Micro-Cap Review Archives Fall 2009

8/4/2019 Micro-Cap Review Archives Fall 2009

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MICRO-CAP REVIEW$5.

microcapreview.co

Made in Amer ic a Edi t ioFeaturing

Ask Mr. Wallstreet

Born in the USAby Ilene Chunko and Avik Roy [6]

Winning Micro-Cap

Strategies Using ETFsby C Michael Carty [14]

Life Insurance

for Investmentby Jeff Keller [23]


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EDITORIAL

www.microcapreview.co

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Micro-cap ReviewP.O. Box 4216

Metuchen, NJ 08840-1848T 732-603-1250F 212-202-6020

SNN Incorporated

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PUBLISHERWesley Ramjeet

[email protected]

EDITORRonald Stone

[email protected]

WRITERSC. Michael Carty

Ilene ChunkoJohn Faessel

Steven GreenfieldChet Hebert

Jeff KellerJordan KimmelSheldon Kraft

Jack LeslieLarry May

Daniel R. MurphyM.C. Elvis Oxley

Avik Roy

ACCOUNTINGJennifer Anglade

[email protected]

ADVERTISINGVong Bui

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BUSINESS DEVELOPMENTRon Stone

[email protected]

CIRCULATIONJackie Peters

[email protected]

Suki [email protected]

GRAPHIC PRODUCTIONTony Vibhakar

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WEBMASTERKelvin Chen

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Micro-Cap Review Magazine is published Quarterly,Spring, Summer, Fall, Winter POSTMASTER send ad-dress Changes to Micro-Cap Review Corporate Offices. Copyright 2009 by Micro-Cap Review Inc. All RightsReserved. Reproduction without permission of the Pub-lisher is prohibited. The publishers and editors are Notresponsible for unsolicited materials. Every effort hasbeen made to assure that all Information presented in thisissue is accurate and neither Micro-Cap Review Maga-zine or any of its staff or authors is responsible for omis-sions or information that is inaccurate or misrepresentedto the magazine.

If we put 2009 in a time capsule and go di-rectly from 2008 to 2010, just think what wewould have missed in 2009. The highlights of2009 should really begin with the lowlights. Infact, the lowlights of 2009 were multi-faceted.They appeared across the financial landscapesimilar to weather patterns leading up to a

perfect storm. In this perfect storm, the hous-ing market bubble reached its pinnacle anddropped like a stone. The torrent of losses felllargely on Wall Street, washing away years ofprofits from the purchase of subprime loans.The tide of losses kept rising until the finan-cial industry was shaken at its foundation.Legendary names like Lehman Brothers, BearStearns, and AIG drowned under a tsunamiof debt. The banking system was a ship thatwas sinking fast until the federal governmentcame to the rescue. The Federal Reserve didwhat it had to do, pouring billions of dollarsinto the banking system. The stock market,led by the Dow Jones Industrial Average andother financial indexes went down like the Ti-

tanic. Both Main Street and Wall Street alikewere left stunned by the bad news, losses,and bankruptcies. People everywhere wereasking, How could this have happened?

Perfect storms take time to develop, happenquickly, and in their aftermath leave a trailof destruction. The perfect storm left manypeople homeless and jobless, while causingthe federal debt to swell. The loss of jobs willtake longer to rebuild than New Orleans af-ter Hurricane Katrina. General Motors stockhas no value, and Chrysler is a penny stock.The year 2009 will also be remembered likethe movie, The Day the Earth Stood Still. Themoney froze like Ted Williams. There was nomovement, except redemptions and internalcalculations of losses. IPOs went MIA.

The buzz words of 2009 became stimulusand bailout and all the money that the gov-ernment could print. The micro-cap stockmarket became an orphanage where alladoptions were cancelled and at best post-poned. They say money talks, but the micro-cap market became empty like the streets of

Anchorage, Alaska on a January evening. Thedisappearance of investment capital createda very lonely atmosphere in which lenders andfunders vanished.

Somehow we remain standing, shaky perhapsand teetering on the abyss. Many of us arewet, some drenched, and some washed out.Incredibly the spirit gauge is turning higher forthe better. Although 2009 has been a horribleyear for most, the worst appears to have beenaverted. The perfect storm is ending, althoughthere are still some lingering clouds ahead.There are many silver linings including gold.

Thankfully you made it through the storm! We

welcome the opportunity to share many ofthese positive stories with you on our futurepages.

Wesley RamjeetPublisher

This Publication is not to be construed, under any circumstances, by implication or otherwise, as an offerto sell or a solicitation to buy or trade in any commodities or securities herein named. Micro-Cap ReviewMagazine and its employees are not, nor do they claim to be registered investment advisors or broker/deal-ers. This magazine contains forward-looking statements within the meaning of Section 21E of the Securi-

ties and Exchange Act of 1934 relating to companies future operating results that are subject to certainrisks that could cause results to differ materially from those projected. Readers are cautioned not to placeundue reliance on these forward-looking statements. This publication undertakes no obligation to updatethese forward-looking statements. Micro-Cap Review Magazine, its owners, employees, their families andassociates may have investments in companies featured within this publication and may elect to sell theseinvestments or purchase additional investments in these companies at any time. However, the policy of oureditorial staff is to avoid any pre-publication trading of featured stocks or sales until the release date of themagazine. In order to be in full compliance with the Securities Act of 1933, Section 17(b), where the publisherhas received payment for advertisement/advertorial of a security, the amount and type of consideration willbe fully disclosed. All information about the Company contained within an advertisement/advertorial hasbeen furnished by the respective Company and the publisher has not made any independent verifications ofsuch information and makes no implied or express warranties on the information provided. Readers shouldperform their own due diligence before investing in any securities mentioned. Investing in securities is specu-lative and carries a high degree of risk. All MicroCap Review Disclaimers apply http://www.microcapreview.com/disclaimer.php before investing view www.sec.gov/investors

W e s l e y R a m j e e t


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BUSINESS AND MARKETS



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TABLE OF CONTENTS

TableofCon

tents


BUSINESS & MARKETS

Born in the USAby Ilene Chunko and Avik Roy 6

Broker Dealer Updateby Jack Leslie 22

Life Insurance for Investmentby Jeff Keller 23

Micro-cap Capitol News from Washington, D.C.by M.C. Oxley & Murphy 35

Compliance Cornerby Chet Hebert 48

FINANCE & INVESTMENTS

Concentrate on the Best Micro-Cap Companies-The Magnet Method of Investing

by Jordan Kimmel 12

Winning Micro-cap Strategies Using ETFsby C Michael Carty 14

Ask Mr.WallstreetWhere Have All the IPOs Gone?by Sheldon Kraft 17

Stock Research: Sionix (SINX)by Steven Greenfield 24

On The Market: Reading International (RDI)by Dr. John Faessel 39

Industry News: Obituaries, Retirements andChange of Firm 50

PROFILED COMPANIES

Bagger Daves (OTCBB:DFRH)8

AngioGenex (OTC:AGGX) 19

Veritec (OTC:VRTC)27

US Preventive Medicine 31

Stanton Chase International 36

Viper Motorcycle 41

Reuven Enterprises 44

Laser Energetics (OTC:LNGT) 45

LIFESTYLES

Vitamin Complexitiesby Dr. Larry May 28

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When we use the phrase Born in the USA, we are not usingit in the way that rock singer, Bruce Springsteen, had in mind.Rather, we use the phrase to mean the spirit of innovation andentrepreneurship that is at the heart of American business. Infact, this spirit is very much alive and well, despite currentmarket conditions. Exciting new companies continue to be

created, even as bad economic news remains widespread.While financing is very difficult for most new ventures today,companies continue to survive, and some even thrive.

Entrepreneurship drives economic growth. In America, peoplebecome entrepreneurs for two reasons. They do it becausethat is the best path available - necessity entrepreneurship,or they do it because they want to make money and createeconomic value - opportunity entrepreneurship. Whereasnecessity entrepreneurship has no meaningful effect on theeconomy, opportunity entrepreneurship has a significant ef-fect on economic growth. In this article we will focus largelyon opportunity entrepreneurship in the United States.

Entrepreneurship During Recessions

During recessions, there is a noticeable uptick in accidentalentrepreneurs, unintended entrepreneurs, or forced entre-preneurs, all signs of necessity entrepreneurship ratchetingup. Thats understandable. And its true that a few of thesenecessity entrepreneurs will surprise themselves and otherswith big successes. But what happens to opportunity entre-preneurship during downturns? The overall number of start-ups tends to remain roughly constant during good times andbad. During economic winters, high-income potential start-ups decline while low-income potential start-ups increase.That suggests the increase in the number of necessity en-trepreneurs is actually offset by a decrease in the number ofopportunity entrepreneurs.

Why should we care about how many and what kind of com-panies are born in the United States during this downturn?Primarily because it will determine what kind of growth wecan expect when this economic storm ends. That is not onlya widely held view among Americans today, but is based onempirical research. We could return to the high growth of thepost-1995 decade. Or we could find ourselves in the midstof a sustained period of sluggish growth, like the early 1970sthrough the mid-1990s. Since a third of all new jobs ingood times and bad are created by start-ups, the quantity,

quality, and speed of job creation through entrepreneurial ac-tivity will be critical to determine how we exit from the currentrecession.

Recessions A Challenge or an Opportunity?

Opportunity entrepreneurs face daunting challenges whenU.S. markets turn south. Outside capital dries up, valuationsget depressed, exit options disappear, and strategies shrink.Most importantly, many consumers and businesses are finan-cially strapped and, as a result, reduce or eliminate spending.

Additionally, investing in innovation, marketing, operations,or capacity carries higher risk. Finally, in an unforgiving mar-ketplace, there is almost zero margin of error for even smallmistakes in business strategy or execution.

So is it all gloom and doom for those with entrepreneurialaspirations? Does a recession spell the end for motivatedfounders? Do bad times create a cohort of businesses withlesser potential? The answer to these questions is a re-sounding no.

Opportunity entrepreneurs enjoy significant advantages dur-ing tough times. According to the Kauffman Foundation, anon-profit organization that focuses on entrepreneurship,Good things grow even in the darkest times. Dark timesbring together two powerful concepts, Schumpeters creativedestruction and Darwins survival of the fittest, in a smolder-ing cauldron of opportunity and risk. Disruptions to the pre-recession status-quo create new opportunities for discerningentrepreneurs.

The winners among the recessionary start-ups the com-panies that succeed often tend to win big. The prize to thewinners is bigger than you would expect, considering thechallenging economic conditions that accompany their birthand infancy. In 2008 just under half of the Inc. 500 and amajority of the U.S. Fortune 500 were started during reces-sions or bear markets. Our economy has contracted a totalof 556 months over the course of the past 152 years (through2007). That is, the U.S. economy has been in a downturn 30.5percent of the time. A whopping 57 percent of U.S. Fortune500 companies founded during the last 152 years were bornin the midst of those difficult times.

Entrepreneurs benefit from some striking advantages duringrecessions. First, key start-up costs tend to fall, such as rent,


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equipment, and labor. Second, founders are forced to bootstrapmore effectively, given financing is scarce. Investors and lendersare more risk-averse, so only the most promising ideas will at-tract capital. Third, newly born companies hatched during reces-sions often have more time to set up the business right beforethey launch. These start-ups also experience the business at ameasured pace before volume ramps up. Fourth, some badly

run businesses get wiped out during downturns, offering relatednewbies a chance to swoop in and fill the void. Finally, loyaltiesloosen and customers are more open to cheaper alternatives toreplace more pricey vendors.

Announcements of Recent Births

During this recession, entrepreneurs are busy creating new op-portunities and doing deals that create viable businesses withrobust prospects for growth and profitability. A combination ofnecessity, aspiration, ambition, and desperation is driving bright,energetic, and resourceful individuals to create new ventures.

Are there certain types of businesses that are more popular? Pastrecessions show that only a handful of technologies remain thefocus of most start-up activity. Information technology is still big,

but specific areas that help cut costs and increase productivity,like e-learning or virtual collaboration, are attracting entrepreneur-ial attention. In addition, healthcare is generally a magnet for newventures at all times. Alternative energy and clean technology,fuelled by government largess, continues to be popular. There isa somewhat heavier emphasis than in the past on ventures thatview the government as a primary customer. There are somebusinesses that are recessionary staples - household products,food, personal services, telecommunications, transportation, andthe vices (e.g., alcohol, tobacco, and gambling).

Some examples of recent entrepreneurial activity in the NY/NJarea reflect these patterns.

C-MAIL, a New York-based start-up, has created a platform

that prioritizes e-mails (within Microsoft Outlook / Exchange) andcaptures business intelligence across the enterprise. The tech-nology integrates with existing enterprise systems and providesproductivity, workflow, and collaboration features to end users,managers, and IT departments. C-MAILs technology is used bya small but growing user base, ranging from Fortune 100 compa-nies to small businesses and government agencies. According toCEO, Manish Sood, Our value proposition of increased produc-tivity and collaboration, cost savings and innovation is even moreappealing to companies in these trying economic conditions.

MySkin is another New York-based start-up. It was createdby current CEO, Rahul Mehendale. Mehendale, a Harvard MBAgraduate, was unhappily toiling away at a large consulting firm

when he decided to do something more interesting. He got to-gether with another Harvard MBA graduate, a leading physician,and one of the worlds eminent biophysicists, to create a com-pany that helps individual customers identify specific skin careproducts best suited for them. At MySkins Web site, visitors areescorted through a series of questions that leads to a personal-ized profile of their skin. MySkins technology engine then helpsvisitors identify skin products that work best for them. It is almostlike a personal clinical test designed for the customer. To keep therecommendations unbiased, the Web site has no advertisementsfrom skincare manufacturers.

-neur Bert Glaser, M.D., founded retinal diagnostics company,Ocular Proteomics LLC, in April 2009. Ocular Proteonics wasfounded to improve eye health care for millions of people suffer-ing from wet Macular Degeneration (wet AMD), the leading causeof blindness in adults over age 50. Lorraine Marchand, the CEOof the company, is clear about the benefits of what others would

consider poor timing, The recession conveyed certain advantag-es in our situation. Research and development, and operating ex-penses had declined; companies were eager to partner and ven-dors were eager for work; and high quality talent was abundantat fair market prices. We were fortunate because we had cash tosustain us for 12 months, so raising capital was not an immediateconcern. With unshakeable conviction that the potential marketwas robust, Dr. Glaser committed personal funds to take the busi-ness to the next stage. Connecting her companys path to suc-cess with other companies born in a recession, Lorraine claims,Surviving a recession and emerging as a sustainable companystrengthens the credibility of start-ups, making them that muchmore attractive to investors looking for their next opportunity asthe market starts to swing back.

-neurship. He once said, If you cant find a job, buy one. Withan SBA loan, he not only bought one, but two companies. Bothcompanies provide separate but related technology services.McDonnell uses both companies as a platform to develop moresophisticated products and services. With the base business,he can evaluate different growth strategies, including expandingproduct offerings, services, and geographic coverage. He can doall of this and have a core business to fund the expansion. Whileboth companies are not early-stage start-ups, they are start-upsnonetheless.

a former division president of a major energy utility as the head oftheir venture? Steve Morgan retired from a senior leadership rolebefore moving into the challenging world of start-ups. While hehas been forced to dramatically change his thinking and the scalefor how he operates day-to-day, he has not downsized his visionfor the new venture. Backed by commercial real estate investorsand founders, this little venture has the potential to change theway we think about clean energy.

Looking Beyond the Downturn

There are some indications that the United States may be onthe brink of an entrepreneurial boom. Contrary to popularly heldbeliefs, entrepreneurship is being driven by the most unexpect-ed demographic trendthe aging population. According to CarlSchramm, CEO of the Kauffman Foundation, Over the past de-

cade or so, the highest rate of entrepreneurial activity occurs inthe 55- to 64-year-old age group. The 2034 age bracket has thelowest rate. Part of the reason is the significant decline in long-term employment among people between the ages of 35 and 64.

Bruce Springsteen wrote Born in the USA as a tribute to patri-otic American soldiers who returned home from Vietnam only tobe greeted by a hostile public. Likewise, we see American en-trepreneurs being resilient, fighting their own battles despite thedownturn in the economy. And while it may be surprising that thisbattle is mostly fought by seasoned professionals, most of thesedaring entrepreneurs hail from Springsteens own generation.



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PROFILED COMPANIES


It all started in 1996, whenMichael Ansley and a collegebuddy explored franchisingopportunities. After research-ing the options, they decidedto open a Buffalo Wild Wingsfranchise. They were in theirmid-20s and had no prior res-taurant experience. With thatsort of background, no bank

wanted to lend them money.Determined to move ahead, they found help from their fami-lies and opened their first Buffalo Wild Wings restaurant inMichigan in 1996.

After a slow start and two years of losses, Michael and hispartner finally realized a small profit in the third year. By then,Michael had learned some hard lessons of running a busi-ness and decided to go out on his own. He sold his interest inthe franchise to his partner and opened his first Buffalo WildWings restaurant in Sterling Heights, Michigan in 1999.

Reinventing the Wheel and Making It Better TheFull-Service Model

You would think that most franchisees would be contentwith a company that had a strong brand, a superior product,a high growth rate, and a record of profitability. But it wasnot so with Michael. He saw an opportunity to improve themodel. Michaels hands-on approach and innovative thinkinghad made him particularly sensitive to what his customerswanted in their dining experience. I realized that the demo-graphics were changing. Many of our guests had been formerloyal college customers. Many were now employed, marriedwith children, and were living in the suburbs. When dining outwith young children, customers preferred not having to getup from their tables for food and beverages.

His answer: a hybrid, full-service model coupled with coun-ter service at his restaurant in Novi, Michigan. He did thisagainst the advice of the corporate office and fellow franchi-sees, which were still wedded to the successful self-servicemodel. In the first year of operations, the Novi store recordedthe highest sales in the Buffalo Wild Wings system and con-tinued to increase sales until it reached the $4 million mark inits third year of operation.

Michael was one of the first to offer full service to his guests.By the end of 2003, the Novi location had recorded the high-est sales in the franchise.

The full-service model was successful because of its diverseand enhanced customer appeal; profits increased on two lev-els:

percent to 11.2 percent of sales, and

sell more menu items.

Between 2004 and 2005, Buffalo Wild Wings corporate lead-ership embraced the full-service model. Today this model isnow available nationwide.

Even before transforming the Novi restaurant into a full-ser-vice operation, Michael was already considered a rising starin the franchise, having been awarded Operator of the Yearin 2000 by the Buffalo Wild Wings corporate office for theoutstanding performance of his Sterling Heights and Fenton

restaurants.

The full-service restaurant in Novi collected numerousawards:

2005, and 2006

of the Year 2007

Today, Diversified Restaurant Holdings, Inc. is one of the larg-est and most successful franchisees of Buffalo Wild Wings,Inc. and the only franchisee that is public (OTCBB: DFRH).Diversified Restaurant Holdings currently owns and oper-ates 16 Buffalo Wild Wings restaurants, 5 in Florida and 11 inMichigan. In August 2010, the company expects to acquirethe nine Buffalo Wild Wings restaurants it currently manages,increasing annual sales by $24.8 million.


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Going After Bigger Game The Massive BurgerMarket

According to the Library of Congress, Connecticut is hometo the first hamburger restaurant in the United States. LouisLassen of Louis Lunch, a small luncheonette in New Haven,sold the first hamburger in 1895. According to New Yorkmagazine, The dish actually had no name until some rowdysailors from Hamburg, Germany named the meat on a bunafter themselves years later. The rest, as they say, is history;the lowly hamburger has become a multi-billion dollar icon of

American food culture.

In 2006, Ansley started looking at opportunities in the fast-casual segment of the hamburger market where his BuffaloWild Wings experience could give him an edge. The oneniche that jumped out was the mid-range price market thatexisted between Wendys on the low end and Red Robin onthe high end. This segment was still relatively underdevel-oped. It had a loyal family-oriented customer base and ap-pealed to people during difficult times. New startups in thissector showed significant growth.

Finding the Local Hook

I felt that a niche opportunity lay in creating a restaurant that

combined all the cost efficiencies and consistent productquality of a franchise restaurant with the traditional feel andcommunity loyalty of an English Pub. Put those two conceptstogether and you have a potent advantage.

The inspiration for the restaurants design came from a wa-tering hole that I found in Cincinnati. The 80-year-old pubwas a classic. It had dark wood paneling and a copper-platedbar. To reinforce the timeless theme, we christened the bar,Bagger Daves Legendary Burgers and Fries. We usednostalgic images gathered from local museums and histori-cal societies to connect with the neighborhood. We even builtan electric train railway running the length of the pub to addto the fun.

Bagger Daves was launched in January 2008 in Berkley,Michigan. The second store opened in Ann Arbor in August2008. Marketing focused on grassroots programs that sup-ported neighborhood non-profits and other events to under-score the companys connection to the community.

The Launch

The menu featured freshly made burgers(never frozen) accompanied by more than30 toppings, fresh-cut fries, a selection ofwines and beers, and hand-dipped milk-shakes. Signature items included SloppyDaves BBQ, the Train Wreck Burger(shown at left), and Bagger Daves Amaz-ingly Delicious Turkey Black Bean Chili.

Hello there! We just wanted to quickly write and tell you thatwe are head over heels for Bagger Daves after trying it for thefirst time last weekend. The burgers taste amazing. They are

juicy and tender, the sauces are great (Chipotle BBQ, hello!),the veggies are crunchy and large, and those Belgian fries areoriginal and tasty. We went last week and then again yester-day, and we plan to go again this week, even though we livean hour away in Adrian. Thank you for delivering such greatfood in a great atmosphere.

Benjamin Ray and Jessica Klein

PROFILED COMPANIES


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On the public relations front, Bagger Daves scored fourth inthe National 2009 March Burger Madness contest. The head-line of the tongue-in-cheek press release reads:

Bagger Daves Upsets Top Seeded McDonaldsRolls into Final Four of the March Burger Madness Tour-nament

Defeated perennial champion with their fresh and fast deliv-ery

This brainchild of BurgerBusiness.com was publisher ScottHume. Hume simulated the excitement of the NCAA Basket-ball Championship Tournament by substituting various burgerchains for the college teams. He renamed the traditional fourregional brackets: the Kroc (named for McDonalds entre-preneur Ray Kroc), McLamore (for Burger King founder JimMcLamore), Thomas (for Wendys founder R. David Thomas),

and Karcher (for Carls Jr. founder Carl Karcher). Burger fanscould follow the games by going towww.burgerbusiness.com and clicking on the Burgerbrack-et1 link to see all the teams and their rankings.

BurgerBusiness.com also selected Bagger Daves as a can-didate for the Top Five Burger Menus.

Future Expansion Plans

For the Company as a whole, we are on track with an ag-gressive expansion program, said Michael Ansley, which willinclude:

Wild Wings affiliated restaurants, increasingoverall sales by an estimated $24.8 million;

five Bagger Daves restaurants over the nextthree years.

This expansion will lay the groundwork for projected revenuesof $60 million by the end of 2011, with an estimated EBITDAmargin of 13.8 percent.

Additionally, the board of directors of Diversified RestaurantHoldings recently agreed to evaluate the benefits of franchis-ing the Bagger Daves concept.

For more information on Diversified Restaurant Holdings,please visit www.diversifiedrestaurantholdings.com.

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PROFILED COMPANIES


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The financial markets have become so emotionally drivenover the last few years that even seasoned investors havelost their way. Media discussions have dumbed down theissue into a debate of whether we are in a bull market orwhether the dramatic rise since the market low on March 9,2009 is a bear market rally. If investors are to make money inthe stock market, they need to tune out the day-to-day medianonsense and remember that all companies are not createdequal. This law applies to people, animals, and public com-

panies.

The stock market is a lot like sports. The games remain vir-tually the same, but the names of the best players change.Once investors realize this, they can better invest and man-age portfolios. In sports, a player rarely shows up in the proswithout first being a superstar in high school. For a companyto be added to the S&P 500, it usually gets added first to thesmaller market cap indexes. Our Magnet Method of invest-ing has been developed to capture and identify these fastperforming companies as they begin to generate profits andaccumulate cash.

In my new book, , I try tohelp investors relate two well known scientific concepts tothe stock market, the bell curve and the S-curve. Below aretwo excerpts that highlight these two powerful realities.

Interestingly, the indexes continue to go higher because thecomponents that make up the index keep changing. So, al-though long-term investing in indexes has proven profitable,investing in the individual companies making up the indexhas not. Many former index companies, such as Pan Ameri-can World Airways (Pan Am) and Bethlehem Steel have gonebankrupt. The index creators simply replaced these nameswith new companies to help the indexes go higher. Althoughseveral names that were removed from the index had beeninvolved in mergers or acquisitions, the majority of the nameswere removed due to underperformance. New industriescontinue to emerge, and new market leaders show up unan-nounced. Individual investors have to find a way to identifythese industries and companies. Also, investors need to re-member that the leaders of past bull markets will often not bethe leaders of the next bull market.


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It amuses me when so-called experts cite the lack of growthin the United States and highlight the problems of GeneralMotors as proof. Back in the 1800s, a filibuster pressuredCongress to close the U.S. Patent Office. The argument was,Now that everything has already been invented, why are wewasting taxpayers money? On the contrary, with the ad-vances in communications and technology, new discoveriesare accelerating today. Interestingly, these breakthroughsusually do not come from larger companies, which are gen-erally too set in their ways. Instead, breakthroughs are usuallyfound in smaller, more innovative companies. Initially, small,niche companies create the new, enabling industries: Micro-soft in 19872000, America Online (AOL) in 19922000, orGoogle in 20002008. In the beginning of the twentieth cen-tury, Ford and Radio Corporation of America (RCA) were theMagnets of their day, but they eventually lost their leadershiprole.

Perhaps Charlie Munger said it best in the August 2008 issueof

Youve got to remember that its in the nature ofthings that most small businesses will never be bigbusinesses. Its also in the nature of things thatmost big businesses eventually fall into mediocrityor worse. So its a tough game out there. Inaddition, the players of the game all have to die.Those are the rules of the gameand you haveto get used to it.

When I was in high school, I used to take the subway trainfrom Manhattan to the Bronx High School of Science. Onestop along the way was Yankee Stadium. As we passed thestadium, I would think about Babe Ruth, Lou Gehrig, andMickey Mantle. I often thought how many kids grew up and

wanted to play in the major leagues. How many made it?How many ever batted .350 for a season or hit 40 home runsin a year? You were talking about the cream of the crop. Intrack and field, how many athletes ever ran the 100 metersin under 10 seconds? In basketball, how many players everscored 40 points in an NBA game? I would often tell myselfthat investors needed to think about public companies in thesame way as well.

By nature, there can be only a few superlatives in anything,publicly traded companies included. The stock market fol-lows the natural order of things. When I was a college studentstudying finance and investments, I sat in class looking ata chart of the bell curve and asked myself a couple of life-

changing questions. Understanding that only five percent ofcompanies can be truly superlative, why would anyone rec-ommend buying the whole list? Why would anyone acceptthe premise of investing in all 500 companies in the S&P orin all 2,000 companies in the Russell small-cap index, unlessthe investor was willing to accept only an average return?

My next thought turned to finding a quantitative way to isolateand measure the superlative companies for investment. Thisbecame my quest over the next 20 years and remained the

backbone of the Magnet Stock Selection System. Underthis method, I focus on finding the up and coming companiesof the day, and the knowledge that is needed to find a fewcompanies at any given time. And that keeps me searchingfor the best micro-cap stocks.

- The Magnet Method of Investing

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Exchange-traded funds (ETFs) are perhaps the greatest in-vestment innovation in the last 15 years. Growing at a tor-rid 60 percent rate since its inception in 1993, ETFs haveamassed assets of $590 billion. There are now 725 ETFs, andthe reason is clear: ETFs provide investors with a low cost,diversified means of investing across a wide variety of assetclasses in portfolios benchmarked to outperform most ac-tively managed separate accounts and mutual funds.

Exchange-traded funds are particularly attractive to peoplewho invest in asset classes that are difficult to manage interms of time and resources. Successful micro-cap invest-ing requires extensive research to determine suitable invest-ments. Investors need to digest a great deal of informationabout many areas: a companys business model, productor service potential, management team, financial resources,productive capacity, resource endowments, proprietary tech-nology or process, patents, and regulatory and environmen-tal restrictions.

Given the time and financial costs, individual investors oftendont do enough work to reach a profitable decision. Even if

they did, it is unlikely that they could successfully populate afully diversified portfolio without professional help.

Enter micro-cap ETFs. Compared with other micro-cap in-vestment choices (e.g., mutual funds, closed-end funds, unitinvestment trusts, futures, and options), ETFs have very realadvantages:

-aged funds. Micro-cap ETFs are indexed to popular micro-cap benchmarks, such as the Dow Jones Select MicroCap,Russell Microcap, and Zacks Micro Cap Indexes. Experiencehas shown that passively managed index funds typicallyoutperform actively managed funds by virtue of their lowerexpenses, reduced turnover, fewer transactions, and lower

management fees.

cap stocks. Each fund has different rules of index construc-tion, stock selection, rebalancing, and number of holdings.Consequently, the funds can provide investors with differentrisk/return choices.

weightings are published on sponsors Web sites and updat-ed daily to reflect any changes. The funds holdings are also

published on listing exchanges Web sites, which permits in-vestors to track their holdings and purchases.

each fund required to meet Regulated Investment CompanyCompliance standards imposed by the Internal Revenue Ser-vice.

throughout the trading day, which allows investors to choosetheir entry and exit prices. Mutual funds trade only once aday at NAV after the close.

closed-end funds, or separately managed accounts. More ofa funds gross performance is given to shareholders, and lessto management fees and other expenses.

transactions between authorized market makers and the fundto be in-kind, using baskets of securities in proportion tothose in the portfolio. Since in-kind transfers involve no cash,

no taxable event occurs. Long-term ETF shareholders arenot normally subject to the year-end capital gains distribu-tions made to most mutual fund shareholders. Fewer capitalgains distributions mean lower capital gains taxes.

than with mutual funds or individual stocks. Micro-cap inves-tors wishing to use leverage should consider using ETFs.

People invest in micro-cap stocks mainly to profit from capi-tal gains, recognizing that these investments have above-av-erage risk. It is therefore advisable to mitigate risk by diver-sifying away as much specific risk associated with individualstocks as possible. Micro-cap ETFs are ideally suited to thistask, because they hold a sufficiently large number of com-

panies; losses in any one holding will not significantly com-promise the portfolio as a whole.

Currently, there are three seasoned micro-cap ETFs avail-able: iShares Russell Microcap Index Fund (NYSE/Arca:IWC), PowerShares Zacks Micro Cap Portfolio (NYSE/Arca:PZI), and First Trusts Dow Jones Select Microcap Index Fund(NYSE/Arca: FDM). These three funds have a similar historyand were all created in August/September 2005. Statistically,they are a unique asset class due to the close correlation oftheir monthly returns, ranging from 0.97 to 0.99. More impor-


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tantly, they can also be considered as an asset class distinct fromthe broad market represented by the S&P 500, since their cor-relations to that index range from 0.90 to 0.92. The distinction isevidence that they can be a valuable means of diversifying broadmarket-based portfolios.

As illustrated in Table 1, these ETFs also have similar volatilities asmeasured by their annualized standard deviations, ranging from23.0 percent to 23.4 percent over the period from October 2005to July 2009. Not surprisingly, these correlations are significantlyhigher than the S&P 500 figure of 17.5 percent.

Table 1. Risk/Return Characteristics of Micro-cap ETFs vs. theS&P 500

* Performance statistics computed from October 2005 to July2009.

The market trend during the October 2005 to July 2009 periodis atypical from its historic long-term trend of rising stock prices.In the nearly four years since these funds have existed, the S&Plost 3.5 percent annually versus the funds losses of between 5.9percent and 11.6 percent.

This recent decline is not expected to continue indefinitely; mi-cro-cap stocks are likely to once again become a preferred assetclass for investors seeking extraordinary capital gains. While eachof these funds represents a logical means of participating in afuture long-term trend of rising prices, one or another might bemore suitable in meeting a particular investors risk/return prefer-ences. To decide which ETF is the most suitable, investors mustunderstand the specific characteristics of each fund.

The iShares Russell Microcap Index Fund is the largest of thethree funds. As of June 30, 2009, it had $286 million in assets andan expense ratio of 0.60 percent. Its annual return of -8.3 percentpositions it midway between the other two funds. The iSharesfund tries to achieve results that correspond to the Russell Mi-crocap Index, before fees and expenses. The iShares fund uses aconsistent methodology that selects the 1,000 smallest stocks inthe Russell 2000 Index, includes only U.S. companies trading onnational exchanges, and excludes any listed on the OTC Bulletin

Board or Pink Sheets. The fund is rebalanced annually to includeonly companies that meet its size criterianone too large or toosmall. Despite annual rebalancing, its turnover rate is 21 percent,the lowest of the three funds.

The PowerShares Zacks Micro Cap Portfolio has assets of $47.4million and an expense ratio of 0.70 percent, the highest of thefunds. It also has the lowest annual return of -11.6 percent and thegreatest volatility. This fund normally invests at least 90 percentof its assets in stocks that comprise the Zacks Micro Cap Index.

A proprietary model selects micro-cap stocks with the greatestpotential to outperform relevant benchmarks and other activelymanaged micro-cap portfolios. This semi-active strategy hasproduced an annual turnover of 54 percent, or 2 times that ofiShares Russell Microcap Index Fund.

First Trusts Dow Jones Select MicroCap Index Fund is the small-est of the three funds in size, with assets of $14.4 million, and anexpense ratio of 0.60 percent. It has the smallest annual loss ofthe funds, -5.9 percent, and the lowest volatility. The First Trustfund seeks to achieve the price and yield performance of the DowJones Select MicroCap Index, before fees and expenses.

The Dow Jones Select MicroCap Index comprises comparativelyliquid stocks with strong fundamentals relative to other micro-capstocks listed on the NYSE, NYSE Amex, and NASDAQ. Thesestocks have market capitalizations falling within the bottom twodeciles of NYSE stocks. The First Trust index screens stocksbased on market capitalization, trading volume, trailing price/earnings and price/sales ratios, quarterly EPS change, operatingmargin, and six-month total return. This apparently semi-active orenhanced strategy produced an annual turnover in the fund of 85percent, four times greater than the iShares fund and 1 times thePowerShares fund.

As with any investment, a final word of caution is in order. A pru-dent investor should investigate further, check each funds updat-ed performance and holdings, and research other relevant data byvisiting their Web sites:

__________________________________________________________

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Where have all the IPOs gone is a great question. Here is a test,name the last initial public offering (IPO) that you can remember.Okay, for me it is Google. The Google IPO is special in that itwas also a self underwritten IPO. Do you remember in what yearGoogle went public? Well, according to my Google search, it was

April 2004 and their first quarterly filing as a public company wason October 22, 2004. Dont look now but that was almost fivelong years ago. I miss IPOs. They were absolutely fun to buy, funto trade, and folks could make real money, if they were able to gettheir hands on IPO stock. So what happened?

I look back with treasured memories, having been an underwriterof IPOs in the day and having experienced their growth. It wasa time when the market was just getting popular outside of theinner circle of stock market professionals. It was the early 1980swhen stocks were only found on the Pink Sheets (actual quotesheets printed on pink paper) before quote machines, Bloombergterminals, and the Internet. Michael Bloomberg was still at Mer-rill Lynch Pierce Fenner and Smith and was struggling to get hisfirst boxes out into the street. New broker dealer boutiques weresprouting up every day, and civilians and would-be brokers werefinding their way to Security Training School at 17 Battery Place in

New York City to be schooled in passing the Series 7 and 63 teststo become registered with the National Association of SecuritiesDealers (NASD).

From all walks of life, many people changed their careers to try atmaking more money than they ever could have imagined. Fromused car salesmen to college graduates, from the garment centerand the teaching profession, people were flocking to 17 BatteryPlace like it was a big magnet.

This spurt in activity would in no way endanger the wire houses,

the New York Stock Exchange, and the American Stock Exchange,which were pinnacles of integrity and tradition in the capital mar-kets. Sure, the exchanges had their IPOs, but suddenly this newemerging growth market was growing from tadpole to frog andfrom the Pink Sheets to electronic trading. The advent of thequotron machine wired Wall Street and created the transparentmarket with Level 3 machines (computerized, real-time tradingsystem of NASDAQ), which aided the growth of the worlds larg-est trading firms like Speer, Leeds, and Kellogg; Herzog, Heine,and Geduld (owned by Merrill Lynch); Troster Singer (owned bySpear Leeds); Nash Weiss (owned by Quick & Riley); and many


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others. This technological breakthrough ultimately was the marketmaking system that turned NASDAQ into what it is today a billiondollar public company (NSDQ). The ultimate benefit of this marketmaking business was the creation of unlimited liquidity, the singlemost important ingredient for a robust market. Beside creating anew place to buy and sell, the new system was fast, vast, andtrackable.

The market making system created liquidity as each new marketmaker could trade the same listing with others and compete fororders based on order size and posted price. Market making wasthoroughly different from its forbears at the exchanges. The ex-changes only had one specialist making the book on a stock,whereas NASDAQ had several market makers, each having its ownbook. The creation of the market making system single-handedlycreated an industry of its own within the financial community.

Initial public offerings began very quickly. New retail brokeragefirms started to build branch offices in great numbers and neededto give hungry new registered stock brokers something to sell. Fur-ther, the growing number of traders needed something to trade.

Securities trading was a business that needed inventory, and whatis a better way to gain inventory than to create your own? Thus,was born the great IPO market that never looked back. The NAS-DAQ flourished, the SEC needed more help and created the Na-tional Association of Securities Dealers (NASD), and the ranks ofstockbrokers and traders grew exponentially. The US stock mar-kets had spawned a capital base like no other in the world.

An amazing number of new companies was created and funded,including Microsoft, Oracle, Intel, Apple, Sun Microsystems, andYahoo, until the dot-com boom market took companies like AOLto more than $400 per share. Rational valuations and revenue andearnings guidelines were good for the old line stocks of the NYSE,but not for many of the new stocks. Trillions upon trillions of dol-lars of net worth were accrued. Oh yes, it was the days of trading

stocks in fractions before the five percent markup rule, and beforetrading stocks in penny decimals removed the spreads. Lets justsay the NASDAQ had become the Wild Wild West and everybody,including his or her mother, was going public. Financial reportingbecame an obscenity, and unscrupulous characters pervaded theonce pristine integrity-filled world of the New York stock markets.

New issue whores became rampant, new issue hedge funds in-vaded unsuspecting underwriters, and the criminal underworldinvaded the market and took no prisoners. Eventually scandalspublic outcry, political candidates promising reform, media coverage, major arrests and prosecutions led to heavy regulatory intervention and enforcement. Finally, new rules including Rule FD (fudisclosure) and Sarbanes-Oxley became law.

So what happened to this once flourishing IPO marketplace? Inshort, it came to a crashing end almost as quickly as it began. Thedot-com bust and the buildings that went down on September 112001 in New York City practically put the financial markets out obusiness. One by one, NASD members started dropping like fliesWall Street literally cleared out, abandoning the Wall Street vicin-ity and moving uptown, across the river, or out of business. Bro-kers whose client books had incinerated in value went on to newcareers. Liquidity dried up, stocks didnt trade, and new moneystopped flowing in. Additionally, the government clamped downand justifiably over-regulated the stock market. Focus switchedfrom the easy pickings of new issues that flew upwards in the after-market to the salvage of whatever money was available.

Many IPOs had difficulty staying afloat. Prices dropped, capitadried up, and those that remained suffered major market cap set-backs. Many companies diminished in size and lost their listing onthe small-cap or national market system (NMS). Created in 1995the OTC Bulletin Board, received countless fallen angels and leftover public companies. Eventually the Pink Sheets became the lasbastion of listing for non-reporting and struggling stocks. Duringthis time many individual investors unfortunately got destroyed.

The resilience of Wall Street was to be proven again as the private investment in public equity (PIPE) and reverse merger business emerged from the ruins of the dot-com bust. Remember alof those failed new issues and useless stocks? Well, they becamepublic shell companies of the previous new issue market. These

shell companies suddenly had a use from a cadre of companiesthat wanted to go public without an underwriting.

My next article will depict the PIPE and reverse merger market andthe rebirth of the new issue market using old public shells.


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How AngioGenex Inc. is leading the way for early stage biophar-maceutical firms in a downturn economy!

Introduction

AngioGenex, Inc., is a fully reporting public company (AGGX:OB)that was established on world-class research of Dr. RobertBenezra at the Memorial Sloan-Kettering Cancer Center in NewYork City. Dr. Benezras discovered the Id (inhibitor of differentia-tion) genes and the Id proteins that play a critical role in caus-

ing cancer in humans. He defined the role of these Id agents asa final common pathway for the induction of new blood vesselformation by modulating other factors such as VEGF, the tar-get for AvastinTM, Roche/Genentechs enormously successfulmonoclonal antibody for the treatment of cancer. Normally, the Idgenes are activated during development of the fetal embryo andthen are turned off at birth. Dr. Benezra demonstrated that the Idgenes are activated and Id proteins expressed in the blood ves-sels of all tumors examined to date. These new, tumor-associatedblood vessels are required to support the growth and spread ofthe cancer. Dr. Benezra also demonstrated that mice without theId gene do not display tumor-associated new blood formationwhen implanted with human tumors and are resistant to growthof all cancers studied to date. With regard to extrapolating find-ings in mouse models of human cancer to treatment of cancerpatients, an important observation is that the Id genes and pro-teins in mouse and man are virtually identical.

Internal Scrutiny of AngioGenex

Strengths. The companys anti-Id small molecule and anti-senseproducts have been fully validated using in vivo animal studies.The results represent a significant commercial opportunity, if thefindings are validated in human clinical trials. In addition, the ther-apeutic targets of the companys drugs (Id genes and Id proteins)are found only in fetal or cancerous tissue, suggesting a signifi-cant safety benefit for a therapeutic agent that targets these moi-eties. The company also enjoys the support of highly respectedresearchers in the Id field and has experienced management with

extensive commercial expertise in the development of this typeof product. The company has filed five patents, one of which hasbeen approved and the remaining patents are pending approval.Finally, the company has developed a highly sensitive analysisfor Id in blood that can be used as a diagnostic test to supportcost-effective and efficient use of its therapeutic products (per-sonalized medicine).

Weaknesses. The main weakness of the company is chronicunder-capitalization. This has delayed many activities required toadvance the companys promising drugs, including filing inves-tigational new drug (IND) applications and commencing humanclinical trials.

Opportunities. If successful, the AngioGenex technology will ful-fill a significant unmet medical need, thereby providing a majormarket opportunity.

Threats. The main threat to the company is that continued undercapitalization will delay progress of its candidate products andwill allow other companies time to develop and commercializecompeting products.

Assessment of the Current Environment forAngioGenex

Strengths. The public increasingly recognizes that progressmade against cancer has been only marginal, despite enormousinvestments over decades of private and public research. In ad-dition, the significant limitations with respect to efficacy (minimal),adverse events (life-threatening) and cost (extremely high) of theexisting prototype approach to mitigate tumor associated newblood vessel formation (Avastin) are now obvious and well report-ed. Hopefully, recognition of these realities will increase interestin new approaches, such as the AngioGenex anti-Id technology.With respect to cost, the lead AngioGenex anti-Id therapeuticdrug is a small molecule that is relatively inexpensive to manu-facture. This savings will likely increase in significance as bothprivate and government medical care payers try to reduce cost.

Weaknesses. Problematic for a number of years, the investmentenvironment for early-stage companies has become decidedlygrimmer with the recent economic decline. In addition, the U.S.Food and Drug Administration (FDA) has become even more ag-gressive in auditing and evaluating data submitted by sponsors.

Opportunities. Historically, the efficacy hurdles for a product likethe AngioGenex anti-Id agents have been quite low, given thateven a modest survival benefit can form the basis for an NDAapproval. In addition, there is a high probability that the FDA willgrant priority review for a product of this type, further expedit-ing the commercialization process. Recently, Johnson & John-son acquired a company with a similar background, Cougar Bio-tech (NASDAQ:CGRB), at a significant premium in a deal worth

$1 billion. AngioGenex has the potential to participate in sucha transaction once its technology has been clinically validated(proof-of-concept achieved). Finally, the market for a success-ful anti-cancer agent remains very large, potentially in the multi-billion dollar range.

Threats. Many companies currently are competing for funds inthe early-stage oncology space. Also, this type of developmentprogram lacks predictive value, since human clinical trials oftendo not validate the technologys earlier in vivo results in animaltests.

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AngioGenex Strategies

AngioGenex has formulated a number of strategies to exploitthe advantages and minimize the disadvantages and risks listedabove.

Strategy 1. Continue to attract non-institutional investors. Thiswas accomplished by performing a reverse merger to place An-gioGenex in a public market so that individual investors can haveliquidity with their investment and immediate upside on news ofcompany advancements.

Strategy 2. Focus development of the anti-Id drugs on theirsynergy with taxanes like TaxolTM instead of exploring the sin-gle agent activity in multiple tumor types and stages of tumordevelopment. The synergy of an anti-Id approach with Taxol hasbeen demonstrated in both in-house studies conducted at a re-spected contract research organization and in studies reportedin the scientific literature. Using the anti-Id as an adjuvant toTaxol also provides a relatively straightforward, easy to imple-ment, lower cost and lower risk clinical trial design for the Phase

One study with the agent. As part of this strategy, the lead smallmolecule anti-Id protein molecule will be developed initially andthe lead anti-Id gene antisense oligonucleotide studied only as aback-up to the small molecule to conserve resources.

Strategy 3. Build the company for sale or partnership after proofof concept is achieved in a Phase Two clinical trial. This will bedone because the optimum upside for early investors appearsto be achieving proof of concept but before the enormous in-vestments needed to bring the product through registration andproduct launch. This strategy requires reliance on contract re-search organizations for most R&D activities (minimal infrastruc-ture, low internal overhead, only performing studies needed forproof of concept and to affect a smooth technical handoff to abuyer or partner). The contract research organizations selectedfor the activities will need to have a successful past experiencewith FDA audits.

Strategy 4. Continue to optimize and evaluate the diagnostictest. Availability of such a test would greatly increase the valueof the project to potential buyers or partners. In particular, medi-cal insurance companies are more likely to accept requests forreimbursements for treatment, if the decision to use the agent isbased on a pretreatment diagnostic that detects Id proteins inblood or tumor.

Strategy 5. Perform research, as opposed to drug development,only to expand and protect Id-related intellectual property andto provide supporting data for the use of anti-Id drugs to treat

ocular conditions, such as age-related macular degeneration ordiabetic retinopathy. The intention is to partner these early toprovide funding for the oncology effort.

Summary

The financial reward for developing successful new oncologyproducts appears to be greater than ever. However, obtainingand carefully spending investment funds, not technical or regu-latory obstacles, is now the greatest challenge to achieving suc-cess in developing new therapeutic modalities for the oncologymarket. The current reality demands that AngioGenex adopts

new strategies that minimize cost and maximize the chance ofclinical success for new agents.

Find Out More

To find out more about AngioGenex, please visit the companysWeb site at www.angiogenex.com or send an e-mail [email protected]. AngioGenex is currently seeking$5 million to bring its first therapeutic through completion ofPhase One clinical development. Please contact William Watsonat [email protected] for details.

Footnotes:

1 Lewis T, Chasing a cure, Medical Marketing and Media,October 2008.

2 Perk J et al. Id family of helix-loop-helix proteins incancer. Nature Reviews Cancer 2005; 5: 603-614.

3 Parkinson DR, Ziegler J, Educating for personalizedmedicine: a perspective from oncology, Clin PharmacolTher. 2009; 86:23-5.

4 Kolata G, Altman LK, Forty Years War; Weighing Hope

and Reality in a Cancer Battle, Published August 28, 2009.5 Kolata G, Pollack A, The Evidence Gap: Costly Cancer

Drug Offers Hope, but Also a Dilemma, New York Times;Published: July 6, 2008.

6 Shaked Y, Henke E, Roodhart JM, Mancuso P,Langenberg MH, Colleoni M, Daenen LG, Man S,Xu P, Emmenegger U, Tang T, Zhu Z, Witte L, StrieterRM, Bertolini F, Voest EE, Benezra R, Kerbel RS,Rapid chemotherapy-induced acute endothelial progenitor cell mobilization: implications for antiangiogenicdrugs as chemosensitizing agents. Cancer Cell. 2008;

14: 263-73.

Disclaimer:

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This initial column will address the duties of the Financial Indus-try Regulatory Authority (FINRA). The FINRA Web site states thefollowing:

Created in July 2007, FINRA is the leading non-governmentalregulator for all securities firms doing business with the U.S.publicnearly 4,800 firms employing nearly 647,000 registeredrepresentatives. Our chief role is to protect investors by main-taining the fairness of the U.S. capital markets. We carry it out bywriting and enforcing rules, examining firms for compliance withthe rules, informing and educating investors, helping firms pre-empt risk and stay in compliance, and providing trade reportingand other industry utilities.

(www.finra.org/AboutFINRA/Leadership/index.htm)

When someone has concerns over their interaction with FINRAthey need to contact the Office of the Ombudsman. This officeis in place to provide a private and impartial forum for any entity,

which interacts with FINRA. I urge you to utilize their servicesmore frequently. Listed below is the purpose of the office andthe contact information.

The Ombudsmans Office provides a neutral and confidentialforum for member firms and their employees, public investors,and any other business or individual who interacts with FINRAto voice their concerns about operations, enforcement, or oth-er FINRA activities or staff. Individuals who are unsure of theproper channel for addressing a concern or feel that the issuecannot be resolved through other channels should contact theOmbudsmans Office.Upon receiving a concern, the Ombudsmans Office conductsan independent review of the situation and works toward the

identification and evaluation of positive solutions for all partiesinvolved.Please note that the Office of the Ombudsman is not meant toreplace other channelssuch as the Investor Complaint Center,the Office of the Whistleblower or BrokerCheckfor addressingissues related to other organizations. Rather, the OmbudsmansOffice can help resolve concerns about FINRA or its staff in afair, impartial and confidential manner. If staff from the Ombuds-mans Office is unable to assist you with your concern, we willgladly direct you to FINRA personnel who can help you.

Contact the Ombudsman:Call toll-free at (888) 700-0028, weekdays from 9 a.m. to 5 p.m.,EST.

Write to: FINRA OmbudsmanP.O. Box 9492Gaithersburg, MD 20898-9492

(www.finra.org/AboutFINRA/Ombudsman/index.htm)

FINRA is establishing a consolidated FINRA rulebook that willconsist solely of FINRA Rules. Until the completion of the rule-book consolidation process, the FINRA rulebook includes NASDRules and Incorporated NYSE Rules (together referred to as theTransitional Rulebook), in addition to the new consolidatedFINRA Rules. As the FINRA Rules are approved and becomeeffective, the rules in the Transitional Rulebook that address thesame matter of regulation will be eliminated. When the consoli-dated rulebook is completed, the Transitional Rulebook will have

been eliminated in its entirety.

While the NASD Rules generally apply to all FINRA members,the Incorporated NYSE Rules apply only to those members ofFINRA that are also members of the NYSE. FINRA Rules applyto all members, unless such rules have a more limited applica-tion by their terms.

All FINRA members are subject to the FINRA By-Laws andSchedules to the By-Laws.

(www.finra.org/Industry/Regulation/FINRARules/index.htm)

Fifty-eight rule filings have been initiated so far this year. Over53 notices have been listed through August 31, 2009. There is

a short time window allowed for members, investors, and thegeneral public to comment on the proposed FINRA rules andregulatory notices. FINRA members should be more proactive incommenting on the proposed rules that govern FINRA memberfirms.

Navigating this maze of filings and notices can be overwhelm-ing. This column will help guide the broker dealer communitythrough these complex corridors and direct firms to the appro-priate resource that can help them find what they need.


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I was never good at selling life insurance. This was because Icouldnt honestly tell clients that they would ever make a pennyfrom a policy. Despite the returns and tax savings touted inglossy marketing materials, I couldnt look clients in the faceand tell them that the returns would accrue only after they weredead. And when this happened, the death benefits would go tosomeone elsetheir heirs. What kind of investment was that?

And besides, I had been more of an investment guy than anestate planner, so I avoided life insurance pretty much across

the board. Then I learned about the life insurance settlementsmarket, or simply life settlements market.

I learned that seniors could actually sell their policies to inves-tors who would hold and pay for the policy until the eventualdeath claim was paid. This changed everything for me. What ifseniors could activate a policy, and later sell it at a profit? Therewas a time when there was no question that this could be done.These days doing so may not be that easy, but the point is thata living person has a way to get out of a policy that he/she nolonger wants. In fact, policy holders can often make a profit, orat least recover a portion of their investment. For seniors, lifeinsurance is no longer a dead-end street where they are left withan unwanted policy that faced lapse after years of premium pay-ments. Now there is liquidity where once there was none.

I also learned that banks owned tons of life insurance policies onexecutives who worked at the bank in the past. Large corpora-tions also took out policies on their key employees. After thekey employees retired, some retained the policies and otherssold them to investors. Warren Buffet is one such investor inthese types of policies.

The life settlements market is a large market in which insurancepolicies are bought and sold every day. We used to say that thismarket was not correlated to the stock, bond, and real estatemarkets. Last fall many investors realized that when liquidityevaporated to such a point, all assets dropped in value, regard-less of past correlation.

The life settlements market has been knocked around by thecredit crunch in recent years, but the market seems to be re-covering. From a practical standpoint, there appears to be nocorrelation between how long an individual will live and what ishappening in the stock market. This is one of the primary driv-ers behind the growth of the life settlements market. Peoplesimply want easy-to-understand investments whose value willnot evaporate overnight. I view this market as one of the keyareas without any real correlation to other asset classes whereinvestors can get solid returns.

The basic premise is simple you buy a dollar for a dime andyou pay a nickel each year until the dollar matures at some un-known date. My oversimplification is meant to explain that thisinvestment involves buying a contract at a steep discount, withan annual carry cost that is also low. There is, however, no cer-tain maturity date, so the risk is that the insured person lives toolong and wipes out any gains you may expect. You can imaginethat buying an insurance policy on an 80 year-old male for adime and paying a nickel each year to continue the policy seems

like a safe and profitable investment. Continuing our example, ifour 80 year-old male lives to 90, the cost basis is only 60 centson the dollar.

I recently spoke with a few investment officers of large Europeanpension funds. The investment managers expressed interest inthe market, but said that the market would have to grow sub-stantially before they could invest. This surprised me becausethe market was estimated to be $12 billion or so annually. Theproblem was that these pension fund managers were managingVERY large funds. A direct allocation (one-half percent of assetsunder management) would equate to roughly $12 billion andsoak up an entire years worth of policy sales! This market wasclearly not ready for such large investors. Investment manag-ers admitted that they had invested in smaller hedge funds thatcurrently have exposure to the market. The reaction by pensionfund managers was an indication that we were moving in theright direction, but that we were not quite there yet.

In recent years, some analysts claimed that we could have a$100 billion market in the next decade or so. This means thatin the next few years the same pension managers may seri-ously consider the life settlements market. The growth rate ofthis market has been around 20 percent annually. Last yearsgrowth, however, did not keep up with projections, so we willhave to see what the future holds.

All in all, I would say that the market is maturing and has ad- justed to the problems in the past 12 months. Clearly there is

some correlation between the life settlements market to othermarkets, but overall the correlation is minor. The life settlementsmarket looks to have a promising future. After we resolve someoutstanding tax and regulatory issues, the market should dovery well.


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Sionix Corporation is a water company with a unique productand a promising future. The company has done much to perfectits patented water treatment technology. Research and devel-

opment success in recent years has translated into commercialdeals. Because Sionixs water purification technology has dis-tinctive advantages, the company stands to capture significantmarket share in the global water infrastructure and purificationmarket. To better appreciate Sionixs value, investors will needto understand the global water purification market, the compa-nys Elixir water treatment system, and the companys growthplans.

Although the majority of the earths surface is covered by water,only three percent of it is freshwater. And of this three percent,only a fraction is available for use. Today close to one billionpeople lack adequate access to clean drinking water. Accord-ing to the World Bank, 88 percent of all diseases are caused

by unsafe drinking water, inadequate sanitation, and poor hy-giene. About half of the worlds hospital beds are occupied bypatients suffering from waterborne diseases. Besides the de-veloping world, the United States has an urgency to upgrade itswater infrastructure to keep drinking water safe. According tothe U.S. Environmental Protection Agency (EPA), the UnitedStates will need to spend $334 billion over the next 20 years tomaintain and improve the countrys public water infrastructureand to comply with the Safe Drinking Water Act. Of this amount,approximately $60 billion will be needed to upgrade thousands

of water systems that serve fewer than 3,300 people. At anygiven time, thousands of such water systems do not meet EPAstandards.

In addition to the water utilities market, the Elixir water treat-ment system is also ideal for industrial wastewater purification,onsite hotel water purification services, sewage treatment, andwater purification needs that arise from emergencies and naturaldisasters. Further, developing countries have an urgent and crit i-cal demand for cost-effective water purification systems.

U.S. federal laws require many industrial companies that pro-duce waste water to clean and process polluted water beforedisposing of it. Companies subject to such regulations includeoil and gas companies, hog and poultry operations, meat pro-cessing plants, and dairy farms. As will be discussed, Sionix hasalready delivered its Elixir system to an oil and gas customer.

Sediment-based or slow sand filtration is the most commonlyused water purification method in the United States. This sys-tem, however, has many drawbacks. The method uses filtrationbeds with very large concrete structures that require large tractsof land, often hundreds of feet long. In addition, the filtrationprocess is time consuming. Filters often become clogged andmust be back-flushed with water, which in turn produces ad-ditional waste water. Besides the higher operating costs andgreater land use, sediment-based filtration does not protect


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against many harmful pathogens that are too small to be removedby slow sand filtration. To kill these pathogens, water utilities haveto use large amounts of disinfectants. Disinfectants can react withorganic matters in the water to create harmful by-products, suchas Trihalomethanes, a cancer-causing compound.

Sionixs Elixir water treatment system uses patented dissolved airfloatation (DAF) technology with the following benefits.

in the water (as well as over 90 percent of dissolved iron and man-ganese), and provides a barrier against microbial contaminants,thereby greatly reducing the need for disinfectants, such as chlo-rine.

back flushing. -ventional slow sand filtration methods. The Elixir system can treathigher volumes of water with a much smaller physical plant.

40-foot ISO containers that can be easily transported by truck,train, or plane. A customized Elixir system can be delivered to acustomer within 12 weeks of the order.

drinkable water, each tiny unit is secure from outside contamina-tionboth deliberate and natural. -cies and humanitarian missions around the globe.

A single Elixir water treatment system can produce up to 325,000gallons of water per day, or enough water for 2,400 people or 500-600 homes in the United States. Thus, a single Elixir system canprovide the water purification needs for a small community whilemeeting EPA requirements. In the developing world, where percapita water consumption is much less, a single unit could provide

water treatment to a community 10 to 20 times larger. In addition,multiple units can be grouped together for increased capacity.

Perhaps the greatest attraction of Sionixs Elixir system is its cost.A Sionix water treatment plant costs about three to five times lessto construct than conventional plants. Since the DAF system re-moves 99.5 percent of organic matter, fewer disinfectants and backflush processes are needed, which translates into lower operatingcosts. Chemical disinfectant costs of a Sionix system are up to 20percent less than those of conventional sedimentation systems.

In 2007, Sionix signed an agreement with the Serrano Water Dis-trict in Orange County, California to install an Elixir treatment sys-tem at the Villa Park Dam to treat runoff water. The company hasused this project to continually test, evaluate, and improve theElixir system. The company has achieved promising results andintends to market the Elixir system to municipalities that want tocomply with EPA regulations at a fraction of the cost of conven-tional methods.

In June 2009, Sionix delivered an Elixir water treatment unit to In-novated Water Equipment, an oil and gas services company. The

unit will be used to process contaminated water produced by nat-ural gas wells. Because the Elixir system can be easily shippedonsite, the customer avoids the high costs of shipping the con-taminated water to a treatment plant or landfill. This project couldrepresent a significant opportunity for Sionix, given there are thou-

sands of natural gas and oil wells in the United States.

During a recent conference call, Mr. John Pavia, Sionixs chairmanof the board, spoke of the companys significant growth potentialdue to the many markets that the Elixir system could serve. Hereferenced several deals currently being negotiated that will likelybe signed by year end. Specifically the company is in the processof signing two multi-unit deals, one with an overseas customer.

Before 2009, Sionix focused on research and development. Thecompany recently began to shift focus from research to marketingand sales. The efforts are bearing fruit, as the company is aboutto enter into agreements with customers in multiple industriesand markets. As the worlds demand for clean water continuesto grow, Sionixs water purification market share will increase. Ifthe world will beat a path to ones door for a better mouse trap,imagine what they will do for clean water.

Readers with questions about this article should send an e-mail toSteven Greenfield at [email protected] or call516-300-4070. More information about Sionix Corporation can befound at www.sionix.com.

Footnotes:

1. The remainder is locked in icecaps and glaciers.2. See the EPAs 3. Of this amount, $75 billion will be for water

purification and treatment.

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Veritec, Inc. is an emerging star in the market for mobile financialcards, biometric identification (ID) cards, and the convergence ofthese technologies into a single universal card. Headquartered inGolden Valley, Minnesota, the company was founded in 1982 by aNASA scientist who invented the original VeriCode (2-D barcode)to mark and track space shuttle system components. At the time,this data storage technology was considered too complex to beused for human identification. The VeriCode technology, however,helped spawn an industry of public domain 2-D bar codes that arewidely used today.

Veritecs technology is now ready for human identification ap-plications. The company appears headed for great success af-ter integrating its mobile banking software platform with its data

processing center and Visas third party card transaction services.Veritecs target markets include prepaid and debit cards and citi-zen identification cards that can be used for secure EBT paymenttransactions. These electronic cards can be readily linked to therapidly evolving mobile and Internet communications markets.Veritec operates in a high growth niche. The companys technol-ogy is available worldwide at low cost. Further, the technology ishighly secure and provides unmatched storage capacity and mas-sively scalable data processing.

Using proprietary bar coding technology, Veritecs Bio-ID card cansecurely and accurately verify each cardholders identity. Veritecscodes can be printed on inexpensive media, such as plastic cardsand paper, using off-the-shelf printers. The technology allows forhigh security and exceptionally large data storage. These advan-tages allow card issuers to enroll citizens using the Bio-ID cardwith a complementary suite of software and readers. Veritec is asmall company, but its technology and products are robust. Withan experienced management team, the company cooperates with

strategic partners globally to provide the necessary supportinghardware and system integration. And perhaps most importantly,customers can deploy Veritecs technology using limited staffingand overhead support.

Veritecs MTC mobile prepaid cards have special security andconvenient features that surpass those of other financial cards inthe industry. Using their mobile phone or the Internet, cardholderscan literally turn the card on and off at will, at any time. Money canbe transferred instantly to and from the card by electronic fundstransfer, check, another card, or using the Visa Ready-link net-

work. The card can be used for payroll, money transfer, and moneymanagement in real-time and cost-effectively. Cardholders will nolonger need to buy a money order, use a check, or go to the bankor money transfer location. They can simply use the prepaid cardswith the Internet or a phone.

To complement its MTC cards, Veritec also offers a state-of-the-art product called PhoneCodes. It allows merchants and mobilephone carriers to send or receive an electronic ticket, coupon, giftcertificate, or a receipt instantly via a text message to a cell phone.For example, when the cardholder uses the Veritec MTC card topurchase products over the Internet, the cardholder can requestan electronic receipt to the cell phone. The cardholder can alsouse the MTC card to receive credit from store coupons or rewardsprograms as well.

In summary, Veritec is a technology company that has spent over$20 million during the last 10 years to develop its specialized tech-nologies. Its research and development effort has resulted in a suiteof great products that are tested and ready for the marketplace.Veritec is a publically traded company (OTC:VRTC.PK). Additionalinformation on the company is available at www.veritecinc.com orwww.vtfs.com, or by contacting Jeff Hattara, president and chiefexecutive officer, at (763) 253-2670 or [email protected].

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MICRO-CAPREVIEW3

RDQUARTER2009


People take vitamins and mineral supple-ments for various reasons. The most obvi-ous reason is to stay healthy and avoid dis-eases. Few people, however, understandhow vitamins and mineral supplementsactually work. Even scientists arent quitesure either. Knowledge of this area is verymuch a work in progress. One thing forsure is that current studies have disprovedvitamins as a magic bullet to prevent an as-sortment of diseases. Taking a multivitaminis a recommended form of nutritional insur-ance, but you must choose wisely to avoiddoing more harm than good.

My fascination with vitamins and supple-ments began when I was a kid. Like manypeople, I would often read the US Depart-ment of Agriculture (USDA) label on cerealboxes and tried to make sense of what thenutrition and recommended daily allowance(RDA) information meant. My thinking hasevolved since then. As a physician, I start-ed dismissing the idea that vitamin supple-ments were essential because of Americasgreat bounty of foods. Amazingly, conclu-sions about vitamins have changed little.

Its important for people to keep the follow-

ing points in mind:

1) The best source ofvitamins and minerals is food.

2) Natural supplements are better than syn-thetic ones.3) The belief that more is better is incorrect.4) Vitamins should be taken with meals to maximize

benefits.5) Availability is better when the same amount is

consumed in a divided dose.6) Scientific research and medical judgment is

essential to choosing the right form and dose asresearch evolves.

Taking multivitamins/minerals is an acceptable option under cer-tain conditions. The devil is in the details. The following discus-sion is designed to help you evaluate the facts and make the best

judgment.

Vitamin A is more stick than carrot

Vitamin A is a retinoid compound, which is closely related to car-otenoids. Prominent carotenoids include Lycopene, lutein, andzeaxanthin. Vitamin A is an antioxidant that helps maintain good

vision, a strong immune system, proper bone metabolism, anhealthy skin.

People mistakenly believe that vitamin A can protect against cancer. A disturbing study found that vitamin A actually increased thrates of lung cancer and death in smokers. Another concerninstudy showed that taking high doses of vitamin A can increase thrisk of osteoporosis. A nurse health study of 72,000 postmenopausal women found that consuming higher levels of vitamin Asignificantly increased the risk of hip fractures.

People often take too much vitamin A and in the wrong form. Vtamin A is best ingested as food and taken in a limited amount aa retinol, along with beta carotene and mixed carotenoids. Totavitamin A should not exceed 3,000 units per day.

Vitamin B is strong, happy and alert

The B vitamins are water soluble. They are critical cofactors in biologic processes that generate energy, support mood and cogn

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tion. Many people consume B complex vitamins to increase ener-gy and alertness. It has been a popular practice among physiciansto administer vitamin B12 as a treatment for fatigue.

As people age, absorption of B vitamins decreases. Medications,

such as diuretics, deplete nutrients, notably thiamine B1. ThiamineB1 deficiency can lead to a condition called Beriberi. Alcoholicssuffer from a variety of serious problems as a result of extreme thi-amine B1 deficiency, including amnesia and cognitive impairmentknown as Wernicke-Korsakoff syndrome. An amount of thiamine inexcess of the recommended daily allowance is good insurance.Riboflavin B2 participates in a variety of reactions in metabolismthat generates energy. The USDA recommended daily allowance isaround 1 mg, which is easily obtained from food. Higher amountsin B-complex preparations are safe. A 400 mg dose of riboflavinhas been used for prevention of migraine headaches.Niacin, known as nicotinic acid or vitamin B3, is an essential nutri-ent. Niacin deficiency can lead to diarrhea, dermatitis, and de-mentia. It occurs in situations of extreme poverty, malnutrition, orchronic alcoholism. In doses of 500 mg to several grams, niacinbecomes an effective drug to improve lipid profiles, lowering cho-lesterol and triglycerides, and raising the good HDL cholesterol.Flushing is a common side effect but the popular flush free inosi-tol Hexa-nicotinate does not improve cholesterol profiles.Pantothenic acid or vitamin B5 participates in energy productionwithin the cell. The daily required dose is about 5 mg but more isnot harmful. A derivative of vitamin

Micro-Cap Review Archives Fall 2009

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