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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
fourish, management must set up Iormal pro-
cedures to monitor performance.
The most important step to monitor the com-
pany’s performance is preparing a 13-week
rolling cash fow. This cash fow shows the
sources and uses of funds weekly. With this
report, the company can identify problems
before they occur and can anticipate cash
needs quickly. The cash fow report not only
helps senior management, but also helps rank
and fle workers to identiIy problems early.
Early identifcation can be the diIIerence be-
tween a small problem and a big one.
After the company has completed a 13-week
cash fow and realizes that it needs additional
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-
There may still be opportunities to reduce
expenses that were previously not identifed.
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,
such as technology and staIfng, with another
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-
pany, but both companies realized signifcant
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
PAGE ( 4 ) 2ND QUARTER 2009
PAGE ( 5 ) 2ND QUARTER 2009
Business & Markets
15 Concentric M&A Strategy
by Alex Parsinia
by Patrick Martin and Mark Coleman
23 Never Seen a Stock Market Like This
by Sheldon Kraft
27 Opportunity Knocks During
by 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 Market
by Jordan Kimmel
11 Capital Alternatives: Ten Things
to Know Before Merging with a SPAC
by Karl Douglas
13 Ask Mr. Wallstreet
by Sheldon Kraft
Legal, Tax, & Accounting
36 Ask the Tax Guys: ESOP
by Alex Hart and Michael Kessel
38 Compliance Corner
by Chet Hebert
40 Dealing with the Surprise
David Rosenﬁeld and James Moss
Travel & Entertainment
50 Dovetail Restaurant Review
44 Allied Energy
47 Ivanhoe Energy
35 Announced Transactions
vO|ÜME 4 º lSSÜE 1 º 2ND OÜARTER 2009
PAGE ( 6 ) 2ND QUARTER 2009
Executives often ask me the question, “Have you found
it yet?” That question is obviously asked by potential “cli-
ents¨ with reIerence to fnding capital Ior them. While it is
never easy to fnd Iunding sources Ior small businesses, it
is certainly harder now than ever before. So, the clients’
urgency to have that question answered in the aIfrmative is
greater than ever too. Yet, they rarely stop to ask two funda-
(1) Why is it so hard to fnd Iunding?
(2) What can I do to optimize the chances of
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
connections, and the right idea. He was trying to fnd ad-
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
paragraphs, and mistakes in word usage. The fow oI the
document was non-existent. The business argument was
diIfcult to understand. The plan oI action was missing. The
fnancial projections consisted oI one line revenue and ex-
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
client`s objectives and fnancing needs. Furthermore, when
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
were you shopping this deal?), fawed in terms oI market or
fnancial analysis, or simply lacking coherence. As a capital
advisor with no prior knowledge of the client or his business
proposal, my frst question is the same as that oI the ulti-
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?
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RI RQH OLQH UHYHQXH DQG H[SHQVH LWHPV
PAGE ( 7 ) 2ND QUARTER 2009
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
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.
Sloppy work spoils that crucial frst impression, raises unnec-
essary questions, and increases the risk of a failed connection.
So why go there?
Second, clients should reach out and fnd someone they can
work with to develop the highest-impact product. Retain and,
oh, yes, work with them! I am not suggesting hiring Goldman
Sachs or even a second tier player. Their fee structures are not
suitable for small-cap and micro-cap companies. However,
there are many independents (myself included) that can work
with you to get the job done, and get it done well. The fees are
reasonable and well worth the investment. The retainer struc-
ture aligns everyone`s objectives and commitment to the best
Third, clients should choose an advisor who has broad indus-
try experience relevant to the business being presented. That
industry knowledge enhances the logic and credibility of the
material being presented. Also, an industry-specifc advisor is
likely to have a good relationship with investors in that indus-
try, thus enabling a more focused funding search.
Fourth, clients should hire someone with preferably a 'buy-
side¨ experience. A 'buy-sider¨ should have either worked as
an underwriter of deals or has a direct investment experience.
A 'buy-sider¨ will know what his/her counterparts at funding
sources will look for and will address any gaps. He/she will
have greater analytical sense of what`s required and will pres-
ent the information in a way that makes sense. In contrast,
all too often I see pitches that are high on 'gloss¨ and low
on content generated by independent 'sell-side¨ investment
bankers. Their game is to increase the probability of a 'look¨
by funding sources. This is a good thing for the investment
banker, but not always for the client. The approach requires
time and commitment to respond to each look, with no clear
commitment from either side.
Lastly, clients should stop and listen to investor and market
feedback! If you are a client, review your materials, under-
stand why people have problems, and adjust the information
being presented. Engage your advisor in the process. Remem-
ber that he/she is on your side and wants the deal done. Are
you not getting a response? That is a very powerful message.
Something is wrong with what you are proposing. Generally,
no one will tell you why, so try to infer from the response, or
the lack thereof. Are you being told that the investment is too
early stage? You are probably targeting the wrong investors.
Are you being told that the minimum EBITDA threshold is
not reached? Well, most likely your plan is too aggressive or
too leveraged, so the risk/return balance is not right. Are you
being asked a number of times about the resumes of your man-
agement team? Well, maybe you do not have the right team.
Are you being asked about your balance sheet and that '24
percent note to a related party¨ buried in your liabilities? Per-
haps it is time to consider fnancial restructuring to enhance
the attractiveness of your plan.
Strangely enough, these are obvious and logical points - aren`t
they? So, why do so many companies plunge ahead and fail?
Well, the cost of retaining a professional advisor is one key
consideration. The typical lines I get include the following:
· We do not have money.
· What? I have to pay for this?
· Isn`t the advisor supposed to do this for free?
· Why should I pay for this at all?
· Why don`t you have the investor pay
for this? (the best line)
These points are perhaps understandable, but largely irrele-
vant. The only thing that matters is fnding and securing fund-
ing. How much is that worth to a company looking for capital
to get the business up and running? I bet a lot more than the
$30,000 to $50,000 that is paid to the advisor.
P.S. The guy who was looking for capital to buila his internet
platform nearly six months later is still looking, probably
with the same pitch!
Victor Nowicki is a principal of Jitron Capital (www.vitron-
capital.com). The hrm proviaes business ana capital aavisory
services to small and medium-sized companies and business
PAGE ( 8 ) 2ND QUARTER 2009
“Jordan Kimmel’s The MAGNET Method of Investing:
Find, Trade, and Proñt from ExceptionaI Stocks is
an amazingly detailed and intuitive book. I especially
enjoyed Jordan's insights into diversifcation, the inef-
fcient market and identifying stocks that are in their
‘sweet spot.’ Jordan’s writing style is also very straight
forward and refreshing. He succeeds in taking com-
plicated subjects and explaining them in a straight for-
ward and insightful way. This is simply an incredible
book that is a must read for both beginning and serious
--Louis G. Navellier, chairman and founder of Navellier
& Associates, Inc., and author of The LittIe Book That
Makes You Rich
Every bull market has its share of leading companies
that are new to the spotlight. Traditional investors who
proft by timing the market may end up Irustrated, un-
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,
market-savvy traders proft Irom stock market trends,
there is nothing more proftable than identiIying the
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
day¨ or a policy speech by a government oIfcial, too
many investors focus on the wrong things. The reality
is that nobody can or should predict the future. Doing
so is not required to generate profts in the stock mar-
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
the economy`s fuctuations, Lynch tried to fnd his 'ten
baggers.” These are companies that win market share
and spin oII Iree cash fow, and ultimately appreciate in
value by ten times.
Every environment has a handful of companies that
dominate their niche market and are great stocks to
own. The diIfculty Ior investors is to fnd the best com-
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
fnd and invest in the best companies beIore the institu-
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.
By choosing diversifcation, you are assured to gener-
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
In my new book, The Magnet Method of Investing, I ex-
amine the beliefs and strategies of the greatest investors
oI our era and how they infuenced Magnet. The book
walks you through the process of identifying the best
Let Our Magnet
Find You the Best
Micro-cap Stocks in Any Market…
PAGE ( 9 ) 2ND QUARTER 2009
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
If investors are willing to do a little extra research, they
will realize there`s a great opportunity to proft Irom
market ineIfciencies created by smaller companies.
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-
viction that several excellent proftable opportunities
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.
Trying to fgure out whether the market or a company
within it is “cheap” enough is one approach, but I need
to go Iurther. I want to fnd early stage companies that
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
returns, you must fnd the Iew true market leaders, or
what I call “Magnet Stocks.” If you’ve been left be-
hind, it’s never too late to start doing your homework.
Don`t let profts pass you by!
Jordan Kimmel is President and
Portfolio Manager of The Magnet
Investment Group LLC and is the
developer of the MAGNET® Stock
Selection Strategy. Mr. Kimmel ap-
pears regularly on ABC, CNBC,
ana Fox Business News, ana hosts
his own weekly radio show, Magnet
Investing with Jordan Kimmel, on
the JoiceAmerica Business Network.
He is the author of the wiaely acclaimea book, Magnet®
Investing, which was publishea in 2000. He is working on
completing his second book, The Magnet Method of In-
vesting, which is scheaulea to be publishea in August 2009.
PAGE ( 10 ) 2ND QUARTER 2009
PAGE ( 11 ) 2ND QUARTER 2009
Ten Things to Know Before Merging with a SPAC
In the 'Capital Alternatives` column, we explore various
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-
ated several years ago to fll a void created by Security and
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-
ny investors to experience the benefts oI private company
valuations. SPACs served as an eIIective fnancing tool and
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.
In the frst quarter oI 2009, over 20 companies, represent-
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-
actions are extremely diIfcult to complete Ior several rea-
Proxy Requirement - The frst major hurdle is that SPACs
require upwards of 70 percent of investors to approve the
proposed merger. Achieving that level is extremely dif-
fcult, regardless oI the investment merits. Many hedge
funds that have invested in SPAC transactions have been
Iorced to meet signifcant redemptions. Regardless oI the
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-
eft is that yield buyers probably saved many equity Iunds
(e.g., hedge funds) from taking huge losses that would have
been otherwise created by signifcant stock sales. However,
with a signifcant number oI SPAC shares now in the hands
of yield investors, the proxy vote is generally an automatic
“no,” because yield investors want the shares to mature.
In response to these diIfculties, SPAC sponsors and com-
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
by the Iunds in trust. The sponsors vote the shares aIfrma-
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-
tion. 'No vote loans¨ can add signifcant expense to a trans-
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
PAGE ( 12 ) 2ND QUARTER 2009
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
sponsor will want a signifcant ownership oI the post-merged
company, so that cost should also be taken into account. This
can change the valuation and attractiveness of the transac-
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
need to raise a signifcant amount
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
However, if a SPAC transaction is structured properly, it can
be an excellent way to fund an acquisition. To reduce the
risks and increase the benefts, deal sponsors may consider
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
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
4. Reconstitute the shareholder base. In
this process, an investment frm is paid
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
their aIfrmative votes. Investors beneft Irom having both
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.
Karl Douglas is Managing Director of European American
Equities, Inc., a member of FINRA ana SIPC.
PAGE ( 13 ) 2ND QUARTER 2009
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-
nity is approaching Iast. It begins with proft taking Irom
the overheated bull market, resulting in a fight to saIety
away from Dow Jones stocks. My philosophy is a nuance
of the “trickle-down effect.” Investors who sold Dow Jones
stocks are fushed with cash and are looking Ior new op-
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
shaking mightily with infationary signs and recessionary
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?
The trickle-down eIIect is on the fnancial horizon. Like wa-
ter, cash always fnds its own level. It is fnally here. The
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
The perfect storm was created by 10 ingredients:
· Revised SEC Rule 144 that permits a
six-month holding period
· Huge cash on the sidelines
· Long undervalued marketplace
· Incredible technology and domestic
· Hedge Iunds crushed in sub-prime
· Regulatory cleanup did its intended
· Wall Street boutiques starting up
· Old Street reeling in pain
· Investor panic soon to cause more selling
pressure on high-priced stocks
· Commodity prices out oI control
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
move lower down the equity path by frst buying small-cap
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
under fre. These managers are the new cadre oI mavericks
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
fIty cents stock is tomorrow`s fve dollar stock, a ten-Iold
I will be chastised, criticized, and scorned for my recom-
mendations. Needless to say, I have been there before. It’s
tough being alone at frst, but pretty soon I will be looking
over my shoulder, as the herd builds momentum from be-
Shelaon Kraft is founaer ana C.E.O. of SNN Incorporatea.
He can be reachea at askmrwallstreet¸snnwire.com
PAGE ( 14 ) 2ND QUARTER 2009
PAGE ( 15 ) 2ND QUARTER 2009
Concentric M&A Strategy
for Micro-cap Companies
Mergers and acquisitions (M&A) is a signifcant
area for most micro-cap companies. Its strategic im-
portance cannot be understated, because many compa-
nies are looking to achieve growth, proftability, and
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
parts. Doing so leads to long-term growth and proft-
ability. Companies can choose from several possible
Forward Integration Strategy
Forward integration involves acquiring a frm that dis-
tributes your products and services in the channel of
distribution (i.e., a manuIacturing frm that acquires
one of its distributors).
Backward Integration Strategy
Backward integration involves acquiring a frm that
supplies you with raw materials or products (i.e., a
restaurant chain that acquires a food distribution com-
Horizontal Integration Strategy
Horizontal integration involves acquiring a frm that
competes with you in the same industry (i.e., an aero-
space company acquiring one of its competitors).
Diversifcation involves acquiring a frm that operates
in a different industry and is not related to your core
business but has potential to oIIset some defciencies
(i.e., cigarette manufacturing companies acquiring
companies in the soft drink industry).
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
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VRFLDWHG ZLWK VWDUWXS FRPSD-
QLHV DQG DYRLGV WKH KLJK FRVW
PAGE ( 16 ) 2ND QUARTER 2009
Through its subsidiaries, Zcom offers the following ser-
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
Zcom offers products and services through its Home Shop-
ping Network that are marketed and promoted through
Zcom`s television stations, as well as through aIfliates.
Existing products include Super Fuel and TV Box.
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
include the right to develop, mine, process, refne, and
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
invested $600,000 to buy land to build fve beachIront
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
the target profle. These companies have unmet needs
that prevent them from obtaining higher valuations. Many
companies can reach the next level if limiting factors
were removed. Limiting Iactors are commonly identifed
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
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-
Business Systems – Progressing from a small to a mid-
dle-market operation requires updated business systems,
technology upgrades, new best practices, and additional
staIfng, which may strain existing resources.
Financing – A company that grows organically and prof-
itably may not generate faster growth because of lim-
ited cash and lack oI experience in obtaining fnancing.
Achieving organic growth without additional fnancing
is oIten a slow process that may not generate suIfcient
returns required by investors.
Contacts – Small companies often operate with limited
infuence. The lack oI key contacts hinders a company`s
ability to achieve business goals rapidly.
These limiting factors play directly to the strengths of the
Zcom concentric model, which is summarized below:
· Provide key management
· Infuse cash for rapid growth
· Monetize uncompleted or underdeveloped products
· Implement systems, controls, and procedures
· Provide technology and operating infrastructure
· Increase revenue and proftability
· Identify, develop, secure, and protect
· Identify, develop, and expand distribution and
· Effectively market and advertise products and services
PAGE ( 17 ) 2ND QUARTER 2009
· Perform M&A to build out portfolio companies
Zcom provides a launch pad for entrepreneurs to maxi-
mize commitment and effort to achieve accelerated
growth. Through subsequent M&A activity, synergis-
tic benefts are obtained Ior all subsidiaries. To put it
simply, Zcom’s tactical advantages and skill sets help
promising companies grow faster and improve valua-
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
beneft to acquire companies at a lower cost.
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
while returns are optimized Irom (a) diversifcation in
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-
cessIully applied the concentric model to proft Irom
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-
market companies. The concentric model flls a vital
gap in industries in which Zcom operates.
Acquired companies gain improved systems, resources,
and contacts to maximize their opportunities for suc-
cess. Zcom helps manage overhead Iunctions (fnance,
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,
which are Iocused largely on fnance and management.
Zcom’s approach is to use technology and other ser-
vices as tools to accelerate growth. Examples of infra-
structure technologies include:
· Customer relationship management
· Content management
· Media management and distribution
· Internet access
· Global reach
· Data centers and servers
· IT management
· Application and Web site development
· Database management and distribution
· Product development
· SoItware development
The benefts are compelling when technology inIra-
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-
cess is Iollowed to assess the ft oI the company and its
management. Suitable candidates generally meet the
· Proftable operations or near-term
· Capable management team
· Assets that may be developed into
· Synergy with existing holdings
· Growth potential relative to business
PAGE ( 18 ) 2ND QUARTER 2009
· Compatible corporate culture
· Well-managed risks
The due diligence process includes a review oI fnanc-
es, strategic ft, the management team, and acceleration
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
· The acquired company`s management
team is supported by Zcom management
· Management is deployed on a project basis
· Outsourcing is used
· New sales, marketing, and media initiatives
are formulated and executed
· Systems are put into place to streamline
· Technology inIrastructure and intellectual
property are deployed
· Management controls are put into practice
to monitor and track progress
· Appropriate capitalization is directed toward
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.
Dr. Alex Parsinia is Chairman ana
CEO of Zcom Networks, Inc. Dr.
Parsinia is an M&A expert who has
extensive senior management experi-
ence and a background in the media
ana telecommunications inaustry. He
is responsible for the overall strategy
ana operations of Zcom. Before foin-
ing Zcom, he servea as chief execu-
tive ofhcer of several companies, in-
cluding Supertel Communications, Signet Paper Company,
Pioneer Envelope Company, and Allied Corporate Invest-
ments. He taught courses in business strategy ana mergers
ana acquisitions (M&A) as a professor in the executive MBA
program at Pepperaine University in Malibu, California.
His acaaemic backgrouna incluaes several aegrees, inclua-
ing a bachelor of science in mechanical engineering, a mas-
ters of business administration, and a doctor of philosophy
in international business. He is a certihea M&A specialist
and has published books and numerous articles in national
ana international fournals.
PAGE ( 20 ) 2ND QUARTER 2009
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
winner. For fnancial and accounting purposes, these
M&A transactions are commonly called carve-outs.
What are you buying?
Potential buyers should be aware that fnancial data oI
the carve-out unit is oIten not comparable to fnancial
data of the parent company that is presented to inves-
tors, lenders, and other third parties. Also, the fnan-
cial data of the carve-out unit may not follow gener-
ally accepted accounting principles (GAAP). Further,
division-level fnancial inIormation oIten includes
intra-company transactions, corporate allocations, and
fnancial adjustments, which may not be relevant to a
To get the true fnancial picture, investors should as-
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
aIter completing such an analysis can proftability,
quality oI earnings, and fnancial Iorecasts be evalu-
ated. A similar analysis should be done on the balance
sheet to understand cash fow trends and working capi-
tal requirements of the stand-alone entity, which are
often different from the larger organization.
Investors should also consider the following issues:
· Transition Services Agreement ('TSA¨)
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
Ior a suIfcient transition period. A general
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.
· Working capital requirements - Develop a
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
capital. Buyers need to think oI cash fows
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.
· Capital expenditure ('capex¨)
requirements– Evaluate capex requirements
in light oI expected cash fows, including
maintenance expenditures, whether they
are capitalized or not for accounting
PAGE ( 21 ) 2ND QUARTER 2009
· Bridging the stand-alone fnancial statements
to forecasts – Verify that the seller’s
projections are grounded in reality. If the
seller has not properly presented the
historical fnancials, their projections may be
· Concentration oI customers and vendors
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
include fnancial and accounting support that can bring
the critical depth of knowledge to complete complex
It is imperative that buyers have a thorough under-
standing oI the issues beIore entering into a defnitive
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.
Laurus Transaction Aavisors proviaes expert hnancial ana
accounting due diligence services to buyers and sellers in
M&A transactions. The hrm also proviaes portfolio manage-
ment services for private equity investors and advisory ser-
vices to unaerperforming ana overleveragea businesses.
PAGE ( 22 ) 2ND QUARTER 2009
PAGE ( 23 ) 2ND QUARTER 2009
Never Seen a Stock Market Like This Before
I have spoken with numerous ex-traders, chartered fnan-
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
stave oII depression by shoring up troubled fnancial institu-
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
fnd in this market Ior sure. Focusing on micro-cap stocks
seems timely, because they are the new opportunity haven.
Let`s start by defning micro-cap stocks.
By Free Dictionary on Google:
Micro-cap stock. A micro-cap stock is one with a smaller
market capitalization - sometimes much smaller - than stocks
described as small-caps. (Market capitalization is fgured by
multiplying the current market share price by the number of
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
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.
Wikipedia defnes micro-cap stocks as stocks oI publicly
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.
PAGE ( 24 ) 2ND QUARTER 2009
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
come with success. Pricing is likely to be ineIfcient. Fewer
institutional investors and analysts operate in this space, due
to the relatively small dollar amounts involved and the lack
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-
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
price ineIfciency creates opportunities Ior savvy investors.
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-
pany`s fnancial statements to learn how much net proft is
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:
· Has this company invented a compelling
product or service that taps a unique niche
in the market place?
· Is the company`s sector 'hot¨?
· Are there comparison companies to
· Is management outstanding?
· Does the company have a better
way of doing things?
· Will the company`s oIIering be in demand
in the future, no matter what the
· Is the company`s history exciting?
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
may be diIfcult Ior individual investors to conduct in-depth
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-
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-
dependent, Iee-based research frms. These frms issue stock
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-
Iormation on penny stock companies can be diIfcult to fnd,
and a stock can be easily manipulated.
In the U.S. fnancial markets, the term penny stock com-
monly refers to any stock trading outside one of the ma-
jor exchanges (NYSE, NASDAQ, or AMEX), and is often
considered pejorative. However, the oIfcial SEC defnition
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
PAGE ( 25 ) 2ND QUARTER 2009
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-
DAQ are fooded with micro-cap stocks and even some penny
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.
Whether labeled as a penny stock or a micro-cap stock, stocks
of some very familiar companies are trading at levels not seen
in decades. For example, from January 2007 to February 24,
2009, the following blue chip stocks experienced a sharp price
Company Stock Share Price Share Price
Symbol Jan 07 Feb 09
Citigroup C $55.66 $2.60
General Motors GM $30.30 $2.22
New York Times NYT $24.27 $3.95
General Electric GE $30.30 $9.08
Offce Depot ODP $38.27 $1.26
US Airways LCC $53.89 $3.66
Okay, now what? How should investors deal with this plethora
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.
Really go through the Web site to fnd as much inIormation as
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
more diIfcult today than ever beIore. Now we have to know
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.
We may have seen the worst of the market downfall; the air
is out of the balloon. The government bailouts have propped
up several prominent household company names. Nevertheless,
the market is still a very scary place. I recommend buying into
liquidity. Look for stocks that have trading volume, no matter
how 'good¨ the story is. It is always easier to buy than to sell,
and you must always buy with the idea of selling. Without li-
quidity (trading volume), there is no exit strategy.
Shelaon Kraft is founaer & CEO of SNN Incorporatea.
He can be reachea at skraft¸snnwire.com
Loiacono, S. (2009, March 23). How To Evaluate A Micro-Cap
Company. Retrieved March 22, 2009, from Investopedia: http://
Securities and Exchange Commission. (2009, March 23). Mi-
crocap stock. A Guiae for Investors. Retrieved March 22, 2009,
from Securities and Exchange Commission: http://www.sec.
The Free Dictionary. (2009, March 23). Retrieved March 22,
2009, from TheFreeDictionary: http://fnancial-dictionary.the-
Wikipeaia. (2009, March 23). Retrieved March 22, 2009, from
PAGE ( 26 ) 2ND QUARTER 2009
PAGE ( 27 ) 2ND QUARTER 2009
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
Companies can overcome diIfculties by Iocusing on
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.
o Business planning, both short-term and
· Where do we need to be at the end of the month?
· Where do we want to be at the end of the year?
In three years? In fve years?
· Are all senior managers and owners on the same
page about the plan?
· What are the three strategic imperatives that will
be driving the company?
o Organizational development
· Do we have the right people in the right place,
doing the right job?
· Do our leaders have the skills they need for today
· Do we have a system to get timely feedback to
· How can we identify problems sooner rather than
· Who will be responsible for creating solutions?
· Who will be responsible for implementation?
o Developing a team of advisors to lead
the company through the process.
· What expertise do we need outside the
· How will the team work together to accomplish
· Who are the stakeholders and how should they
PAGE ( 28 ) 2ND QUARTER 2009
Understanding factors that can cause a crisis is the key to
grow or protect a business. By creating or revising strate-
gic protocols, company leaders can better detect potential
problems and fnd ways to mitigate a crisis. These proto-
cols can include:
o Financial statement reviews with bankers
o Periodic management reviews
o Operational audits
o Enhanced product quality control
o Vigorous dialogue with customers
o Improved information systems
o Creating an early warning system to help
By implementing these strategic protocols, the company
can avoid serious issues to focus on current and future
Having access to good information is essential during diff-
cult times. Information systems should be in place to track,
measure, and analyze the most important parts of the busi-
ness; having good information will help managers make
right decisions. Information that is useful includes those
that address the following areas:
· Identifying sources of revenues
· Identifying top product lines and customers and
their stage of developmental process
· Understanding inventory turns
· Implementing key indicators and other metrics
· Preparing costing analysis
· Creating a decision-making process to help maintain
consistency and focus
· Managing cash and other resources
A lack of good information can hamstring decision-making.
Quality of information is equally important as quantity of
information. The more companies know and understand
the details of the business, the better they can manage dur-
ing an economic downturn and prepare for future growth.
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-
als to make it work. Start with your certifed public ac-
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-
ence, CPA involvement can signifcantly reduce costs and
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.
Mark H. Fowler, CMC, CPA, is Presiaent of Stowe Management
Corporation, a corporate reengineering hrm basea in Santa
Monica, California. He has workea with CPAs ana their cli-
ents for over 25 years involving profect turnarounas, succession
planning, mergers, acquisitions, ana corporate growth. He is
also the author of the forthcoming book, Always Adding Value,
which is expectea to be out in December 2009.
Stowe Management Corporation
P.O. Box 2028
Santa Monica, CA 90406
Copyright© 2006—2009 Stowe Management Corporation. All
PAGE ( 30 ) 2ND QUARTER 2009
TIGRcub™ Security Gives Investors
Access to Top-Line Revenues
TIGRcub™ Security is an investment product pioneered by
Entrex Inc. that offers unique aavantages to micro-cap ana
miaale-cap investors ana companies. Investors beneht from
having liquidity and stability of returns that are based on a
percentage of the issuers revenues for a aehnite perioa. Is-
suing companies beneht by obtaining capital without creat-
ing equity ailution.
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
Income Generation Rights Certifcate. Entrex launched TI-
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).
To date, investment bankers have identifed more than 800
public and private companies that will consider TIGRcub™
structures Ior various fnancing projects.
With a depressed equity market, companies fnd this non-
dilutive security to be far more compelling than issuing
new stock. Also, more investors are fnding that TIGRcub¹
solves their concerns about micro-cap companies, including
illiquidity, infation, and risks associated with market Iactors
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
the fnancing needs oI middle-market companies. Entrex
has been a leader in building the inIrastructure. The frm has
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
satisfes their need Ior risk adjusted returns, current income,
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
growth companies and investors who fnd equity and debt
capital markets to be limited and ineIfcient.
Specifcally, the Entrex team developed the security aIter
fnding that the equity and mezzanine debt markets had seri-
· Factors unrelated to company fnancial
performance adversely affect stock price.
Two major infuences are investor sentiment
and the complex algorithmic trading models
routinely exercised. Both of these factors are
completely outside a company’s direct
· Public company revenue and stock price
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.
· Revenue volatility is substantially lower
than stock price volatility. This is seen at both
company and portfolio levels, representing
lower investor risk.
· Revenues (both public and private
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.
PAGE ( 31 ) 2ND QUARTER 2009
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
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
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
well, even when stock prices fuctuated and declined.
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-
Modern Corporate Finance Solutions & Investment Op-
tions Are a Natural Evolution of the Capital Market-
“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-
zanine debt fnancing with stock warrants was their only
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
PAGE ( 32 ) 2ND QUARTER 2009
wait on a liquidity event to recover their investment. In to-
day`s potentially infationary environment, the TIGRcub¹
security also oIIers investors a way to hedge infation, be-
cause revenues Ior most companies climb during infation-
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
'But these fnancing circumstances are not a true refection
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-
The TIGRcub¹ security can accommodate the capital struc-
tures of nearly any company and still meet investor return
requirements. TIGRcub¹ fnancing can be accomplished
using various models:
· The High Yield Variable Annuity model
offers investors a higher risk/higher reward model
where the internal rate of return (IRR) improves
as the issuing company`s revenues grow.
· The Fixed Annuity model has more bond-like
characteristics where, in exchange for a
pre-determined IRR, an issuing company
can actually decrease its cost of capital
over time by showing extraordinarily
high revenue growth.
· The Exchange Offer model allows companies a
way to buy back stock from shareholders
through a TIGRcub¹ or create a tender
offer to buy back the outstanding shares
of the company with the proceeds of a
TIGRcub¹ fnancing. To the extent
that a company wishes to privatize,
Sarbanes-Oxley compliance costs
and obligations could be eliminated and
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,”
What Fund Managers Say About TIGRcubs™
Several funds are organizing capital to invest in TIGR-
cub™ securities. One group is Arctaris Capital Partners
in Waltham, Massachusetts. 'The fnancial markets are at
a juncture where the need for innovation of practical and
transparent fnancial structures is crucial,¨ said Andrew D.
Clapp, managing partner. 'The time is now Ior fnance to
render new solutions that satisfy both investors and compa-
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.
PAGE ( 33 ) 2ND QUARTER 2009
The TIGRcub™ Stimulus Package
Watkins concludes by saying that revenue-based investing is
the stimulus that U.S. companies and global capital markets
“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
United States. It can restore and even increase capital fows
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
equity market, TIGRcubs¹ oIIer tremendous benefts to both
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
Stephen H. Watkins is CEO ana founaer of
Entrex. An entrepreneur, he founaea ana ex-
itea numerous companies. He is the author
of Capital Can’t Fund What it Can’t Find.
Entrex is a capital market system that brings
investors and issuers together through the
PAGE ( 34 ) 2ND QUARTER 2009
PAGE ( 35 ) 2ND QUARTER 2009
PAGE ( 36 ) 2ND QUARTER 2009
Q: What is an employee stock option plan
Hart: An ESOP is a type oI employee beneft plan.
It`s similar in some ways to a proft-sharing plan.
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?
Hart: An ESOP surpasses other types oI beneft
plans, because it provides tangible and intangible
benefts to a cross-section oI constituents: employ-
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.
For owners, an ESOP can be a tax-eIfcient way to
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
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
company`s stock. Because oI the tax benefts associ-
ated with fnancing an ESOP, ESOP fnancing can be
a less expensive way for companies to raise capital.
Q: What are some of the tax beneñts associated
with ñnancing the ESOP?
Kessel: In general, companies can deduct dividends
paid to an ESOP with certain limitations. If the ESOP
has a loan, such dividend payments can be used by the
ESOP to pay the interest and principal on the loan. Thus,
the effect is that the company gets to deduct the full cost
(principal and interest) of using the proceeds from the
Q: What tax beneñts are available to closely-held
Hart: With some restrictions, shareholders of a closely-
held C corporation who sell shares to an ESOP will pay
no tax on the gain from the sale. To take advantage of
the tax provision under I.R.C. § 1042, the ESOP must
own at least 30 percent of the company`s stock. Further,
the selling shareholders must reinvest the proceeds in
'qualifying securities¨ of other U.S. domestic corpora-
tions (public or private) within 12 months after the sale
to the ESOP.
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?
PAGE ( 37 ) 2ND QUARTER 2009
Q: What tax beneñts are available to S corpora-
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
Q: Who controls the ESOP?
Kessel: The terms of the ESOP document determine
who controls the ESOP and how the shares in the ESOP
are to be voted. Frequently, the trustee of the ESOP
has the right to vote the shares in the ESOP. In closely
held companies, employee shareholders generally have
the right to vote for signifcant events, such as a merger
of the company. It is fairly common for the manage-
ment of a company to remain in place after an ESOP is
Q: What types of companies would beneñt most
by establishing an ESOP?
Hart: Companies that beneft most are those that can
use the tax benefts offered by the ESOP. These are typ-
ically companies that are very proftable with excellent
cash fows that can take advantage of the tax benefts
of the ESOP. The cash fow is necessary to be able to
service the bank-fnanced debt previously discussed.
These companies typically have a strong management
team that offers the selling shareholder an alternative to
selling to an outside party or passing the business on to
Q: How does a company go about setting up an
Kessel: Compared with other retirement plans, such as
a 401(k) plan, an ESOP tends to be a little more diffcult
to set up and maintain. An owner should seek profes-
sional legal and tax advice when setting one up.
Q: What are some of the administrative and com-
pliance considerations in maintaining an ESOP?
Hart: As noted above, an ESOP is similar to a proft
sharing plan and has many of the same administra-
tive and compliance considerations associated with
maintaining a qualifed proft sharing plan. For
example, the ESOP must satisfy discrimination re-
quirements under the Internal Revenue Code and
fle an annual report (Form 5500) with the IRS. II
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
must be appraised each year by a qualifed indepen-
Alexander Hart , CPA, MBA, is the managing partner
of CPA Tax Strategies Inc., a subsiaiary of Proht Plan-
ners, Inc. The hrms proviae tax ana business aavisory
services. Alex speciali:es in tax planning ana tax prep-
aration for business owners ana corporate executives.
Michael Kessel is a partner with the law hrm of Her-
rick, Feinstein LLP. He concentrates his practice in in-
come tax law with a focus on corporate ana partnership
transactions ana real estate. Michael aavises clients on
all aspects of income tax with particular emphasis on
joint ventures, limited liability companies, hedge funds,
equity funas, ana international tax planning.
This article is publishea for information purposes only.
Nothing contained herein is intended to serve as le-
gal or tax aavice or counsel or as an opinion of CPA
Tax Strategies, Inc. (Proht Planners, Inc.) or Herrick,
PAGE ( 38 ) 2ND QUARTER 2009
The Compliance Corner
With this inaugural “Compliance Corner” column, we provide
you with a quick update on important compliance issues facing the
Trying to fnd one issue that trumps all others in today`s market is
like trying to fnd the proverbial needle in a haystack. Depending
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
participants, while fnding time to cover special topics. Your input
and comments are important to us, so drop us an e-mail and let us
know what’s on your mind.
Electronic Blue Sheets
The Options Clearing Corporation and participating exchanges
have begun the Option Symbology Initiative, which will affect
FINRA member frms` Electronic Blue Sheet submissions. Begin-
ning February 12, 2010, FINRA frms must describe all exchange-
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-
ciated person must receive his/her frm`s approval beIore opening
an account; the executing frm must have written approval oI the
account Irom the associated person`s frm beIore executing trades.
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
Compliance is getting tougher, and businesses must fnd ways to
comply. Everyone in the fnancial services industry needs to un-
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. Regulation in its simplest form is a barrier to
entry and, in its worst form, a restraint of free trade. Either way,
we fnd a way to deal with it. And that is why compliance should
be an important part of your business.
Managing risk has taken on new importance and has become an art
in itself. Regardless of how big or small your frm may be, manag-
ing risk is important. Risk management is not only about comply-
ing with rules, it is also about assessing how activities affect the
frm`s capital and how those activities are perceived by the public.
Smart frms assess the regulatory and market landscape and decide
on how best to do business within the boundaries - that is, compli-
ance. No two frms will make the same decisions. That is the beau-
ty of our system; we can be different and still be a market player.
Take NASD Rule 3012 and its sibling NASD Rule 3013, now
known as FINRA Rule 3130. Many frms look at it and say this is a
waste of time and money. Smart frms have looked at the rule and
said, 'How can we make this work for us?¨ Quite simply, NASD
Rule 3012 is a great opportunity for any frm to take an in-depth
look at itself, its business, its processes, and its people. Done cor-
rectly, NASD Rule 3012 will make a frm justify what it is doing
each year. And that is not necessarily a bad thing. Identifying high
risk/low proft areas cannot be all bad. Identifying ineffective su-
pervisors who increase risk cannot be all bad. As a result of regula-
tion, you may actually improve your business and lower your risk.
Chet Hebert is founaer ana Presiaent of The Compliance Depart-
ment Inc., a compliance consulting hrm in Centennial, Coloraao.
The Compliance Department helps broker-aealers ana investment
aavisors in the areas of hrm formation, compliance, CRD service
bureau, outsourcea back-ofhce processing, ana branch ofhce auait
services, incluaing AML ana Reg S-P compliance. More informa-
tion about the hrm can be founa by visiting www.thecomplianceae-
partment.com or by calling Chet at 303-339-9870.
PAGE ( 39 ) 2ND QUARTER 2009
PAGE ( 40 ) 2ND QUARTER 2009
Dealing with the Surprise
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-
Periodically, the government conducts criminal inves-
tigations into alleged product defects. For example, as
The Washington Post recently reported, the U.S. Food
and Drug Administration has opened a criminal inves-
tigation into the highly publicized case involving the
contamination of pet food, in which various pet food
companies determined that they had used melamine-
contaminated ingredients from China in their products.
(Patricia Sullivan, Criminal Probe Opened in Pet Food
Scare, www.washingtonpost.com, April 21, 2007) In-
vestigations such as this one are not isolated events. As
noted in a paper issued in 2001 by the National Legal
Center for the Public Interest:
The product liability arena has long been
subject to criminalization . . . High-profle,
product liability tragedies have incited
legislatures to take aim directly at CEOs.
The media routinely has pounced on product
liability crises . . . to bash big business.
In turn, society has demanded that someone
pay the price.` Legislators, representing
constituents who are thirsty for retribution,
have targeted not only corporations but
also their CEOs.
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 also Press Release oI national proft
consumer advocacy organization Public Citizen, “Pub-
lic Citizen Calls for Criminal Investigation of Breast
Implant Manufacturer for Withholding Safety Data
from FDA,” www.citi:en.org, October 12, 2006; Con-
sumer Product Safety Act, 15 U.S.C. §§ 2068, 2070;
Federal Food, Drug, and Cosmetic Act, 21 U.S.C. §§
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
employees 'by ambush¨ outside the oIfce place, to
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
A company and its employees ignore the threat of an
PAGE ( 41 ) 2ND QUARTER 2009
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 Fooa ana Drug Law Journal.
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
agent who worked on the trading foor.
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, When Unexpectea Government
Agents Drop In. Responaing to Requests for Immeaiate
Interviews, 54 Fooa Drug L.J. 93, 96 (1999))
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-
diana price-fxing case involving concrete companies.
(Kevin Corcoran, The Big Fix, 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
stopped at his oIfce and his home and destroyed in-
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.
Many of the executives interviewed by the FBI later
pled guilty to price-fxing charges or, like Chris Beaver,
were convicted after a jury trial, and fnes totaling $35
million were levied by the Justice Department against
the concrete companies.
FIVE KEY RULES TO FOLLOW DURING A SUR-
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.
2) Consider whether you would prefer to postpone the
interview until you have had an opportunity to consult
with an attorney and prepare for the interview. If you
choose this course, advise the agents that you will be
happy to consider speaking to them, but cannot do so
now without frst speaking to an attorney. Repeat this
statement, without embellishment, if the agents try to
engage you in a dialogue about why you need the ad-
vice of a lawyer. (Of course, if you have already re-
tained a personal attorney or consulted with corporate
counsel, you should not submit to the surprise inter-
view, but rather, should advise the agents to contact that
3) Don`t talk, listen. Listen carefully to what the agents
tell you about the nature of the investigation and the
reason for the interview. It may be useful to prepare
notes summarizing what the agents told you (without
comment) immediately after they leave. If you choose
to postpone the interview until you can consult with an
attorney, avoid answering even 'background¨ questions
until a formal interview can be arranged, as once you
start talking it may be diffcult to stop.
4) Obtain the business cards of the agents before they
PAGE ( 42 ) 2ND QUARTER 2009
5) After the agents have left, immediately contact your
supervisor and/or corporate counsel and advise them of
the contact so that the company`s legal department can
follow up. You and the company`s counsel may also
want to consider whether it is advisable that you retain
your own attorney if you have not already done so.
The surprise interview will most likely occur at a time
when it is diffcult, if not impossible, for the employ-
ee to obtain the advice of corporate counsel, the em-
ployee`s supervisor, or the employee`s personal attor-
ney. The attempted interview will probably take place
at the employee`s home early in the morning or late at
night, or perhaps outside of a store or restaurant dur-
ing the evening or on a weekend. As the government
agents certainly recognize, if the surprise interview is
at home and family members are present, the employee
may feel added pressure to go ahead with the interview
to attempt to get it over with quickly. The employee
should recognize, however, that he or she has no obli-
gation even to invite the agents inside, let alone submit
to the interview.
The employee is probably not a target of the investiga-
tion because the government generally does not con-
duct surprise interviews of a target, although there are
exceptions. Rather, the employee is most likely being
interviewed to develop evidence against other employ-
ees or the company itself.
Since the employee is not being subjected to a custo-
dial interrogation, the agents do not have to give him or
her a Miranda warning. Many people, having watched
crime shows on television, might incorrectly believe
that they are not in any trouble if they are not given a
Miranda warning. However, the fact that no Miranda
warning is given does not make the surprise interview
any less perilous for the employee or the company.
The agents might even attempt to convince the employ-
ee to sign a statement or affdavit. The statement, of
course, will have been prepared in a way that supports
the government`s version of the case. An employee
who signs such a statement without having carefully
reviewed the key documents and facts of the case with
counsel may make misstatements, and thus put both
himself or herself and the company at great risk.
Although probably not a target, the employee can
quickly become one if he or she answers questions or
signs a statement without a suffcient opportunity for
thoughtful refection and preparation. For example,
employees can bring suspicion upon themselves by
answering questions incorrectly out of haste or poor
memory. Of course, an employee may be committing a
serious crime if he or she answers the agents` questions
in a less-than-truthful way by holding back embarrass-
ing or incriminating information, or denying his or her
own acts of misconduct. Lying to the government is a
federal crime - regardless of whether it is to an agent
during an informal surprise interview or to a prosecutor
or regulatory attorney during a deposition taken under
The agents will invariably try to pressure the employee
into agreeing to submit to the interview immediately.
The agents may serve the witness with a grand jury sub-
poena and then suggest that answering questions could
terminate the investigation, or conversely that a failure
to answer might prolong the investigation. The agents
may even claim that this is the employee`s last chance
for leniency. Rarely are these statements anything
other than tactics intended to override the employee`s
better instincts. It is seldom true that there is any genu-
ine necessity for an immediate interview. Furthermore,
the refusal to submit to the interview at that time is not
likely to result in any adverse consequences to the em-
ployee or the company.
Some of the dangers in submitting to a surprise inter-
view include the following.
The agents may employ aggressive interview tech-
niques that make the employee feel nervous and con-
fused. For example, the agents may use the 'good cop,
bad cop¨ routine (yes, this technique is actually used at
times) in an effort to get the employee to lower his or
her guard and speak to the 'good cop.¨ Being caught
off-guard and probably not having had an opportunity
to carefully refect upon the facts, the employee is more
likely to give incorrect or incomplete answers. There
are usually two agents, and their interview notes will
refect only their version of the interview. There will
be no witness to support the employee`s version if it
differs from the agents` version.
PAGE ( 43 ) 2ND QUARTER 2009
Each employee should understand that during an at-
tempted surprise interview he or she has a choice as
to whether or not to answer questions. Testimony can
only be compelled by a subpoena for an appearance be-
fore a grand jury or a regulatory agency at a later date.
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-
ernment oIfce, not at home with the employee`s spouse
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
the counsel oI others, the employee is not sacrifcing
leniency or the benefts oI cooperation Ior the Iollowing
· It is unlikely that leniency will be withheld iI
cooperation takes place at a later time;
· Agents do not have the authority to grant
· Submitting to a surprise interview rarely
terminates an investigation;
· II the employee mistakenly gives incorrect
answers to the agent’s questions, any
prospect for leniency may be compromised;
· Finally, it is highly unlikely that any slight
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
This danger can be avoided by declining
to participate in the surprise interrogation.
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-
PAGE ( 44 ) 2ND QUARTER 2009
Company Proﬁle: Allied Energy
America’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
fnancial markets, investors are looking Ior stability and
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
in the twenty-frst century, new employment opportuni-
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
contributed to a boom in real estate and fnancial mar-
But investors want to know where to put their money
now. Where can they fnd value today that oIIers both
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
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.
'Regardless of the state of the global economy, Allied
Energy continues to grow and plan for the future,¨ said
Steve Stengell, president of AEI, in a recent earnings
release. 'The company is proftable, and its quality of
earnings during this tumultuous economy has improved
signifcantly. And we expect earnings to improve in the
The creation of Allied Gas Transmission in January
2009 is a great example of AEI`s growth initiatives.
The majority-owned subsidiary was created to develop
a natural gas distribution system for AEI`s properties in
Rogers County, Oklahoma. AEI currently owns a three-
mile pipeline which runs from the southern leased
properties in Rogers County to a master meter where
the natural gas is sold. AEI is now developing a ten-
mile pipeline that will reach the northern leased proper-
ties. This will allow AEI to transport natural gas to end
customers without having to pay a third party, which is
a tremendous cost savings to the company. Further, the
pipelines will generate additional revenues by allowing
the company to transport natural gas of smaller produc-
ers in the area.
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
Allied Operating is a very proftable company.
According to Steve Stengell, the success of AEI de-
pends on following through on several key areas:
Leverage assets to build a strong, frst-class oil
and gas company;
IdentiIy and develop signifcant reserves
through exploration efforts;
Build production reserves and other
assets through diversity;
Invest in research and development oI
alternative energy products.
PAGE ( 45 ) 2ND QUARTER 2009
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-
neers, fnancial analysts, and industry experts, whose
combined industry experience is essential to the suc-
cess of each project. The company’s focus is to devel-
op oil and natural gas reserves. To meet the demand for
clean-burning Iuel, the company has made signifcant
investments in natural gas reserves and gas transmis-
sion systems to generate signifcant revenues Ior years
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
in Oklahoma. In 2008, the company expanded its drill-
ing operations to Pawnee County, Oklahoma; southeast
Ohio; Fisher and Leon counties in Texas; and Morgan
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
2007. According to recent audited fnancial statements,
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
company`s net income beIore taxes Ior 2008 was $1.4
million. Selling, general, and administrative expenses
decreased from $5.5 million in 2007 to $3.2 million in
2008. The company attributes the lower costs to im-
proved eIfciencies and investments made in 2008.
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
To fnd out more about AEI, please visit the company`s
Web site at www.alliedenergy.com or send an e-mail to
This Corporate Prohle is basea upon information pro-
viaea by the issuer or company representative. The in-
formation is not intenaea to be, ana shall not constitute,
an offer to sell or solicitation of any offer to buy any
securities. It is intenaea for information only, ana to
increase awareness of Alliea Energy, Inc . Safe Harbor
Statement. The statements in this aavertorial relating
to future proaucts, partnerships, technology ana posi-
tive airection are forwara looking statements within the
meaning of the Private Securities Litigation Reform
Act of 1995. Some or all of the aspects anticipatea by
these forwara looking statements may not, in fact, oc-
cur. Factors that coula cause or contribute to such aif-
ferences incluae but are not limitea to contractual aif-
hculties, aemana for Alliea Energy, Inc. common stock
ana the companys ability to obtain future hnancing.
Micro-Cap Review Maga:ine may have receivea $6000
cash ana/or stock to publish ana print this corporate
prohle. Micro-cap Review Maga:ine aisclaimers apply
ana may be reviewea at http.//www.microcapreview.
com/aisclaimer.php. Before investing in any security,
you are strongly aavisea to review all public hlings of
the issuer of such security, which can be founa at www.
sec.gov as well as the warnings publishea by the SEC
PAGE ( 46 ) 2ND QUARTER 2009
PAGE ( 47 ) 2ND QUARTER 2009
ON THE MARKET
A 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.
I became enamored with Ivanhoe Energy (NASDAQ:
IVAN) in 2005 when I saw frsthand the astonishing
process that converts heavy crude oil to light crude oil.
I was with a group of money managers, analysts, and
high net worth investors from all over the world who
had attended an investor road show in Bakersfeld, Cal-
ifornia. There we visited the new Aera Petroleum plant,
a joint venture project between Exxon and Shell. The
one thousand barrels-a-day demonstration facility had
the look of a small oil refnery. In what amounted to a
two day, on-site seminar, Ivanhoe management gave us
a demonstration of its astonishing HTL¹ processing
Since 2005 Ivanhoe Energy has made much progress in
developing its business, including entering into excit-
ing and highly signifcant deals. But before discussing
these deals, frst let me tell you about the global heavy
oil market, the ingenious HTL¹ (heavy to light oil)
process and the company itself.
The world`s supply of crude oil is getting smaller and
smaller. Most of the easy` stuff, the light and medium
grade crude oil with lower production costs, are quickly
disappearing. In fact, the extraction of the light and me-
dium crude oil that comprise more than 90 percent of
global oil production has exceeded one trillion barrels to
date. The remaining reserves of light and medium crude
oil are located in mature oil felds or in remote environ-
ments, such as deep water and ultra-deep formations,
and in countries that are partially or completely closed
to investment by international oil companies.
While light and medium crude oil is quickly disappear-
ing, there is an abundant supply of heavy crude oil. For
example, three barrels of heavy oil exist for every one
barrel of light oil on the planet. Heavy oil has the vis-
cosity of molasses or tar and is extremely diffcult to
upgrade and transport; in fact, some of the heavy oil is
marooned and can`t be accessed at all. The refnement
and transportation problems historically have made
heavy oil not viable.
Now, with Ivanhoe`s patented HTL¹ process, a solu-
tion is at hand. With this proprietary technology, the
company can convert heavy crude oil to lighter, more
valuable crude oil. The company can do so in high vol-
ume effectively, effciently, and inexpensively.
The HTL¹ conversion process is extremely effcient.
About 90 percent of the heavy oil is converted to light
oil. Equally signifcant is that the remaining 10 percent
is produced as 'resid¨ fuels with some energy left over.
The processing of the resid creates steam, a power by-
product; it takes three barrels of steam to extract one
barrel of heavy crude oil. Ivanhoe`s HTL¹ technolo-
gy has already been successfully applied to continuous
wood and biomass processing for over 15 years with
six commercial plants in operation.
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-
proved viscosity, permitting eIfcient pumping through
pipeline networks. This signifcantly reduces transpor-
tation costs by allowing the oil to be transported to more
PAGE ( 48 ) 2ND QUARTER 2009
convenient processing and marketing points.
Also highly signifcant to note is that these smaller
‘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
oI smaller projects. Importantly, the project fnancings
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
typical and can be signifcant. The huge price swings
can have an extremely negative impact on the cash fow
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
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.
According to fnancial services frm, Raymond James,
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
Pungarayacu heavy oil feld. Ivanhoe Energy Latin
America Inc. will undertake the frst project by devel-
oping the massive Pungarayacu heavy oil feld, located
approximately 125 miles southeast of Quito, Ecuador.
The numbers quoted are spectacular. “Ivanhoe Energy
PAGE ( 49 ) 2ND QUARTER 2009
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
$37 per barrel, you get a gross cash fow number oI
$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
players who control it, many on a frst name basis.
Robert Friedland, Deputy Chairman, is the largest
shareholder. Robert is an international fnancier phe-
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
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-
cessIul oilfeld projects in Venezuela, Qatar, Libya, the
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
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.
There is signifcant upside to the company`s share price
as deals are signed. In fact, I own shares in Ivanhoe
For analytical summaries of how these advantages are
quantifed, send me an e-mail request and I`ll Iorward
you the Raymond James and Tristone Capital research
More information about Ivanhoe Energy can be found
Dr. John Faessel is a seasoned Wall Street
analyst who is widely recognized for his
insights into public companies ana hnan-
cial markets. Dr. Faessel aavises hrms,
brokers, ana traaers. His market evalu-
ations cover global currencies, credit
markets, sector strength analysis, technical analysis,
sentiment overviews, and both long-side and short-side
recommenaations. For over 20 years, Dr. Faessels
On the Market reports have been widely distributed
throughout the worla to an extensive list of hnancial in-
stitutions, investment banks, mutual funds, hedge funds,
brokers, founaations, ana high net worth investors.
PAGE ( 50 ) 2ND QUARTER 2009
The Upper West Side is making its
imprint as a serious, upscale dining des-
tination with restaurants like Dovetail.
Even in these diIfcult times, this small,
streamlined restaurant was packed at
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
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
caught fsh was gained by working near
Montauk, Long Island. He refned his
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
fshing vessel to hear birds pecking over
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.
For the frst course, we tried the signature
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
course, I had the halibut conft. The Iresh
peas, spring onions, and morels took
me from the ocean waves straight to the
felds oI a country Iarm. The dish was
simple, yet highly delicate. My partner in
gastronomic crime had the striped bass.
The dish had an unusual favor oI osso
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
Pitoris, 1st Cru. It was an absolute stun-
ner and complemented our food to per-
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
Dovetail was defnitely worth taking
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.
103 West 77th Street
New York, NY
Tel: 212 362 3800
The Next Course with Heidi
Heidi W. Picone
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