Micro-Cap Review Archives Summer 2009

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

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PAGE ( 3 )2ND QUARTER 2009

www.microcapreview.com

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

PUBLISHERWesley [email protected]

EDITOR

Ronald [email protected]

WRITERS

Marc ClarkMark ColemanKarl DouglasJohn FaesselMark FowlerAlex HartChet HebertMichael KesselJordan Kimmel

Sheldon 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 o

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

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

The recession continues. Business moveson, 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 standand plan for the future. For companies to

-

cedures to monitor performance.

The most important step to monitor the com-

panys 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 bycombining two similar public companies.

Both have expenses for compliance, SO

directors fees, etc. It may not be viable f

either company to survive separately; but

two companies merged, they may becom

stronger and healthier. Another option m

be to investigate ways to share resourc

company to reduce expenses. For examp

one biotech company we know has combin

forces with a second biotech company to r

duce the oversight of its phase two testin

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 raisi

debt or selling equity. In an economy whe

capital and credit seem to have dried u

creative minds have come up with new an

innovative ways to meet the needs of companies. Necessity is the mother of inventio

These methods include selling equity bas

on market volume and shared equity lendin

to name a few.

Good luck in weathering the remainder

this recession. We hope that you take adva

tage of the creative techniques presented

this issue to help you not only to survive th

recession, but also to come out stronger a

be in a position to act when opportunit

present themselves.

WELCOME

Ronald StoneRonald Stone

Edito


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PAGE ( 4 ) 2ND QUARTER 2009


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Business & Markets

15 Concentric M&A Strategyby Alex Parsinia

20 Carve-outsby Patrick Martin and Mark Coleman

23 Never Seen a Stock Market Like ThisBefore

by Sheldon Kraft

27 Opportunity Knocks DuringRecession

by Mark Fowler

Finance & Investments

6 Looking for It and Not Finding?by Victor Nowicki

8 Let Our Magnet Find You the BestMicro-cap Stocks in Any Market

by 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 SurpriseGovernment Interview

David 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


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Executives often ask me the question, Have you foundit 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 theyve

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 anyones motivations orpast 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 documentationis 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

-


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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 readers attention. The document also speaks about

the owners 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 busine


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Jordan Kimmels The MAGNET Method of Investing: isan amazingly detailed and intuitive book. I especially- sweet spot. Jordans writing style is also very straight --

investors.

Every bull market has its share of leading companiesthat 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 strengthwhen 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 easyto 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


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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 Investingdistills over 25 years

of research on what makes a great investment andincludes a mathematical back-test of our proven, un-

emotional, and unbiased system. Using several propri-

etary ratios to analyze a companys 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 companys 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 mediocrereturns generated by Wall Streets diversify and think

long term mentality. If you seek truly exceptional

what I call Magnet Stocks. If youve been left be-

hind, its never too late to start doing your homework.

Jordan Kimmel is President and

Portfolio Manager of The Magnet

Investment Group LLC and is thedeveloper of the MAGNET Stock

-

pears regularly on ABC, CNBC

his own weekly radio show, Magnet

Investing with Jordan Kimmel, on

Magnet

Investing

completing his second book, The Magnet Method of In-

vesting


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PAGE ( 11 2ND QUARTER 2009

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-marketcompanies 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.

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ing roughly $3 billion, have announced proposed mergers.

Additionally, 45 companies, representing over $10 billionof 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, thiscreates a yield to maturity that is often in excess of 10 per-

cent per annum. Thats 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.

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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

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tively. When the transaction breaks trust, the loan is repaid

out of the trust proceeds. China Opportunity AcquisitionCorp. 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 $100million 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


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at risk in a SPAC transaction. Depending on the size of the

SPAC, the sponsors 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 transactionsare 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 equivalentto 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, lets 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).

Lets 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, 5

percent is all that is needed to eliminate the class. This i

a very useful technique to eliminate pressure on the post

merged stock and reduce the potential short by the origina

warrant holders.

2. Negotiate with the original underwriter to pay their fees

based on the amount of cash left in the SPAC at closing. Ionly 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, mos

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 tha

the sponsors shares should be reduced

proportionately to the amount of fund

remaining in the SPAC at closing. Thi

can be made even simpler by purchasing the sponsors position. Most spon

sors will walk away from a SPAC, i

they can get their investment back be

fore the vote. Be aware that sponsor

have no incentive to do a deal, if th

negotiated amount is less than thei

original investment.

4. Reconstitute the shareholder base. In

to resell 70 percent of the existing pub

lic shares to new investors. Additionanew warrants can be issued to new investors in exchange fo

additional shares and liquidity. Simply stated, if you hav

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 th

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 discussewith an attorney who understands SPAC structures. Addi

tionally, coordination with a reputable broker-dealer with ex

pert industry knowledge is essential.


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PAGE ( 132ND QUARTER 2009

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

askMr. WALLSTREET

Market corrections have caused pain and havoc on bullmarkets. 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 turnedupside 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 IPOs 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 carefullyLoad 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 todays

play?

I will be chastised, criticized, and scorned for my recom-

mendations. Needless to say, I have been there before. Its

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

hind.

Sheldon Kraft


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Concentric M&A Strategy

for Micro-cap Companies

M area for most micro-cap companies. Its strategic im-portance cannot be understated, because many compa-higher valuations. Through acquisition, a companycan acquire new distribution channels, new technolo-gies, new markets, and new management talent. The

primary goal of M&A is to build on synergistic resultsso that the whole becomes greater than the sum of the-ability. Companies can choose from several possibleacquisition 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 concentricmodel 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

-

-

-


16/52


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 factor

in the following areas.

Technology Many small companies operate without th

right technology and tools. Too often management rec

ognizes the value of strategic projects but lacks the tim

and resources.

Sales & Marketing Many successful small companie

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 cause

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 additiona

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 th

Zcom concentric model, which is summarized below:


17/52


Zcom provides a launch pad for entrepreneurs to maxi-

mize commitment and effort to achieve accelerated

growth. Through subsequent M&A activity, synergis-

simply, Zcoms 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 Zcoms 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,

Zcoms 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


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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 Zcoms criteria. These companies fall

within Zcoms 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


19/52


20/52


Carve Outs What You See

Isnt 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 beeven tougher. However, given the current credit crisis,many companies are looking to generate extra cash byselling non-core or laggard business units. While thishas created many interesting investment opportunities,investors should be aware of the issues so that theycan buy at the right price. For strategic buyers, thisrepresents a great opportunity to expand their exist-

ing business and achieve economies of scale. Privateequity investors can bring new resources and strongmanagement skills to help turn a black sheep into aM&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 sellers 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.


21/52


to forecasts Verify that the sellers

projections are grounded in reality. If the

seller has not properly presented the

meaningless.

Understand the health of these relationshipsthrough 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-


22/52



23/52


Never Seen a Stock Market Like This BeforeSheldon Kraft

I-cial analysts (CFAs), 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 Ive spoken has repeated, They have never seen a

market like this before. Well, me neither. This is certainlyone 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.

Thats 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 companys 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 VentureExchange, 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.


24/52


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 dont 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 stockprice 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. Youll probably review the com-

earned on revenues, how high debt exists compared to the

companys 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 arent familiar with non-traditional valuation tech-

niques.

How can you invest in micro-cap equities if you dont 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 amicro-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


25/52


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. Dont 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 companys 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 sto

in the market. First, IPOs (mostly reverse mergers), genera

fall into the micro-cap group, as do most special-purpose

quisition companies (SPAC). The shrinking market capitali

tion of large-cap stocks is also adding many new listings to

micro-cap sector. I thought I would never hear that the Uni

States has become the land of micro-cap stocks!

Believe it or not, deciding on which stock is undervalued

the complete history of a stock, like we do the lemon law

for automobiles. Micro-cap stocks need their own lemon law

Caveat emptor (buyer beware) has never been more applica

than it is today.

References

Loiacono, S. (2009, March 23).

Retrieved March 22, 2009, fromInvestopedia: httpwww.investopedia.com/articles/stocks/07/micro_cap.asp

Securities and Exchange Commission. (2009, March 23). M

Retrieved March 22, 20

from Securities and Exchange Commission: http://www.s

gov/investor/pubs/microcapstock.htm

(2009, March 23). Retrieved March

2009, from

freedictionary.com/microcap

(2009, March 23). Retrieved March 22, 2009, fr

Wikipedia: http://en.wikipedia.org/wiki/Microcap_stocks


26/52



27/52


Opportunity KnocksDuring Recession

Mark H. Fowler, CPA, CMC

The media is full of news about recession. Its becomeserious enough that politicians have given the economy

prime attention. While its 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 businessdownturn. 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 downtur

The structural phase is about creating a disciplined ap

proach to strengthen the following areas.


28/52


-

-

o Operational audits

anticipate changes

-

-

-

BUILDING THE RIGHT TEAM

After spending more than 30 years helping companies co

with organizational changes, we can say for certain th

no company can do it alone. It takes a team of professio

countant (CPA). This is the person who may have the b

understanding of your business. Work with your CPA

bring in expertise of other professionals. In our exp

improve effectiveness. We have helped many compan

manage through a crisis. These companies faced dow

sizing, bankruptcy, or dissolution. By working with CPA

corporate development or turnaround experts, attorne

bankers, lenders, and other professionals, we have help

companies achieve dramatic results. Success is achiev

when we roll up our sleeves and work as a team.

also the author of the forthcoming book, Always Adding Val

Stowe Management Corporation

P.O. Box 2028

Santa Monica, CA 90406

Phone: 310-458-1321

Web: www.estowemanagement.com

Email: [email protected]

Copyright 20062009 Stowe Management Corporation.

rights reserved.


29/52

SGS-COC-004752


30/52


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 todays economy, companies have a tough time raisingcapital, 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 companys 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 servicin

corporate trust, and information exchange to facilitate pric

discovery. Entrex is taking revenue-based securities tonew level by providing investors with an attractive inves

ment option. TIGRcub investors can participate in mark

segments that were once unavailable or unattractive and th

and liquidity.

During a recent interview with Micro-Cap Review, Stephe

H. Watkins, founder of Entrex, explained that the TIGR

cub security was created as a solution for middle-mark

ous limitations:

performance adversely affect stock price.

and the complex algorithmic trading models

routinely exercised. Both of these factors are

completely outside a companys 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

Entrexs two public sample groups-

even during recessionary periods.


31/52


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 thechange. 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


32/52


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 todays depressed stock

market can be extremely dilutive, and transactions will be

based on lower valuations than those made just 18 months

ago.

of whats going on, said Watkins, since in many cases, a

companys revenue could be consistent and healthy, yet its

equity value is perceived to be far less than it was only re-

cently.

-

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.


33/52


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 allocationswith 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 todays 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]

-

ofCapital Cant Fund What it Cant Find.

investors and issuers together through the


34/52



35/52


ANNOUNCED TRANSACTIONS


36/52


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 companys stock for employees.The shares acquired by the ESOP are allocated toindividual employee accounts.

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

Q: What are some compelling reasons to have anESOP 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 anemployee 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 betterway to sell his/her shares than through an ESOP. Byselling shares to the ESOP, the owner is transferringownership to people who will have a vested inter-est in the long-term welfare of the company theemployees. The ESOP can help perpetuate the com-panys existence long after the owner/founder leavesthe company.

An ESOP can also be used by companies to raisecapital to fund growth. Under this arrangement, theESOP borrows money from an external source anduses the proceeds to buy newly issued shares of a -a less expensive way for companies to raise capital.

C corporations?

-

ASK THE TAX GUYS

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


37/52


-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 corporations income that is allocated to

the ESOP is exempt from federal income tax; the ESOPis responsible for the income tax. If the ESOP ownedall of the S corporations shares, the ESOP would nothave to pay any federal income tax attributable to the Scorporation.

Q: Who controls the ESOP?

-

by establishing an ESOP?

-

Q: How does a company go about setting up anESOP?

-

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 andthe ESOP has more than 100 participants, the ESOPmust be audited each year. In addition, if the stockheld by the ESOP is not publicly traded, the stock-dent appraiser.

Alexander Hart , CPA, MBA, is the managing partner

-

-

Michael Kessel -

-

joint ventures, limited liability companies, hedge funds,

Nothing contained herein is intended to serve as le-


38/52


The Compliance Corner

Chet Hebert

With this inaugural Compliance Corner column, we provideyou with a quick update on important compliance issues facing thesecurities 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 whats on your mind.

Electronic Blue Sheets

The Options Clearing Corporation and participating exchangeshave begun the Option Symbology Initiative, which will affect

-

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 Persons

As 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 politician

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. Capita

may be more expensive or may not be available in many cases. Bu

we must move on.


39/52



40/52


Dealing with the Surprise

Government Interview

David M. Rosenfield and James A. Moss

This article will help companies and their employees prepare forand, if necessary, deal with a surprise interview by government

agents as part of an investigation of an allegedly defective prod-

-

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 ofthe CEO, National Legal Center for the Public Interest,

March 2001; see also

consumer 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 rightsand 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


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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 incoordinated 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 effectivelyutilized 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

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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 agentsintegrity 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 employees personal attorney. Documents

can be reviewed that may refresh the employees 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 agents questions, any

prospect for leniency may be compromised;

and

advantage gained from immediate

cooperation will ever outweigh the advan-

tages 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.


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Company Profile: Allied EnergyAmericas 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

Americas return to value.

As the United States continues to transition from an

agrarian and industrial society to an information society

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ties will likely be created. Similar opportunities helped

fuel the boom and bust cycles of the last two decades.

For example, in the 1990s innovation in informationtechnology helped spawn many new companies and

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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 Americasenergy independence is good for both investors and the

country alike.

The Future of Energy

One company dedicated to Americas 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 thecreation of Allied Operating, LLC. This wholly-owned

subsidiary manages and operates all of AEIs 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.


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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-

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cess of each project. The companys 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 AEIs properties

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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 2009when 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 thestock, in my opinion.

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Bitumen (heavy crude oil) producers will be compelledto adopt Ivanhoes new breakthrough technology forthe following reasons:

1. Expensive light oil or light oil synthetic substitutesare 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 topower 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


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convenient processing and marketing points.

satellite conversion facilities are inexpensive to setup. They use off-the-shelf components and can bedeployed 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 lightoil and heavy oil has varied from a low of 15 percent toa high of over 60 percent with an average of 34 per-cent. Price variances between winter and summer areof heavy oil projects.

In addition, natural gas prices that fuel the competitionsheavy oil projects have varied from $3.50 to $13.69.

* On July 10, 2008, Ivanhoe Energy acquired fromTalisman Energy two leases located in the heart of theAthabasca 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 barrelsof the heavy (bitumen) oil. Notably, thats only $0.20cents per barrel. The company has said that the projecthas a production capacity of 50,000 barrels per day for

more than 30 years.

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

During a recent conference call, Mr. Robert Friedland,Executive Chairman and CEO, spoke of enormousopportunities and said that he had had intensivedialogues with resource owners in 17 countries, mostof whom are national oil companies. Friedland latermused that the possibilities for Ivanhoe Energy are

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

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 Ivanhoes HTL process over theSAG-D type process (used by the competitor) is rough-ly equivalent to $20 a barrel.

* In October 2008, Ivanhoe Energy signed a c

Micro-Cap Review Archives Summer 2009

Documents

Transcript of Micro-Cap Review Archives Summer 2009