers of Credit Ratings

1. Size – Assets/Sales/Market Capitalization

2. Leverage Ratio – Total Debt/EBITDA

3. Coverage Ratio – EBITDA/Interest

4. Profitability• Free Cash Flow

• Operating Cash Flow

• Return on Assets

5. Stability• Company

• Industry

Funding of AcquisitionKey Factors – Moody’s

1. Positive• Global Leader in Industry• Purchasing Leverage• Diversified Product Mix• Potential Synergies/Cost Savings• Fortune 500 Customer Base• Geographic Diversity• Cost Efficient Operations• Moderate Balance Sheet

2. Negative• Integration Challenges• Moderate Leverage• Challenges of Operating with Leverage• Future Acquisitions

Funding of AcquisitionFactors for Credit Upgrade

1. Successful Completion of Integration

2. Management’s Ability and Willingness to De-leverage

3. Competitive Activity

4. Strength and Experience of Management Team

5. Financial Performance/Balance Sheet

6. Execute Growth Strategy without Impairing Credit Profile

7. Rating Agencies’ View of the Industry

Refinancing of DebtOverview of Process

Activity Time Required

Offering Memorandum 3 – 4 Weeks

Description of Debt 2 – 3 Weeks

Due Diligence (Business and Legal) 1 – 2 Weeks

Sales Force Presentation 1 Week

Road Show Presentation 1 – 2 Weeks

Rating Agency Presentation 1 – 2 Weeks

Rating Agency Meeting 1 Day

Road Show 1 – 2 Weeks

Pricing/Closing

Completion – 8 to 12 Weeks

Refinancing of DebtBenefits from issuing Public Debt

1. Operating/Financial Flexibility

2. Less Scheduled Debt Amortization

3. Amend Credit Facility for more Operating Flexibility

4. Creates Loan Capacity for Future Strategic Initiatives

5. Ability to Raise Capital Quickly and Easily

6. Broaden Investor Base (Debt and Equity)

7. Potential Benefit on Future Equity Value

8. Debt Research Coverage

9. Positive Future Ramifications on Credit Rating

Refinancing of DebtMarket Conditions

1. Technical Factors• Cash Positions of Investors

• Default Rates

• Anticipation – Economic Cycle

2. Favorable Outlook• Manageable Supply

• Investors Looking for Yield

• Benign Interest Rate Environment

3. Assessment of Future Risks• Rising Interest Rates

• New Supply

4. Interest in Higher Rated, Higher Quality Deals

5. Federal Fund Rate

6. Performance of Industry to General Market

Refinancing of DebtSenior Subordinated Notes

1. Size

2. Maturity – Ten Years

3. Call Protection – Non Call 5 Years/Declining Premium Thereafter

4. Use of Proceeds – Repay Senior Secured Debt

5. Security – None

6. Mandatory Redemption – None

7. Change of Control – Investor Put at 101%

8. Equity Claw back – 35% at Par Plus Coupon

9. Covenants – Standard High Yield Incurrence Based Covenants with Limitations

10. Distribution – Rule 144A with Registration Rights

11. Indicative Coupon – 8.250% to 8.500%

12. Covenants Fall Away If Investment Grade Rating Attained

Refinancing of DebtIncurred Base Covenants

1. Additional Indebtedness

2. Restricted Payments

3. Liens

4. Asset Sales

5. Subsidiary Incumbrances

6. Transactions with Affiliates

7. Mergers and Consolidation

Refinancing of DebtAmendments to Existing Credit Agreement

1. Interest

2. Limitation on Indebtedness

3. Fixed Charge Coverage Ratio

4. Total Leverage Ratio

5. Loans and Investments

Toward Future Equity Financing1. Refinancing of Debt

2. Successful Integration

3. Financial Performance

4. External Communication Program

5. Financial Coverage

6. Proper Stock Exchange

Stock ExchangeNYSE vs NASDAQ

NYSE NASDAQ

Market Structure Order Driven Quote Driven

Central Order Flow Dealers

Specialists vs Dealers Long Term Relationship Discretionary

Obligated to Commit Capital No Obligation

Evaluated No Evaluation

Short Sale Governance Little Governance

Market Open Single Opening Price No Single Opening Price

Stock ExchangeMeasurements for Efficiency

1. Price Continuity – Price Change From Trade to Trade

2. Market Depth – Price Change Over 3K, 5K and 10K Trading Sequences

3. Volatility – Average of (Daily High – Daily Low)/Daily High

Stock ExchangeMarket QualityTransfer From NASDAQ to NYSE

Pre Listing Post Listing

1. Price Continuity $0.05 $0.03

2. Volatility 4.6% 3.2%

3. Market Depth

• 3,000 Share Sequences $0.11 $0.08

• 5,000 Share Sequences $0.13 $0.10

• 10,000 Share Sequences $0.17 $0.15

Stock ExchangeTrading Costs

1. SEC Research concludes that NYSE has the lowest Execution Costs.

2. Plexus Group Study concludes that on an average, Institutional Trading Costs are 34% lower on the NYSE

3. Institutional Investor States NYSE has lowest cost Trading Venue in US and one of the lowest in the World

Funding Start UpsEarly Stage

1. Activities• Proof of Principle/Concept

• Identify Market

• Initial Business Plan

• Begin Product Development

• Filing Patent

• Meet with Investors

2. Funded By• Family & Friends

• State/Federal Grants

• Angels

Funding Start UpsMidcourse

1. Activities• Continue Product Development

• CEO/Management

• Substantive Business Plan

• Seek Strategic Partner

• Regulatory Filing if Required

• Meet With Investors

• Administrative Systems in Place

2. Funded By• Angels

• State/Federal Funds

• Venture Capital

• Strategic Partner

• Private Equity

Funding Start UpsTo Market

1. Activities• Complete Organization Staffing

• Space for Business

• Initiate Market/Sales Plan

2. Funding• Venture Capital

• Strategic Partner

• Private Equity

• Specialized Bank

Funding Start UpsExit

• Initial Public Offering

• Strategic Partner

• Acquired by Third Party