SPRING 2019

Q1 2019 Restaurants MERGER & ACQUISTION OVERVIEW

More than one million restaurant locations exist in the US today and competition for customers is fierce. At the same time, operators are navigating a challenging shift in consumer preferences. As Baby Boomers retire and Millennials and Gen Xers show a preference for healthier, on trend food largely from independent and small chains, many of the national chains, particularly in the Casual Dining sector, have lost market share. Mobile ordering, meal kits, and grocery delivery services are also contributing to declining traffic across categories.

Restaurant visits fell from 215 times a year in 2000 to 185 in 2018—a 28- year low, according to the NDP Group.1 In 2018 restaurant traffic declined by 3.2% from 2017, continuing a three year slide. Industry sales in 2018, however, rose by 3.2% with menu price increases largely making up the difference. While consumers are dining out less frequently, they have been willing to pay more when they do go out. Restaurant industry sales are projected to reach $863 billion in 2019, a year-over-year increase of approximately 4.6% from 2018, according to the National Restaurant Association, which also suggests that operators will continue to support growth through price increases.2

As restaurants compete for a share of the consumer wallet in this environment, many are seeking to create economies of scale to reduce costs and create operating efficiencies. Labor shortages, exacerbated by the historically tight job market, remain the biggest challenge for operators with approximately 35% of restaurants indicating they are having difficulties with filling positions.

In 2018, 156 mergers and acquisitions (M&A) were announced or closed in the Restaurant industry—a 16.4% increase from the robust activity in 2017. Deal activity in Q1 2019 is below that of 2018, with 25 transactions announced or closed compared to 45 last year. Despite the dip, transaction volume remains healthy and closely mirrors that of Q1 2017.

Strategic buyers continue to drive the majority of deal activity as they acquire to diversify concepts, enter new geographic regions, and create economics of scale. At the same time, private equity (PE) accounted for 25% of deal activity as they leverage opportunities to consolidate portfolios, gain entrée to high growth concepts, and buy underperforming systems that can be revitalized.

M&A Activity: Restaurants 200 175 156 133 134 TABLE OF CONTENTS 150 129 125  M&A Overview 100 75  Entrée to High Growth 45 50  Consolidation Plays 25 25

 Company Spotlight Number of Transactions 0  Underperforming Systems 2015 2016 2017 2018 Q1 2018 Q1 2019  Public Company Data Source: Capital IQ and Capstone Headwaters Research

2 | RESTAURANTS Q1 2019 ENTRÉE TO HIGH GROWTH Robust returns on fast-growing restaurant concepts continue to attract the interest of private equity firms. In 2018, more than 15 M&A transactions were completed by PE firms targeting growth-chain investment. Differentiated concepts with superior unit performance continue to be of interest to investors as they look to the future growth and opportunities within the industry.

Fast Casual has been the bright spot of the Industry with annualized growth of approximately 7% between 2013 and 2017, according to the NPD Group.3 While growth in the category is slowing, four of the five fastest-growing restaurant chains in the US last year were Fast Casual, each reporting year-over-year growth between 30% and 80%. Characteristics of high-growth companies in this sector have often included integrated technology, online ordering, to-go services, and on trend food with menu items that are seasonal or personalized.

NOTABLE TRANSACTIONS

 J. H. Whitney & Co. Acquires Firebirds Wood Fired Grilled (January 2019, Undisclosed) - J.H. Whitney & Co. acquired Wood Fired Grill from Angelo Gordon & Co. Hailed as one of America’s Top 50 Emerging Restaurant Chains of 2018 by Food Newsfeed, Firebirds is a “polished casual” Has Acquired restaurant chain serving steaks, seafood and burgers that generated $161 million in sales in 2018.4 Firebirds expanded from 18 to 48 locations while owned by Angelo Gordan in 2011.

 Hargett Hunter Capital Partners & TriSpan Acquires Stacked Restaurants (September 2018, Undisclosed) - Hargett Hunter Capital and TriSpan acquired the five unit California-based Stacked. Stacked is a differentiated growth brand with an innovative approach to ordering. Diners at Stacked use tablets to “stack” their own customized , entrees and other dishes by selecting the ingredients of choice to create customized dishes. Has Acquired  Butterfly Equity Acquires Modern Market (February 2018, Undisclosed) – Los Angeles-based PE firm Butterfly Equity acquired the farm-to-table chain Modern Market in February. With 28 locations across , , , Washington DC, and Maryland, Modern Market serves sustainably-sourced, made from scratch meals with organic ingredients. Subsequently, Butterfly announced that it plans to merge Modern Market with Lemonade, another ingredient driven Fast Casual restaurant chain serving healthy food which Butterfly Equity also owns. Has Acquired

3 | RESTAURANTS Q1 2019 CONSOLIDATION PLAYS The number of chain restaurants is projected to grow at an annualized rate of 2.0% over the five years according to IBISWorld.5 This expansion is expected to drive consolidation as companies seek to gain dominance in the fragmented market through acquisition of new technology, locations, and concepts. Labor pressure is also a driver of consolidation and restaurants have sought to improve profitability through shared services and management teams. Additionally, the favorably low interest rate environment has made acquisitions attractive because of the low cost of capital and prospects for higher investment returns.

Since its inception in 2000, Roark Capital has spent billions consolidating restaurants into a formidable portfolio, frequently completing public-to-private transactions. Its franchise investments include Arby’s, Rusty Taco, Carl’s Jr., Hardee’s, Corner Bakery, Auntie Anne’s Pretzels, Ice Cream, , McAlister’s Deli, Moe’s Southwest Grill, Jim ‘N Nick’s BBQ, Jimmy John’s, and .

In 2018, Roark Capital-backed Focus Brands acquired for $200 million. Roark also completed two take-private transactions through its holding company (owner of Arby’s Restaurant Group). In February, Inspire Brands closed its acquisition of ($2.9 billion at 11.2x EV/EBITDA) and in December it completed its acquisition of Sonic ($2.3 billion at 16x EV/EBITDA).

On the public company front, Restaurant Brands International (NYSE:QSR) has built the third-largest global quick-service restaurant chain with iconic North American concepts , , and Louisiana Kitchen. The company is majority owned (51%) by Brazilian investment firm “This is not just Arby’s buying Buffalo 3G Capital. Restaurant Brands International (RBI) has profited from rapid growth with $32 billion in Wild Wings or Sonic. This is Arby’s sales last year and revenue increases of 7.9% and 7.4%, in 2017 and 2018 respectively.6 buying a company, integrating the

Looking ahead, the RBI will prioritize integrating company, and changing from a single- technology into its stores with more options like its branded company to a multi-branded Q4 launched mobile order and pay application for Burger King. Analysts surmise that given RBI’s organization.” strong growth trajectory the company is ready to take on another leading franchise in 2019. —Christian Charnaux, Chief Growth Officer, Inspire Brands7

4 | RESTAURANTS Q1 2019 COMPANY SPOTLIGHT

Founded: 1828 Headquartered: Luxembourg Entity Type: Private Equity Total Investments: ~35

JAB Holding Company, owned by the billionaire Reimann family and based in , has been a leading example of a private equity group that has built an empire of food and beverage brands through strategic acquisitions. As shown in the timeline below, JAB has aggressively, and strategically, expanded its presence, specifically within the and bakery market. The firm continues to build its portfolio and has recently completed the deals highlighted below.

 JAB Acquires Revive Kombucha (December 2018, Undisclosed) –  Through its subsidiary Peet’s Coffee, JAB acquired organic craft Kombucha brewery company, Revive  Kombucha, in December. According to Eric Lauterbach, President of the Consumer Division at Peet’s,  Kombucha is a “natural adjacency to ready-to-drink coffee.”8 The deal will expand Peet’s Coffee retail  business and give it access to more than 2,000 established distribution channels.

 JAB Acquires (May 2018, $1.9 Billion) –  In May, JAB acquired British bakery and chain Pret A Manger for almost $2 billion. Pret, whose  products include salads, pastries, and organic coffee, was founded in 1986 and has grown to more 500  locations across the globe. The acquisition builds on JAB’s take-private acquisition of (April  2017, $7.2 billion) and its subsequent purchase of (November 2017, undisclosed), which added  300 bakery locations in highly-trafficked transportation terminals, universities, and hospitals.

 JAB Acquires Dr. Pepper Snapple Group (January 2018, $18.9 Billion) –  In the largest soft deal drink in history, JAB has acquired Dr. Pepper Snapple Group Inc. (NYSE:DPS) for $18.9  billion via its existing Keurig Green Mountain platform (acquired in 2016 for $13.9 billion). The deal created  the third-largest beverage company in North America to rival Coca-Cola (Nasdaq:COKE) and PepsiCo  (Nasdaq:PEP). The newly minted Keurig Dr. Pepper Inc. (NYSE:KDP) has already begun to diversify its  product line into the trending better-for-you (BFY) market with the purchase of organic beverages and  bottled water producer Core Nutrition LLC (September 2018, $453.3 million).

ACQUISITION TIMELINE: JAB HOLDING CO.

(88.5%)

2012 2013 2014 2015 2016 2017 2018 2019

*

*Existing holding at time of JAB acquisition Source: Capstone Headwaters Research, CBInsights 5 | RESTAURANTS Q1 2019 The Wall Street Journal referred “ to brands like this as ‘fallen angels’ or brands that one time had great affinity and presence in

the marketplace and then, over time, things happens and we find “ ourselves where we are today.

— Tim Casey, CEO, Rego Restaurant Group9

Mar closed many units after 2008 and has been negatively impacted from both high food costs and an ineffective expansion model.

Rego will continue to seek out these distressed assets in the industry and intends to create a portfolio of between Underperforming Systems six and 10 restaurants chains in the Quick-Service and Fast Causal space. The so-called “fallen angels” of the restaurant business are also being “There’s a bunch of us doing it,” High acquired by private equity to be revived Bluff Capital Partners Operating Partner and reintroduced to consumers. The Gerry Lopez commented on buying appeal of underperforming brands is underperforming chains, “but the good that they not only can they typically be news is that the sandbox is huge.”11 purchased at a low cost, many are trading at prices well below the In January 2019, private equity firms replacement cost and at significant Paulson & Co., Inc. and TriArtisan discounts to comparable companies. Capital Advisors, LLC announced their Some PE firms are also leveraging their joint acquisition of Casual Dining chain management teams to create a shared P.F. Chang’s Bistro, Inc. for $700 service model across multiple brands. million. Centerbridge Capital Partners had previously acquired the brand along Last year, Rego Restaurant Group, with its sister chain Pei Wei (since spun backed by High Bluff Capital Partners, off) in 2012 for $1.1 billion at a 8.5x completed its first investments with the EV/EBITDA. Once a high growth purchase of and . concept, P.F. Changs’ was overleveraged Both target companies had been as its sales declined annually between performing poorly in recent years. 2012 and 2019. Quiznos had struggled to stay profitable due to supply chain inefficiencies, poor Also in Q1 2019, Papa Gino’s and management, and its rivalry with D’Angelo Grilled ’ parent . Since 2008, Quiznos reduced company PGHC Holdings gained its locations from 5,000 to 800 and bankruptcy court approval to sell to eventually filed for bankruptcy in 2014. Wynnchurch Capital for $33.8 million. In 2018, company sales dropped 22.4% Papa Gino’s filed for chapter 11 year-over-year.10 Similarly, Taco Del bankruptcy in 2018.

6 | RESTAURANTS Q1 2019 2018 RESTAURANT INDUSTRY BANKRUPTCY FILINGS

&

Acquired by Acquired by Acquired by ($33.8 Million) ($20 Million) (Undisclosed)

Source: Capstone Headwaters Financial Advisory Group and Pitchbook

The maturity of the industry with increasing competition and changing consumer preferences has resulted in year-over-year (YOY) sales declines even among leading chains such as McDonalds (-7.9%), Subway (-4.4%), (-4.2%), and Applebee’s (-6.8%). Applebee’s second-largest franchise chain RHM Franchise Holdings filed for chapter 11 bankruptcy in 2018 and announced it would close up to 20 of its 150+ restaurants in an effort to reorganize.

As operators file for bankruptcy to close underperforming locations, get out from under expensive leases and restructure overleveraged balance sheets, investors are also taking note of the prospective investment opportunities associated with restaurant systems that emerge from a bankruptcy proceeding. Rather than signaling the end of the restaurants’ life, bankruptcy provides the tools to restructure and reboot a concept — which select investors are finding attractive if valuations are low and reflect the risk inherent in a turnaround.

PUBLIC COMPANY TRADING & OPERATING DATA

Quick Service Price % 52 Wk Market Enterprise LTM EV / LTM Company 04/29/19 High Cap Value Revenue EBITDA Margin Revenue EBITDA Inc. $77.80 82.8% $2,007.8 $3,059.6 $866.0 $259.2 29.9% 3.5x 11.8x McDonald's Corporation $197.42 99.4% $150,729.0 $180,950.2 $21,025.2 $10,212.6 48.6% 8.6x 17.7x Restaurant Brands International Inc. $66.46 97.8% $16,718.5 $30,024.5 $5,369.0 $2,162.0 40.3% 5.6x 13.9x The Wendy's Company $18.71 98.5% $4,332.4 $6,685.4 $1,263.9 $392.1 31.0% 5.3x 17.1x YUM! Brands, Inc. $103.80 99.4% $31,752.4 $41,511.4 $5,688.0 $1,899.0 33.4% 7.3x 21.9x

EV = enterprise value; LTM = last twelve months Mean 36.6% 6.1x 16.4x $ in millions, except per share data Median 33.4% 5.5x 17.1x NM = Not Meaningful Harmonic Mean 35.5% 5.5x 15.7x

7 | RESTAURANTS Q1 2019 PUBLIC COMPANY TRADING & OPERATING DATA (CONTINUED)

Fast Casual Price % 52 Wk Market Enterprise LTM EV / LTM Company 04/29/19 High Cap Value Revenue EBITDA Margin Revenue EBITDA , Inc. $676.79 93.8% $18,756.3 $20,692.8 $5,024.8 $589.7 11.7% 4.1x NM El Pollo Loco Holdings, Inc. $12.85 69.6% $496.2 $563.4 $435.8 $59.7 13.7% 1.3x 9.4x Fiesta Restaurant Group, Inc. $13.30 43.1% $361.3 $435.8 $688.6 $63.0 9.1% 0.6x 6.9x Freshii Inc. $1.50 28.8% $47.4 $20.4 $21.7 $1.7 7.8% 0.9x 12.0x The Habit Restaurants, Inc. $11.07 60.5% $228.9 $249.6 $402.1 $33.0 8.2% 0.6x 7.6x Noodles & Company $7.30 54.1% $320.7 $361.0 $457.8 $26.6 5.8% 0.8x 13.6x Potbelly Corporation $9.19 64.9% $221.5 $202.1 $422.6 $29.6 7.0% 0.5x 6.8x Inc. $61.97 88.4% $1,840.4 $1,821.8 $459.3 $63.2 13.8% 4.0x 28.8x Wingstop Inc. $77.18 97.9% $2,269.0 $2,568.3 $153.2 $45.2 29.5% 16.8x NM

Mean 11.9% 3.3x 12.2x Median 9.1% 0.9x 9.4x Harmonic Mean 9.6% 1.0x 9.3x

Casual Dining Price % 52 Wk Market Enterprise LTM EV / LTM Company 04/29/19 High Cap Value Revenue EBITDA Margin Revenue EBITDA Bloomin' Brands, Inc. $20.54 82.5% $1,882.4 $2,924.8 $4,138.1 $378.7 9.2% 0.7x 7.7x Brinker International, Inc. $43.82 80.9% $1,643.3 $2,899.1 $3,174.1 $392.0 12.3% 0.9x 7.4x Darden Restaurants, Inc. $121.62 98.1% $14,956.3 $15,580.8 $8,415.4 $1,166.7 13.9% 1.9x 13.4x Dine Brands Global, Inc. $91.73 90.7% $1,621.7 $2,923.9 $780.9 $208.5 26.7% 3.7x 14.0x Gourmet Burgers, Inc. $32.29 48.1% $418.7 $603.7 $1,338.6 $121.1 9.0% 0.5x 5.0x Texas Roadhouse, Inc. $61.09 81.2% $4,388.0 $4,195.1 $2,457.4 $290.8 11.8% 1.7x 14.4x

Mean 13.8% 1.6x 10.3x Median 12.1% 1.3x 10.5x Harmonic Mean 12.1% 1.0x 8.2x

Differentiated Casual Price % 52 Wk Market Enterprise LTM EV / LTM Company 04/29/19 High Cap Value Revenue EBITDA Margin Revenue EBITDA BJ's Restaurants, Inc. $50.99 66.7% $1,064.5 $1,130.2 $1,129.0 $130.2 11.5% 1.0x 8.7x , Inc. $50.09 83.2% $2,186.6 $2,283.1 $2,332.3 $225.9 9.7% 1.0x 10.1x Chuy's Holdings, Inc. $21.08 61.8% $355.6 $347.4 $398.2 $35.3 8.9% 0.9x 9.8x Dave & Buster's Entertainment, Inc. $59.22 88.3% $2,167.7 $2,539.6 $1,265.3 $275.7 21.8% 2.0x 9.2x BJ's Restaurants, Inc. $50.99 66.7% $1,064.5 $1,130.2 $1,129.0 $130.2 11.5% 1.0x 8.7x

EV = enterprise value; LTM = last twelve months Mean 13.0% 1.2x 9.5x $ in millions, except per share data Median 10.6% 1.0x 9.5x NM = Not Meaningful Harmonic Mean 11.5% 1.1x 9.4x

8 | RESTAURANTS Q1 2019 PUBLIC COMPANY TRADING & OPERATING DATA (CONTINUED)

Fine Dining Price % 52 Wk Market Enterprise LTM EV / LTM Company 04/29/19 High Cap Value Revenue EBITDA Margin Revenue EBITDA Del Frisco's Restaurant Group, Inc. $6.89 40.5% $230.2 $558.0 $378.2 $21.6 5.7% 1.5x 25.8x Ruth's Hospitality Group, Inc. $26.56 78.2% $808.7 $844.6 $452.3 $71.8 15.9% 1.9x 11.8x $6.89 40.5% $230.2 $558.0 $378.2 $21.6 5.7% 1.5x 25.8x

Mean 10.8% 1.7x 18.8x Median 10.8% 1.7x 18.8x Harmonic Mean 8.4% 1.6x 16.2x

Family Price % 52 Wk Market Enterprise LTM EV / LTM Company 04/29/19 High Cap Value Revenue EBITDA Margin Revenue EBITDA Cracker Barrel Old Country Store $171.65 92.8% $4,126.7 $4,357.4 $3,077.6 $384.9 12.5% 1.4x 11.3x Denny's Corporation $18.83 98.4% $1,159.2 $1,475.7 $630.2 $103.3 16.4% 2.3x 14.3x Luby's, Inc. $1.42 49.1% $42.4 $79.2 $347.2 $1.7 0.5% 0.2x NM

Mean 9.8% 1.3x 12.8x Median 12.5% 1.4x 12.8x Harmonic Mean 1.4% 0.5x 12.6x

Pizza Price % 52 Wk Market Enterprise LTM EV / LTM Company 04/29/19 High Cap Value Revenue EBITDA Margin Revenue EBITDA Domino's Pizza, Inc. $268.87 88.1% $11,051.6 $14,682.5 $3,483.5 $619.8 17.8% 4.2x 23.7x Papa John's International, Inc. $51.87 82.1% $1,648.3 $2,270.7 $1,573.3 $127.8 8.1% 1.4x 17.8x Papa Murphy's Holdings, Inc. $6.47 99.8% $110.2 $197.8 $126.4 $22.0 17.4% 1.6x 9.0x

Mean 14.4% 2.4x 16.8x Median 17.4% 1.6x 17.8x Harmonic Mean 12.7% 1.9x 14.3x

Beverage Retail Price % 52 Wk Market Enterprise LTM EV / LTM Company 04/29/19 High Cap Value Revenue EBITDA Margin Revenue EBITDA Coca-Cola Consolidated, Inc. $328.00 95.6% $2,342.4 $3,565.5 $4,625.4 $241.2 5.2% 0.8x 14.8x DAVIDsTEA Inc. $1.39 26.0% $36.2 $21.9 $164.9 NM NA 0.1x NM Dunkin' Brands Group, Inc. $75.18 97.2% $6,210.0 $8,742.1 $1,321.6 $458.5 34.7% 6.6x 19.1x Keurig Dr Pepper Inc. $28.61 99.3% $40,263.3 $56,181.3 $7,442.0 $2,165.0 29.1% 7.5x 25.9x Corporation $76.91 99.2% $95,645.3 $99,790.3 $25,552.7 $5,409.9 21.2% 3.9x 18.4x

EV = enterprise value; LTM = last twelve months Mean 22.5% 3.8x 19.6x $ in millions, except per share data Median 25.1% 3.9x 18.8x NM = Not Meaningful Harmonic Mean 13.2% 0.5x 18.8x

9 | RESTAURANTS Q1 2019 CONTACT US CITATIONS

1. 1. Bloomberg, “American Eating Habits Are Changing To learn more about industry trends, financing Faster than Can Keep Up,” alternatives, and merger and acquisition opportunities, https://www.bloomberg.com, accessed April 18, 2019. please contact: 2. Restaurant Business, “National Restaurant Association’s State of the Industry Report is Here,” Leigh Hudson https://www.restaurantbusinessonline.com, accessed Managing Director Consumer Investment Banking April 25, 2019. 415-850-3729 3. NPD, “Fast Casual Is Only U.S. Restaurant Channel to [email protected] Increase Traffic Over Past Five Years,” https://www.npd.com/, accessed April 3, 2019. Bill Harrison 4. Food NewsFeed, “FSR 50 Emerging Chains for the Managing Director Future,” https://www.foodnewsfeed.com, accessed April Head of Consumer Investment Banking 3, 2019. 917-596-5533 [email protected] 5. IBISWorld, “Chain Restaurants in the US,” https://www.ibisworld.com, accessed March 20, 2019. 6. Restaurant Brands International, “Restaurant Brands International Inc. Reports Full Year and Fourth Quarter 2018 Results,” http://www.rbi.com, accessed April 1, 2019. 7. QSR, “Inside Inspire’s New Brand Empire,” https://www.qsrmagazine.com/reports/inside-inspire-s- new-brand-empire, accessed March 27, 2019. 8. Cision PR Newswire, “Peet's Coffee to Acquire Majority Stake in Revive Kombucha,” https://www.prnewswire.com, accessed April 3, 2019. 9. Restaurant Business, “How Tim Casey Plans to Fix Quiznos,” https://www.restaurantbusinessonline.com, accessed March 28, 2019. 10. Restaurant Business, Top 500,” https://www.restaurantbusinessonline.com/top-500- chains-2018/quiznos, accessed April 4, 2019. 11. Fast Casual, “Quiznos’ Parent Company Hires Former Exec,” https://www.fastcasual.com, accessed April 2, 2019.

10 | RESTAURANTS Q1 2019 BUILT FOR THE MIDDLE MARKET Capstone Headwaters is an elite investment banking firm dedicated to serving the corporate finance needs of middle market business owners, investors and creditors. Capstone Headwaters provides merger & acquisition, private placement, corporate restructuring and financial advisory services across 16 industry verticals to meet the life cycle needs of emerging enterprises. Headquartered in Boston, MA and Denver, CO, Capstone Headwaters has 19 offices in the US, UK and Brazil with a global reach that includes over 300 professionals in 33 countries.

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