HOW TO USE REVERSE MERGER TO RAISE CPAITAL

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HOW TO USE REVERSE MERGER TO RAISE CPAITAL

• Joseph Xiong
• J A Advisory Group
• Managing Director

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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

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PART IOVERVIEW ON REVERSE MERGERS
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What is Reverse Merger?

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

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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

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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

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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.

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The Process
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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

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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

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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.
• The ongoing public reporting requirements, need
  for audited financial statements, compliance with
  the SEC rules and regulations and investor
  relations activities substantially increase the
  cost of doing business.
• 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.
• The public reporting process and the need to
  maintain interest in the company takes a
  tremendous amount of management's time and
  energy.
• 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.

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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

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PART II KEY FACTORS FOR A SUCCEFFUFL REVERSE
MERGER
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Assemble A High Quality Team

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

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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

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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
• Elements of the strategy includes identifying
  market makers and brokers that trade small/micro
  cap market
• 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

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ALTERNATIVE FUNDING RESOURCES FOR REVERSE MERGER

• PIPE, 144A, Regulate S

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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

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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
• Mutual fund restrictions on minimum share price,
  trading volume and market cap precluded ownership
• Crossover VCs and private equity firms view
  select public companies as startups that went
  public too soon
• Emergence of sub-100 million small- and
  micro-cap hedge funds
• More favorable terms, higher volume and
  diversification
• In 2003, healthcare and technology/communications
  issuers accounted for approximately 42 of
  proceeds raised, down from approximately 65 in
  1998

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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

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PIPE Trends

• Average PIPE proceeds between 10-15 million

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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.

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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
• No longer the last resort financing option
• 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

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J A Advisory Group Inc.

• Bringing The U.S. Capital Market To China

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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

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Our Tools

• Debt Underwriting
• IPO/Reverse Merger
• Project Finance
• MA
• Merchant Banking
• PIPE/Private Placement

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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

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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

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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 MA 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

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Contact Information

• Joseph Xiong
• Managing Director
• J A Advisory Group Inc.
• Phone [phone]
• Fax [phone]
• E-Mail info_at_jaadvisorygroup.com