An Overview of the PIPEs Market with a Focus on Reverse Mergers

PIPES: THE NEXT BIG THING OR FOOL’S GOLD? An Overview of the PIPEs Market with a Focus on Reverse Mergers Disclaimer • This document is not intended as, and does not constitute an offer to sell or solicit any person to purchase securities. Any mention of securities named in this document is neither a recommendation nor a solicitation. Investment decisions should not be made based on information in this document, but client should rely exclusively on the offering material when considering whether to invest. • Investing in PIPE involve risks and subject to restriction that may increase the risk of investment loss. PIPE can be highly illiquid and no readily market. • This document is not intended as, and does not constitute an offer to sell or solicit any person to purchase securities. Any mention of securities named in this document is neither a recommendation nor a solicitation. Investment decisions should not be made based on information in this document, but client should rely exclusively on the offering material when considering whether to invest. • Past return is not indicative of future performance. 1 Table of Contents 1. 2. Introduction PIPEs: An Overview • Brief Definition and Description • Recent Market History Reverse Mergers / PIPE Financings • Overview of the Transaction Structure • Advantages and Disadvantages • Recent Market History • Success Factors Conclusions Appendices • Additional PIPE Market Statistics • Profiles of Recent Successful Reverse Mergers 3. 4. 5. 2 Introduction • PIPEs have become dominant financing strategy for small cap companies over the last five years • In general, PIPEs have delivered excellent returns, which have attracted new investors to the asset class • In order to keep up with the demand by investors, “new” public companies are being created through reverse-mergers • As in any emerging market, the opportunity for abuse exists; however, selectively, a reverse-merger in combination with a PIPE can be an effective alternative to an IPO or other financing strategy • Not surprisingly, high quality companies are key to high quality transactions and lead to more attractive returns for investors 3 PIPEs: An Overview 4 PIPEs: An Overview What is a PIPE? • Private Investment in Public Equity • An alternative source of financing for public companies (other than registered primary or secondary offerings) • An equity (or equity linked) security – – – – Common Convertible Preferred Convertible Debt Equity Line • Marketed to Accredited Investors under Regulation D – Traditionally hedge funds, but has broadened to include any private equity investor (VCs, Buyout Funds, individuals etc.) putting equity capital into a company • Traditional PIPEs vs. Structured (or “non-traditional”) 5 PIPEs: An Overview What Kinds of Companies Issue PIPEs? • Especially appropriate for small to mid-cap public companies • Created for sectors for which public demand fluctuates – Healthcare / Biotech – Technology • Market capitalizations generally less than $500 million – Median market cap is $40 million • Looking to raise: $5 to $50 million 6 PIPEs: An Overview Why a PIPE vs. an Underwritten Offering? • PIPEs can involve substantially shorter execution timetables • Marketing a PIPE deal can be a very streamlined process • PIPEs are sold to accredited (institutional and sophisticated individual) investors, who often tend to take longer-term views on the issuer • PIPE investor base continues to grow. Fewer institutional investors focused on small-cap new issues. 7 PIPEs: An Overview Disadvantages of PIPEs • Dilution: – PIPEs are often sold by issuers at a discount to the current market price (median discount for $5 - $50 million raised since 2001 is 12%) – Often entail issuing warrants as sweeteners • PIPEs can only be marketed to accredited investors, limiting distribution • Only up to 20% of outstanding shares can be issued without shareholder approval • Issuer faces potential shorting abuses from investors (though the SEC has taken a more aggressive stance against this practice) 8 PIPEs: An Overview Overview of the PIPEs Market • In 2004, 1,158 companies raised $14.8 billion through PIPEs, the most ever number of transactions and second only to 2000 in dollars invested. By comparison, in 1998, 197 companies raised $1.7 billion in the PIPEs market. Traditional PIPE Activity 1995 - 2005: Transactions & Volume 1400 1200 1000 860 810 650 854 1,158 $25 $20 Number of Financings Volume ($ in billions) 800 600 400 200 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 YTD $15 497 528 $10 145 79 195 197 $5 $0 Deals $ Volume Traditional PIPEs Include Common Stock, Common Stock - Shelf Sale and Convertible - Fixed (Source: Placement Tracker) • From 1995 to 1998, there were on average 154 PIPE placements per year, accounting for approximately $2 billion annually. • From 1999 to 2004, there were approximately 800 placements per year, accounting for approximately $13.8 billion annually. 9 PIPEs: An Overview Why Has The PIPE Market Grown So Substantially? • Traditional capital became more scarce: – The public markets became much less accessible to small-cap companies following the market correction in 2000. – Associated with this trend is the marked decrease in the number of middle-market focused investment banks willing and/or able to do smaller public underwritings. Public Equity Issues: $50 Million and Below Public Issues from 1995 - 2005: Transactions 1200 1000 800 600 400 200 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 YTD 741 979 Public Issues from 1995 - 2005: Dollar Volume ($ in billions) $25 $23.1 $19.7 $20 779 $17.7 $13.4 $10.6 $15 552 353 316 276 207 190 202 86 $10 $8.7 $7.3 $5.6 $6.3 $5.3 $2.5 $5 $0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 YTD (Source: SDC) • “Alternative” capital became much more abundant. The number and dollars allocated to private equity and hedge funds has substantially increased. – Hedge funds had approximately $1,036 billion under management at the end of 1Q05. – Private Equity (Buyout, VC and Mezzanine) funds have collectively raised approximately $426 billion since 2000. 10 PIPEs: An Overview Overview of the PIPEs Market • Since 1999, PIPEs have steadily become the dominant method small-cap companies use to raise equity. Traditional PIPEs as % of Total Small-Cap Equity Financing from 90% 75% 60% 58.5% 1995 - 2005: By # of Transactions 73.1% 79.6% 77.4% 80.9% 80.8% 86.0% So far in 2005, public companies raising $50 million or less went the PIPE route (instead of registered public offerings) 86% of the time (versus only 10% in 1995). 45% 30% 15% 0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 YTD 9.6% 12.9% 26.3% 20.0% Traditional PIPEs as % of Total Small-Cap Equity Financing from 1995 - 2005: By Dollar Volume 80% 70% 60% 50% 40% 30% 20% 10% 0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 YTD 12.2% 11.4% 5.7% 10.0% 45.8% 74.6% 70.7% 69.1% 66.5% 63.0% 79.5% (Sources: Placement Tracker and SDC) 11 Reverse Mergers / PIPE Financings 12 Reverse Mergers / PIPE Financings What is a Reverse Merger? • An alternative method for private companies to access the capital markets has become more popular in recent years. • The Reverse Merger PIPE decouples the IPO into its two component elements, 1) "going public" and 2) raising equity capital. • Has developed from a somewhat esoteric and sometimes maligned transaction, into a legitimate alternative to an IPO as a way to go public. • When done correctly, the reverse merger results in a well capitalized public entity with a supportive investor base. 13 Reverse Mergers / PIPE Financings Why the Renewed Popularity of Reverse Mergers? • Development and maturity of the PIPE market has created demand. Reverse mergers create new PIPE “product” to fill that demand. • The moribund IPO market of the past four years: Number of Reverse Merger PIPE Financings vs. IPOs 140 (1) Dollar Volume of Reverse Merger PIPE Financings vs. IPOs (In $Millions) $2,500 117 2067.6 $2,000 (1) 120 N umber of C ompanies 100 80 64 60 41 40 20 0 30 23 12 16 D ollar Volume $1,500 $1,000 634.6 $500 650.4 846.2 11 111.9 $0 121.1 205.8 207.7 2001 2002 Reverse Mergers 2003 IPOs 2004 2001 2002 2003 2004 Reverse Mergers IPOs 1. Deals smaller than $50 million 14 Reverse Mergers / PIPE Financings Why the Renewed Popularity of Reverse Mergers? (cont.) • PIPE terms and process can be more favorable than the Private Equity / VC alternative. – Due diligence and negotiation processes are much shorter – PIPEs generally do not entail operating covenants or governance provisions • Less middle-market-focused investment banking coverage • Reduced incentive for broker-dealers to make markets in small caps because spreads have gotten smaller. • Reverse Mergers have become more common vehicles for foreign companies to gain access to the US capital markets. 15 Reverse Mergers / PIPE Financings Mechanics of Reverse Merger Transaction 1. ABC: Standalone Private Company “ABC” Private Company 5 Stockholders • Private company with “real” operations (revenues, assets and liabilities) • No liquid market for stock • Seeks to be public in order to have: – greater access to capital – liquidity for stockholders – acquisition currency – more attractive employee stock compensation / incentive plan 16 Reverse Mergers / PIPE Financings 2. ABC Identifies a Shell Company “XYZ” Public Company 5,000 shares 300 Stockholders • A suitable shell company (“XYZ”): – Former operating company, but probably has no current operations (no revenues) – Few, if any, assets and liabilities – May or may not be reporting to the SEC – May or may not be listed on an exchange (Nasdaq, OTC:BB) – Controlled by one or a small number of stockholders • After thorough legal due diligence, ABC decides to move forward with XYZ 17 Reverse Mergers / PIPE Financings 3. Reverse Merger Transaction XYZ acquires 100% of ABC… “ABC” Private Company 100,000 shares of XYZ “XYZ” Public Company …in exchange for 100,000 shares of XYZ. 5,000 shares 5 Stockholders 300 Stockholders Reverse Merger Process • Technically, XYZ is the acquirer • XYZ distributes 100,000 shares to ABC • New XYZ shares distributed to ABC stockholders 18 Reverse Mergers / PIPE Financings 4. Consolidation Process 100,000 shares 95.2% 5 Stockholders “XYZ” Public Company 5,000 shares 4.8% 300 Stockholders “ABC” Subsidiary • ABC stockholders’ private company shares are cancelled • XYZ now owns ABC, but ABC stockholders own and control the combined entity 19 Reverse Mergers / PIPE Financings 5. ABC is Now Public 100,000 shares 95.2% 5 Stockholders “ABC” Public Company 5,000 shares 4.8% 300 Stockholders • ABC is merged into XYZ • The combined company changes its name to ABC (generally the case) • The company elects a new Board of Directors • Next steps: – Apply for listing, if XYZ was not already listed – Seek additional capital (PIPE or registered secondary offering) 20 Reverse Mergers / PIPE Financings Types of Shell Companies Type of Shell Listed and reporting company Advantages • Shorter time to completion • Riskier Disadvantages • More due diligence required • More expensive process Non-listed, nonreporting, true shell • Less risky • Less expensive process • Longer time to completion 21 Reverse Mergers / PIPE Financings Advantages of Reverse Mergers vs. IPOs • Generally less expensive than IPOs (at least the going public part). Usually cost several hundred thousand dollars. • Shorter timetable to public status (one to four months). • Less risky for the company (IPOs are often pulled or delayed due to market conditions beyond the company's control -- after significant expenses have been incurred). • Relative ease of execution compared an IPO – Less management time required – Less legal work required • No need to have a "sexy" story just go public. (However, it helps to attract ongoing investor attention and to attract subsequent financing.) • Not necessary to attract an underwriter (although placement agent commonly used). • Attract longer-term stable investors. No flippers. 22 Reverse Mergers / PIPE Financings Disadvantages of Reverse Mergers vs. IPOs • Risk of becoming an Orphan Stock. The company may end up as a public company with a low, undervalued price, little float, no research coverage, scant outside investor attention and restricted liquidity. • No underwriter role or "gatekeeper" that investors can rely upon. As a result, reverse mergers can create stocks susceptible to manipulation and "pump and dump" schemes. This has created a lingering stigma attached to certain reverse mergers. • Dilution to the company from the shell owners’ maintaining some ownership. • Shells may have some contingent or undisclosed liabilities. • Going public through a reverse merger does not guarantee the company access to new capital. • Reverse mergers may be subject to SEC scrutiny. (Technically, reverse mergers are not the intended way for companies to go public.) 23 Reverse Mergers / PIPE Financings Sanders Morris Harris Reverse Merger/PIPE Study • In order to evaluate the success of Reverse Merger/PIPEs, we looked at PIPE investments into shells from 2001 to November 2004 and tracked the stocks’ subsequent performance. • We identified 111 companies that have executed reverse mergers and, since 2001, executed 178 PIPE financings. • Median placement amount: $3.0mm • Median pre-money market capitalization: $24.4mm • Median Warrant Coverage: 50.0% 24 Reverse Mergers / PIPE Financings How Have Reverse Mergers/PIPE Financings Performed? Price Peformance of Shell Financings 20.0% 10.0% 0.0% -6.2% -10.0% -12.4% -17.4% -20.0% -30.0% -34.5% -40.0% -50.0% -60.0% -70.0% -59.5% -20.5% -15.8% -1.4% Stock Price Performance Over the same time period, IPOs under $50 million declined only 10%. Perform ance One Month after Placement Three Months after Placement Mean Six Months after Placement Median One Year after Placement Companies Reverse Merger PIPEs Stock Prices with Higher/Lower 80 60 40 67 N ber of C m an um o p ies 20 48 23 22% of companies had higher stock prices after a year. 11 0 -20 -39 Over the same time period, 51% of IPOs under $50 million were up. -40 -85 -85 -80 -60 -80 -100 One Month after Placement Three Months after Placement Six Months after Placement One Year after Placement 25 Reverse Mergers / PIPE Financings How Have Reverse Mergers/PIPE Financings Performed? Trading Volume: Proved to be the best predictor of success. One-Year Price Performance by Trading Volume 6 4 5 37% 2 2 0 0 -2 0% -4 -6 -8 -8 -10 -12 -11 -8 -41% -5 -6% -10% -15% -20% -30% -40% -50% 50% # Increased / Decreased 2 30% 20% 10% Top Quartile Second Quartile Decrease Increase Third Quartile Bottom Quartile Mean One Year Price Performance 26 M ean O Year Price Perform ne ance 40% Reverse Mergers / PIPE Financings How Have Reverse Mergers/PIPE Financings Performed? Exchange on Which Stock is Listed: Nasdaq companies were up 0.3% Median Price Performance (1) After One Year by Type of Exchange 5% -5% 0.3% Price Perform ance (2) -15% -15% -25% -35% -45% -55% -52% OTC: BB (43 PIPEs) Amex (3 PIPEs) Nasdaq (3 PIPEs) 1. Price performance relative to Russell 2000. 2. Return takes initial discount/premium into account. 27 Reverse Mergers / PIPE Financings How Have Reverse Mergers/PIPE Financings Performed? Industry: Healthcare-related companies greatly outperformed all other industries. Median Price Performance (1) After One Year by Industry 100% 80% 60% 79% Price Perform ance (2) 40% 20% 0% -20% -40% -60% -80% -59% Healthcare Related (13 PIPEs) All Others (37 PIPEs) 1. Price performance relative to Russell 2000. 2. Return takes initial discount/premium into account. 28 Reverse Mergers / PIPE Financings How Have Reverse Mergers/PIPE Financings Performed? Type of Security: Companies issuing Convertible Preferred greatly outperformed all other types of securities. (1) Median Price Performance 80% After One Year by Type of Security 68% 60% (2) Price Perform ance 40% 20% 0% -20% -24% -40% -16% Common (23 PIPEs) Convertible Debt (5 PIPEs) Convertible Preferred (10 PIPEs) 1. Price performance relative to Russell 2000. 2. Return takes initial discount/premium into account. 29 Reverse Mergers / PIPE Financings What Factors Help Create a Successful Reverse Merger? • Obviously, execution of the company's business plan is paramount. – Ultimate value creation occurs post-offering rather than at the offering itself. • For low-priced stocks in general, more trading volume generally equals better stock performance. • For the financing part of the transaction, the company should choose a placement agent that can not only effectively market the company to the right shareholder base, but one who can be supportive of the company post-financing. – Such support may include market-making, equity research, and ongoing advisory and investment banking services. • The company has a qualified and properly structured Board of Directors, with qualified independent directors. 30 Reverse Mergers / PIPE Financings What Factors Help Create a Successful Reverse Merger? • Before embarking, a private company needs to make sure being public is the right thing to do: – For a number of reasons, larger companies, especially those with $30 million or more in annual revenues, perform better than smaller companies. Companies should make sure the timing is right. – Management is ready to handle the increased scrutiny public companies must face. – Establish a sufficient incentive option pool that anticipates several years of grants. – The company can afford the incremental time and expense required to comply with disclosure and reporting responsibilities. Offering preparation – do not be afraid to delay an offering to get the following elements properly in place: – Hire competent legal counsel that has actually been through one of these transactions (few big name firms actually have). – As part of an audit process, have the auditors evaluate internal financial controls and make recommendations with respect to SOX compliance. – Interview investor relations firms prior to launching the offering –companies will need effective IR to be sufficiently prepared for the level of communications expected by institutional investors. Raise enough capital for growth purposes – companies should not be undercapitalized from the outset. 31 Conclusions • A successful transaction is predicated on having an overall strategic plan – Sound strategic vision – Strong operational results – Comprehensive financial strategy • Company must be attractive to a broad group of investors that can help create active trading in the stock – Definable “story” that investors can understand – Executable strategy to reach those investors – Support of placement agent and key investors who help the company execute its plan • Public companies are subject to substantially more regulations and potential risks. The company should have strong rationale for being public, regardless of the strategy used to achieve that objective. 32 Appendices 33 PIPE Market Statistics Trends in the PIPE Market • Financings most recently peaked in the first quarter In 2004, but remained strong and increased in Q4. Quartely PIPE Activity Q3 2003 - Q4 2004 Transactions & Volume 600 $6.4 521 $6.3 453 $5.2 428 $4.3 339 $4.0 419 $5.1 $7.0 $6.0 $5.0 $4.0 $3.0 Volume (in billions) 500 Number of Financings 400 300 200 100 0 397 $2.0 $1.0 $0.0 Q3 '03 Q4 '03 Q1 '04 Q2 '04 Q3 '04 Q4 '04 Deals (Source: PrivateRaise.com) $ Volume 34 PIPE Market Statistics Who Were the Most Active Investors: Top Ten Investment Managers - 2004 By Total Dollars Invested Total Dollars ($mm) $503.0 428.4 365.5 314.8 264.8 236.1 221.6 190.0 Average Placement $251.5 71.4 4.0 3.4 132.4 78.7 73.9 190.0 # of Investments 2 6 91 93 2 3 3 1 Rank 1 2 3 4 5 6 7 8 Fund Silver Lake Partners Warburg Pincus LLC Laurus Capital Management Highbridge Capital Management Gerdau S.A. (NYSE: GGB) Onex Corp. The Cypress Group Icahn Associates Corp. 9 10 Wellington Management Company Sage Capital Growth, Inc. (Cavallo Capital Corp.) 188.1 185.8 11.1 7.4 17 25 By Number of Investments Total Dollars ($mm) $113.7 314.8 54.1 365.5 68.7 35.0 39.2 118.1 Average Placement $1.2 3.4 0.6 4.0 0.8 0.4 0.5 1.8 # of Investments 99 93 93 91 84 83 81 69 Rank 1 2 2 4 5 6 7 8 Fund Omicron Capital, L.P. Highbridge Capital Management Bristol Capital Advisors Laurus Capital Management Downsview Capital, Inc. LH Financial Services Corp. (Alpha Capital AG) Iroquois Capital L.P. Staro Asset Management (Stark Asset Management) Ramius Capital Group Stonestreet LP 9 10 124.9 22.5 1.9 0.4 68 66 (Source: PrivateRaise.com) 35 PIPE Market Statistics What Were the Most Active Sectors? By Dollar Amount Total Amount Sector ($mm) Energy Resources & Related $ 2,357 Telecommunications 1,683 Biotech 1,606 Pharmaceuticals & Related 1,508 Internet 1,323 Healthcare 1,217 Metals, Minerals & Stones 952 Computers 777 Software 670 Financial Services 668 Mining & Related 646 By Number of PIPEs 2004 PIPEs by Sector Financial Services Soft ware Computers M et als, M inerals & St ones Healthcare Internet Pharmaceuticals & Related Biotech Telecommunications Energy Resources & Related Total # of PIPEs 148 97 114 119 151 145 98 120 78 22 59 $- $500 $1,000 $1,500 $2,000 $2,500 Sector Internet Energy Resources & Related Healthcare Computers Pharmaceuticals & Related Biotech Metals, Minerals & Stones Telecommunications Electronics & Related Software Commercial Services 2003 PIPEs by Sector Computers Healt hcare M ining & Related Telecommunications Biotech M etals, M inerals & Stones Energy Resources & Related M edia & Related Financial Services Pharmaceuticals & Related Total Amount ($mm) $ 1,323 2,357 1,217 777 1,508 1,606 952 1,683 548 670 507 Total # of PIPEs 151 148 145 120 119 114 98 97 78 78 67 $(Source: PrivateRaise.com) $500 $1,000 $1,500 $2,000 $2,500 36 PIPE Market Statistics Common and Preferred PIPEs: Trends from 2001 - 2004 At Market/Discounted, Fixed-Price Common Stock (with/without Warrants) (1) Average Raise (in $ mm) Average Equity Market Cap (in $) Average Stock Price ($) Average Discount vs. Market Price Inclusion % of Warrants Average Warrant Coverage Average Warrant Exercise Price Premium 2004 11.8 130.9 5.3 18.6% 59.5% 57.9% 8.9% 2003 11.7 161.2 20.7 16.6% 53.3% 52.0% 9.4% 2002 12.1 182.6 6.6 14.4% 46.6% 56.5% 11.1% 2001 14.5 252.2 7.6 16.5% 35.4% 54.8% 12.1% Premium, Fixed-Price Convertible PIPEs (2) Average Raise (in $ mm) Average Equity Market Cap (in $) Average Stock Price ($) Average Term (Yrs) Average Dividend/Coupon Average Premium vs. Market Price Inclusion % of Warrants Average Warrant Coverage Average Warrant Exercise Price Premium (Source: PrivateRaise.com) 2004 14.1 185.6 4.0 4 5.2% 16.2% 73.1% 44.2% 23.6% 2003 35.8 216.4 5.5 6 5.9% 18.0% 33.3% 34.3% 32.4% 2002 14.9 123.2 4.9 14 6.5% 21.2% 51.4% 40.8% 27.8% 2001 24.4 163.8 4.8 11 6.6% 22.6% 45.7% 57.0% 38.1% (1) Excludes PIPEs where conversion price is <100% or >200% of the market price of issuer's common stock (2) Excludes PIPEs where purchase price is <50% or >100% of the market price of issuer's common stock 37 Dyadic International Inc. (DYAD) Business Description Dyadic International, Inc. operates as a biotechnology company in the United States. It develops, manufactures and sells proteins, enzymes, peptides, and other biomolecules derived from genes. The company also licenses its enabling proprietary technologies, including C1 Expression System. Dyadic International is based in Jupiter, Florida. Ownership Summary Bioform LLC Cooper Hill Partners, L.L.C. Crestview Capital Funds Knott Partners Mercantile Capital Partners Origin Capital Management LLC Financial Snapshot ($mm) Market Data as of 1/26/05 Exchange OTC: BB Price Per Share $5.20 Shares Outstanding 22.2 Market Cap 115.6 Enterprise Value 115.5 Pequot Capital Management, Inc. Pinnacle Advisers, L.P Reverse Merger Description Dyadic International acquired CCP Worldwide, Inc. in a reverse merger transaction on 11/05/2004. CCP Worldwide supplies and markets corrugated boxes, folding cartons and foam packaging products. PIPE Financing Date 11/05/04 Amount ($mm) $25.4 Security Common Use of Proceeds Working capital and other general corporate purposes CAGR (as of 2/1/04) 53% 38 Dyadic International Inc. (DYAD) (b) (c) (a) $9 200 Volume ('000) $6 Price 150 100 $3 50 $0 Nov-04 Price 0 Dec-04 Volume ('000) (a) (b) (c) 12/23/2004 11/5/2004 11/5/2004 Announced the change of independent registered public accounting firm from Sherb & Co., LLP to Ernst & Young LLP. Announced that it has succesfuly completed the financing of 25.3 million led by The Pinnacle Fund L.P., Mercantile Capital Group, Knott Partners, and Crestview Capital Funds. Announced the completion of a simultaneous stock-for-stock merger with CCP Worldwide, Inc. 39 Psychiatric Solutions Inc. (PSYS) Business Description Psychiatric Solutions, Inc. provides inpatient behavioral health care services in the United States. It operates in two segments, Owned and Leased Facilities, and Management Contract. The Owned and Leased Facilities segment provides inpatient mental and behavioral health services. The company’s residential treatment centers offer long term treatment programs for behavioral health problems. The Management Contract segment develops, organizes, and manages behavioral health care programs within general third party medical/surgical hospitals, and manages inpatient behavioral health care facilities for government agencies. Ownership Summary % of Shares Outstanding Institutional Holders State Street Research & Management Credit Suisse Asset Management Northwestern Mutual Oak Investment Partners Systematic Financial Management Wall Street Associates Harris Investment Management Emerald Advisers Strong Capital Management Wellington Mgmt Barclays Global Investors All Others Total Institutional Holders 5% Holders Acacia Research Investment Total 5% Holders Insiders Public and Other Total Shares Outstanding 5.5 5.0 3.6 3.5 3.2 3.0 2.6 2.3 2.1 1.8 1.8 40.4 74.7 Financial Snapshot ($mm) Balance Sheet as of 9/30/04 Cash & Equivalents $17.7 Other Current Assets 85.7 Other Assets 350.5 Total Assets 453.9 Current Liabilities 66.8 Other Liabilities 14.5 Debt 243.5 Market Data as of 1/26/04 Exchange Nasdaq NM Equity 129.1 Price Per Share $36.44 Total Liabilities & Equity $453.9 Shares Outstanding 19.3 Market Cap 704.9 Enterprise Value 941.7 LTM Income Statement Revenue $457.2 Gross Profit 171.5 EBITDA 56.9 EBIT 47.7 Net Income 13.0 8.2 8.2 1.1 16.0 100.0 Reverse Merger Description Acquired PMR Corporation on 5/6/2002 through a stock purchase. PMR engaged in the development and management of health care programs PIPE Financing Date 04/01/03 07/02/02 Amount ($mm) Security $25.0 Preferred: Convertible 20.0 Senior Subordinate Notes Use of Proceeds To fund acquisitions of freestanding psychiatric patient hospitals Hospital Acquisitions 40 CAGR (as of 12/31/04) 131% NA Psychiatric Solutions Inc. (PSYS) (k)(j) $40 35 30 Volume ('000) 25 Price 20 1,000 15 10 5 0 Aug-02 0 Dec-02 Apr-03 Price Aug-03 Dec-03 Apr-04 Aug-04 Dec-04 500 1,500 2,000 (i) (h) (g)(f) (e) (d) (c) (b)(a) Volume ('000) (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) 12/21/2004 12/14/2004 08/04/2004 06/01/2004 01/06/2004 12/24/2003 12/18/2003 06/09/2003 03/04/2003 08/06/2002 08/06/2002 Announced that it has inreased its revolving credit facility's size to $150 million from $125 million with a syndicate of lenders led by Bank of America. Made a public equity offering of 3 million shares priced at $33.70, with proceeds to relieve some outstanding debt. Raised it's guidance for the full year 2004 Announced that it has increased its revolving credit facility to $125 million from its previous level of $50 million. Announced agreement with Bank of America for a new $50 million revolving credit facility to replace its $50 million revolving credit facility with an asset-based lender. Sold 6,900,000 shares of common stock at $16.00 per share in a registered public offering, including 3.6 million shares from existing investors. Made a public equity offering of 6.9 million shares priced at $16.00. Psychiatric Solutions Inc. announced that it is planning a private offering of $150 million of senior subordinated notes to finance the acquisition of Ramsay Youth Services Inc., to refinance a substantial portion of PSIs debt, and to repay all of the debt of Ramsay Youth Services. Ramsay Youth Services Inc. announced that it opened the Macon Behavioral Treatment System, a 131-bed residential treatment center in Macon, Georgia. The treatment center will primarily provide behavioral health treatment services to children and adolescents. Announced the appointment of Mr. Jack E. Polson to Chief Accounting Officer. Announced that it will consider acquisition of psychiatric hospitals as part of its growth strategy. 41 Education Lending Group, Inc. (EDLG) Business Description Education Lending Group, Inc., a finance company, provides student loan products, services, and solutions to students, parents, schools, and alumni associations. It engages in originating and purchasing guaranteed student loans made under the federal family education loan program, which includes consolidation loans, Stafford loans, and parent loans for undergraduate students. It also offers and purchases alternative supplemental loans that may be guaranteed by a third party guarantor. Education Lending Group was formed in 1999 as Direct III Marketing. The company, following a merger with Whirlwind Ventures, changed its name to Education Lending Group, Inc. in 2002. Education Lending Group has been acquired by CIT Group on 1/4/05 in a cash deal worth about $318 million. Ownership Summary % of Shares Outstanding Institutional Holders Cmwl Trust Codan Trust Company Total Institutional Holders 5% Holders Cit Group Roland And Dawn Arnall Living Trust Winton Capital Management All Others Total 5% Holders Public and Other Total Shares Outstanding 4.2 2.8 7.0 Financial Snapshot ($mm) LTM Income Statement Revenue $68.0 Gross Profit 8.3 Operating Income 8.3 Net Income 8.4 Balance Sheet as of 9/30/04 Cash & Equivalents $16.7 Other Current Assets 4,233.4 Other Assets 22.5 Total Assets 4,272.6 Current Liabilities 11.8 Other Liabilities 11.9 Market Data as of 12/31/04 Exchange Nasdaq NM Debt 4,238.4 Price Per Share $15.52 Equity 10.6 Shares Outstanding 16.7 Total Liabilities & Equity $4,272.6 Market Cap 259.2 Enterprise Value 4,480.9 19.9 10.5 8.3 7.1 45.8 47.1 100.0 Reverse Merger Description Education Lending Group formerly known as Direct III Marketing acquired Whirlwind on 4/20/1999. Whirlwind was a shell company with no operations. PIPE Financing Date 12/14/01 Amount ($mm) $4.0 Security Common Use of Proceeds To fund initial three business channels for originating student loans CAGR (as of 12/31/04) 179% 42 Education Lending Group, Inc. (EDLG) (i) $18 $15 1,500 $12 Price $9 $6 500 $3 $0 Apr99 0 Dec04 1,000 Volume ('000) (h) (g)(f)(e)(d)(c)(b) 2,000 Aug99 Dec99 Apr00 Aug00 Dec00 Apr01 Price Aug01 Dec01 Apr02 Aug02 Dec02 Apr03 Aug03 Dec03 Apr04 Aug04 Volume ('000) (a) (b) (c) (d) (e) (f) (g) (h) (i) 01/04/2005 06/16/2004 05/14/2004 04/07/2004 03/15/2004 01/30/2004 11/25/2003 10/28/2003 07/22/2002 Announced that it has entered into a definitive agreement for it to be acquired by CIT Group Inc., (NYSE: CIT) in a transaction valued at approximately $4619.4 million. Voiceglo announced a strategic partnership with FinancialAid.com, a subsidiary of Education Learning Group Inc. Subsidiary Student Loan Xpress Inc. announced it will offer its reduced-rate Federal student loans to Maine students and their families. Announces the creation of a new subsidiary, Education Loan Servicing Corporation, which will provide nationwide origination and servicing support for student loans. Announced the appointment of David A. Beach as Executive Vice President and Chief Marketing Officer. Subsidiary Student Loan Xpress Inc. announced that it now offers parents PLUS Loans with secure online application and instant pre-approval. Announced intention to use the net proceeds of the public offering to fund the development of the newly-formed student loan servicing subsidiary and for general corporate purposes, including potential acquisitions, capital expenditures and working capital. Announced the appointment of David H. Harmon as President and CEO of its newly formed loan servicing subsidiary, Education Loan Servicing Corporation. Announced the implementation of its new electronic signature service. 43 Isolagen Inc. (ILE) Business Description Isolagen Inc. engages in the development and commercialization of autologous cellular therapy for hard and soft tissue regeneration. Autologous cellular therapy involves extracting and processing a patient's own cells and then reintroducing the cells back in to the patient. Its lead product candidate is in Phase III clinical development and has applications in cosmetic dermatology. Ownership Summary % of Shares Outstanding Institutional Holders Perceptive Capital Heartland Advisors Barclays Global Investors Lighthouse Capital Management Delaware Investment Advisors Apex Capital Sterling Johnston Capital Management Dimensional Fund Advisors Wasatch Advisors Castlerock Asset Management Gruber & Mcbaine Capital Management All Others Total Institutional Holders 5% Owners Insiders Public and Other Total Shares Outstanding 4.2 4.2 3.2 3.3 3.0 2.5 2.0 1.7 1.5 1.4 1.3 15.7 44.0 10.1 25.5 20.4 100.0 Financial Snapshot ($mm) LTM Income Statement Revenue $2.5 Gross Profit 0.9 EBITDA (17.9) EBIT (18.9) Net Income (19.1) Balance Sheet as of 9/30/04 Cash & Equivalents $62.0 Other Current Assets 3.3 Other Assets 4.3 Total Assets 69.6 Current Liabilities 8.1 Other Liabilities 0.5 Debt Market Data as of 1/26/04 Exchange AMEX Equity 61.1 Price Per Share $7.10 Total Liabilities & Equity $69.6 Shares Outstanding 30.3 Market Cap 215.1 Enterprise Value 153.1 Reverse Merger Description Acquired American Financial Holding on 8/10/2001 through a stock purchase. American Financial had no business operations prior to the merger. PIPE Financing Date 08/10/01 07/16/02 05/09/03 08/28/03 Amount ($mm) Security $2.0 Common 10.1 Preferred: Convertible 4.4 Preferred: Convertible 20.2 Common Use of Proceeds To fund R&D projects and initial FDA trial, to explore the viability of entering foreign markets, to provide working capital and for general purposes To strengthen balance sheet and position for growth To support completion of production facilities in Australia and to provide support for the commercialization of product both in Europe and Asia To support domestic and international commercialization, late stage clinical development, capital expenditures and for working capital 44 CAGR (as of 12/31/04) 54% 78% 64% 23% Isolagen Inc. (ILE) (s) $15 $12 $9 Price $6 $3 $0 Aug-01 (r) (q)(p)(o) (n)(m) (l)(k)(j) (i)(h)(g) (e) (f) (d)(c)(b)(a) 5,000 4,000 Volume ('000) 3,000 2,000 1,000 0 Dec-01 Apr-02 Aug-02 Dec-02 Apr-03 Aug-03 Dec-03 Apr-04 Aug-04 Dec-04 Price (a) (b) 11/27/2004 11/20/2004 Volume ('000) Announced that it intends to offer $75 million of convertible subordinated notes due to qualified institutional buyers. Announced that it expects to establish a current Good Manufacturing Practices facility in the Northeast to serve as primary manufacturing facility and headquarters for US as part of its refined strategy for global commercialization of Isolagen Process. (c) (d) (e) (f) (g) 10/25/2004 10/06/2004 07/21/2004 06/09/2004 05/24/2004 Announced that it authorized the repurchase of up to 2,000,000 shares of the company's common stock. Announced that its board of directors appointed Robert J. Bitterman as President and Chief Executive Officer. Announced the commencement of its Phase III Pivotal Trials. Isolagen will be conducting two identical trials for the treatment of facial wrinkles. Announced the pricing of its follow-on offering of 7,000,000 shares of common stock at a price of $8.50 per share. The gross proceeds of the offering will be $59.5 million. Announced that the FDA has approved its request for a Special Protocol Assessment relating to the design of pivotal Phase III clinical trials to be conducted in support of registration of its Process for treatment of nasolabial folds and glabellar lines. (h) (i) (j) (k) (l) (m) (n) (o) (p) (q) (r) (s) 05/12/2004 04/23/2004 03/22/2004 03/05/2004 03/03/2004 12/16/2003 11/17/2003 08/01/2003 07/29/2003 06/17/2003 01/23/2003 09/17/2002 Announced the completion of Phase I Clinical Trial and Begining of Phase II Clinical Trial of Periodontal Dental Disease. Dismissed Pannell Kerr Forster of Texas P.C and engaged BDO Seidman LLP as independent accountants. Announced additional findings from further analysis of results from a 6-month, double-blind clinical study in which their proprietary treatment successfully reversed gingival recession and improved deep-periodontal pocketing. Announced the results of a 6-month, double-blind, clinical study in which their proprietary treatment successfully reversed gingival recession and improved deep-periodontal pocketing. Announced that the initial portion of its Phase III study is complete and the results indicate statistically that the therapy is both safe and effective. Announced that it has developed a new cell culturing system and automated manufacturing system as part of its manufacturing cost reduction efforts. Announced that it will be unable to file their next 10-Q by the deadline required by the SEC. Announced that it received License from the Therapeutic Goods Administration in Australia to begin the manufacture of autologous fibroblasts. Announced that the Company's Phase III trial for dermal defects has commenced pursuant to an effective Investigational New Drug Application (IND) for the treatment of wrinkles and scars. Announced that the Company has entered a research collaboration with the University of Texas Health Science Center at Houston Vivian L. Wolff Neurological Research Center. Announced the opening of the company's third cellular processing laboratory located in Sydney, Australia. Announced the opening of the London cellular laboratory. 45 INTAC International, Inc. (INTN) Business Description INTAC International, Inc. provides Internet content in China. The company operates through three segments: Internet Portal, Wireless Handset Distribution, and Automobile Distribution. Internet Portal segment provides career development services through the company’s Internet portal. It provides assessments on the Internet portal and through local career service centers. Wireless Handset Distribution segment distributes wireless handset products to mobile communications equipment wholesalers, agents, retailers, and other distributors worldwide. Automobile Distribution segment distributes luxury automobiles from Europe to mainland China. Ownership Summary % of Shares Outstanding Institutional Holders Dws Investment Gmbh Barclays Global Investors Whitney & Company State Street Global Advisors Tiaa Cref Investment Management Northern Trust Ohio Public Employees Retirement System California State Teachers Retirement System Alliance Capital Management Merrill Lynch Investment Managers All Others Total Institutional Holders Insiders Public and Other Total Shares Outstanding 5.9 0.9 0.3 0.2 0.2 0.1 0.1 0.1 0.1 0.0 0.1 7.9 59.4 32.7 100.0 Financial Snapshot ($mm) LTM Income Statement Revenue $89.4 Gross Profit 6.0 EBITDA 0.8 EBIT 0.6 Net Income 0.8 Balance Sheet as of 9/30/04 Cash & Equivalents $8.5 Other Current Assets 21.4 Other Assets 3.2 Total Assets 33.2 Current Liabilities 13.6 Other Liabilities Debt Market Data as of 1/26/04 Exchange Nasdaq SC Equity 19.7 Price Per Share $15.00 Total Liabilities & Equity $33.2 Shares Outstanding 21.1 Market Cap 316.4 Enterprise Value 308.0 Reverse Merger Description Acquired Commodore Minerals on 9/28/2001 through a stock purchase PIPE Financing Date 10/25/01 09/15/03 Amount ($mm) $3.0 4.5 Security Common Common 05/13/04 12.0 Common Use of Proceeds For general working capital purposes To fund the participation in an Internet portal joint venture with China Putian Corp and the Ministry of Education in China called "Career Net," as well as for working capital To expand Intac Purun's Internet portal business, for strategic acquisitions or business alliances and for general working capital purposes 46 CAGR (as of 12/31/04) 29% 104% -34% INTAC International, Inc. (INTN) (l) 18 15 12 Price 9 6 3 0 Oct-01 400 300 200 100 0 Feb-02 Jun-02 Oct-02 Feb-03 Price Jun-03 Volume ('000) Oct-03 Feb-04 Jun-04 Oct-04 Volume ('000) (k) (j)(i)(h)(g) (f) (e) (d) (c) (b) (a) 600 500 (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) 12/03/2004 06/25/2004 08/14/2003 02/10/2003 09/26/2002 08/15/2002 05/29/2002 05/16/2002 04/26/2002 04/25/2002 04/01/2002 12/26/2001 Announced that Intac Purun has been exclusively selected by the MOE to launch and operate an integrated communication solution for elementary and middle schools across China. Announced Shelf Registration of $43.02 million and announced and equity offering of $14.72 million. Announced an increase in revenues for the second quarter of 2003 compared to the same quarter the previous year. Announced the signing of an exclusive agreement with T-Mobile Deutschland GmbH (T-Mobile) to purchase refurbished mobile handsets under a trade-in program. Announced that it has signed a letter of intent to pursue a strategic alliance with China United Telecommunications Corporation. Announced that they will be unable to file their next 10-Q by the deadline required by the SEC. Announced the appointment of J. David Darnell as Senior Vice President and Chief Financial Officer. Announced that they will be unable to file their next 10-Q by the deadline required by the SEC. Announced that it is pursuing a strategic alliance with China Putian Corporation (Putian). Announced that KPMG LLP resigned as principal accountants of the company effective April 18, 2002. Announced that they will be unable to file their next 10-K by the deadline required by the SEC. Commodore Minerals Inc. announced that it has successfully launched its representative office in Beijing China. The company distributes wireless products manufactured by many of the major equipment manufacturers including Nokia, Motorola, Siemens, Ericsson and Samsung. 47 VitalStream Holdings, Inc. (VSTH) Business Description VitalStream Holdings, Inc. provides products and services that allow companies to broadcast video, audio, and other related digital media over the Internet. The company provides content delivery network services, such as streaming, hosting, and related products and services that allow clients to outsource their digital broadcasting needs, as well as hosting and support services. Vitalstream offers its products to companies in various industries, including media and entertainment, advertising, radio, Internet gaming, and to companies needing online training or Web casting. Ownership Summary % of Shares Outstanding Institutional Holders Columbia Wanger Asset Management RS Investment Management Columbia Acorn Trust Total Institutional Holders 5% Holders Dolphin Communications All Others Total 5% Holders Insiders Public and Other Total Shares Outstanding 4.5 1.1 1.8 7.3 Financial Snapshot ($mm) Balance Sheet as of 9/30/04 Cash & Equivalents $9.9 Other Current Assets 1.2 Other Assets 4.2 Total Assets 15.3 Current Liabilities 2.5 Other Liabilities 1.0 Debt Market Data as of 1/26/04 Exchange OTC:BB Equity 11.8 Price Per Share $0.76 Total Liabilities & Equity $15.3 Shares Outstanding 57.7 Market Cap 43.8 Enterprise Value 35.7 LTM Income Statement Revenue $8.8 Gross Profit 4.9 EBITDA 0.3 EBIT (0.8) Net Income (1.5) 25.4 16.3 41.7 15.7 35.3 100.0 Reverse Merger Description Acquired Sensar Corporation on 12/31/2001 through a stock purchase. Sensar was engaged in the design, development and marketing of analytical scientific instrumentation. Sensar had no revenues prior to the merger. PIPE Financing Date 01/16/03 06/16/04 Amount ($mm) Security $1.1 Debt: Convertible 11.0 Common Use of Proceeds General corporate purposes, including working capital General corporate purposes, including investment in R&D, facilitation of strategic acquisitions and related costs, strengthening balance sheet, obtaining more favorable terms from vendors and satisfying certain qualification criteria for listing on the Nasdaq 48 CAGR (as of 12/31/04) 105% 57% VitalStream Holdings, Inc. (VSTH) (q) $2.0 $1.8 $1.6 $1.4 $1.2 Price $1.0 $0.8 $0.6 $0.4 $0.2 $0.0 Jan-02 May-02 Sep-02 Jan-03 May-03 Sep-03 Jan-04 May-04 Sep-04 400 200 0 800 600 1,200 1,000 Volume ('000) (p) (o) (n)(m)(l)(k) (j)(i) (h) (g) (f) (e) (d) (c)(b)(a) Price Volume ('000) (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) (m) (n) (o) (p) (q) 11/20/2004 11/02/2004 10/13/2004 08/17/2004 07/07/2004 05/12/2004 02/10/2004 10/15/2003 04/22/2003 04/08/2003 10/01/2002 09/05/2002 09/04/2002 08/01/2002 06/25/2002 04/24/2002 01/14/2002 Announced that Paul S. Summers resigned as chief executive officer and president of VitalStream Holdings Inc. Philip N. Kaplan, co-founder and chief operating officer has been appointed as president of VitalStream Holdings Inc. in addition to his role as COO. Announced availability of a new MediaOps(TM) Software Development Kit (SDK) to speed development and deployment of customers' flash video streams. Entered into Loan and Security Agreement with Comerica Bank pursuant to which the Bank may extend up to an aggregate of $4,000,000 in credit to the Company. Announced the immediate availability of Macromedia (R) Flash(TM) Video Streaming Service Lite. Announced ability to deliver live Macromedia Flash(TM) video content. Announced the appointment of Mark Belzowski as chief financial officer. Announced that they have teamed up with InteleNet Communications Inc. to increase the network capacity and redundancy of their respective networks. Announced introducement of a bulk reseller program targeted at businesses serving clients with high-volume streaming media needs. Announced alliance with MESoft(TM) Partners LLC. Announced formal alliance with Accordent Technologies. The alliance enables customers to create Web-based presentations with Accordent products and deliver them around the world using VitalStream's fast and reliable content delivery network. Announced partnership with Sonic Foundry Inc. to offer an easy-to-use, high-quality corporate Web presentation solution. Announced MediaConsole Pro, the next generation of the company's digital broadcasting services. Announced the introducement of the VitalPartner Program, the first reseller program of its kind in the streaming media sector. Announced that they have been selected to host the SPY Kids 2 movie Web site. Announced that Clear Channel Radio signed an agreement for its 200-plus streaming radio stations to use the VitalStream Digital Broadcast Network. Announced an agreement with Sorceron Inc. to host content created using Sorceron Cauldron - the recently released professional authoring platform for modular streaming media. Announced the release of VitalPresenter, a Web conferencing service for live, multimedia presentations over the Internet. 49 Houston 600 Travis Street, Suite 3100 Houston, TX 77002 (713) 224-3100 New York 320 Park Avenue, 17th Floor New York, NY 10022 (212) 317-2700 527 Madison Avenue, 6th Floor New York, NY 10022 (212) 419-3900 Los Angeles 333 South Hope Street, 26th Floor Los Angeles, CA 90071 (213) 253-2232 50