FOCUS ANNOUNCES RECORD-BREAKING 2006: Every January, FOCUS releases an open letter to business associates and friends of the firm, candidly reviewing the past year, summarizing completed transactions, citing Partner and staff additions and generally looking ahead to prospects for the coming year.

Both in terms of revenue and professional growth, FOCUS shattered records in 2006. You will find details in the article below, “Reviewing a Record-Breaking 2006: Looking Confidently Ahead to 2007.”

Also included in this issue is, “Dry Bulk Shipping Market Overview and Outlook: 2007 and Beyond,” by Gianpiero (JP) Balestrieri. This fascinating overview -- supported by solid research and informed insight -- of the global dry bulk shipping industry can help mitigate the risks and maximize the rewards of acquiring, financing, and operating dry bulk vessels.

Mr. Balestrieri, a FOCUS Partner and Global Head of the Structured and Project Finance Group, has extensive international experience in managing and closing very complex multi-party transactions in Europe, Latin America, Africa, and Asia, among other emerging market regions.

Active FOCUS Deals
With over 25 years of experience across many verticals, FOCUS currently has nearly 60 active transaction engagements in its four offices in Atlanta, Chicago, San Francisco, and Washington, DC in the following specific business sectors.

• Asset Management
• BioScience
• Building Materials
• Business Process Outsourcing (multiple assignments)
• Business Services
• Call Center Software and Services
• Construction (Infrastructure)
• Consulting
• Distribution
• Energy
• Engineering
• Financial Services
• Fire Protection
• Food Processing
• Food Service Management
• Government Contracting (multiple assignments)
• Healthcare Business Services
• Home Automation
• Information Management
• IT Outsourcing (multiple assignments)
• IT Services (multiple assignments)
• Library Services
• Manufacturing
• Maritime Shipping
• Market Research
• Media
• Medical Devices (multiple assignments)
• Medical Diagnostics
• Medical Staffing
• Printing
• Retail
• Security
• Software (multiple assignments)
• Sports Apparel
• Telecommunications
• Transaction Management Services
• Truck/Transport Capital Equipment

Our transaction process provides us with up-to-the-minute market knowledge in these sectors. Are any of them of corporate development interest to you? Give us a call or drop us a note.

Inquiries should be addressed via e-mail to info@focusbankers.com, by telephone to 202-470-1973 or by fax to 202-785-9413.

Reviewing a Record-Breaking 2006 -- Looking Confidently Ahead to 2007

Both in terms of revenue and professional growth, 2006 truly was a record-shattering year for FOCUS Enterprises with revenue up by 104 percent and the number of FOCUS Partners increasing by almost 25 percent.

The addition of five new Partners brought the firm’s professional total to 22 bankers. A Director of Marketing and Business Development, as well as three Regional Business Development Managers joined the Director of Research to round out the expanding team.

In the past year, the firm’s record of closed deals, revenue growth, and expanding engagement list validates the firm’s vision and strategy:

“Our mission is clear. We provide buy side, sell side, and capital raising advisory services for transactions between $5 and $300 million, serving private and public companies in the US and international marketplace. We will continue to provide the highest quality strategic advisory services customized for this market space. We will grow our firm by continuing to leverage our Partners’ C-level operating experience and hands-on approach, our proven transaction methodology, our deep research capability, and our broad geographic coverage.”

In 2006, FOCUS completed numerous M&A, corporate sale, consulting, and strategic partnering assignments, including the following closed transactions:

• Global Document Solutions Inc. Acquired Best Strategy, LLC
• Evnine Vaughan Associates, Inc. Recapitalization Transaction
• Western Shower Door, Inc. Recapitalization Transaction
• Strategic Defense Alliance Corporation Acquired Computer Networks & Software
• Cambridge Systems Acquired Video & Telecommunications
• Rich-SeaPak Acquired WorldCatch Foods
• Voight & Schweitzer Acquired Clark Substations
• Islington Capital Partners Recapitalized Library Systems and Services
• Diebold Acquired Certain Assets of ERAS Banking Technology
• CareTek, LLC Acquired Certain Ownership Interests in Blue Canopy
• BMS Holdings, SA Acquired BMS and BOCS with a Senior Secured Debt Facility from Dexia
• Comm-Works, a Portfolio Company of Morgenthaler, Acquired Intelex
• The Bostwick-Braun Company Acquired Steel City Products from Sterling Construction Company, Inc.

Complete details about each of these transactions can be found at http://www.focusbankers.com/tombstones/mergers.asp.

2007 Middle Market M&A Momentum Continues

Since 2002, the middle market has improved steadily and throughout 2006 once again was an active segment of the broader M&A market. In 2006, the number of middle-market announced deals closed by FOCUS doubled over 2005. Many key factors that drove 2006 results are predicted to continue to drive a strong 2007 M&A market momentum, including:

• Strong economic environment,
• Available capital from both strategic and financial buyers,
• Willing debt markets,
• Continued participation of the private equity community.

FOCUS believes that 2007 has the potential to be a very strong year for M&A activity in the middle market. We feel particularly positive about 2007 for two reasons: prices are robust, and both buyers and sellers are beginning to realize that the current market will not last indefinitely. At the same time, astute buyers can still find reasonable values, particularly when they can avoid the auction process by finding proprietary deals. Private equity funds which target companies with EBITDA under $20 million are sitting on large amounts of cash -- which suggests that demand for good middle market companies will continue.

We are less confident, however, that the positive outlook will continue throughout 2008. It is possible that buyers and investors may pull back significantly during 2008. The Iraq conflict still provides lots of uncertainty on the fiscal and geo-political fronts, and that coupled with the looming 2008 presidential election may cause buyers to delay decisions and capital commitments until well after the elections.

As we begin our 25th anniversary year in business, FOCUS is dedicated to assisting all clients in achieving their business goals. We wish our friends, clients, and colleagues a most profitable 2007.

FOCUS Mezzanine Provides Growth Capital to Viztek, LLC

FOCUS Mezzanine, an affiliate of FOCUS Enterprises, has provided growth capital to Viztek LLC., a leading software development company and a value-added reseller of computed radiography (CR) scanners and related hardware.

Joe Cermin, Viztek’s President, stated that “The FOCUS partners involved knew our business, were responsive to our requests, and closed the transaction quickly and on reasonable terms. We see them now as a partner, and would certainly use them again in the future as our growth continues.”

Capital will be used for both organic and external growth. Use of proceeds internally will be for sales and marketing, and in particular, expansion of Viztek’s established distribution network. 20/20 HealthCare Partners is a co-investor in Viztek and will assist the company with continued strategic development and growth.

FOCUS Mezzanine, LLC makes subordinated debt and preferred equity investments in successful, later-stage middle market operating businesses. To learn more, go to http://www.focusbankers.com/focuscapital/focuscapital.asp.

Elizabeth Dunlop Richter Joins FOCUS Chicago Office as Director of Business Development

The Chicago office of FOCUS Enterprises, Inc., an investment banking firm providing merger, acquisition, and corporate finance services to middle market companies, is adding a new Director of Business Development. “Attracting such outstanding talent to the FOCUS Chicago team adds substantial depth as we continue our expansion, said William S. Lear, FOCUS Managing Partner, Midwest Region. “A communications and business development professional like Elizabeth Richter will be a great asset.”

About Elizabeth Dunlop Richter
Prior to joining FOCUS in Chicago as Director of Business Development, Ms. Richter was Senior Vice President of Content and Production for InLight, Incorporated. She also held a series of management positions at Pleasant Company, a subsidiary of Mattel, Inc., and at WTTW and WLS-TV, ABC’s owned television station in Chicago…more.

Dry Bulk Shipping Market Overview and Outlook: 2007 and Beyond
By Gianpiero (JP) Balestrieri, Partner and Global Head, Structured and Project Finance, FOCUS Enterprises

Dry Bulk Carrier Industry Overview

The dry bulk market has experienced extreme volatility in the past several years, with new building prices, sales and purchase prices (“SnP”), and freight and charter rates hitting record highs in 2004 and experiencing drops in 2005 accompanied by a robust upswing in 2006. Strong dry trade expansion has been the primary driver of record high charter rates in the past few years.

Understanding demand and supply fundamentals to date in the dry bulk industry’s trade cycles will firmly support key stakeholders -- including ship owners, operators, investment banks, lenders, investors, insurance brokers, and capital markets participants -- in evaluating and mitigating the risks and rewards in acquiring, financing, and operating dry bulk vessels over the years to come.

Chinese Demand
China’s growing impact on the world economy has been the primary driver of the recent dry bulk expansion. Chinese dry bulk import volumes have more than doubled in the three years from 2001-2004, accounting for 94 percent of the growth of the dry bulk trade during that period¹. This growth caught shippers by surprise, and as a result, earnings jumped three times higher in 2004 than previous record earnings.

For example, shipping a ton of iron ore from Brazil to Asia had an average cost of $7/ton in the 1990s but in 2004, it cost over $30/ton. The substantial increase in dry bulk demand was further reinforced with the lack of Chinese logistical sophistication. Chinese port congestion led to exceptionally long delays at Chinese ports, creating upward pressure on bulk charter rates.

Since 2004, bulk charter rates have moderated as seaborne trade has slowed, and the Chinese have improved their logistical organization. Current bulk earnings, however, are still substantially above historical averages from the 1990s.

Average earnings for Handymax vessels in 2006, for example, are over $18,000/day while historical average annual minimal earnings have been at $12,000/day (over the last 10 years) and the latest peak earnings (YTD 2006) have reached up to $26,500/day. Whether charter rates revert back to historical means or persist at higher rates in the next several years will depend substantively on the steadiness of continued Chinese and other emerging demand.

Dry Bulk Vessel Supply
Lack of capacity investment during the 2001 global recession also contributed to the recent spike in charter rates. The shipping industry suffered during the 2001 recession because of: international unrest; terrorism (9/11); changing economic trends; and shifts in production and consumption patterns that altered cargo movements. While record bulk earnings spurred capacity investments in 2004 and 2005, the time lag between new building signings and deliveries strained supply and tightened the dry bulk market.

Recently, the dry bulk market has become more balanced as vessels began to be delivered from new building contracts signed in 2003 and 2004 and scrapings have remained at minimal levels. For the first half of 2006, 12.9 million deadweight tonnage (dwt -- a measure of the capacity of a cargo ship) of new dry bulk tonnage, or about 3.7 percent of the fleet size at the beginning of the year, already have been delivered. Illustrating the absence of significant scrapping, only 17 dry bulk vessels headed to the scrap yards in 2005, representing a total of 0.7 million dwt. In 2004, only 0.5 million dwt were removed from service during the year².

The Trade Development Cycle

Evolution of Seaborne Trade
While new commodities and technologies have been important drivers of the shipping industry, shifts in regional trade remain the largest factor in shipping market change. Charter and freight rates are ultimately determined by global trade. Therefore, understanding the current and future impact of China will help stakeholders predict future shipping market conditions for the capital markets.

In the last fifty years, the world economy has been transformed from a collection of closed economic zones dominated by the European and Sino-Soviet empires, to a system of free trade between more than 100 independent countries. This evolution introduced a period of almost continuous change as the European empires were dismantled in the 1950s, the Soviet empire in the late 1980s, and as China joined the world market in the 1990s.

The impact on shipping was profound; triggering four consecutive waves of seaborne trade growth, spread at about fifteen year intervals between 1955 and 2005³.

1. In the 1950s, Europe dismantled its colonial system and rebuilt its economy after the war around the Bretton Woods’ free trade principles.
2. In the early 1960s, the Japanese economic miracle produced a decade of growth during which Japanese imports reached 600 million tons.
3. In the 1960s and 1970s, growth exhibited by South Korea and the Asian Tigers followed the growth development of Japan.
4. In the 1990s, China started its development.

The last three waves of seaborne trade had a distinctive pattern, and studying their causes provides a useful starting point to understand China’s impact on the shipping industry’s current cycle. These waves -- referred to as Trade Development Cycles (TDCs) -- are driven by the development cycle of emerging economies. The process is as follows:

As the economy develops through stages two and three, the demand for raw materials such as oil, iron ore, coal, nonferrous metal ores, and forest products increases as the industrial infrastructure is built up. If raw materials are not available locally they must be imported, as must the more sophisticated machinery. These imports are paid for by exports of manufactures and any primary exports which are available.

The reconciliation of domestic and foreign markets thus forms a basic requirement of growth at this stage. Assembly industries, shipbuilding, and automobiles frequently are developed as lead export earners; a pattern set by Japan in the 1950s and subsequently followed by South Korea and several other countries⁴.

Although the cycle is well understood, it is very difficult to predict the turning point. The previous trade development cycles confronted the shipping industry with a complex supply management task which, with the benefit of hindsight, it did not handle well. For example, the rapid trade growth caused by the European and Japanese TDCs in the 1950s and 1960s ended with an investment bubble in the early 1970s that left the broader shipping industry under a cloud for twenty years. As we move through the Chinese TDC, shipping investors can benefit tremendously by understanding China’s progression along the steep slope of the development cycle.

China in the 1990s
Chinese trade began to have a significant impact on the global economy in the early 1990s. By then, China’s import trade had edged up to 100 million tons, but still was globally insignificant, accounting for only 2 percent of seaborne imports. However, the internal reforms following Deng Xiaoping’s tour of China in 1992 produced a staggering trade boom. This has translated into record dry bulk demand, mostly because of growth in Chinese imports rather than exports.

Though Chinese exports grew rapidly, they have only moderately increased global seaborne trade. Chinese exports rose at the expense of other country’s share of trade and were generally in small tonnage manufactures. Instead, it was China’s import growth that significantly increased global dry bulk demand, with the increased Chinese demand for raw materials and the increased trade distances to transport bulk to China.

By 2000, Chinese dry bulk imports had reached 300 million tons, and in 2005 they were about 708 million tons. In tonnage terms, exports have grown more slowly, reaching approximately 400 million tons in 2005, but the export cargoes include many manufactures, which have a high-volume for their weight. In 2004, China accounted for 10 percent of world imports but accounted for 40 to 60 percent of the increase in seaborne trade volumes over the last five years.

Future Development of China's Trade
China’s development closely follows the classic TDC. Normally steel and energy dominate the process. During the last three years, 70 percent of the growth of Chinese import cargoes have come from iron ore and oil. With other steel related trades and products included, energy and steel accounted for about two-thirds of China’s import growth. This is exactly what happened in Europe and Japan during the previous TDCs and without these rapidly growing commodities, China’s rise would hardly have been noticed.

Dry Bulk Demand Factors

China’s development has dominated the dry bulk industry in the past couple of years. China’s development is expected to continue being the most important demand factor in the dry bulk market in the near and medium term.

Near Term Dry Bulk Demand
In the near term, global steel production -- especially related to China -- will continue to drive dry bulk demand, as global iron ore and steel products continue to remain above historical levels. In 2005, global steel production expanded by about 6.5 percent with a 27 percent increase in Chinese steel production and 19.8 percent growth in Indian steel production. Chinese and Indian steel production already have increased by 19.6 percent and 17.6 percent, respectively, year over year in the first five months of 2006, suggesting that the import demand for steel products remains strong.

Coal trade also should remain strong and support dry bulk demand. Following a year of quite strong import increases to both Europe and the United States, this trend should continue throughout 2007. In Europe, high energy prices should keep coal demand firm. The United States should begin to see a shift of its coal trade routes. Last year, the United States imported about 2.5 million tons of coal from Indonesia while Colombia exports to the United States stagnated. This trend should continue and may accelerate in the near term.

Medium Term Dry Bulk Demand
In the medium term, China should continue to be the most significant contributor to dry bulk demand growth. Based on previous TDC, China’s recent impact on the dry bulk market is unlikely to be a short-term phenomenon and its development will continue to increase dry bulk demand in the medium term.

Based on historical and current fundamentals, China’s development should not slow for at least another 7 to 10 years. Historically, the European TDC lasted 23 years from 1950 to 1973, while Japan’s lasted for a little more than a decade due to its smaller size. In terms of population and geography, China is the largest country to move through a TDC in recent history. China’s TDC did not really take off until the late 1990s. Given its size, this suggests that China’s development cycle should not slow for at least another decade, auguring for continued strength in bulk demand.

Dry Bulk Vessel Supply and Market Balance

Near Term Dry Bulk Supply and Market Balance
Fleet growth was higher in 2006 than in 2005 and should steadily grow for 2007. The existing order book stands at almost 64.2 million dwt, representing 18 percent of the existing fleet. Deliveries of bulk carriers in 2006 will reached 26 million dwt, an increase of about 3 million dwt from 2005, mainly due to delays in deliveries that were scheduled in 2005. Meanwhile, vessel scrapping should remain almost non-existent, with only 1.9 million dwt scrapped in 2006⁵.

In the near term, dry bulk market balance is expected to slightly weaken. Although strong growth in demand is expected to continue, the growth will still be slightly below the net fleet growth and subsequently the fleet utilization will eventually firm up towards the end of 2007.

Medium Term Dry Bulk Supply and Market Balance
Fleet growth will be limited in the medium term. The aging of many dry bulk vessels will result in more scrapping in 2007 and 2008, while a negative outlook by dry bulk ship owners has limited new building orders. Bulk carrier vessel contracts have decreased by 1 percent since 2005⁶. A tightening credit market will put further restraining pressure on new building contracts. Market balance should therefore become tighter in the medium term as demand overwhelms the available supply of Handymax and Panamax fleets through the end of 2009.

¹Stopford, Martin, Dec. 7, 2005: “China in Transition: Its impact on shipping in the last decade and the next.” Clarkson Research Services Ltd.

²Kartsonas, John (2006). “Against the Seasonal Winds.” Citigroup Global Markets.

³Stopford, M., Dec. 7, 2005. “China in Transition: Its impact on shipping in the last decade and the next.” Clarkson Research Services Ltd.

⁴Stopford, Martin (1997). Maritime Economics. Routelege, London.

⁵“Dry Bulk Market.” Fearnley’s Research Services. Oct. 2006.

⁶“Shipping Intelligence Weekly.” Clarkson Research Services Ltd.

About Gianpiero (JP) Balestrieri: For an in-depth review of the Handymax and Panamax Dry Bulk charter and SnP market outlook and strategic M&A and financing initiatives, please call or email Gianpiero (JP) Balestrieri at 202 470 1962 or jp.balestrieri@focusbankers.com. Throughout the year, Mr. Balestrieri and his team will be issuing extensive Dry Bulk Research and Case Studies on financing and investment structures on completed transactions on the FOCUS website at www.focusbankers.com.