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The Reverse Merger Process
Prepared April, 2004
The FastestLowest Cost
Highest Valuationand Most Liquid ...
...Process for going public
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Presentation Liability Statement
Liability Statement: This proposal has been assembled based upon informationprovided by the MacLellan Group, Inc., TriPoint Capital Advisors, LLC and AmaroqCapital, LLC. Significant work product and intellectual property held by these threefirms is disclosed in this presentation and any of their advisors, affiliates,subsidiaries, subcontractors and or its contents are subject to an acknowledgedconfidentiality, nondisclosure and non-circumvention agreement. Any use of the
information enclosed without the written permission of and compensation to theMacLellan Group, Inc., TriPoint Capital Advisors, LLC and Amaroq Capital, LLC. willbe considered a significant breach of this acknowledged confidentiality,nondisclosure and non-circumvention agreement. In the event of a breach, thefirms named above may together or separately seek fines, penalties, damagesremedies and relief in U.S. Federal or state courts where they are organized.
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Why Complete an RTO?
Increase your Companys ability to raise capital
Expands the scope of your Investor base;
Provides a liquidity path for your shareholders and creates the opportunity forgreater diversification of shareholder wealth;
Private equity investors are difficult to attract to the your Company as long as it
is private;
A typical IPO is extremely difficult for smaller companies (under 100M inrevenues);
Typical small-cap IPO cost averages up to US$1-3 million in expenses andprofessional fees, plus commissions on the capital that is raised;
The RTO process for a small-cap company typically runs approximatelyUS$350,000 in fees and expenses, plus approximately 12-15 percent of theshares issued; and
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Market Comparisons
US HK Singapore China
Liquidity $$$$$ $$ $$ $
Valuation 20x - 25x 10x 10x - 12x 25x - 40x
Capital $$$$$ $$ $$ $
Regulatory $$$$ $ $ $
Fees $350-500,000 $1.1m - $1.5m $1.4m $2.2m
Partners $$$$ $$$ $$ $
Transparency $$$$$ $ $$ $
Acquisitions $$$$$ $$ $$ $
Timing $$$$ $$ $$ $
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Our Reverse Merger Approach
Members of our team have advised and been actively involved in numerousreverse mergers over the past 11 years
Our RTO process relies on a team of professionals possessing the requiredtalents in critical areas of the transaction. These specialized areas include:
Transaction management
Contract & SEC legal work,
Target shell company sourcing,
Investor relations,
Business planning, research
Investment banking / capital raising
We assumes an role on the Board of Directors and actively promotes thestrategic vision of the Company.
We typically focuses on 2-3 transactions per year. One such success in 2003 wasAXM Pharma currently operating with a +100M Market Capitalization.
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Professional Advisory Process - A Two-Stage Approach
A more detailed description of our process is outlined in our ProfessionalAdvisory Agreement.
Our aim is to position your Company to raise significant capital at a highvaluation with maximum liquidity.
The costs associated related to our advisory work are spread out over a 6-months and is approximately $250,000.
Stage 1 - Commences immediately following the execution of our Professional Advisory Agreement.During this stage we will work with the Company and its international auditors, construct the dealstructure, begin drafting all relevant documents, conduct due diligence, write the business plan, undertakea preliminary valuation, speak with potential investors.
Stage 2 - We execute the transaction including the share swap agreement and all US SEC filings, thecompletion of private equity or debt financings, the writing of a Research report and the beginning of theInvestor relations program and the eventual listing on a major stock exchange.
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Our Reverse Merger Team
Mr. Douglas MacLellan:Team Leader, CEO, of the MacLellan Group,Inc. (Los Angeles)
Mr. Joe Cunningham: Financial Advisor, Origination and Execution Specialist, Business Plan &Research Coordinator, President, Amaroq Capital,LLP (Minneapolis)
Mr. Curtis Hollister: Adviser and Origination specialist - based in Canada.
Mr. Mark Elenowitz: Financial Advisor & Equity Structure, Managing Director, TriPoint Capital Advisors,LLC (NYC)
Mr. Louis Taubman, Esq.: Securities and Exchange Commission (SEC) Lawyer, General Counsel ofTriPoint Capital Advisors, LLC(New York)
Tom Madden: Key Investor Relations Specialist, President, Madden Consulting, LLP (Seattle)
John Steinmetz: Investment Banking, TerraNova Capital Inc., New York
Andre Schwegler: Sales, TerraNova Capital, New York
Charles li: China Attorney, T&C Law Offices, Beijing
Lifeng Zhang: China based transaction specialist
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The Five Pillars of a Successful RTO
1). Develop a growth focused Business Plan.- We will assist in the development of the business plan and financial model
2). Ensure profitability is reached in the year preceding the RTO.- It needs to be US GAPP based accounting profit
3). Follow the process outlined of the advisory team.
- We have executed this process many several times before- You are paying us, please listen to our advice- We have worked with many companys in their first overseas venture
4). The Board of Directors and most importantly the CEO must be 100% behind the transaction
- Assign a dedicated Transaction manager with a team he / she can rely upon- The demands on managements time can be intensive
- Document and process control are critical
5). Plan to become one of the leading businesses in your industry
- The RTO will transform your business, be prepared for the changes that willtake place
Our aim is to provide the company with the money it needs to executeits strategy.
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Your Companys Reverse Merger Process
Follow our Proven Reverse
Merger Process and together we
will create and enhanced path to
new equity investment. Ourunique process provides a
channel for your Company to
receive a premium valuation on
raising capital, through a tiered
multi-round financing strategy.
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RTO Timetable (Sample Transaction)
W k1 -2 Wk 3-4 Wk5 Wk6 Wk7 Wk8 Month3
Month4
Month5
Month6
Sign Appointment
Letter
Due Diligence
Audit
Draft Agreements
Valuation analysis
Execute Share
Swap Agreements
Begin trading onOTC
Investor RelationsProgram
File with SEC
PrintPPM
Market $ CloseonPIPE Investment
File RegistrationStatement
File with AMEX
Road Show toInvestors
RegistrationStatementApproved
April 2004: Sign Advisory Agreement. Shell Companyreview & negotiations. New Business Plan drafting iscommenced. Auditors are retained & they commence auditprocess.
June 2004: Definitive Agreement between Xian FilmGroup & Shell Company is executed. Audit is completed.Business Plan is Completed. Initial Research Report isdrafted.
July, 2004: The Merger is completed. Drafting of the
Private Placement Memorandum. Initial Research Report ispublished. The Stock starts trading & your Company is apublicly listed company!
August, 2004: PPM is completed & the Offeringcommences.
September, 2004: PPM is closed US$15 million is raised.
October, 2004: SB-2 Registration Statement is drafted andfiled with the SEC and Xian Film Group files for AMEXor NASDAQ listing.
December 2004: SB-2 is approved by the SEC and XFGgains listing on AMEX or NASDAQ .
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Potential RTO Structure
Variations of this structure are possible where circumstances permit
OTC
USA China
Chinese
Company
US New
Company
JV
WOFE
Shell
Company
AMEX
Share Swap
Share Swap
Effective ownership
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Reverse Merger Process: The Shell
Step One: Locating suitable Shell merger candidate We have many sources for shell companies and can have a transaction ready in a
matter of weeks. Undertake due diligence on the Shell (i.e. SEC filings, audit, legal records)
Step Two: Due Diligence Deal Structuring with your Company Due Diligence: legal records, accounts, articles of incorporation and legal records. Negotiations: Structuring transaction, defining terms and conditions Complete US GAAP Audit of your Company.
Step Three: The Merger The official merger: Share Exchange, Share Purchase and/or Asset Purchase
Agreements, issuance of new shares, etc.
Step Four: Public Company SEC Filings: Form 8K, Form 14C, Form 14F, Form 3 and others as required Maintain SEC Filings: Quarterly and Annual Reports, other filings as required.
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Typical Transaction Overview
Employ our methodology to create a publicly traded company that will facilitateraising capital and will drive higher valuation multiples.
Create new business plan based upon public merger and possible acquisitionstrategy.
Merge your Company with existing Public Company.
Assist with initial SEC filings and corporate compliance requirements.
Deploy comprehensive Investor Relations & Public Relations campaigns in orderto stimulate active trading of the your Company Companys stock.
Raise additional capital through a private placement (typically convertiblepreferred shares) to facilitate the growth and expansion of the business.
Provide initial research coverage & assist with investor relations and supportservices
Apply for a senior listing on the American Stock Exchange (AMEX) or theNASDAQ SC.
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Reverse Merger Highlights
Merger of your Company and the Shell Companywill take approximately 90 days.
New Financing within 180 days.
China Shareholders would own approximately up to80% or more of the Company post merger & pre-financing.
Example
The total share pool would likely be kept atapproximately 15 million shares (post merger &financing) in order to try and maintain a per shareprice US$3.50 or higher.
Based upon existing cash assets and expectedprivate placement the Company would immediatemoved to an Amex or NASDAQ. (ie:4 th Qtr03).
OriginalCompany
Public Shell
Your Company shares are purchased or swappedby the public shell company
Public ShellConvertible
Securities issued
for US$15 million
The ultimate amount of capital raised and the valueof the offering could adjust down the total amount ofdilution, wherein the china shareholders maintain ahigher percentage ownership in the business.
Capitalization:
Industry Valuation18 X 2004P/E.
Stock issued to Investors @ a minimum of a $36M pre-
investment valuation for 30% of the Company.
US$250,000 in fees & expenses and 15% of the stock will go topay for Public Shell, Merchant Banking, Investor Relations, Legaland Accounting services.
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Shareholder Structure Post Merger
The following is an example of a capital structure
Based upon a total of 10 million shares outstanding immediately after the merger betweenyour Company & the Shell Company. The initial target trading price is anticipated to beapproximately US$3.50 per share.
Shell Company Shareholders: 0.45 million shares
Your Company: 8.5 million shares Advisory Interests: 1.05 million shares
Its anticipated that an additional 5 million shares would be issued in the private placementfor raising US$15 million less fees and expenses associated with the underwriting. These feesare typically 7 - 10 percent plus underwriters warrants of the amount raised.
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Raising Capital with Direct Investors
Raising capital through a PIPE (Private Investment in a Public Equity)based on the following issues:
Market Capitalization
Share Price
Liquidity
Float
Our Investor Relations program will stimulate demand and drive themarket capitalization and liquidity of your Company
We can expect to raise approximately 10% - 15% of the market
capitalization of the company during the first round of financing
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US Exchanges and Markets
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AMEX Listing Requirements for US Companies
Shareholders' Equity $4 million Shareholders' Equity $4 millionPre-tax income $750,000 in last fiscal year or in 2 of its last 3 fiscal years History of Operations 2 yearsDistribution 800 public shareholders and 500,000 publicly held Distribution 800 public shareholders and 500,000 publicly held
or or
400 public shareholder and 1 million shares publicly held 400 public shareholder and 1 million shares publicly heldor or
400 public shareholders, 500,000 shares publicly held andaverage daily trading volume of 2,000 shares for prior 6
months
400 public shareholders, 500,000 shares publicly held andaverage daily trading volume of 2,000 shares for prior 6
months
Price $3 per share Price $3 per shareMarket Value of Public Float $3 million Market Value of Public Float $15 million
Shareholders' Equity $4 million
Total market Capitalization $50 millionDistribution 800 public shareholders and 500,000 publicly held
or
400 public shareholder and 1 million shares publicly heldor
400 public shareholders, 500,000 shares publicly held andaverage daily trading volume of 2,000 shares for prior 6
monthsMarket Value of Public Float $15 million
Standard 3
Standard 1 Standard 2
Note: Companies must also comply with other listing requirements
such as having a majority (50% for SB filers) of independent directors,
independent audit committee, and others.
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AMEX Listing Requirements for International Companies
Pre-Tax Income $750,000 latest fiscal year Pre-Tax Income N/Aor
2 of most recent 3 fiscal years
Market Value of Public Float $3 million Market Value of Public Float $15 millionShare Price $3 Share Price $3Operating History N/A Operating History 2 YearsStockholders' Equity $4 million Stockholders' Equity $4 million
Public Float 500,000 Public Float 1 millionPublic Shareholders 800 Public Shareholders 400Average Daily Volume N/A Average Daily Volume N/A
Public Float 500,000 Public Float 1 million (worldwide)Public Shareholders 400 Public Shareholders 800 (worldwide)Average Daily Volume 2,000 Average Daily Volume N/A
Alternative 3 Alternative 4
Regular Financial Guidelines Alternate Financial Guidelines
Alternative 1 Alternative 2
Distribution Guidelines
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AMEX Listing Process
Notes:1) Company must comply with all listing guidelines.
2) Companys application is approved by AMEXListing Department
The Company files an original listingapplication and supporting documentationwith the exchange and pays a $1,000non-refundable fee
The Companys original listing applicationand supporting documentation are reviewed
by Amex Listing Qualifications staff toensure adherence to Exchange Listingguidelines
If necessary, the Company files anExchange Act Registration Statementand exhibits with the SEC
The Exchange reserves a Ticker The SEC Orders the Exchangesymbol and approves listing Act Registration Statement Effective
The Company selects a Specialist
Security is admitted to dealings
Step 1
Step 2
Step 3
Step 4
The Company files an original listingapplication and supporting documentationwith the exchange and pays a $1,000non-refundable fee
The Companys original listing applicationand supporting documentation are reviewed
by Amex Listing Qualifications staff toensure adherence to Exchange Listingguidelines
If necessary, the Company files anExchange Act Registration Statementand exhibits with the SEC
The Exchange reserves a Ticker The SEC Orders the Exchangesymbol and approves listing Act Registration Statement Effective
The Company selects a Specialist
Security is admitted to dealings
Step 1
Step 2
Step 3
Step 4
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Nasdaq National Market Listing Requirements
Requirements
Standard 1
Marketplace Rule
4420 (a)
Standard 2
Marketplace Rule
4420 (b)
Standard 3
Marketplace Rule
4420 (c)
Standard 1
Marketplace Rule
4450 (a)
Standard 2
Marketplace Rule
4450 (b)
Stockholders' equity $15 million $30 million N/A $10 million N/A
Market Value of listed
securities N/A N/A $75 million N/A $50 million
or or or
Total Assets $75 million $50 million
and and and
Total Revenue $75 million $50 million
Income fromcontinuing operationsbefore income taxes(in latest fiscal year or
2 of last 3 years)
$1 million N/A N/A N/A N/A
Publicly held shares 1.1 million 1.1 million 1.1 million 750,000 1.1 million
Market value ofpublicly held shares $8 million $18 million $20 million $5 million $15 million
Minimum bid price $5 $5 $5 $1 $1Shareholders (roundlot holders)
400 400 400 400 400
Market makers 3 3 4 2 4Operating History N/A 2 years N/A N/A N/ACorporate
governance
Yes Yes Yes Yes Yes
Initial Listing Continued Listing
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Nasdaq SMALLCAP Market Listing Requirements
Companies must meet minimum initial and continued financialrequirements
Requirements Initial Listing Continued Listing
Stockholders' equity or $15 million or $2.5 million or
Market Value of listed securities or $50 million or $35 million or Net Income from continuing operations (inlatest fiscal year or 2 of the last 3 fiscalyears)
$750,000 $500,000
Publicly held shares 1 million 500,000
Market value of publicly held shares $5 million $1 millionMinimum bid price $4 $1Shareholders (round lot holders) 300 300Market makers 3 2Operating history or 1 year or N/AMarket Value of listed securities or $50 millionCorporate governance Yes Yes
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AXM A Recent RTO Experience
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Can You Picture Yourself ?
AXM Pharmas Inc., Chairperson,
Madam Wang Wei Shi, rings the opening bell
At the American Stock Exchange (AMEX)
27 April 2004.
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AXM Pharma Experience
Pharmaceutical company based in the Shenyang, PRC
Wholly-owned subsidiary Shenyang Tianwei Werke Pharmaceuticals,Co. Ltd.
OTC and prescription pharmaceutical products
Currently trading on American Stock Exchange under symbol AXJ
Recent traded as high as $7.50 per share Average daily volume of 110,000
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2003- 2004 Highlights
Record sales of US$10.4 million Operating income of US$2.25 million
Initial listing on Companys Stock
Raised US$8.0 million
Groundbreaking of new US cGMP manufacturing plant
In-licensing of Sunkist brand of vitamin & supplement products
Expanding sales into three new markets
Gained senior listing on Amex
Attracted experience senior management
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AXM Pharma Trading History
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Contact Information
Mr. Douglas C. MacLellanCEOThe MacLellan Group, Inc.8324 Delgany AvenuePlaya del Rey, California 90293e-mail: [email protected]: 310-301-7728fax: 310-301-7748US cel: 310-283-4201
China cel: 011-861-369-121-3337
Mr. Joseph T. CunninghamPresidentAmaroq Capital, LLC18 Pheasant LaneNorth Oaks, Minnesota 55127 SAe-mail: [email protected]: 651-204-2048tel 2: 651-490-0038cel: 612-306-0527
mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]