HOW TO USE REVERSE MERGER TO RAISE CPAITAL

Joseph Xiong J & A Advisory Group Managing Director

AGENDA
OVERVIEW ON REVERSE MERGERS
KEY FACTORS FOR A SUCCESSFUL REVERSE
MERGER

ALTERNATIVE FUNDING SOURCES FOR

REVERSE MERGER (PIPE, 144A,REG S)

J & A ADVISROY GROUP OVERVIEW

PART I OVERVIEW ON REVERSE MERGERS

What is Reverse Merger?

Reverse merger is an alternative method for small and medium size
In a reverse merger, a private company acquires a public entity by
owning the majority shares of the public entity (usually 90% or more) private companies to become public without going through the long and complicated process of traditional Initial Public Offering (IPO)

At the close of merger, the private company takes on corporate

structure of the public entity with its own company name, assets, officers, directors, management team and becomes public

The Process
Step One:
Finding a suitable shell and making sure it is clean A public shell could be either a public traded reporting company or a non-trading public reporting company (A Blank Check Company) A public shell usually has no operation or business activities and has no remaining employees and management team Shells that have no significant assets can be purchased for prices generally ranging from $200,000 to over $400,000 USD

The Process
Step Two:
Seeking experienced law firm Seeking reputable auditing firm The investors of private company buy an overwhelming majority of the shell shares for a nominal amount and/or the shell shareholders vote to authorize the issuance of a new large and highly diluted block of shares

The Process
Step Three:
The large block of shell company shares that is now controlled by the private company investors are swapped for the private company, thereby acquiring it. The shell company now owns the assets and ongoing business of the private company, including its name, officers, directors and management team.

The Process

Private Company ABC

Public Shell XYZ

Post-Merge (Public) ABC

Advantages Of Being Public Traded Company

Increase liquidity of the ownership shares of the company
Higher share price and thus higher company valuation Greater access to the capital markets through future stock offering The ability to make acquisitions using the companys public stocks The ability to use stock incentive plans to attract talents and to
retain key employees

Going public can be part of a retirement strategy for owners

Advantages Of Going Public By Means Of Reverse Merger

The costs are significantly less than the costs required for traditional IPO (Average $500,000 VS Over 1 million) The time required is considerably less than for an IPO (Average 4-6 months VS Average 12-18 months) An IPO may be withdrawn due to an unstable market condition even after most of the up-front costs have been expended The lack of an earning history does not normally keep a privately held company from completing a reverse merger The company does not require an underwriter

Disadvantages Of Bing A Public Company

Higher visibility: A public company is essentially under a microscope. There is little
confidentiality. All material transactions and contracts become public information. compliance with the SEC rules and regulations and investor relations activities substantially increase the cost of doing business.

The ongoing public reporting requirements, need for audited financial statements,

Public companies have long been accused of having a short term business focus.

Management often is consumed with the daily price of the companies and manage the business in response. a tremendous amount of management's time and energy.

The public reporting process and the need to maintain interest in the company takes

Increased liability. In 2002 there were 259 securities class action lawsuits and in 2003
there were 211. The average settlement in 2001 and 2002 was $16.6 and $24.3 million respectively.

Skepticism About Reverse Merger

No capital infusion after completion of reverse merger
Capital markets closed, no institutional following to raise
stock price

Private placements difficult due to low public valuation Low liquidity stock ends up trading OTC or on the pink
sheets

PART II KEY FACTORS FOR A SUCCEFFUFL REVERSE MERGER

Assemble A High Quality Team

Highly Qualified Financial Advisors
Registered And Experienced Auditing Firm Experienced And Reputable Law Firm

Pre-Merger Planning
Private Company Preparation
Cleaning up corporate structure Setting up corporate governance Prepare financial statement Independent Board of Director Independent Auditing Committee Good management team which includes English speaking CFOs and CEOs Attractive business plan with ability to execute it

Post-Merger Planning
Develop and implement a strategy that creates liquidity for the shares,
raises capital, and provides long term value and market support for the firm that trade small/micro cap market

Elements of the strategy includes identifying market makers and brokers

Develop relationships with managers and institutional investors of small cap

investment fund that creates infusion of capital

A financial communication program that develops awareness and attention

of the company and thus creates long term value and market support
Road shows Independent Research Public Relationship

ALTERNATIVE FUNDING RESOURCES FOR REVERSE MERGER

PIPE, 144A, Regulate S

Private Placement Market

Number of private placements (PIPEs, 144a and Reg S)

has grown by over 38% annually since 1995 Between 2000-2003, over $210 billion raised through the private market
Only $80 billion raised through IPOs over past three years
Private Placement Transactions
1,800 1,600 1,400 1,200

Transactions

1,000 800 600 400 200 -

Reg S 144A All PIPES

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004 (YTD)

Source: Placem entTracker.com

PIPE Market
In early 1990s, PIPEs were primarily opportunistic financings for
small and/or distressed, high-growth companies
Often times structured as death-spiral or toxic transactions

After market collapse, confluence of factors has legitimized PIPE

market
Dearth of capital for prematurely public, but worthwhile companies
cap precluded ownership

Mutual fund restrictions on minimum share price, trading volume and market

Crossover VCs and private equity firms view select public companies as startups that went public too soon

More favorable terms, higher volume and diversification

Emergence of sub-$100 million small- and micro-cap hedge funds

In 2003, healthcare and technology/communications issuers accounted for

approximately 42% of proceeds raised, down from approximately 65% in 1998

PIPE Trends
PIPE transaction volume has grown by over 29%
since 1995
114 PIPEs for proceeds of $1.4 billion in 1995 881 PIPEs for proceeds of $11.6 billion in 2003
1,400 1,251 1,200 1,037 25 30

Number of PIPEs

1,000 881 800 687 15 600 457 400 306 253 200 5 114 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 (YTD) 440 10 767 20

Proceeds ($B)

Source: Placem entTracker.com

PIPE Trends
Average PIPE proceeds between $10-15 million
$25 $23 19.7 $20 $18 15.0 $15 14.2 13.4 12.1 $13 $10 $8 $5 $3 $1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 (YTD) 6.8 11.4 13.2 12.4 16.0

Average PIPE Proceeds

Source: Placem entTracker.com

$MM

Recent Trends
Chinese issuers are tapping U.S. investors through the
144a private placement of stock, a limited offering that allows large institutions to purchase shares -- and that circumvents the Securities and Exchange Commission and Sarbanes-Oxley altogether.

Since January 2003, 10 Chinese companies have

launched IPOs of $250 million or more solely in Hong Kong and nine of them also have sold shares to qualified U.S. institutional investors through 144a private placements.

Pricing Trends
Recent market recovery has created a more favorable environment
for issuers
Common stock at a discount prevalent structure vs. convertible preferred Typical discount has narrowed from 20-25% to 20-15%

Size of discount dependent on several factors, including:

Liquidity (average daily trading volume) Enterprise value Profitability Transaction size

PIPEs now accepted and even rewarded in the market

Larger private placement candidates six months ago now

considering secondary or follow-on offerings
PIPE market expected to remain robust for small-and micro-cap issuers

No longer the last resort financing option

J & A Advisory Group Inc.

Bringing The U.S. Capital Market To China

OVERVIEW
OUR MISSION:
Advising growing companies in China tapping into the financial and intellectual capital of the U.S.

OUR STRENGTH:
Human Resources Intellectual Resources Financial resources

Our Tools
Debt Underwriting IPO/Reverse Merger Project Finance M&A Merchant Banking PIPE/Private Placement

How Can We Help

Capital raising efforts for business expansion Providing clients with strategic partners to grow

sales Improving profit margin with cost management strategies Enhancing leadership among competitors with better technologies and management skills Providing equity holders with risk management strategies

How Do We Proceed
Phase I:
Listen and identify your challenges Evaluate the merit of challenges Get your commitment

Phase II:
Research for solution Propose solution Implement solution Track the outcome of the solution

Recent Transactions
Raising $20 million USD senior debt for a government

coastline extension project in China Advising a fast growing auto parts company in Shanghai on a $10 million USD reverse merger deal Initiating a business relationship between a German brand auto parts supplier in the U.S. with one of the exclusive auto parts distributors in China Structuring a M&A transaction between a China based cardboard manufacturer and a U.S. partner Initiating a LBO transaction for a U.S. public traded company in Shanghai, China

Contact Information
Joseph Xiong Managing Director J & A Advisory Group Inc. Phone: (917) 941.8003 Fax: (212) 256.4944 E-Mail: [email protected]