PIPE transactions are privately issued equity or equity-linked securities that are sold to accredited investors under Regulation D by public companies. PIPE issuers range in size from small OTC Bulletin Board companies to large-cap NYSE-traded companies. Transaction sizes have ranged from under $1 million to over $200 million. In 2003, approximately 1,400 PIPE transactions were completed for total proceeds of approximately $18 billion. This activity is up from approximately 800 transactions for proceeds of approximately $14 billion in 2002.

PIPE investors have shown interest across a broad range of industries. In 2003, healthcare and technology/ communications issuers accounted for approximately 42% of proceeds raised, down from approximately 65% in 1998. Companies in many other industries accessed the PIPE market in 2003, including issuers in the mining, chemicals, energy, utilities, consumer, financial, REIT and industrial sectors.

Within the spectrum of equity alternatives for a publicly traded company, a PIPE transaction generally best fits companies with a market capitalization under $400 million that seek an equity infusion of less than $75 million. Traditional public equity alternatives include add-on equity offerings ("secondary" or follow-on offerings) and 144A convertible securities. These transactions are typically underwritten and require extensive institutional and/or retail distribution networks. Due to the need for liquidity in the secondary trading market for these types of securities, as well as the overhead requirement on the part of the underwriter, the minimum transaction size is typically $65 million to $100 million to achieve optimal execution for traditional public offerings.

While a PIPE transaction is marketed to a limited number of investors over a short period of time, a traditional public transaction may require a broader marketing process and, in the case of an add-on offering, the filing of a registration statement with the SEC prior to pricing. This filing process tends to create an overhang in the market, resulting in an "announcement effect" on the issuer's stock. This announcement effect has been studied, and most practitioners use a proxy of a 15% decline in the stock price prior to pricing. For companies that are able to access traditional public alternatives for larger amounts (typically above $75 million), pricing at the close of the transaction may be more issuer-friendly than a PIPE transaction due to broader marketing and the lack of any liquidity discount associated with receiving unregistered securities. However, careful review of the entire process must be conducted to determine the full array of strengths and weaknesses associated with each alternative.

ISSUER CONSIDERATIONS
Following are the benefits a potential issuer may consider when evaluating a PIPE transaction:

* Does not require SEC registration prior to offering * Allows for a more flexible transaction size than traditional public alternatives * Improves balance sheet strength and financial flexibility * Offers greater confidentiality and eliminates typical price declines on filing of traditional public offering ("announcement effect") * Requires minimal preparation before launch * Increases issuer's trading liquidity levels and diversifies shareholder base * Allows for a targeted marketing process, reducing management's time contribution

PIPE TRANSACTION TYPES
PIPE transactions may be issued in a variety of forms, including registered common stock ("registered directs"), unregistered common stock, convertible preferred stock, convertible debt and equity credit lines ("ECLs").

Registered Direct Common Stock
Common stock issued under an existing and effective registration statement. Essentially a traditional add-on offering marketed to, and negotiated with, a select investor universe vs. broad marketing from an institutional and retail sales force. This security offers the investor the benefits of receiving registered shares. Issuers have the benefit of mitigating a liquidity discount and broadening the investor base.

Common Stock
Common stock issued as a private placement under Regulation D with an agreement to register the shares as soon as possible after the transaction closes. Provides investors with the ability to build a position in a security and enables the issuer to quickly and quietly access the equity market. A liquidity discount is typically incorporated into the pricing due to the fact that the investor is unable to trade the shares until they are registered.

Convertible Preferred or Convertible Debt
Equity-linked security structured as preferred stock or subordinated debt. The security is issued as a private placement with an agreement to register the underlying shares as soon as possible after the transaction closes. Provides an investor with a senior position relative to the common shareholders as well as current income in the form of a dividend or coupon. Provides an issuer with broad flexibility with regard to structure and the ability to issue stock at a premium to a straight common stock alternative. Issuers should understand that convertible transactions tend to cause "overhang" in the market, i.e., the downward pressure on stock prices due to the existence of a sizeable block of securities that will be released into the market. Depending on the structure, consideration should also be given to rating agency treatment and senior debt covenants, if applicable.

Equity Credit Line
A contractual agreement between an issuer and investor that enables the investor to purchase a formula-based quantity of stock at set intervals of time, typically monthly, at future stock prices. Formulas tend to be based on trading liquidity. An effective registration statement must be maintained in order for drawdowns to be completed.

HISTORY OF THE PIPE MARKET
While PIPEs have been issued for over 10 years, the transaction category truly emerged as a source of financing for companies in the mid-1990s. During this period, PIPE deals were primarily opportunistic financings for small and/or distressed high-growth companies, typically structured with floating conversion prices known as "death spiral" transactions. This negative taint was soon vetted in the press and in the legal arena, providing insight and education to issuers and advisors. This attention impacted the investors in PIPE securities to structure transactions with more issuer-friendly terms, which in turn attracted more companies to entertain and issue PIPE securities, resulting in the higher volumes of issuers accessing the market in recent years.

As a result of increased size and diversification, the PIPE market has been institutionalized over the past three years. Industry newsletters, conferences and databases track the market closely, providing a level of visibility into market participants, structures and process. Several legal and financial advisors have entered the business. Application of proceeds has also broadened from strictly smaller amounts of growth capital to acquisition financing, de-leveraging, working capital and secondary sales.

The relevance of the public equity add-on market is often discussed in the context of the growth potential of the PIPE market. While public equity add-ons have had mixed performance in recent years, this market continues to be significantly larger than the PIPE market. There were over 400 add-on transactions in 2003 with proceeds of approximately $60 billion. Comparing this to the 2003 PIPE market proceeds of approximately $18 billion indicates that the PIPE market most likely will not replace the add-on market. Instead, the PIPE market many support a targeted market of small- and micro-cap companies that do not appeal to the traditional public add-on market investor, as well as mid-cap companies that prefer faster execution and confidentiality.