Micro-Cap Review Magazine Summer 2009

PAGE ( 3 )2ND QUARTER 2009

www.microcapreview.com

P.O. Box 4216Metuchen, NJ 08840-1848T 732-603-1250F 212-202-6020

PUBLISHERWesley [email protected]

EDITOR

Ronald [email protected]

WRITERS

Marc ClarkMark ColemanKarl DouglasJohn FaesselMark FowlerAlex HartChet HebertMichael KesselJordan KimmelSheldon KraftPatrick MartinVictor NowickiAlex ParsiniaHeidi PiconeDavid RosenfieldRonald Stone

ACCOUNTINGJennifer [email protected]

ADVERTISINGVong [email protected]

BUSINESS DEVELOPMENT

Ron [email protected]

CIRCULATION

Jackie [email protected]

Suki [email protected]

GRAPHIC PRODUCTIONTony [email protected]

WEBMASTERKelvin [email protected]

Micro-Cap Review Magazine is published Quarterly, Spring, Summer, Fall, Winter POSTMASTER send address Changes to

-

has been made to assure that all Information presented in this is-sue is accurate And neither Micro-Cap Review Magazine or any of its staff or authors is responsible for omissions or information

This Publication is not to be construed, under any circumstances, by implication or otherwise, as an offer to sell or a -

families and associates may have investments in companies featured within this publication and may elect to sell these

about the Company contained within an advertisement/advertorial has been furnished by the respective Company and the

The recession continues. Business moves on, although many companies are downsiz-ing and are struggling to maintain their mar-ket share. Businesses that survive in this economy must understand where they stand and plan for the future. For companies to

-cedures to monitor performance.

The most important step to monitor the com-pany’s performance is preparing a 13-week

sources and uses of funds weekly. With this report, the company can identify problems before they occur and can anticipate cash

helps senior management, but also helps rank

-tween a small problem and a big one.

After the company has completed a 13-week

cash, the company has three options: increase revenues, reduce expenses, or raise addition-al cash from an outside source. Since we are now nine months into the current recession, the possibility of increasing revenues or re-ducing expenses at this point may be prob-lematic.

There may still be opportunities to reduce

Reducing expenses may be accomplished by combining two similar public companies.

Both have expenses for compliance, SOX, director’s fees, etc. It may not be viable for either company to survive separately; but if two companies merged, they may become stronger and healthier. Another option may be to investigate ways to share resources,

company to reduce expenses. For example, one biotech company we know has combined forces with a second biotech company to re-duce the oversight of its phase two testing. The technologies remained with each com-

cost savings.

If cost saving is not an option, then the com-pany will have to generate cash by raising debt or selling equity. In an economy where capital and credit seem to have dried up, creative minds have come up with new and innovative ways to meet the needs of com-panies. Necessity is the mother of invention. These methods include selling equity based on market volume and shared equity lending, to name a few.

Good luck in weathering the remainder of this recession. We hope that you take advan-tage of the creative techniques presented in this issue to help you not only to survive this recession, but also to come out stronger and be in a position to act when opportunities present themselves.

WELCOME

Ronald StoneRonald Stone

Editor

PAGE ( 4 ) 2ND QUARTER 2009


Business & Markets

15 Concentric M&A Strategyby Alex Parsinia

20 Carve-outsby Patrick Martin and Mark Coleman

23 Never Seen a Stock Market Like This Beforeby Sheldon Kraft

27 Opportunity Knocks During Recessionby Mark Fowler

Finance & Investments

6 Looking for It and Not Finding?by Victor Nowicki

8 Let Our Magnet® Find You the Best Micro-cap Stocks in Any Marketby Jordan Kimmel

11 Capital Alternatives: Ten Things to Know Before Merging with a SPACby Karl Douglas

13 Ask Mr. Wallstreetby Sheldon Kraft

Legal, Tax, & Accounting

36 Ask the Tax Guys: ESOPby Alex Hart and Michael Kessel

38 Compliance Cornerby Chet Hebert

40 Dealing with the Surprise Government InterviewDavid Rosenfield and James Moss

Travel & Entertainment

50 Dovetail Restaurant ReviewHeidi Picone

Profiled Companies

30 Entrex

44 Allied Energy

47 Ivanhoe Energy

35 Announced Transactions

www.microcapreview.com


Executives often ask me the question, “Have you found it yet?” That question is obviously asked by potential “cli-

is certainly harder now than ever before. So, the clients’

greater than ever too. Yet, they rarely stop to ask two funda-mental questions.

(2) What can I do to optimize the chances of funding success?

Generally, I receive a call from potential clients after they’ve already spent four to six months looking for funding from easy-to-reach sources, such as their local bankers or from family and friends. Sometimes they have other contingency business brokers in on the action. A call to me is another at-tempt to engage. A failed search at this stage indicates that something is missing, something has not been done right, or something is wrong with the risk/return relationship.

Let me illustrate. A while back I got a call from a frustrated developer of an internet-based social networking platform. He had exhausted his own capital in a 24-month effort and urgently needed a third party investor to keep the develop-ment going. He appeared to have the right people, the right

-ditional capital for about a year. He also appeared to be well connected and had solicited many high net worth individu-als – with no success.

Now, it is not my job to question anyone’s motivations or past efforts. I got the call. I picked up the phone. I patiently listened to the story. It did make some sense. This was a start-up. Then I asked for a business plan.

Surprisingly, what I got was a 45-page document. More correctly, I got a heavily edited draft of a business plan with Microsoft Word “track changes” option turned on. The

document was written with grammatical errors, incomplete

document was non-existent. The business argument was

-pense items and a big “hockey stick.”

After reading the document and actually checking out the prototype of the system with my colleagues, I called to ask as to who and why this document was produced. It turned out that it was written by a consultant hired by the client. In its current form, the business plan was used to support the

asked about the physical and logical state of the document, the client did not appear to see anything wrong with it. Well, what can I say?

Unfortunately, this is more or less typical of about 50 to 70 percent of new business funding initiatives coming my way involving smaller companies. More, because sometimes I get calls that are backed by incomplete business documen-tation. And less, because even when the documentation is produced, it is often incomplete, out-of-date (how long

advisor with no prior knowledge of the client or his business -

mate investor. Is the proposed business sound and saleable? The investor wants to know this to get an assessment of his

Looking for It, and Not Finding?

Victor Nowicki

-


return. I want to know this to see if the deal is placeable. In other words, will I ever make money on this?

So, what do clients need to do to improve the chances of obtaining funding?

First, before heading out to the market, clients must under-stand the importance of communication. A business plan, an investment memorandum, a private placement memorandum, or simply a pitch that is being provided to investors must (1) be readable; (2) have a comprehensive investment logic; and (3) be presentable, clean, and error-free. As with any mar-keting material this document is all about grabbing and hold-ing the reader’s attention. The document also speaks about the owner’s character, management ability, and competency.

-essary questions, and increases the risk of a failed connection. So why go there?

-

-

-

-

-

-

-

-

--

with the same pitch!

Victor Nowicki -

services to small and medium-sized companies and business


“Jordan Kimmel’s The MAGNET Method of Investing: is

an amazingly detailed and intuitive book. I especially -

‘sweet spot.’ Jordan’s writing style is also very straight --

investors.”

Every bull market has its share of leading companies that are new to the spotlight. Traditional investors who

-less they can identify the new market leaders. Rarely do fallen leaders of the last bull market regain their strength when the next upswing takes place. While experienced,

best individual stocks at the right time.

Too many investors continue to focus on the economy or “the market,” rather than trying to isolate the best companies. Whether it is the economic “number of the

many investors focus on the wrong things. The reality is that nobody can or should predict the future. Doing

-ket. Legendary investor, Peter Lynch, once said, “If you spent an hour per year thinking about the economy, you probably wasted 59 minutes.” Instead of mulling over

baggers.” These are companies that win market share

value by ten times.

very environment has a handful of companies that dominate their niche market and are great stocks to

-panies that have yet to become household names. Be-cause of the sheer size, most mutual funds will look at a company only after there has been a huge run up in prices, or when the company has had several years of continued expansion and stock splits. This actually puts individual investors at an advantage, if they can

-tional investors do. Over a lifetime, an individual needs only to identify a few small companies that will end up blossoming to accumulate real wealth.

I am not one to encourage the public by saying that it is easy to make money in the stock market. Investing in small-cap companies is certainly not easy. The market is never lacking of great sounding stories, and it is easy to get caught up in ideas that never materialize. Even when there are sound ideas and good management, many things can and do go wrong. This is not to say that I am negative or discouraging people from invest-ing in the stock market. As with any truths in life, there can only be a few true superlatives. By isolating the best stocks to own and focusing your energy on those select companies, you can make money in the stock market.

-ate only average returns. Remember though, if you are willing to focus your capital on only a few companies, you better have a sound methodology to identify the right ones!

In my new book, The Magnet Method of Investing, I ex-amine the beliefs and strategies of the greatest investors

walks you through the process of identifying the best

Let Our Magnet® Find You the Best Micro-cap Stocks in Any Market…

Jordan Kimmel


individual stocks to own at any time. The book intro-duces The Magnet® Stock Selection Process, a combi-nation of the most robust aspects of value, growth, and momentum investing. The book has already received many endorsements by some of the best institutional and individual investors in the industry. In essence, The Magnet Method of Investing distills over 25 years of research on “what makes a great investment” and includes a mathematical back-test of our proven, un-emotional, and unbiased system. Using several propri-etary ratios to analyze a company’s balance sheets and income statements, the process is not fooled by the bot-tom line earnings that continue to be manipulated by so many companies.

If investors are willing to do a little extra research, they

Years ago I was very vocal about the problems of earn-ings manipulation and the “pay for play research” that was coming out of Wall Street. These problems har-bored an environment where larger companies tended to “play games” whenever insider ownership decreased. If all things were equal, I would prefer investing in companies with fewer shares outstanding and a higher percentage owned by management and other insiders.

There is no question that this bear market over the last 18 months has created a tremendous opportunity for as-tute and unemotional investors. Despite my strong con-

exist in this market, I am more selective in my stocks

now than most investors. Many companies are still overvalued, while others are not growing fast enough to score highly under the Magnet process. But clearly this highly emotional and fear induced market has driv-en many excellent companies down to valuation levels that are rarely seen.

within it is “cheap” enough is one approach, but I need

are accumulating a lot of cash. While I embrace the te-nets of value investing, simply buying stocks with low valuation metrics is not enough for me. I also need to see a company’s stock “acting well” or exhibiting “rela-tive strength versus the overall market.”

In The Magnet Method of Investing, I encourage indi-vidual investors to think differently. I remind readers that they must work to move away from the mediocre returns generated by Wall Street’s “diversify and think long term” mentality. If you seek truly exceptional

what I call “Magnet Stocks.” If you’ve been left be-hind, it’s never too late to start doing your homework.

Jordan Kimmel is President and Portfolio Manager of The Magnet Investment Group LLC and is the developer of the MAGNET® Stock

-pears regularly on ABC, CNBC,

his own weekly radio show, MagnetInvesting with Jordan Kimmel, on

Magnet®Investingcompleting his second book, The Magnet Method of In-vesting


Capital Alternatives:Ten Things to Know Before Merging with a SPAC

ways to raise both debt and equity capital, which are out-side of the traditional IPO or private equity investment op-

Special purpose acquisition companies (SPACs) were cre-

Exchange Commission rules that eliminated blind pools. SPAC underwriting took off at the beginning of 2005. Since then, over $18 billion have been raised for SPAC invest-ments in the United States, and another $3 billion have been raised in Europe, primarily in the London AIM market.

At the onset, SPACs provided a way for middle-market companies to access private capital, and for public compa-

helped fuel the reverse merger market, where private place-ments closed simultaneously with a shell merger and sub-sequent registration of private shares. By the end of 2008, some 60 SPACs successfully completed acquisitions, repre-senting over $6.1 billion in funding.

-ing roughly $3 billion, have announced proposed mergers. Additionally, 45 companies, representing over $10 billion of aggregate funding, are seeking acquisitions. Another 31 companies, representing over $2.6 billion of SPAC funding, are in the process of liquidating.

With a slowdown in private investment activity, many com-panies that seek equity capital are taking notice of the $10 billion pool available for acquisitions. Companies consid-ering a SPAC merger should understand that these trans-

-sons.

Proxy Requirementrequire upwards of 70 percent of investors to approve the proposed merger. Achieving that level is extremely dif-

funds that have invested in SPAC transactions have been

investment merit, they often veto the transaction to get their much needed funds back. Many investors cannot even wait

the full period, and so they sell shares in the open market. This drives the share price down below the original issu-ance price. With an average trust period of 18 months, this creates a yield to maturity that is often in excess of 10 per-cent per annum. That’s a 10 percent guaranteed return from cash in the trust!

Yield Investors – Yield investors have quickly caught on to the “SPAC yield” opportunity and have bought any shares available with a reasonable yield to maturity. That served to keep share prices at reasonable levels. One side ben-

(e.g., hedge funds) from taking huge losses that would have

of yield investors, the proxy vote is generally an automatic “no,” because yield investors want the shares to mature.

-panies seeking mergers have become extremely creative in trying to complete transactions. Many buy shares from shareholders who will potentially vote “no” by borrowing money and closing on a lesser amount. Using these “no vote loans,” the sponsor buys the shares with a loan secured

-tively. When the transaction breaks trust, the loan is repaid out of the trust proceeds. China Opportunity Acquisition Corp. recently used the “no vote buy out” strategy to repur-chase roughly 2.9 million shares to close its merger transac-

-action. Interest rates typically range from ten to mid-teens percent, plus warrants. The important thing to realize is that the “no vote loan” strategy will dramatically reduce the net proceeds for the post-merged company. In many cases, this can be in excess of 70 to 90 percent.

Expenses – Transaction expenses associated with a SPAC merger can be very high. In many cases, the original SPAC underwriter has a deferred fee of four percent. On a $100 million SPAC deal, that amounts to $4 million of legacy fees. Take our “no vote loan” scenario and you end up with net proceeds of $30 million. You just paid 12 percent in leg-acy fees before you even pay the M&A banker. Addition-ally, legal fees run high because of the proxy requirements.

Sponsor Shares – The sponsor is the party that has money

Karl Douglas


at risk in a SPAC transaction. Depending on the size of the SPAC, the sponsor’s money can range from three to six per-cent. In exchange for that investment and management ex-pertise, the sponsor can earn up to a 20 percent return. The

company, so that cost should also be taken into account. This can change the valuation and attractiveness of the transac-tion.

Warrant Overhang – Most completed SPAC transactions are trading at deep discounts to the original value. In many cases, this is due to market performance, sector performance, and individual company performance. However, the impact of the tremendous amount of “in the money” warrants that are issued should not be overlooked. In many cases, these warrants create a natural “covered short sale” for funds that originally invested in the SPAC.

Secondary Underwriting - When all is said and done, a SPAC merger in the current market is equivalent to a reverse merger into a shell with a marginal amount of cash. Com-panies wishing to complete acqui-sitions using SPAC proceeds will

of additional capital with a private placement. As an example, let’s use a proposed merger with a $100 mil-lion SPAC and a 70 percent “no vote loan.” If $50 million of net proceeds is needed to complete the transac-tion, additional capital of $20 mil-lion, plus expenses, will need to be raised. Market rate for a private placement of that size is roughly seven percent, so there is potentially another $2.1 million in fees (assuming capital is raised to cover deal costs).

Let’s summarize the potential cost of our $50 million merger. Legal fees are roughly $2 million (both sides of the transac-tion). Total underwriting fees would be roughly $6 million, and the “no vote loan” would cost around $1.5 million. Based on those assumptions, deal costs would reach 19 percent. By comparison, a reverse merger into a shell would be about half the cost. A reverse merger transaction would involve under-writing costs of $3.5 million, legal costs of $1 million, and shell costs of $500,000. Additionally, on a shell company with 99 percent ownership, dilution is less than that of the SPAC transaction.

However, if a SPAC transaction is structured properly, it can be an excellent way to fund an acquisition. To reduce the

structuring the SPAC, using the following strategies.

1. Tender for the outstanding warrants. In many cases, 51 percent is all that is needed to eliminate the class. This is a very useful technique to eliminate pressure on the post-merged stock and reduce the potential short by the original warrant holders.

2. Negotiate with the original underwriter to pay their fees, based on the amount of cash left in the SPAC at closing. If only 10 percent of the cash is left in the SPAC, then 10 per-cent of the legacy fees should be paid. You may want to sug-gest some minimum fee to gain concession. Remember, most SPACs will divest, and no fees are paid upon divestiture.

3. Negotiate with the sponsors to re-duce their interest in the post-merged company. Again, the principle is that the sponsors’ shares should be reduced proportionately to the amount of funds remaining in the SPAC at closing. This can be made even simpler by purchas-ing the sponsors’ position. Most spon-sors will walk away from a SPAC, if they can get their investment back be-fore the vote. Be aware that sponsors have no incentive to do a deal, if the negotiated amount is less than their original investment.

4. Reconstitute the shareholder base. In

to resell 70 percent of the existing pub-lic shares to new investors. Additional

new warrants can be issued to new investors in exchange for

additional shares and liquidity. Simply stated, if you have successfully tendered for the warrants, a much smaller per-centage of new warrants can be issued to new investors to gain their votes. This process requires a prospectus, however, since the warrants are newly issued. However, reselling the public shares is often less costly than doing a private place-ment. Also, a “no vote loan” facility is not needed.

If these steps are taken, then a SPAC is a good way to raise capital for an acquisition. These steps should be discussed with an attorney who understands SPAC structures. Addi-tionally, coordination with a reputable broker-dealer with ex-pert industry knowledge is essential.


What Happens Next in the Low-Priced, Emerging Growth Stock Marketplace?

ask Mr. WALLSTREET

Market corrections have caused pain and havoc on bull markets. When a correction hits, the Street endures more pain and suffering, the longer the bull market runs. The cur-rent correction is related primarily to Dow Jones stocks. The price adjustments to these stocks and the 10 percent drop in the Dow Jones Industrial Average (DJIA) are indicative that stocks were overbought, over held, and overvalued. Will the stock market drop more? Is this the opportunity for inves-tors to step in and buy? Am I trying to catch a knife? Is the trend my friend? And should I sell in this market?

Market experts have abundant opinions. I would rather fo-cus on something different. I believe that a new opportu-

away from Dow Jones stocks. My philosophy is a nuance of the “trickle-down effect.” Investors who sold Dow Jones

-portunities aside from low interest-bearing debt instruments and risky investments. The herd mentality ran the market to new highs, while the underpinning of U.S. companies was

warnings from economists. The real estate market is turned upside down. Financial institutions are in a liquidity crisis. Google is the best stock in the universe. Do we need more evidence that a solution is needed?

-

perfect storm has arrived for low-priced, emerging growth companies - this shunned marketplace, the disregarded emerging growth sector. Although the group has been down a long time, the Pink Sheets are attempting to become an exchange.

The perfect storm was created by 10 ingredients:

six-month holding period

opportunities

mortgages

job

pressure on high-priced stocks

Low-priced, emerging growth companies are about to turn HOT. Smart money will begin bridging toward IPO’s and secondary offerings. An undervalued market is eagerly awaiting its turn of the trickle-down effect. Money will

companies with earnings and then buying companies with great new technology and innovative business models. In-vestors are looking for new talent with corporate experience

who are wedded to a mission and vision for success.

The time is now. Pick and choose your jockey carefully.Load up on opportunity. My contrarian opinion is valuable short-term for long-term results. It is easy to follow cost av-eraging by buying NYSE or Dow Jones stocks when prices are lower, but why do it when chances are good that today’s

play?

I will be chastised, criticized, and scorned for my recom-mendations. Needless to say, I have been there before. It’s

over my shoulder, as the herd builds momentum from be-hind.

Sheldon Kraft


Concentric M&A Strategy for Micro-cap Companies

Marea for most micro-cap companies. Its strategic im-portance cannot be understated, because many compa-

higher valuations. Through acquisition, a company can acquire new distribution channels, new technolo-gies, new markets, and new management talent. The primary goal of M&A is to build on synergistic results so that the whole becomes greater than the sum of the

-ability. Companies can choose from several possible acquisition strategies.

Forward Integration Strategy-

tributes your products and services in the channel of

one of its distributors).

Backward Integration Strategy

supplies you with raw materials or products (i.e., a restaurant chain that acquires a food distribution com-pany).

Horizontal Integration Strategy

competes with you in the same industry (i.e., an aero-space company acquiring one of its competitors).

in a different industry and is not related to your core

(i.e., cigarette manufacturing companies acquiring companies in the soft drink industry).

Concentric Strategy

The concentric model exploits the gap in traditional investment and acquisition models. The concentric model is positioned somewhere between incubator and venture-backed start-ups. Each company within this business model works with sister companies in over-lapping and synergistic ways. Acquisition targets are generally early stage technology and resource-based companies that can grow rapidly. Target companies typically have established operations with revenues from $1 million to $5 million. The concentric acquisi-tion strategy minimizes the risks associated with start-up companies and avoids the high cost of acquiring later stage companies.

The concentric model unlocks the hidden value of portfolio companies. Company growth is achieved by enhancing management resources, integrating technol-ogies, leveraging synergies, and infusing capital at key stages. Shareholder value and returns are maximized by multiple expansion, revenue growth, and liquidity events at strategic moments.

ABOUT ZCOM NETWORKS, INC.

Zcom is a publicly traded company. Its stock is trad-ed on the over-the-counter (OTC) market under the ticker symbol, ZCNW. Zcom has two core businesses: broadcasting/shopping network and real estate/mineral rights.

Alex Parsinia

--

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Through its subsidiaries, Zcom offers the following ser-vices.

BROADCASTING

Zcom offers radio and video content delivered live and on demand over the internet. Listeners can access the pro-grams 24 hours a day, 7 days a week, directly or by pod-cast. Shows are organized into channels grouped around themes and stations containing channels within larger subject categories. Zcom is in the process of launching a new television station called Smart Money TV through direct broadcast satellite (DBS), cable, and IPTV. The broadcast covers North America and reaches over eight million households.HOME SHOPPING

Zcom offers products and services through its Home Shop-ping Network that are marketed and promoted through

Existing products include Super Fuel and TV Box.

MINERAL RIGHTS

Through the mineral rights division, Zcom has acquired the gold mining rights and other mineral rights known as CLS #12 in Ridgecrest, California. The mineral rights

sell minerals found on the claim, including gold, silver, platinum, tungsten, and copper.

REAL ESTATE INVESTMENTS

Zcom works with E-Realty in Los Angeles, California, a company with over 100 real estate agents, to acquire undervalued residential and commercial properties in California, as well as in other locations. In January 2009, Zcom acquired ownership interest in the Playa Venao De-velopment property in Panama. This joint venture has

villas and 20 condominiums.

THE GROWTH OPPORTUNITY

Zcom is focused on acquiring and accelerating the growth of early opportunity companies using the concentric strat-egy. There are some 150,000 media, resource-based, technology, and related companies that potentially meet

that prevent them from obtaining higher valuations. Many companies can reach the next level if limiting factors

in the following areas.

Technology – Many small companies operate without the right technology and tools. Too often management rec-ognizes the value of strategic projects but lacks the time and resources.

Sales & Marketing – Many successful small companies acquire customers and a basic level of business, but run into problems when trying to develop the proper sales and marketing organizations required to achieve rapid and consistent growth. The challenges are typically caused by lack of money, resource constraints, or limited knowl-edge.

Business Systems – Progressing from a small to a mid-dle-market operation requires updated business systems, technology upgrades, new best practices, and additional

Financing – A company that grows organically and prof-itably may not generate faster growth because of lim-

returns required by investors.

Contacts – Small companies often operate with limited

ability to achieve business goals rapidly.

These limiting factors play directly to the strengths of the Zcom concentric model, which is summarized below:


Zcom provides a launch pad for entrepreneurs to maxi-mize commitment and effort to achieve accelerated growth. Through subsequent M&A activity, synergis-

simply, Zcom’s tactical advantages and skill sets help promising companies grow faster and improve valua-tions.

A NEW INVESTMENT VEHICLE

Zcom acquires early stage companies that are capable of scalable and rapid growth. These promising com-panies do not have the same investment risks that are associated with start-up companies. Focusing on com-panies at the right growth stage gives Zcom the added

Zcom infuses capital and improves operations of ac-quired companies to increase the value of Zcom’s capi-tal holdings. Because Zcom is directly involved in the operations of acquired companies, risks can be lowered

multiple companies at various stages of acceleration and (b) ongoing acquisitions, which continually build assets to drive and elevate returns on investment. Li-quidity events for acquired companies may be conduct-ed at appropriate times to maximize shareholder value.

Zcom has developed an exciting launch pad for private companies, structured to maximize commitment and effort toward achieving business goals. Zcom has suc-

an untapped market. This market sits between the in-cubator model for start-ups and the acquisition model of private and public equity buy-out funds for middle-

gap in industries in which Zcom operates.

IMPLEMENTATION PLAN

Acquired companies gain improved systems, resources, and contacts to maximize their opportunities for suc-

accounting, legal, marketing, public relations, etc.) to allow the subsidiary management team to focus on business execution and growth.

Zcom offers portfolio companies operational technolo-gy, intellectual property, and shared corporate resources to help each company succeed. This strategy is funda-mentally different from other investment companies,

Zcom’s approach is to use technology and other ser-vices as tools to accelerate growth. Examples of infra-structure technologies include:

-structure is used across acquired companies to stream-line operations. Value is further created when intellec-tual property is developed throughout the enterprise. Where possible, leverage is achieved through outsourc-ing common functions to minimize cost.

ACQUISITION CRITERIA AND PROCESS

After identifying a potential acquisition, a rigorous pro-

management. Suitable candidates generally meet the following criteria:

intellectual property

opportunity


ACQUISITION EXECUTION

-

preparedness. The due diligence process provides for an agreed-upon execution plan to be implemented im-mediately upon acquisition.

Zcom acquires companies using restricted stock, war-rants, and cash, depending on the circumstances of the target company. Acquired companies maintain their identity and operate as wholly-owned or majority-owned subsidiaries. Subsidiary management has P&L responsibility for its operations.

Upon acquisition, the concentric model moves forward in parallel:

team is supported by Zcom management

are formulated and executed

operations

property are deployed

to monitor and track progress

new initiatives

THE EXPECTATIONS

Zcom is focused on acquiring companies with poten-tial for growth and much higher scalable revenues. The company is focused on completing acquisitions in an or-derly and controlled manner. Within the United States, there are some 150,000 innovative and early stage com-panies that meet Zcom’s criteria. These companies fall within Zcom’s areas of expertise in the media, shopping network, resource-based, and technology industries.

-ence and a background in the media

is responsible for the overall strategy ---

cluding Supertel Communications, Signet Paper Company, Pioneer Envelope Company, and Allied Corporate Invest-

-ing a bachelor of science in mechanical engineering, a mas-ters of business administration, and a doctor of philosophy

and has published books and numerous articles in national


Carve Outs What You See Isn’t Always What You Get Patrick S. Martin, CPA, CMA and Mark A. Coleman, CPA

Buying a business is tough. Buying a piece of a busi-ness, such as a division, plant, or product line, can be even tougher. However, given the current credit crisis, many companies are looking to generate extra cash by selling non-core or laggard business units. While this has created many interesting investment opportunities, investors should be aware of the issues so that they can buy at the right price. For strategic buyers, this represents a great opportunity to expand their exist-ing business and achieve economies of scale. Private equity investors can bring new resources and strong management skills to help turn a “black sheep” into a

M&A transactions are commonly called carve-outs.

What are you buying?

data of the parent company that is presented to inves--

cial data of the carve-out unit may not follow gener-ally accepted accounting principles (GAAP). Further,

intra-company transactions, corporate allocations, and

buyer.

-sess the impact of intra-company transactions, allo-cated costs, and shared services. The analysis should consider the potential costs to operate the carved-out business on a stand-alone basis. The cost analysis should consider personnel, infrastructure, information technology, and other operational requirements. Only

-ated. A similar analysis should be done on the balance

-tal requirements of the stand-alone entity, which are often different from the larger organization.

Investors should also consider the following issues:

Negotiate an agreement with the seller that provides for the use of the seller’s assets and people during a transition period. All too often, the terms of the TSAs do not provide

rule of thumb is to take the amount of time you think it will take to transition the business away from the seller, and then multiply that by two to determine the length of the transition period.

target working capital amount (based on the balance sheet of the stand-alone carve-out unit) and incorporate this into the purchase and sale agreement. This way you can be sure that the acquired entity has adequate working capital to fund ongoing operations without the need of new

in light of the new capital and cost structure, growth rate of the business, and any planned operational changes that could affect future working capital needs.

requirements– Evaluate capex requirements

maintenance expenditures, whether they are capitalized or not for accounting purposes.


to forecasts – Verify that the seller’s projections are grounded in reality. If the

seller has not properly presented the

meaningless.

Understand the health of these relationships through discussions with customers and vendors. Consider having a third party create questionnaires and carry out interviews with customers and vendors. Frequently, businesses suffer, because the buyer misjudged the health of these relationships.

Get the right help

Both buyers and sellers consistently underestimate how much time and effort are needed to complete a carve-out. Further, the disruption caused by this process can lead to missed opportunities for the entity being sold and create management fatigue. The right group of ad-visors can help reduce the risk and uncertainty often as-sociated with a divestiture. The advisory group should

the critical depth of knowledge to complete complex carve-outs.

It is imperative that buyers have a thorough under-

purchase agreement. Evaluating accounting informa-tion at a trial balance level is essential to understand the true operating performance of the business being purchased. Beginning this effort early allows buyers to more quickly assess value and identify key negotiat-ing points. Further, if the carve-out analysis reveals a negative result, buyers can avoid wasting time on unat-tractive investment opportunities.

accounting due diligence services to buyers and sellers in -

ment services for private equity investors and advisory ser-


Never Seen a Stock Market Like This BeforeSheldon Kraft

I -cial analysts (CFA’s), and retired stockbrokers who worked on Wall Street as far back as 1955. I was a newbie myself on the Street in 1984. Without reservation, everyone with whom I’ve spoken has repeated, “They have never seen a market like this before.” Well, me neither. This is certainly one for the history books. Amazingly, it is the one thing that everyone seems to agree upon. As the Dow Jones and S&P decline, and the new White House administration works to

-tions, I am thinking about what is going to happen to the micro-cap stock sector. Unless the world is coming to an end, there will be opportunities in all markets, albeit hard to

seems timely, because they are the new opportunity haven.

By Free Dictionary on Google:

Micro-cap stock. A micro-cap stock is one with a smaller market capitalization - sometimes much smaller - than stocks

multiplying the current market share price by the number of outstanding shares.)

The cut-off for deciding that a stock belongs in one category or the other is arbitrary. However, the market capitalization thresholds currently being suggested for micro-caps range from $50 million to $250 million.

Micro-caps are not only the smallest of the publicly trad-ed corporations, but they are also among the most volatile. That’s partly because they often lack the cash reserves that may allow a larger company to weather rough periods.

From the Securities and Exchange Commission (SEC) Web site:

The term “micro-cap stock” applies to companies with a low or “micro” capitalization, meaning the total market value of the company’s stock. Micro-cap companies typically have limited assets. For example, in cases where the SEC sus-pended trading in micro-cap stocks, the average company had only $6 million in net tangible assets - and nearly half had less than $1.25 million. Micro-cap stocks tend to be low priced and trade in low volumes.

traded companies that have a market capitalization of $250 million or less. The vast majority of U.S. stocks fall into this category, but they make up only a small fraction of the to-tal stock market value. Most are traded on over-the-counter (OTC) exchanges. Their prices are quoted on the OTC Bul-letin Board (OTCBB) or the Pink Sheets. Larger, more es-tablished micro-caps are often listed on the NASDAQ Small Cap or American Stock Exchange (AMEX). Other common exchanges for U.S. micro-caps include the Alternative In-vestment Market (AIM) in London, the Toronto Venture Exchange, and the Frankfurt and Berlin stock exchanges. The AIM has become a popular alternative to listing on U.S. exchanges, because the Sarbanes-Oxley Act of 2002 dispro-portionately increased the accounting and legal costs of U.S. stock listings for small companies.


Micro-cap stocks are notorious for their volatility. A high percentage of these companies fail to execute on their busi-ness plans and go out of business. Fraud and market manipu-lation are not uncommon. The trading transactions costs can be quite high. However, many investors believe that these risks are outweighed by the large percentage returns that

institutional investors and analysts operate in this space, due to the relatively small dollar amounts involved and the lack of liquidity.

The micro-cap and small-cap sectors have outperformed larger stocks since 2000. New indexes have been created to track the performance of micro-caps as an asset class. These include the Russell Micro-cap Index, the Dow Jones Select Micro-cap Indexes, and the Dow Jones Wilshire U.S. Micro-cap Index.

Micro-cap companies rarely enjoy regular research cover-age by analysts. It can take more time and effort to analyze a small company than a large one. Fewer published reports mean that investors have to do more original research. Thus, micro-cap stocks often don’t trade at their full values. The

When it comes to analyzing a micro-cap company, the ap-proach is the same as that for a larger company; the differ-ence is a matter of emphasis. Like any other potential in-vestment, you might start out by assessing the current stock price against its 52-week high/low trading range. You might glance at valuation ratios, such as the price/earnings mul-tiple or price/book multiple, to see whether the stock looks underpriced or overpriced. You’ll probably review the com-

earned on revenues, how high debt exists compared to the company’s capital base, and whether the company is gener-ating cash or burning it.

Questions to think about include:

product or service that taps a unique niche in the market place?

measure against?

way of doing things?

in the future, no matter what the economic cycle?

The promise of wild returns in micro-cap equities, howev-er, comes with a price. Liquidity is usually limited, which means that investors may not be able to sell a micro-cap stock quickly enough to minimize losses when things go wrong. This also affects the size of the stock position. Liquidity af-fects both buy-side and sell-side activities. Lack of liquidity may cause a higher buy price and a lower sell price. Also, it

original research required. Investors need to be careful to risk only as much money as they are prepared to lose. Also, valuing micro-cap equities can be especially challenging if investors aren’t familiar with non-traditional valuation tech-niques.

How can you invest in micro-cap equities if you don’t have the time or skill to do the necessary due diligence? You might want to check out some free research ideas from in-

reports on many interesting micro-cap companies that just might be right (or very wrong) for your portfolio.

Here is a good question. What is the difference between a micro-cap stock and a penny stock?

In the United States, a penny stock is a common stock that trades for less than $5 a share and trades “over the counter” through quotation services, such as the OTC Bulletin Board or the Pink Sheets. Although a penny stock is said to be “thinly traded,” daily trading volume can be in the hundreds of millions of shares for a sub-penny stock. Legitimate in-

and a stock can be easily manipulated.

-monly refers to any stock trading outside one of the ma-jor exchanges (NYSE, NASDAQ, or AMEX), and is often

of a penny stock is a low-priced, speculative security of a very small company, regardless of market capitalization or whether it trades on a securitized exchange (like NYSE or


NASDAQ) or an over-the-counter listing service, such as the OTCBB or Pink Sheets. The terms, penny stock, micro-cap stock, small-caps, and nano-caps, are sometimes used inter-changeably; however, according to the SEC, the status of penny stocks is determined by share price, not by market capitalization or listing service.

Thus, a micro-cap stock can be a penny stock, if it trades under $5 per share. A penny stock that trades under $5 per share can only be a micro-cap stock if it has a minimum of $10 million market capitalization. Don’t look now but the NYSE and NAS-

stocks. There are so many in fact that NASDAQ and the NYSE have had to suspend the share price requirements for listing.

The threat of delisting stocks had been growing at the NYSE, but NASDAQ suspended the requirements for delisting as of November 25, 2008.

Okay, now what? How should investors deal with this plethora of opportunity?

It seems to me there must be gems in the heap of micro-cap stocks. When investing, I always take heed of the old advice: meet with management, look for undervalued stocks, and evalu-ate revenues and EBITDA, unless investing in the biotech or alternative energy industries. Management experience is a big plus. Read the company’s business plan and visit the Web site.

possible – the more information you have, the better you will understand the business model.

Micro-cap and penny stocks represent the fastest growing stocks in the market. First, IPO’s (mostly reverse mergers), generally fall into the micro-cap group, as do most special-purpose ac-quisition companies (SPAC). The shrinking market capitaliza-tion of large-cap stocks is also adding many new listings to the micro-cap sector. I thought I would never hear that the United States has become the land of micro-cap stocks!

Believe it or not, deciding on which stock is undervalued is

the complete history of a stock, like we do the “lemon laws” for automobiles. Micro-cap stocks need their own lemon laws. Caveat emptor (buyer beware) has never been more applicable than it is today.

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ReferencesLoiacono, S. (2009, March 23).

Retrieved March 22, 2009, from Investopedia: http://www.investopedia.com/articles/stocks/07/micro_cap.asp

Securities and Exchange Commission. (2009, March 23). Mi- Retrieved March 22, 2009,

from Securities and Exchange Commission: http://www.sec.gov/investor/pubs/microcapstock.htm

(2009, March 23). Retrieved March 22, 2009, from -freedictionary.com/microcap

(2009, March 23). Retrieved March 22, 2009, from Wikipedia: http://en.wikipedia.org/wiki/Microcap_stocks


Opportunity KnocksDuring Recession

Mark H. Fowler, CPA, CMC

The media is full of news about recession. It’s become serious enough that politicians have given the economy prime attention. While it’s easy to be discouraged with these issues, tough times can also help companies pre-pare for the future.

Many businesses go through a crisis more than once dur-ing their lifetime. Experience has shown that companies are most vulnerable before, during, and after a business downturn. Problems that do not arise during good times can become thorny issues during bad times. When things start to get tough, many companies go into survival mode. They start cutting back. They reduce spending and scramble to get things done. They procrastinate until they have no choice but to react to a situation. Then they wait until the crisis is over to make meaningful changes. Taking this approach can lead to poor results both long-term and short-term.

The word “crisis” in Chinese also means “opportu-nity.” Thus, while the economy may cause problems, it also can present opportunities for companies willing to think ahead. We believe that now is a good time to make meaningful changes. Changes made today can ease the current pain and help companies survive. In some cases, changes can help companies emerge from the recession much stronger. They will be ready to capitalize on op-portunities when the economy rebounds.

THREE KEY AREAS FOR REVIEW

three key areas: structural elements, strategic protocols, and tactical actions/services.

A solid foundation is essential to the success of any

business. Issues that seemed invisible in a thriving econ-omy can become serious threats in a market downturn. The structural phase is about creating a disciplined ap-proach to strengthen the following areas.


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o Operational audits

anticipate changes

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BUILDING THE RIGHT TEAM

After spending more than 30 years helping companies cope with organizational changes, we can say for certain that no company can do it alone. It takes a team of profession-

-countant (CPA). This is the person who may have the best understanding of your business. Work with your CPA to bring in expertise of other professionals. In our experi-

improve effectiveness. We have helped many companies manage through a crisis. These companies faced down-sizing, bankruptcy, or dissolution. By working with CPAs, corporate development or turnaround experts, attorneys, bankers, lenders, and other professionals, we have helped companies achieve dramatic results. Success is achieved when we roll up our sleeves and work as a team.

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also the author of the forthcoming book, Always Adding Value,

Stowe Management CorporationP.O. Box 2028Santa Monica, CA 90406Phone: 310-458-1321 Web: www.estowemanagement.comEmail: [email protected]

Copyright© 2006—2009 Stowe Management Corporation. All rights reserved.

SGS-COC-004752


TIGRcub™ Security Gives Investors Access to Top-Line Revenues

TIGRcub™ Security is an investment product pioneered by

having liquidity and stability of returns that are based on a --

In today’s economy, companies have a tough time raising capital, because investors are staying away from the stock market. In response, investment bankers and brokers are working hard to win investors back into the market with in-novative products. One such product derives income from the issuing company’s revenues. The new security offers investors more stable current income, potential income growth, and liquidity.

The security of choice is called TIGRcub™ or Top-line -

GRcub™ last summer after several years of vetting by top legal, tax, and accounting experts. TIGRcub™ is set for rap-id adoption by institutional investors, fund managers, and middle-market companies (with annual revenues from $5 million to $250 million).

public and private companies that will consider TIGRcub™

dilutive security to be far more compelling than issuing

solves their concerns about micro-cap companies, including

unrelated to company performance.

History Supports Revenue-based Securities as a Good Alternative for Investors

Revenue-based securities (i.e., royalties) have been around for centuries. What is new is that an entire marketplace is being created to promote the use of TIGRcub™ to meet

established standards and the platform for global servicing, corporate trust, and information exchange to facilitate price discovery. Entrex is taking revenue-based securities to a new level by providing investors with an attractive invest-ment option. TIGRcub™ investors can participate in market segments that were once unavailable or unattractive and that

and liquidity.

During a recent interview with Micro-Cap Review, Stephen H. Watkins, founder of Entrex, explained that the TIGR-cub™ security was created as a solution for middle-market

-ous limitations:

performance adversely affect stock price.

and the complex algorithmic trading models routinely exercised. Both of these factors are completely outside a company’s direct control.

show a distinct lack of correlation in upward and downward trends over time. Multiple data sets revealed that stock price and revenue growth are independent variables.

than stock price volatility. This is seen at both company and portfolio levels, representing lower investor risk.

companies) tend to grow more steadily than do equity prices. In fact, quarter- over-quarter indexed revenue growth of private company revenues outperformed Entrex’s two public sample groups- even during recessionary periods.


The dichotomy between revenue growth and stock price is highlighted by the recent 30 percent decline in the stock market. Even in a strong market, revenue continues to be less volatile and oriented toward growth, when compared to equity values.

Blue chip companies in the Dow Jones Industrial Average (DJIA) also experience this disconnect between revenue growth and equity value. Based on a study of DJIA compa-nies covering a 10-year period, revenues of companies in ag-gregate tended to be stable and increasing, even when stock prices declined.

The DJIA study compares the revenue performance of com-panies to the aggregate stock price performance over the last decade. The DJIA graph shows how revenues increased by

nearly 50 percent for the aggregate group. Yet this increase occurred when the stock price over the same period declined by 10 percent.

One might ask why the stock is worth so much less when the overall revenue is increasing at a healthy pace. Earnings clearly plays a role in equity value. But earnings is only one

of many factors that impact equity value. Many investors cannot see this.

The disparity between revenue and stock price is further il-lustrated in a study of small public companies conducted by Entrex. The study covers over 6,000 micro-cap companies with revenues less than $250 million during a 10-year period. These companies are included in the Entrex Micro-cap Rev-enue Index (EMRI). The EMRI data (see graph) show that stock prices exhibit high volatility, whereas company rev-enue shows far lower volatility and stable overall growth.

Entrex found that the revenue/stock price dilemma also ap-plied to privately held companies that make up the Private Company Index (PCI). For the three-year period 2006-2008, indexed revenue growth of PCI companies outperformed that of both EMRI and DJIA companies. This data further illustrates that company revenues in aggregate performed

This research shows that the TIGRcub™ security is a win-win solution for both investors and issuers. TIGRcubs™ of-fer companies a way to raise capital that meets investors’ need for current income, while minimizing ownership dilu-tion and governance issues that are often associated with eq-uity transactions.

Modern Corporate Finance Solutions & Investment Op-tions Are a Natural Evolution of the Capital Market-place

“Just as markets for other critical resources are changing and adapting to economic conditions today, so too should capital markets,” said Watkins. “TIGRcubs™ are leading the change. The security allows investors to take advantage of the good revenue positions that many companies are in to-day, even though their stock prices might look bad.”

“TIGRcubs™ have unique advantages that appeal to com-panies that previously thought that an equity raise or mez-

option. With a TIGRcub™ transaction, current ownership and shareholder structure is retained. In addition, issuing the security is not detrimental to the balance sheet like tra-ditional debt, as there are different ways to account for the TIGRcub™ security, depending on how it is structured,” said Watkins. Thus, the TIGRcub™ could actually serve to de-leverage the balance sheet, making the company a more appealing target for additional debt, equity, or TIGRcub™ capital at a later stage.

An upside for investors is that they see immediate cash re-turns that are distributed monthly. Investors do not have to


wait on a liquidity event to recover their investment. In to-

--

ary periods.

TIGRcubs™ Are a Solution for Micro-cap Finance

Micro-cap companies avoid raising equity capital when their share price is falling. Doing so in today’s depressed stock market can be extremely dilutive, and transactions will be based on lower valuations than those made just 18 months ago.

of what’s going on,” said Watkins, “since in many cases, a company’s revenue could be consistent and healthy, yet its equity value is perceived to be far less than it was only re-cently.”

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Essentially, TIGRcubs™ offer a way for companies to raise capital without the complexity of having equity valuations. “TIGRcub™ investors are poised to enjoy returns associated with revenue growth without fear of stock price volatility,” said Watkins.

What Fund Managers Say About TIGRcubs™

Several funds are organizing capital to invest in TIGR-cub™ securities. One group is Arctaris Capital Partners

a juncture where the need for innovation of practical and

render new solutions that satisfy both investors and compa-nies.”

Arctaris has adopted TIGRcubs™ as an important solution and presents the security as an opportunity to limited part-ners of their fund and to portfolio companies.


The TIGRcub™ Stimulus Package

Watkins concludes by saying that revenue-based investing is the stimulus that U.S. companies and global capital markets need today.

“A movement away from the customary asset allocations of stocks, bonds, and cash is possible with the availability of revenue-based securities. A move toward asset allocations with revenue-based securities offers a new investment op-portunity that can have a substantial economic impact in the

into some of the most important sectors of the U.S. econo-my,” said Watkins.

“In light of the adverse conditions of the credit markets and the challenges associated with raising capital in the public

investors and company issuers.”

“TIGRcubs™ are the security for today’s economy. It is a solution that will raise investing to a new level of reward for all parties involved.”

For more information, contact Entrex at 877-4-ENTREX or visit www.entrex.net. Stephen Watkins can be reached at [email protected]

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of Capital Can’t Fund What it Can’t Find.

investors and issuers together through the


ANNOUNCED TRANSACTIONS


Q: What is an employee stock option plan (ESOP)?

An ESOP is formed by setting up a trust fund to ac-quire shares of a company’s stock for employees. The shares acquired by the ESOP are allocated to individual employee accounts.

The ESOP can acquire shares in several ways. One way is to have the company issue new shares of its stock directly to the ESOP. The second way is to have the company contribute cash to the ESOP to buy existing shares (e.g., from a departing owner of a closely held company). The third way is to have the ESOP raise money by borrowing from an exter-nal source, such as a bank or the company, and then buy the shares. Frequently, a bank will lend to the company, and the company will then lend the pro-ceeds of the loan to the ESOP.

Q: What are some compelling reasons to have an ESOP as a business owner?

plans, because it provides tangible and intangible -

ees, owners, and the company.

At the most basic level, an ESOP can serve as an employee incentive plan that fosters a sense of own-ership among employees. When employees have an ownership stake in a company, they tend to be moti-vated to work harder, stay with the company longer, and help it succeed. Morale improves and staff turn-over is minimized.

liquidate their ownership interest in a company. An

owner who is retiring after many years has no better way to sell his/her shares than through an ESOP. By selling shares to the ESOP, the owner is transferring ownership to people who will have a vested inter-est in the long-term welfare of the company – the employees. The ESOP can help perpetuate the com-pany’s existence long after the owner/founder leaves the company.

An ESOP can also be used by companies to raise capital to fund growth. Under this arrangement, the ESOP borrows money from an external source and uses the proceeds to buy newly issued shares of a

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a less expensive way for companies to raise capital.

C corporations?

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ASK THE TAX GUYS

You are thinking about setting up an employee stock option plan (ESOP) for your business.Are there any tax benefits to you as a business owner?


-tions?

Kessel: Unfortunately, shareholders of an S corpora-tion cannot take advantage of the tax-free reinvestment provision available to shareholders of a C corporation. However, the S corporation’s income that is allocated to the ESOP is exempt from federal income tax; the ESOP is responsible for the income tax. If the ESOP owned all of the S corporation’s shares, the ESOP would not have to pay any federal income tax attributable to the S corporation.

Q: Who controls the ESOP?

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by establishing an ESOP?

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Q: How does a company go about setting up an ESOP?

-

Q: What are some of the administrative and com-pliance considerations in maintaining an ESOP?

sharing plan and has many of the same administra-

tive and compliance considerations associated with

example, the ESOP must satisfy discrimination re-quirements under the Internal Revenue Code and

the ESOP has more than 100 participants, the ESOP must be audited each year. In addition, if the stock held by the ESOP is not publicly traded, the stock

-dent appraiser.

Alexander Hart , CPA, MBA, is the managing partner -

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Michael Kessel --

joint ventures, limited liability companies, hedge funds,

Nothing contained herein is intended to serve as le-


The Compliance Corner

Chet Hebert

With this inaugural “Compliance Corner” column, we provide you with a quick update on important compliance issues facing the securities industry.

on your market niche, various issues may or may not be important to you. We will try to cover issues that are most pertinent to market

and comments are important to us, so drop us an e-mail and let us know what’s on your mind.

Electronic Blue SheetsThe Options Clearing Corporation and participating exchanges have begun the Option Symbology Initiative, which will affect

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traded options using explicit data elements (the Option Symbology Initiative), instead of the current Options Price Reporting Authority codes. For complete information on this change, refer to FINRA Regulatory Notice 09-18. Use of explicit data elements is volun-tary as of April 30, 2009, and mandatory as of February 12, 2010.

SEC Approval and Effective Date for New Consolidated FINRA Rules on the Transfer of Customer Accounts, Recommendations to Customers in OTC Equity Securities and Anti-Intimidation/Coordination; Effective Date: June 15, 2009. Refer to FINRA Regulatory Notice 09-20 for full details on these changes.

Personal Securities Transactions by or for Associated PersonsAs part of rule book consolidation, FINRA wants to combine NASD Rule 3050 and NYSE Rule 407. Under the proposed rule, an asso-

For complete information, refer to FINRA Regulatory Notice 09-22. This rule is up for comments. As a responsible member, you should review the proposed rule and send FINRA your comments.

So the Rules Are Changing

-derstand why we need to follow regulations. It is not rocket sci-ence that regulations exist to maintain an orderly market. We have varying degrees of regulations since the inception of the 1933 Act and the 1934 Act. Both laws are still very much alive and are en-

forced. Over the years and usually in response to an embarrassing debacle, the Security Acts have been amended. Many politicians have tried to fashion rules that would protect investors from un-scrupulous market participants. The current situation is not any different, except that the damages are far more severe and recovery is expected to take longer. That does not mean that we cannot and should not continue our business. Sure, it may be harder. Capital may be more expensive or may not be available in many cases. But we must move on.

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Dealing with the Surprise Government Interview

David M. Rosenfield and James A. Moss

This article will help companies and their employees prepare for and, if necessary, deal with a surprise interview by government agents as part of an investigation of an allegedly defective prod-

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The Washington Post-

Criminal Probe Opened in Pet Food -

After all, someone needs to be held accountable.

(Stanley A. Twardy, Jr., et al., The Criminalization of the CEO, National Legal Center for the Public Interest, March 2001; see alsoconsumer advocacy organization Public Citizen, “Pub-lic Citizen Calls for Criminal Investigation of Breast Implant Manufacturer for Withholding Safety Data from FDA,” , October 12, 2006; Con-sumer Product Safety Act, 15 U.S.C. §§ 2068, 2070;

Federal Food, Drug, and Cosmetic Act, 21 U.S.C. §§ 331, 333).

When conducting criminal investigations about pos-sible corporate wrongdoing, in both alleged defective products matters and other cases, government agents often seek to interview company executives and other

minimize the likelihood that a supervisor or a company lawyer might intervene to thwart the interview. There is nothing improper in using this investigative technique. Nevertheless, employees should know their legal rights and understand the risks they take when they submit to such surprise negotiations.

Employees should recognize that they are not required under the law to participate in any surprise interview. They should also be aware that any statements that they do make are not “off the record,” and can and will be used later by the government against the company and/or the employee at a trial or other legal proceeding. Generally, employees should carefully consider their options before submitting to interviews of this type without the advice of counsel and without ample time to prepare.

A company and its employees ignore the threat of an


ambush or surprise interview, particularly at a time when the company may have committed wrongdoing or is under investigation, at their own peril. In numer-ous cases, law enforcement or regulatory agencies have used ambush interviews to collect evidence to prosecute a company and its employees. For example, as noted in a 1999 article in the

The government followed this pattern [the use of ambush interviews] ... when it began the public stage of an investigation of suspected fraudulent commodity trading practices in Chicago. For months, the government secretly gathered information through an FBI

When that phase of the investigation was complete, the government unleashed teams of prosecutors and agents who visited numerous traders at home during the evening in coordinated and simultaneous interviews. Few traders sought to consult with a lawyer, and many provided information that supported subsequent prosecutions.

(Steven M. Kowal,

Additionally, as reported in a May 6, 2007 article in The Indianapolis Star, in May 2004, the FBI effectively utilized a series of 20 early morning surprise interviews at the homes of various corporate executives in an In-

(Kevin Corcoran, , The Indianapolis Star,May 6, 2007) Some of the executives lied to the FBI during these surprise interviews, and one executive, af-ter learning that the FBI wanted to talk to him, even

-criminating documents. The Indianapolis Star article described some of the ambush interviews in detail, in-cluding the following interview:

In Noblesville [Indiana], Chris Beaver, operations manager at Beaver Materials, invited investigators in and offered them refreshments. He was calm and talkative, but he repeatedly denied any involvement.His wife was getting their children ready

for school. Beaver, who was being groomed by his father to lead the company, later said he had hoped authorities would leave without hauling him away in handcuffs as his children watched from atop the staircase.

FIVE KEY RULES TO FOLLOW DURING A SUR-PRISE INTERVIEW

1) Be respectful, but do not be intimidated. Act cour-teously and as calmly as possible under the circum-stances, although you may understandably be nervous and concerned. Do not yell, curse, or attack the agents’ integrity or motives.

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-view, but rather, should advise the agents to contact that


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her a Miranda

Miranda Miranda

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ADVANTAGES TO CONDUCTING THE INTER-VIEW AT A LATER TIME

There are many advantages and few disadvantages to having the interview conducted at a later time. First, delaying the interview affords the employee time to prepare and review the facts with corporate counsel and/or the employee’s personal attorney. Documents can be reviewed that may refresh the employee’s recol-lection, thus assuring that more accurate answers are given. The delay also provides the employee with the opportunity to decide in an unpressured setting whether or not to talk to the government at all, or instead ex-ercise his or her Fifth Amendment right not to testify. Second, any later interview will likely be held at a gov-

and children in the next room. Third, the presence of an attorney on behalf of the employee or the company is protection against a potentially unfair or deceptive in-terrogation. Fourth, by insisting upon the right to seek

reasons:

cooperation takes place at a later time;

leniency;

terminates an investigation;

answers to the agent’s questions, any prospect for leniency may be compromised; and

advantage gained from immediate cooperation will ever outweigh the advantages of waiting. The real danger is that the information provided by the employee

during the surprise interview will be incomplete, incorrect, or presented in a way that is subject to misinterpretation by the agents.

This danger can be avoided by declining to participate in the surprise interrogation.

CONCLUSION

What a company executive or other employee does when confronted with a surprise or “ambush” interview during a criminal investigation into an allegedly defec-tive product is critical for both the employee and com-pany. Declining to submit to the interview until a later time, so that the employee has a chance to review the facts carefully and speak to an attorney, may well be more advantageous to both the employee and the com-pany.


Company Profile: Allied EnergyAmerica’s Return to Value How one company is making it happen!

Investors today want an answer to a pressing ques-tion, “Where is my money safe?” With uncertainty in

safety. Addressing this question requires examining America’s return to value.

As the United States continues to transition from an agrarian and industrial society to an information society

-ties will likely be created. Similar opportunities helped fuel the boom and bust cycles of the last two decades. For example, in the 1990’s innovation in information technology helped spawn many new companies and

-kets.

But investors want to know where to put their money

income and safety? The answer is energy. America will return to value when investors put more of their money in domestic oil and gas resources and alternative en-ergy. With the world facing an economic crisis, energy is a sound investment option. Investing in America’s energy independence is good for both investors and the country alike.

The Future of Energy

One company dedicated to America’s energy indepen-dence is Allied Energy, Inc. (PINK: AGGI). Allied En-ergy, Inc. (AEI) is a company committed to developing domestic oil and gas resources and alternative energy. AEI has acquired numerous properties to assure long-term growth. The company uses leading-edge geosci-ences and other technology to identify and develop quality oil and gas properties.

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Forward Thinking

In 2008, AEI extended its forward thinking with the creation of Allied Operating, LLC. This wholly-owned subsidiary manages and operates all of AEI’s proper-ties in Rogers County, Oklahoma. As the number of oil wells in Rogers County grew to over 50, it made sense to stop paying other companies to operate them. Now

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and gas company;

through exploration efforts;

assets through diversity;

alternative energy products.


According to Stengell, “Allied Energy was formed in June 2003 to be a leader in the oil and gas industry. The company relies on its geologists, petroleum engi-

-cess of each project. The company’s focus is to devel-op oil and natural gas reserves. To meet the demand for

investments in natural gas reserves and gas transmis-

to come.”

AEI currently has about 6,000 acres of leased proper-ties and more than 70 wells under development or ap-proaching production in Rogers County, Oklahoma. Allied Operating LLC manages all of AEI’s properties

-ing operations to Pawnee County, Oklahoma; southeast

County, Colorado.

Growth In Adverse Conditions

AEI has achieved impressive growth over the last few years when many companies downsized or went out of business. In 2006, the company reported over $5 mil-lion in revenue. Revenue increased to $9.1 million in

the company reported revenue of $13.3 million for 2008. This is an increase of $3.2 million or 31.2 per-cent compared to 2007. The growth occurred during a period when oil and natural gas prices were falling. The

decreased from $5.5 million in 2007 to $3.2 million in 2008. The company attributes the lower costs to im-

AEI embarked on another major expansion in 2009 when the company established Allied Alternative En-ergy, LLC (AAE). AAE has been working hard to de-velop alternative energy resources, such as wind, solar, and fuel cell technologies. The company recently en-tered into a partnership with a waste management com-pany to develop renewable energy resources.

Find Out More

Web site at www.alliedenergy.com or send an e-mail to [email protected].

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ON THE MARKETA World Awash In Oil – Heavy Oil,

A most highly disruptive technology to convert it into light oil - A “Best Idea”

Ivanhoe Energy (IVAN) $1.42 Nasdaq

Market Cap - $396 million

Two mega deals* completed – but not visible in the stock, in my opinion.

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Bitumen (heavy crude oil) producers will be compelled to adopt Ivanhoe’s new breakthrough technology for the following reasons:

1. Expensive light oil or light oil synthetic substitutes are not needed to dilute the oil for transport. The di-luents cost more than the lightest crude oil.

2. Outside energy (i.e., natural gas) is not needed to power the conversion. The upgrading process is self-sustaining and fuels itself.

3. The process produces light crude oil with vastly im-

-tation costs by allowing the oil to be transported to more


convenient processing and marketing points.

‘satellite’ conversion facilities are inexpensive to set up. They use off-the-shelf components and can be deployed to remote sites with relatively small instal-lations. This is in stark contrast to existing technolo-gies that do not adjust well to the scaling requirements

should be relatively easy and non-dilutive.

Since January 2006, the price differential between light oil and heavy oil has varied from a low of 15 percent to a high of over 60 percent– with an average of 34 per-cent. Price variances between winter and summer are

of heavy oil projects.

In addition, natural gas prices that fuel the competition’s heavy oil projects have varied from $3.50 to $13.69.

* On July 10, 2008, Ivanhoe Energy acquired from Talisman Energy two leases located in the heart of the Athabasca oil sands region of Alberta, Canada. The to-tal purchase price was Can$90 million ($88 million). The resource is now said to contain 441 million barrels of the heavy (bitumen) oil. Notably, that’s only $0.20 cents per barrel. The company has said that the project has a production capacity of 50,000 barrels per day for more than 30 years.

This one deal can potentially generate about $1 billion of revenues a year for 20 years.

During a recent conference call, Mr. Robert Friedland, Executive Chairman and CEO, spoke of “enormous opportunities” and said that he had had “intensive dialogues with resource owners in 17 countries, most of whom are national oil companies.” Friedland later mused that the possibilities for Ivanhoe Energy are

Canada alone has two trillion barrels of heavy oil re-serves. For perspective, Saudi Arabia’s oil reserves are said to be 300 billion barrels. The picture is clear; there’s plenty of heavy oil out there, and Ivanhoe En-ergy has a next generation process to convert it to light oil.

With a world-wide shortage of light crude oil, the mar-ket for a conversion solution to address this predica-ment is indeed mind-boggling.

the superiority of Ivanhoe’s HTL™ process over the SAG-D type process (used by the competitor) is rough-ly equivalent to $20 a barrel.

* In October 2008, Ivanhoe Energy signed a contract with Ecuador state oil companies, Petroecuador and Petroproduccion, to explore and develop Ecuador’s

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approximately 125 miles southeast of Quito, Ecuador.

The numbers quoted are spectacular. “Ivanhoe Energy


plans to invest about $4.5 billion in the project and Ec-uador will pay $37 per barrel to extract the oil. Ivanhoe might produce 108,000 barrels of heavy oil a day at the

At 108,000 barrels a day times 365 days a year times

$1.5 billion per year at a fully operational facility.

On July 8, 2008, Ivanhoe Energy completed a private placement of warrants to raise Can$88 million ($86 million). After the transaction, 52 institutions held 18 percent of Ivanhoe’s common shares.

It’s important to point out that Ivanhoe’s management team is a brain trust of entrepreneurial talent. Execu-tives have legendary management experience on a glob-al scale. They have a long and super successful history of doing important international deals. Plus, they know where all the heavy oil is out there… and they know the

Robert Friedland, Deputy Chairman, is the largest -

nom who sold his nickel deposit company to Inco for $4.2 billion in 1996. He is also Chairman of Ivanhoe Mines Ltd. (NYSE: IVN), which is known for its Oyu Tolgoi mine in Mongolia. The Oyu Tolgoi mine is rec-ognized as one of the world’s largest copper-gold por-phyry deposits. Robert is an entrepreneur and investor par excellence. He has raised billions in capital over the course of an incredible career.

David Martin is CEO and Chairman of Ivanhoe Energy Latin America. A geologist, he was formerly CEO and President of Occidental Petroleum (NYSE: OXY) for 26 years.

Leon Daniel is Chairman and CEO of Ivanhoe Energy Middle East and North Africa. He was formally Execu-tive Vice President of Worldwide Business Develop-ment for Occidental Petroleum. He has over 40 years experience in the oil and gas industry that includes suc-

North Sea, Columbia, Russia, and the United States.

You may recall that Occidental Petroleum was one of the all-time winning stock plays. Both Martin and Dan-iel were at the helm at Occidental Petroleum during its great boom and growth years, and they say, “between

them they have found more crude oil on planet earth than anybody.”

Ivanhoe Energy now employs many former Occidental executives, 3-D seismic geologists, and geophysicists. Further, with the acquisition of Ensyn, Ivanhoe Energy acquired some exceptional mid-management talent. What you get with Ivanhoe Energy is a reformulated Occidental Petroleum in a new small-cap bottle.

Ivanhoe Energy is now on the doorstep of numerous agreements that are expected to be signed within the next several months. As part of the new proposed deals, the company is asking for a percentage participa-tion (i.e., joint venture) in the oil producing property.

as deals are signed. In fact, I own shares in Ivanhoe Energy.

For analytical summaries of how these advantages are

you the Raymond James and Tristone Capital research reports.

More information about Ivanhoe Energy can be found at www.ivanhoe-energy.com.

is a seasoned Wall Street analyst who is widely recognized for his

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-ations cover global currencies, credit

markets, sector strength analysis, technical analysis, sentiment overviews, and both long-side and short-side

On the Market reports have been widely distributed -

stitutions, investment banks, mutual funds, hedge funds,


The Upper West Side is making its imprint as a serious, upscale dining des-tination with restaurants like Dovetail.

streamlined restaurant was packed at 8:30 P.M.

When we arrived, the friendly staff welcomed us at the door. They were all wearing ties. Once inside, you see a simple interior with grey carpeting, na-ked walls, and brick columns lit with candles. Struck by the somewhat stark surroundings, you wonder how the food will relate. The restaurant speaks of na-ture. One big wall had rows of black and white pictures of naked tree branches.

After what seemed a long anticipation, the waiter presented us a trio of pre-meal teasers. Instead of standard rolls, we were treated to the mouth watering corn-bread with parmesan cheese prepared by pastry chef, Vera Tong. We glanced at the menu. It was not your run of the mill menu, to say the least. It left you wanting to know more about chef John Fraser.

Chef John Fraser had an interesting back-ground. He was studying in California to become a doctor when his career took a sharp turn after he met none other than Thomas Keller at The French Laundry in Napa Valley. Fraser’s exposure to fresh

artistry after spending time at Tailievert and L’Arpege in Paris, France. Return-

ing to New York from France, he opened Snack Taverna, a small Greek trattoria. Two years later he moved again, this time to the notable Compass. Fraser was making a name for himself, and it was time to open his own place - Dovetail.

Looking at the appetizers menu, we couldn’t help but notice a few adven-turous dishes, such as lamb’s tongue or pig’s head a la plancha. I decided on the more conventional baked scallops. The scallops were perfectly seared and delicately nestled on a slab of iceberg le sale. A separate dish of sea urchin sat close by. To eat you had to combine the scallop and the sea urchin with each bite. With a taste of the scallops and sea urchin, you felt transported to an ocean

the trolleys. My husband went with a conservative dish - sardines, a standard of his when he is in Spain. But this time, his face showed a whole new emotion after biting into the mix of refreshing marmalade bits, slightly bitter broccoli rabe, and spicy chili oil.

crab ravioli with salty chorizo, chunks of sweet potato, all bound with a layer of brown butter. Without saying a word, we both gobbled it down. For the second

peas, spring onions, and morels took me from the ocean waves straight to the

simple, yet highly delicate. My partner in gastronomic crime had the striped bass.

buco, my husband’s favorite. The mix of lentils, carrots, and piquillo vinaigrette made the osso buco jealous. My husband felt he was dining in Tuscany, Italy.

Such ambition made no surprise of the wine selection either. I was happy to see one page with wines priced under $75. We went with a 2006 Burgundy from Chassagne-Montrachet,Margeot-Clos Pitoris, 1st Cru. It was an absolute stun-ner and complemented our food to per-fection.

Pastry chef, Vera Tong, did not disap-point us with dessert. Her signature bread pudding was deceptively simple. The pudding blended perfectly with bananas, bacon brittle, and a tender scoop of rum ice cream. Simple food indeed had gone sophisticated!

a trip to the west side of Central Park. Let’s hope John Fraser never exchanges his chef’s knife for a doctor’s scalpel.

The last say: they have a grotto-like pri-vate room with windows to view where all the action takes place – the kitchen.

Dovetail103 West 77th StreetNew York, NY Tel: 212 362 3800

The Next Course with Heidi

Heidi W. Picone

Micro-Cap Review Magazine Summer 2009

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Transcript of Micro-Cap Review Magazine Summer 2009