Micro-Cap Review Magazine Summer 2009

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WELCOME

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

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he recession continues. Business moves on, although many companies are downsizing and are struggling to maintain their market share. Businesses that survive in this economy must understand where they stand and plan for the future. For companies to ÀRXULVK PDQDJHPHQW PXVW VHW XS IRUPDO SURcedures to monitor performance.

PUBLISHER Wesley Ramjeet wesley@microcapreview.com EDITOR Ronald Stone Ron@microcapreview.com

The most important step to monitor the company’s performance is preparing a 13-week UROOLQJ FDVK ÀRZ 7KLV FDVK ÀRZ VKRZV WKH sources and uses of funds weekly. With this report, the company can identify problems before they occur and can anticipate cash QHHGV TXLFNO\ 7KH FDVK ÀRZ UHSRUW QRW RQO\ helps senior management, but also helps rank DQG ¿OH ZRUNHUV WR LGHQWLI\ SUREOHPV HDUO\ (DUO\ LGHQWL¿FDWLRQ FDQ EH WKH GLIIHUHQFH EHtween a small problem and a big one.

WRITERS Marc Clark Mark Coleman Karl Douglas John Faessel Mark Fowler Alex Hart Chet Hebert Michael Kessel Jordan Kimmel Sheldon Kraft Patrick Martin Victor Nowicki Alex Parsinia Heidi Picone David RosenďŹ eld Ronald Stone

After the company has completed a 13-week FDVK ÀRZ DQG UHDOL]HV WKDW LW QHHGV DGGLWLRQDO cash, the company has three options: increase revenues, reduce expenses, or raise additional cash from an outside source. Since we are now nine months into the current recession, the possibility of increasing revenues or reducing expenses at this point may be problematic.

ACCOUNTING Jennifer Anglade Accounting@microcapreview.com ADVERTISING Vong Bui Vong@microcapreview.com

There may still be opportunities to reduce H[SHQVHV WKDW ZHUH SUHYLRXVO\ QRW LGHQWLÂżHG Reducing expenses may be accomplished by combining two similar public companies.

BUSINESS DEVELOPMENT

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, VXFK DV WHFKQRORJ\ DQG VWDI¿QJ ZLWK DQRWKHU company to reduce expenses. For example, one biotech company we know has combined forces with a second biotech company to reduce the oversight of its phase two testing. The technologies remained with each comSDQ\ EXW ERWK FRPSDQLHV UHDOL]HG VLJQL¿FDQW cost savings. If cost saving is not an option, then the company 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 companies. 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 advantage of the creative techniques presented in this issue to help you not only to survive this recession, but also to come out stronger and be in a position to act when opportunities present themselves.

Ronald Stone

Ron Stone Ron@microcapreview.com CIRCULATION

Ronald Stone Editor

Jackie Peters Jackie@microcapreview.com Suki Chen Suki@microcapreview.com GRAPHIC PRODUCTION Tony Vibhakar Tony@microcapreview.com WEBMASTER Kelvin Chen Kelvin.chen@3amediaonline.com Micro-Cap Review Magazine is published Quarterly, Spring, Summer, Fall, Winter POSTMASTER send address Changes to 0LFUR &DS 5HYLHZ &RUSRUDWH 2I¿FHV ‹ &RS\ULJKW E\ 0LFUR &DS 5HYLHZ ,QF $OO 5LJKWV 5HVHUYHG 5HSURGXFWLRQ ZLWKRXW SHUPLVVLRQ RI WKH 3XEOLVKHU LV SURKLELWHG 7KH SXEOLVKHUV DQG HGLWRUV DUH 1RW UHVSRQVLEOH IRU XQVROLFLWHG PDWHULDOV (YHU\ HIIRUW has been made to assure that all Information presented in this issue is accurate And neither Micro-Cap Review Magazine or any of its staff or authors is responsible for omissions or information WKDW LV LQDFFXUDWH RU PLVUHSUHVHQWHG WR WKH PDJD]LQH

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This Publication is not to be construed, under any circumstances, by implication or otherwise, as an offer to sell or a VROLFLWDWLRQ WR EX\ RU WUDGH LQ DQ\ FRPPRGLWLHV RU VHFXULWLHV KHUHLQ QDPHG 0LFUR &DS 5HYLHZ 0DJD]LQH DQG LWV HPSOR\HHV DUH QRW QRU GR WKH\ FODLP WR EH UHJLVWHUHG LQYHVWPHQW DGYLVRUV RU EURNHU GHDOHUV 7KLV PDJD]LQH FRQWDLQV IRUZDUG ORRNLQJ VWDWHPHQWV ZLWKLQ WKH PHDQLQJ RI 6HFWLRQ ( RI WKH 6HFXULWLHV DQG ([FKDQJH $FW RI UHODWLQJ WR FRPSDQLHVÂś IXWXUH RSHUDWLQJ UHVXOWV WKDW DUH VXEMHFW WR FHUWDLQ ULVNV WKDW FRXOG FDXVH UHVXOWV WR GLIIHU PDWHULDOO\ IURP WKRVH SURMHFWHG 5HDGHUV DUH FDXWLRQHG QRW WR SODFH XQGXH UHOLDQFH RQ WKHVH IRUZDUG ORRNLQJ VWDWHPHQWV 7KLV SXEOLFDWLRQ XQGHUWDNHV QR REOLJDWLRQ WR XSGDWH WKHVH IRUZDUG ORRNLQJ VWDWHPHQWV 0LFUR &DS 5HYLHZ 0DJD]LQH LWV RZQHUV HPSOR\HHV WKHLU families and associates may have investments in companies featured within this publication and may elect to sell these LQYHVWPHQWV RU SXUFKDVH DGGLWLRQDO LQYHVWPHQWV LQ WKHVH FRPSDQLHV DW DQ\ WLPH +RZHYHU WKH SROLF\ RI RXU HGLWRULDO VWDII LV WR DYRLG DQ\ SUH SXEOLFDWLRQ WUDGLQJ RI IHDWXUHG VWRFNV RU VDOHV XQWLO WKH UHOHDVH GDWH RI WKH PDJD]LQH ,Q RUGHU WR EH LQ IXOO FRPSOLDQFH ZLWK WKH 6HFXULWLHV $FW RI 6HFWLRQ E ZKHUH WKH SXEOLVKHU KDV UHFHLYHG SD\PHQW IRU DGYHUWLVHPHQW DGYHUWRULDO RI D VHFXULW\ WKH DPRXQW DQG W\SH RI FRQVLGHUDWLRQ ZLOO EH IXOO\ GLVFORVHG $OO LQIRUPDWLRQ about the Company contained within an advertisement/advertorial has been furnished by the respective Company and the SXEOLVKHU KDV QRW PDGH DQ\ LQGHSHQGHQW YHULÂżFDWLRQV RI VXFK LQIRUPDWLRQ DQG PDNHV QR LPSOLHG RU H[SUHVV ZDUUDQWLHV RQ WKH LQIRUPDWLRQ SURYLGHG 5HDGHUV VKRXOG SHUIRUP WKHLU RZQ GXH GLOLJHQFH EHIRUH LQYHVWLQJ LQ DQ\ VHFXULWLHV PHQWLRQHG ,QYHVWLQJ LQ VHFXULWLHV LV VSHFXODWLYH DQG FDUULHV D KLJK GHJUHH RI ULVN $OO 0LFUR&DS 5HYLHZ 'LVFODLPHUV DSSO\ KWWS ZZZ PLFURFDSUHYLHZ FRP GLVFODLPHU SKS EHIRUH LQYHVWLQJ YLHZ ZZZ VHF JRY LQYHVWRUV

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6/,5-% s )335% s .$ 15!24%2 www.microcapreview.com

Legal, Tax, & Accounting

Business & Markets 15

Concentric M&A Strategy by Alex Parsinia

20

Carve-outs by Patrick Martin and Mark Coleman

23

Never Seen a Stock Market Like This Before by Sheldon Kraft

27

Opportunity Knocks During Recession by Mark Fowler

36

Ask the Tax Guys: ESOP by Alex Hart and Michael Kessel

38

Compliance Corner by Chet Hebert

40

Dealing with the Surprise Government Interview David Rosenfield and James Moss

Travel & Entertainment 50

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

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Dovetail Restaurant Review Heidi Picone

Profiled Companies 30

Entrex

44

Allied Energy

47

Ivanhoe Energy

35

Announced Transactions

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Looking for It, and Not Finding? Victor Nowicki

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xecutives often ask me the question, “Have you found it yet?â€? That question is obviously asked by potential “cliHQWV´ ZLWK UHIHUHQFH WR ÂżQGLQJ FDSLWDO IRU WKHP :KLOH LW LV QHYHU HDV\ WR ÂżQG IXQGLQJ VRXUFHV IRU VPDOO EXVLQHVVHV LW is certainly harder now than ever before. So, the clients’ XUJHQF\ WR KDYH WKDW TXHVWLRQ DQVZHUHG LQ WKH DIÂżUPDWLYH LV greater than ever too. Yet, they rarely stop to ask two fundamental questions.

:K\ LV LW VR KDUG WR ÂżQG IXQGLQJ" (2) What can I do to optimize the chances of funding success?

Generally, I receive a call from potential clients after they’ve already spent four to six months looking for funding from easy-to-reach sources, such as their local bankers or from family and friends. Sometimes they have other contingency business brokers in on the action. A call to me is another attempt 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 development going. He appeared to have the right people, the right FRQQHFWLRQV DQG WKH ULJKW LGHD +H ZDV WU\LQJ WR ÂżQG DGditional capital for about a year. He also appeared to be well connected and had solicited many high net worth individuals – 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 changesâ€? option turned on. The

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document was written with grammatical errors, incomplete SDUDJUDSKV DQG PLVWDNHV LQ ZRUG XVDJH 7KH Ă€RZ RI WKH document was non-existent. The business argument was GLIÂżFXOW WR XQGHUVWDQG 7KH SODQ RI DFWLRQ ZDV PLVVLQJ 7KH ÂżQDQFLDO SURMHFWLRQV FRQVLVWHG RI RQH OLQH UHYHQXH DQG H[pense items and a big “hockey stick.â€?

Âł7KH EXVLQHVV DUJXPHQW ZDV GLIÂżFXOW WR XQGHUVWDQG 7KH SODQ RI DFWLRQ ZDV PLVVLQJ 7KH ÂżQDQFLDO SURMHFWLRQV FRQVLVWHG RI RQH OLQH UHYHQXH DQG H[SHQVH LWHPV DQG D ELJ ÂľKRFNH\ VWLFN ϫ 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 FOLHQWÂśV REMHFWLYHV DQG ÂżQDQFLQJ QHHGV )XUWKHUPRUH ZKHQ 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 documentation. And less, because even when the documentation is produced, it is often incomplete, out-of-date (how long ZHUH \RX VKRSSLQJ WKLV GHDO" Ă€DZHG LQ WHUPV RI PDUNHW RU ÂżQDQFLDO DQDO\VLV RU VLPSO\ ODFNLQJ FRKHUHQFH $V D FDSLWDO advisor with no prior knowledge of the client or his business SURSRVDO P\ ÂżUVW TXHVWLRQ LV WKH VDPH DV WKDW RI WKH XOWLmate investor. Is the proposed business sound and saleable? The investor wants to know this to get an assessment of his

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

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/DVWO\ FOLHQWV VKRXOG VWRS DQG OLVWHQ WR LQYHVWRU DQG PDUNHW So, what do clients need to do to improve the chances of IHHGEDFN ,I \RX DUH D FOLHQW UHYLHZ \RXU PDWHULDOV XQGHUobtaining funding? VWDQG ZK\ SHRSOH KDYH SUREOHPV DQG DGMXVW WKH LQIRUPDWLRQ EHLQJ SUHVHQWHG (QJDJH \RXU DGYLVRU LQ WKH SURFHVV 5HPHPFirst, before heading out to the market, clients must under- EHU WKDW KH VKH LV RQ \RXU VLGH DQG ZDQWV WKH GHDO GRQH $UH stand the importance of communication. A business plan, an \RX QRW JHWWLQJ D UHVSRQVH" 7KDW LV D YHU\ SRZHUIXO PHVVDJH investment memorandum, a private placement memorandum, 6RPHWKLQJ LV ZURQJ ZLWK ZKDW \RX DUH SURSRVLQJ *HQHUDOO\ or simply a pitch that is being provided to investors must (1) QR RQH ZLOO WHOO \RX ZK\ VR WU\ WR LQIHU IURP WKH UHVSRQVH RU be readable; (2) have a comprehensive investment logic; and WKH ODFN WKHUHRI $UH \RX EHLQJ WROG WKDW WKH LQYHVWPHQW LV WRR (3) be presentable, clean, and error-free. As with any mar- HDUO\ VWDJH" <RX DUH SUREDEO\ WDUJHWLQJ WKH ZURQJ LQYHVWRUV keting material this document is all about grabbing and hold- $UH \RX EHLQJ WROG WKDW WKH PLQLPXP (%,7'$ WKUHVKROG LV ing the reader’s attention. The document also speaks about QRW UHDFKHG" :HOO PRVW OLNHO\ \RXU SODQ LV WRR DJJUHVVLYH RU the owner’s character, management ability, and competency. WRR OHYHUDJHG VR WKH ULVN UHWXUQ EDODQFH LV QRW ULJKW $UH \RX 6ORSS\ ZRUN VSRLOV WKDW FUXFLDO ¿UVW LPSUHVVLRQ UDLVHV XQQHF- EHLQJ DVNHG D QXPEHU RI WLPHV DERXW WKH UHVXPHV RI \RXU PDQessary questions, and increases the risk of a failed connection. DJHPHQW WHDP" :HOO PD\EH \RX GR QRW KDYH WKH ULJKW WHDP So why go there? $UH \RX EHLQJ DVNHG DERXW \RXU EDODQFH VKHHW DQG WKDW ´ SHUFHQW QRWH WR D UHODWHG SDUW\µ EXULHG LQ \RXU OLDELOLWLHV" 3HU6HFRQG FOLHQWV VKRXOG UHDFK RXW DQG ÀQG VRPHRQH WKH\ FDQ KDSV LW LV WLPH WR FRQVLGHU ÀQDQFLDO UHVWUXFWXULQJ WR HQKDQFH ZRUN ZLWK WR GHYHORS WKH KLJKHVW LPSDFW SURGXFW 5HWDLQ DQG WKH DWWUDFWLYHQHVV RI \RXU SODQ RK \HV ZRUN ZLWK WKHP , DP QRW VXJJHVWLQJ KLULQJ *ROGPDQ 6DFKV RU HYHQ D VHFRQG WLHU SOD\HU 7KHLU IHH VWUXFWXUHV DUH QRW 6WUDQJHO\ HQRXJK WKHVH DUH REYLRXV DQG ORJLFDO SRLQWV DUHQ·W VXLWDEOH IRU VPDOO FDS DQG PLFUR FDS FRPSDQLHV +RZHYHU WKH\" 6R ZK\ GR VR PDQ\ FRPSDQLHV SOXQJH DKHDG DQG IDLO" WKHUH DUH PDQ\ LQGHSHQGHQWV P\VHOI LQFOXGHG WKDW FDQ ZRUN :HOO WKH FRVW RI UHWDLQLQJ D SURIHVVLRQDO DGYLVRU LV RQH NH\ ZLWK \RX WR JHW WKH MRE GRQH DQG JHW LW GRQH ZHOO 7KH IHHV DUH FRQVLGHUDWLRQ 7KH W\SLFDO OLQHV , JHW LQFOXGH WKH IROORZLQJ UHDVRQDEOH DQG ZHOO ZRUWK WKH LQYHVWPHQW 7KH UHWDLQHU VWUXFWXUH DOLJQV HYHU\RQH·V REMHFWLYHV DQG FRPPLWPHQW WR WKH EHVW ‡ :H GR QRW KDYH PRQH\ SRVVLEOH SURGXFW ‡ :KDW" , KDYH WR SD\ IRU WKLV" ‡ ,VQ·W WKH DGYLVRU VXSSRVHG WR GR WKLV IRU IUHH" 7KLUG FOLHQWV VKRXOG FKRRVH DQ DGYLVRU ZKR KDV EURDG LQGXV- ‡ :K\ VKRXOG , SD\ IRU WKLV DW DOO" WU\ H[SHULHQFH UHOHYDQW WR WKH EXVLQHVV EHLQJ SUHVHQWHG 7KDW ‡ :K\ GRQ·W \RX KDYH WKH LQYHVWRU SD\ LQGXVWU\ NQRZOHGJH HQKDQFHV WKH ORJLF DQG FUHGLELOLW\ RI WKH IRU WKLV" WKH EHVW OLQH

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Let Our MagnetÂŽ Find You the Best Micro-cap Stocks in Any Market‌ Jordan Kimmel DQG VSLQ RII IUHH FDVK Ă€RZ DQG XOWLPDWHO\ DSSUHFLDWH LQ “Jordan Kimmel’s The MAGNET Method of Investing: value by ten times.

)LQG 7UDGH DQG 3URÂżW IURP ([FHSWLRQDO 6WRFNV is an amazingly detailed and intuitive book. I especially HQMR\HG -RUGDQÂśV LQVLJKWV LQWR GLYHUVLÂżFDWLRQ WKH LQHIÂżFLHQW PDUNHW DQG LGHQWLI\LQJ VWRFNV WKDW DUH LQ WKHLU ‘sweet spot.’ Jordan’s writing style is also very straight IRUZDUG DQG UHIUHVKLQJ +H VXFFHHGV LQ WDNLQJ FRPSOLFDWHG VXEMHFWV DQG H[SODLQLQJ WKHP LQ D VWUDLJKW IRUZDUG DQG LQVLJKWIXO ZD\ 7KLV LV VLPSO\ DQ LQFUHGLEOH ERRN WKDW LV D PXVW UHDG IRU ERWK EHJLQQLQJ DQG VHULRXV investors.â€?

(very environment has a handful of companies that dominate their niche market and are great stocks to RZQ 7KH GLIÂżFXOW\ IRU LQYHVWRUV LV WR ÂżQG WKH EHVW FRPpanies that have yet to become household names. Because 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 /RXLV * 1DYHOOLHU FKDLUPDQ DQG IRXQGHU RI 1DYHOOLHU puts individual investors at an advantage, if they can $VVRFLDWHV ,QF DQG DXWKRU RI 7KH /LWWOH %RRN 7KDW ÂżQG DQG LQYHVW LQ WKH EHVW FRPSDQLHV EHIRUH WKH LQVWLWX0DNHV <RX 5LFK 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.

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very bull market has its share of leading companies that are new to the spotlight. Traditional investors who SURÂżW E\ WLPLQJ WKH PDUNHW PD\ HQG XS IUXVWUDWHG XQless 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, PDUNHW VDYY\ WUDGHUV SURÂżW IURP VWRFN PDUNHW WUHQGV WKHUH LV QRWKLQJ PRUH SURÂżWDEOH WKDQ LGHQWLI\LQJ WKH best individual stocks at the right time.

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 investing 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. %\ FKRRVLQJ GLYHUVLÂżFDWLRQ \RX DUH DVVXUHG WR JHQHUate only average returns. Remember though, if you are willing to focus your capital on only a few companies, you better have a sound methodology to identify the right ones!

Too many investors continue to focus on the economy or “the market,â€? rather than trying to isolate the best companies. Whether it is the economic “number of the GD\´ RU D SROLF\ VSHHFK E\ D JRYHUQPHQW RIÂżFLDO WRR many investors focus on the wrong things. The reality is that nobody can or should predict the future. Doing VR LV QRW UHTXLUHG WR JHQHUDWH SURÂżWV LQ WKH VWRFN PDUket. Legendary investor, Peter Lynch, once said, “If you spent an hour per year thinking about the economy, you probably wasted 59 minutes.â€? Instead of mulling over In my new book, The Magnet Method of Investing, I exWKH HFRQRP\ÂśV Ă€XFWXDWLRQV /\QFK WULHG WR ÂżQG KLV ÂłWHQ amine the beliefs and strategies of the greatest investors baggers.â€? These are companies that win market share RI RXU HUD DQG KRZ WKH\ LQĂ€XHQFHG 0DJQHW 7KH ERRN walks you through the process of identifying the best

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individual stocks to own at any time. The book introduces The MagnetŽ Stock Selection Process, a combination 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, unemotional, and unbiased system. Using several proprietary ratios to analyze a company’s balance sheets and income statements, the process is not fooled by the bottom line earnings that continue to be manipulated by so many companies.

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 driven many excellent companies down to valuation levels that are rarely seen. 7U\LQJ WR ÂżJXUH RXW ZKHWKHU WKH PDUNHW RU D FRPSDQ\ within it is “cheapâ€? enough is one approach, but I need WR JR IXUWKHU , ZDQW WR ÂżQG HDUO\ VWDJH FRPSDQLHV WKDW are accumulating a lot of cash. While I embrace the tenets 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 wellâ€? or exhibiting “relative strength versus the overall market.â€? In The Magnet Method of Investing, I encourage individual 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 termâ€? mentality. If you seek truly exceptional UHWXUQV \RX PXVW ÂżQG WKH IHZ WUXH PDUNHW OHDGHUV RU what I call “Magnet Stocks.â€? If you’ve been left behind, it’s never too late to start doing your homework. 'RQÂśW OHW SURÂżWV SDVV \RX E\

Jordan Kimmel is President and Portfolio Manager of The Magnet Investment Group LLC and is the developer of the MAGNETÂŽ Stock If investors are willing to do a little extra research, they 6HOHFWLRQ 6WUDWHJ\ 0U .LPPHO DSZLOO UHDOL]H WKHUHÂśV D JUHDW RSSRUWXQLW\ WR SURÂżW IURP pears regularly on ABC, CNBC, PDUNHW LQHIÂżFLHQFLHV FUHDWHG E\ VPDOOHU FRPSDQLHV DQG )R[ %XVLQHVV 1HZV DQG KRVWV Years ago I was very vocal about the problems of earnhis own weekly radio show, Magnet ings manipulation and the “pay for play researchâ€? that Investing with Jordan Kimmel, on was coming out of Wall Street. These problems harWKH 9RLFH$PHULFD %XVLQHVV 1HWZRUN bored an environment where larger companies tended to +H LV WKH DXWKRU RI WKH ZLGHO\ DFFODLPHG ERRN MagnetÂŽ “play gamesâ€? whenever insider ownership decreased. Investing ZKLFK ZDV SXEOLVKHG LQ +H LV ZRUNLQJ RQ If all things were equal, I would prefer investing in completing his second book, The Magnet Method of Incompanies with fewer shares outstanding and a higher vesting ZKLFK LV VFKHGXOHG WR EH SXEOLVKHG LQ $XJXVW

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 astute and unemotional investors. Despite my strong conYLFWLRQ WKDW VHYHUDO H[FHOOHQW SURÂżWDEOH RSSRUWXQLWLHV exist in this market, I am more selective in my stocks

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Capital Alternatives: Ten Things to Know Before Merging with a SPAC Karl Douglas ,Q WKH ³&DSLWDO $OWHUQDWLYHV´ FROXPQ ZH H[SORUH YDULRXV ways to raise both debt and equity capital, which are outside of the traditional IPO or private equity investment opWLRQV

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pecial purpose acquisition companies (SPACs) were creDWHG VHYHUDO \HDUV DJR WR ÂżOO D YRLG FUHDWHG E\ 6HFXULW\ DQG 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 investments in the United States, and another $3 billion have been raised in Europe, primarily in the London AIM market.

the full period, and so they sell shares in the open market. This drives the share price down below the original issuance price. With an average trust period of 18 months, this creates a yield to maturity that is often in excess of 10 percent 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 yieldâ€? opportunity and have bought any shares available with a reasonable yield to maturity. That served to keep share prices at reasonable levels. One side benHÂżW LV WKDW \LHOG EX\HUV SUREDEO\ VDYHG PDQ\ HTXLW\ IXQGV (e.g., hedge funds) from taking huge losses that would have EHHQ RWKHUZLVH FUHDWHG E\ VLJQLÂżFDQW VWRFN VDOHV +RZHYHU At the onset, SPACs provided a way for middle-market ZLWK D VLJQLÂżFDQW QXPEHU RI 63$& VKDUHV QRZ LQ WKH KDQGV companies to access private capital, and for public compa- of yield investors, the proxy vote is generally an automatic Q\ LQYHVWRUV WR H[SHULHQFH WKH EHQHÂżWV RI SULYDWH FRPSDQ\ “no,â€? because yield investors want the shares to mature. YDOXDWLRQV 63$&V VHUYHG DV DQ HIIHFWLYH ÂżQDQFLQJ WRRO DQG helped fuel the reverse merger market, where private place- ,Q UHVSRQVH WR WKHVH GLIÂżFXOWLHV 63$& VSRQVRUV DQG FRPments closed simultaneously with a shell merger and sub- panies seeking mergers have become extremely creative sequent registration of private shares. By the end of 2008, in trying to complete transactions. Many buy shares from some 60 SPACs successfully completed acquisitions, repre- shareholders who will potentially vote “noâ€? by borrowing senting over $6.1 billion in funding. money and closing on a lesser amount. Using these “no vote loans,â€? the sponsor buys the shares with a loan secured ,Q WKH ÂżUVW TXDUWHU RI RYHU FRPSDQLHV UHSUHVHQW- E\ WKH IXQGV LQ WUXVW 7KH VSRQVRUV YRWH WKH VKDUHV DIÂżUPDing roughly $3 billion, have announced proposed mergers. tively. When the transaction breaks trust, the loan is repaid Additionally, 45 companies, representing over $10 billion out of the trust proceeds. China Opportunity Acquisition of aggregate funding, are seeking acquisitions. Another 31 Corp. recently used the “no vote buy outâ€? strategy to repurcompanies, representing over $2.6 billion of SPAC funding, chase roughly 2.9 million shares to close its merger transacare in the process of liquidating. WLRQ Âł1R YRWH ORDQV´ FDQ DGG VLJQLÂżFDQW H[SHQVH WR D WUDQVaction. Interest rates typically range from ten to mid-teens With a slowdown in private investment activity, many com- percent, plus warrants. The important thing to realize is that panies that seek equity capital are taking notice of the $10 the “no vote loanâ€? strategy will dramatically reduce the net billion pool available for acquisitions. Companies consid- proceeds for the post-merged company. In many cases, this ering a SPAC merger should understand that these trans- can be in excess of 70 to 90 percent. DFWLRQV DUH H[WUHPHO\ GLIÂżFXOW WR FRPSOHWH IRU VHYHUDO UHDsons. Expenses – Transaction expenses associated with a SPAC merger can be very high. In many cases, the original SPAC Proxy Requirement 7KH ÂżUVW PDMRU KXUGOH LV WKDW 63$&V underwriter has a deferred fee of four percent. On a $100 require upwards of 70 percent of investors to approve the million SPAC deal, that amounts to $4 million of legacy proposed merger. Achieving that level is extremely dif- fees. Take our “no vote loanâ€? scenario and you end up with ÂżFXOW UHJDUGOHVV RI WKH LQYHVWPHQW PHULWV 0DQ\ KHGJH net proceeds of $30 million. You just paid 12 percent in legfunds that have invested in SPAC transactions have been acy fees before you even pay the M&A banker. AdditionIRUFHG WR PHHW VLJQLÂżFDQW UHGHPSWLRQV 5HJDUGOHVV RI WKH ally, legal fees run high because of the proxy requirements. investment merit, they often veto the transaction to get their much needed funds back. Many investors cannot even wait Sponsor Shares – The sponsor is the party that has money

2ND QUARTER 2009

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at risk in a SPAC transaction. Depending on the size of the SPAC, the sponsor’s money can range from three to six percent. In exchange for that investment and management expertise, the sponsor can earn up to a 20 percent return. The VSRQVRU ZLOO ZDQW D VLJQLÂżFDQW RZQHUVKLS RI WKH SRVW PHUJHG company, so that cost should also be taken into account. This can change the valuation and attractiveness of the transaction. 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 moneyâ€? warrants that are issued should not be overlooked. In many cases, these warrants create a natural “covered short saleâ€? 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. Companies wishing to complete acquisitions using SPAC proceeds will QHHG WR UDLVH D VLJQLÂżFDQW DPRXQW of additional capital with a private placement. As an example, let’s use a proposed merger with a $100 million SPAC and a 70 percent “no vote loan.â€? If $50 million of net proceeds is needed to complete the transaction, additional capital of $20 million, 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 transaction). Total underwriting fees would be roughly $6 million, and the “no vote loanâ€? 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 underwriting costs of $3.5 million, legal costs of $1 million, and shell costs of $500,000. Additionally, on a shell company with 99 percent ownership, dilution is less than that of the SPAC transaction.

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 postmerged stock and reduce the potential short by the original warrant holders. 2. Negotiate with the original underwriter to pay their fees, based on the amount of cash left in the SPAC at closing. If only 10 percent of the cash is left in the SPAC, then 10 percent of the legacy fees should be paid. You may want to suggest some minimum fee to gain concession. Remember, most SPACs will divest, and no fees are paid upon divestiture. 3. Negotiate with the sponsors to reduce 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 purchasing the sponsors’ position. Most sponsors will walk away from a SPAC, if they can get their investment back before the vote. Be aware that sponsors have no incentive to do a deal, if the negotiated amount is less than their original investment. 4. Reconstitute the shareholder base. In WKLV SURFHVV DQ LQYHVWPHQW ÂżUP LV SDLG to resell 70 percent of the existing public shares to new investors. Additional new warrants can be issued to new investors in exchange for WKHLU DIÂżUPDWLYH YRWHV ,QYHVWRUV EHQHÂżW IURP KDYLQJ ERWK additional shares and liquidity. Simply stated, if you have successfully tendered for the warrants, a much smaller percentage 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 placement. Also, a “no vote loanâ€? 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. Additionally, coordination with a reputable broker-dealer with expert industry knowledge is essential.

.DUO 'RXJODV LV 0DQDJLQJ 'LUHFWRU RI (XURSHDQ $PHULFDQ However, if a SPAC transaction is structured properly, it can (TXLWLHV ,QF D PHPEHU RI ),15$ DQG 6,3& be an excellent way to fund an acquisition. To reduce the ULVNV DQG LQFUHDVH WKH EHQHÂżWV GHDO VSRQVRUV PD\ FRQVLGHU PAGE ( 12 )

2ND QUARTER 2009

ask Mr. WALLSTREET What Happens Next in the Low-Priced, Emerging Growth Stock Marketplace? Sheldon Kraft

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arket 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 current 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 investors 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 focus on something different. I believe that a new opportuQLW\ LV DSSURDFKLQJ IDVW ,W EHJLQV ZLWK SURÂżW WDNLQJ IURP WKH RYHUKHDWHG EXOO PDUNHW UHVXOWLQJ LQ D Ă€LJKW WR VDIHW\ away from Dow Jones stocks. My philosophy is a nuance of the “trickle-down effect.â€? Investors who sold Dow Jones VWRFNV DUH Ă€XVKHG ZLWK FDVK DQG DUH ORRNLQJ IRU QHZ RSportunities 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 VKDNLQJ PLJKWLO\ ZLWK LQĂ€DWLRQDU\ VLJQV DQG UHFHVVLRQDU\ 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? 7KH WULFNOH GRZQ HIIHFW LV RQ WKH ÂżQDQFLDO KRUL]RQ /LNH ZDWHU FDVK DOZD\V ÂżQGV LWV RZQ OHYHO ,W LV ÂżQDOO\ KHUH 7KH perfect storm has arrived for low-priced, emerging growth companies - this shunned marketplace, the disregarded emerging growth sector. Although the group has been down a long time, the Pink Sheets are attempting to become an exchange.

‡ ,QFUHGLEOH WHFKQRORJ\ DQG GRPHVWLF opportunities ‡ +HGJH IXQGV FUXVKHG LQ VXE SULPH mortgages ‡ 5HJXODWRU\ FOHDQXS GLG LWV LQWHQGHG job ‡ :DOO 6WUHHW ERXWLTXHV VWDUWLQJ XS ‡ 2OG 6WUHHW UHHOLQJ LQ SDLQ ‡ ,QYHVWRU SDQLF VRRQ WR FDXVH PRUH VHOOLQJ pressure on high-priced stocks ‡ &RPPRGLW\ SULFHV RXW RI FRQWURO

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 PRYH ORZHU GRZQ WKH HTXLW\ SDWK E\ ¿UVW EX\LQJ VPDOO FDS companies with earnings and then buying companies with great new technology and innovative business models. Investors are looking for new talent with corporate experience XQGHU ¿UH 7KHVH PDQDJHUV DUH WKH QHZ FDGUH RI PDYHULFNV 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 averaging by buying NYSE or Dow Jones stocks when prices are lower, but why do it when chances are good that today’s ¿IW\ FHQWV VWRFN LV WRPRUURZœV ¿YH GROODU VWRFN D WHQ IROG play? I will be chastised, criticized, and scorned for my recommendations. Needless to say, I have been there before. It’s WRXJK EHLQJ DORQH DW ¿UVW EXW SUHWW\ VRRQ , ZLOO EH ORRNLQJ over my shoulder, as the herd builds momentum from behind.

The perfect storm was created by 10 ingredients:

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2ND QUARTER 2009

6KHOGRQ .UDIW LV IRXQGHU DQG & ( 2 RI 611 ,QFRUSRUDWHG +H FDQ EH UHDFKHG DW DVNPUZDOOVWUHHW#VQQZLUH FRP

PAGE ( 13 )

2ND QUARTER 2009

PAGE ( 14 )

Concentric M&A Strategy for Micro-cap Companies Alex Parsinia

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HUJHUV DQG DFTXLVLWLRQV 0 $ LV D VLJQLÂżFDQW area for most micro-cap companies. Its strategic importance cannot be understated, because many compaQLHV DUH ORRNLQJ WR DFKLHYH JURZWK SURÂżWDELOLW\ DQG higher valuations. Through acquisition, a company can acquire new distribution channels, new technologies, 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 SDUWV 'RLQJ VR OHDGV WR ORQJ WHUP JURZWK DQG SURÂżWability. Companies can choose from several possible acquisition strategies.

³7KH FRQFHQWULF DFTXLVLWLRQ VWUDWHJ\ PLQLPL]HV WKH ULVNV DVVRFLDWHG ZLWK VWDUW XS FRPSDQLHV DQG DYRLGV WKH KLJK FRVW RI DFTXLULQJ ODWHU VWDJH FRPSDQLHV ´

'LYHUVLÂżFDWLRQ 6WUDWHJ\ 'LYHUVLÂżFDWLRQ LQYROYHV DFTXLULQJ D ÂżUP WKDW RSHUDWHV in a different industry and is not related to your core EXVLQHVV EXW KDV SRWHQWLDO WR RIIVHW VRPH GHÂżFLHQFLHV (i.e., cigarette manufacturing companies acquiring companies in the soft drink industry). Concentric Strategy The concentric model exploits the gap in traditional investment and acquisition models. The concentric model is positioned somewhere between incubator and venture-backed start-ups. Each company within this business model works with sister companies in overlapping 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 acquisition strategy minimizes the risks associated with startup 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 Forward Integration Strategy enhancing management resources, integrating technol)RUZDUG LQWHJUDWLRQ LQYROYHV DFTXLULQJ D ÂżUP WKDW GLV- ogies, leveraging synergies, and infusing capital at key tributes your products and services in the channel of stages. Shareholder value and returns are maximized GLVWULEXWLRQ L H D PDQXIDFWXULQJ ÂżUP WKDW DFTXLUHV by multiple expansion, revenue growth, and liquidity one of its distributors). events at strategic moments. Backward Integration Strategy %DFNZDUG LQWHJUDWLRQ LQYROYHV DFTXLULQJ D ÂżUP WKDW supplies you with raw materials or products (i.e., a restaurant chain that acquires a food distribution company). Horizontal Integration Strategy +RUL]RQWDO LQWHJUDWLRQ LQYROYHV DFTXLULQJ D ÂżUP WKDW competes with you in the same industry (i.e., an aerospace company acquiring one of its competitors). 2ND QUARTER 2009

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

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

WKH WDUJHW SUR¿OH 7KHVH FRPSDQLHV KDYH XQPHW QHHGV that prevent them from obtaining higher valuations. Many companies can reach the next level if limiting factors ZHUH UHPRYHG /LPLWLQJ IDFWRUV DUH FRPPRQO\ LGHQWL¿HG in the following areas. Technology – Many small companies operate without the right technology and tools. Too often management recognizes the value of strategic projects but lacks the time and resources.

Sales & Marketing – Many successful small companies acquire customers and a basic level of business, but run into problems when trying to develop the proper sales and marketing organizations required to achieve rapid and consistent growth. The challenges are typically caused by lack of money, resource constraints, or limited knowlZcom offers products and services through its Home Shop- edge. ping Network that are marketed and promoted through =FRPœV WHOHYLVLRQ VWDWLRQV DV ZHOO DV WKURXJK DI¿OLDWHV Business Systems – Progressing from a small to a midExisting products include Super Fuel and TV Box. dle-market operation requires updated business systems, technology upgrades, new best practices, and additional MINERAL RIGHTS VWDI¿QJ ZKLFK PD\ VWUDLQ H[LVWLQJ UHVRXUFHV 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 LQFOXGH WKH ULJKW WR GHYHORS PLQH SURFHVV UH¿QH DQG sell minerals found on the claim, including gold, silver, platinum, tungsten, and copper.

Financing – A company that grows organically and profitably may not generate faster growth because of limLWHG FDVK DQG ODFN RI H[SHULHQFH LQ REWDLQLQJ ¿QDQFLQJ $FKLHYLQJ RUJDQLF JURZWK ZLWKRXW DGGLWLRQDO ¿QDQFLQJ LV RIWHQ D VORZ SURFHVV WKDW PD\ QRW JHQHUDWH VXI¿FLHQW returns required by investors.

REAL ESTATE INVESTMENTS

Contacts – Small companies often operate with limited LQÀXHQFH 7KH ODFN RI NH\ FRQWDFWV KLQGHUV D FRPSDQ\œV Zcom works with E-Realty in Los Angeles, California, ability to achieve business goals rapidly. a company with over 100 real estate agents, to acquire undervalued residential and commercial properties in These limiting factors play directly to the strengths of the California, as well as in other locations. In January 2009, Zcom concentric model, which is summarized below: Zcom acquired ownership interest in the Playa Venao Development property in Panama. This joint venture has ‡ 3URYLGH NH\ PDQDJHPHQW LQYHVWHG WR EX\ ODQG WR EXLOG ¿YH EHDFKIURQW ‡ ,QIXVH FDVK IRU UDSLG JURZWK ‡ 0RQHWL]H XQFRPSOHWHG RU XQGHUGHYHORSHG SURGXFWV villas and 20 condominiums. THE GROWTH OPPORTUNITY Zcom is focused on acquiring and accelerating the growth of early opportunity companies using the concentric strategy. There are some 150,000 media, resource-based, technology, and related companies that potentially meet PAGE ( 16 )

2ND QUARTER 2009

‡ ,PSOHPHQW V\VWHPV FRQWUROV DQG SURFHGXUHV ‡ 3URYLGH WHFKQRORJ\ DQG RSHUDWLQJ LQIUDVWUXFWXUH ‡ ,QFUHDVH UHYHQXH DQG SURÀWDELOLW\ ‡ ,GHQWLI\ GHYHORS VHFXUH DQG SURWHFW LQWHOOHFWXDO SURSHUW\ ‡ ,GHQWLI\ GHYHORS DQG H[SDQG GLVWULEXWLRQ DQG PDUNHWLQJ FKDQQHOV ‡ (IIHFWLYHO\ PDUNHW DQG DGYHUWLVH SURGXFWV DQG VHUYLFHV

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Zcom provides a launch pad for entrepreneurs to maximize commitment and effort to achieve accelerated growth. Through subsequent M&A activity, synergisWLF EHQH¿WV DUH REWDLQHG IRU DOO VXEVLGLDULHV 7R SXW LW simply, Zcom’s tactical advantages and skill sets help promising companies grow faster and improve valuations. A NEW INVESTMENT VEHICLE Zcom acquires early stage companies that are capable of scalable and rapid growth. These promising companies do not have the same investment risks that are associated with start-up companies. Focusing on companies at the right growth stage gives Zcom the added EHQH¿W WR DFTXLUH FRPSDQLHV DW D ORZHU FRVW Zcom infuses capital and improves operations of acquired companies to increase the value of Zcom’s capital holdings. Because Zcom is directly involved in the operations of acquired companies, risks can be lowered ZKLOH UHWXUQV DUH RSWLPL]HG IURP D GLYHUVL¿FDWLRQ LQ multiple companies at various stages of acceleration and (b) ongoing acquisitions, which continually build assets to drive and elevate returns on investment. Liquidity events for acquired companies may be conducted at appropriate times to maximize shareholder value.

Zcom offers portfolio companies operational technology, intellectual property, and shared corporate resources to help each company succeed. This strategy is fundamentally different from other investment companies, ZKLFK DUH IRFXVHG ODUJHO\ RQ ¿QDQFH DQG PDQDJHPHQW Zcom’s approach is to use technology and other services as tools to accelerate growth. Examples of infrastructure technologies include:

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7KH EHQH¿WV DUH FRPSHOOLQJ ZKHQ WHFKQRORJ\ LQIUDstructure is used across acquired companies to streamline operations. Value is further created when intellectual property is developed throughout the enterprise. Where possible, leverage is achieved through outsourcZcom has developed an exciting launch pad for private ing common functions to minimize cost. companies, structured to maximize commitment and effort toward achieving business goals. Zcom has suc- ACQUISITION CRITERIA AND PROCESS FHVVIXOO\ DSSOLHG WKH FRQFHQWULF PRGHO WR SUR¿W IURP an untapped market. This market sits between the in- After identifying a potential acquisition, a rigorous procubator model for start-ups and the acquisition model FHVV LV IROORZHG WR DVVHVV WKH ¿W RI WKH FRPSDQ\ DQG LWV of private and public equity buy-out funds for middle- management. Suitable candidates generally meet the PDUNHW FRPSDQLHV 7KH FRQFHQWULF PRGHO ¿OOV D YLWDO following criteria: gap in industries in which Zcom operates. ‡ 3UR¿WDEOH RSHUDWLRQV RU QHDU WHUP IMPLEMENTATION PLAN SUR¿WDELOLW\ ‡ &DSDEOH PDQDJHPHQW WHDP Acquired companies gain improved systems, resources, ‡ $VVHWV WKDW PD\ EH GHYHORSHG LQWR and contacts to maximize their opportunities for sucintellectual property FHVV =FRP KHOSV PDQDJH RYHUKHDG IXQFWLRQV ¿QDQFH ‡ 6\QHUJ\ ZLWK H[LVWLQJ KROGLQJV accounting, legal, marketing, public relations, etc.) to ‡ 6FDODELOLW\ allow the subsidiary management team to focus on ‡ *URZWK SRWHQWLDO UHODWLYH WR EXVLQHVV business execution and growth. opportunity 2ND QUARTER 2009

PAGE ( 17 )

‡ &RPSDWLEOH FRUSRUDWH FXOWXUH ‡ :HOO PDQDJHG ULVNV 'U $OH[ 3DUVLQLD LV &KDLUPDQ DQG &(2 RI =FRP 1HWZRUNV ,QF 'U 3DUVLQLD LV DQ 0 $ H[SHUW ZKR KDV ACQUISITION EXECUTION H[WHQVLYH VHQLRU PDQDJHPHQW H[SHULence and a background in the media 7KH GXH GLOLJHQFH SURFHVV LQFOXGHV D UHYLHZ RI ¿QDQFDQG WHOHFRPPXQLFDWLRQV LQGXVWU\ +H HV VWUDWHJLF ¿W WKH PDQDJHPHQW WHDP DQG DFFHOHUDWLRQ is responsible for the overall strategy preparedness. The due diligence process provides for DQG RSHUDWLRQV RI =FRP %HIRUH MRLQan agreed-upon execution plan to be implemented imLQJ =FRP KH VHUYHG DV FKLHI H[HFXmediately upon acquisition. WLYH RI¿FHU RI VHYHUDO FRPSDQLHV LQcluding Supertel Communications, Signet Paper Company, Zcom acquires companies using restricted stock, war- Pioneer Envelope Company, and Allied Corporate Investrants, and cash, depending on the circumstances of the PHQWV +H WDXJKW FRXUVHV LQ EXVLQHVV VWUDWHJ\ DQG PHUJHUV target company. Acquired companies maintain their DQG DFTXLVLWLRQV 0 $ DV D SURIHVVRU LQ WKH H[HFXWLYH 0%$ identity and operate as wholly-owned or majority- SURJUDP DW 3HSSHUGLQH 8QLYHUVLW\ LQ 0DOLEX &DOLIRUQLD owned subsidiaries. Subsidiary management has P&L +LV DFDGHPLF EDFNJURXQG LQFOXGHV VHYHUDO GHJUHHV LQFOXGing a bachelor of science in mechanical engineering, a masresponsibility for its operations. ters of business administration, and a doctor of philosophy LQ LQWHUQDWLRQDO EXVLQHVV +H LV D FHUWL¿HG 0 $ VSHFLDOLVW Upon acquisition, the concentric model moves forward and has published books and numerous articles in national in parallel: DQG LQWHUQDWLRQDO MRXUQDOV

‡ 7KH DFTXLUHG FRPSDQ\œV PDQDJHPHQW team is supported by Zcom management ‡ 0DQDJHPHQW LV GHSOR\HG RQ D SURMHFW EDVLV ‡ 2XWVRXUFLQJ LV XVHG ‡ 1HZ VDOHV PDUNHWLQJ DQG PHGLD LQLWLDWLYHV are formulated and executed ‡ 6\VWHPV DUH SXW LQWR SODFH WR VWUHDPOLQH operations ‡ 7HFKQRORJ\ LQIUDVWUXFWXUH DQG LQWHOOHFWXDO property are deployed ‡ 0DQDJHPHQW FRQWUROV DUH SXW LQWR SUDFWLFH to monitor and track progress ‡ $SSURSULDWH FDSLWDOL]DWLRQ LV GLUHFWHG WRZDUG new initiatives THE EXPECTATIONS Zcom is focused on acquiring companies with potential for growth and much higher scalable revenues. The company is focused on completing acquisitions in an orderly and controlled manner. Within the United States, there are some 150,000 innovative and early stage companies that meet Zcom’s criteria. These companies fall within Zcom’s areas of expertise in the media, shopping network, resource-based, and technology industries. PAGE ( 18 )

2ND QUARTER 2009

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

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uying a business is tough. Buying a piece of a business, 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 existing business and achieve economies of scale. Private equity investors can bring new resources and strong management skills to help turn a “black sheepâ€? into a ZLQQHU )RU ÂżQDQFLDO DQG DFFRXQWLQJ SXUSRVHV WKHVH M&A transactions are commonly called carve-outs. What are you buying?

VKHHW WR XQGHUVWDQG FDVK Ă€RZ WUHQGV DQG ZRUNLQJ FDSLtal requirements of the stand-alone entity, which are often different from the larger organization. Investors should also consider the following issues: ‡ 7UDQVLWLRQ 6HUYLFHV $JUHHPHQW Âł76$´ Âą 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 IRU D VXIÂżFLHQW WUDQVLWLRQ SHULRG $ JHQHUDO 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.

3RWHQWLDO EX\HUV VKRXOG EH DZDUH WKDW ÂżQDQFLDO GDWD RI ‡ :RUNLQJ FDSLWDO UHTXLUHPHQWV 'HYHORS D WKH FDUYH RXW XQLW LV RIWHQ QRW FRPSDUDEOH WR ÂżQDQFLDO target working capital amount (based on data of the parent company that is presented to investhe balance sheet of the stand-alone WRUV OHQGHUV DQG RWKHU WKLUG SDUWLHV $OVR WKH ÂżQDQcarve-out unit) and incorporate this into the cial data of the carve-out unit may not follow generpurchase and sale agreement. This way you ally accepted accounting principles (GAAP). Further, can be sure that the acquired entity has GLYLVLRQ OHYHO ÂżQDQFLDO LQIRUPDWLRQ RIWHQ LQFOXGHV adequate working capital to fund ongoing intra-company transactions, corporate allocations, and operations without the need of new ÂżQDQFLDO DGMXVWPHQWV ZKLFK PD\ QRW EH UHOHYDQW WR D FDSLWDO %X\HUV QHHG WR WKLQN RI FDVK Ă€RZV buyer. in light of the new capital and cost structure, growth rate of the business, and 7R JHW WKH WUXH ÂżQDQFLDO SLFWXUH LQYHVWRUV VKRXOG DVany planned operational changes that sess the impact of intra-company transactions, allocould affect future working capital needs. cated costs, and shared services. The analysis should consider the potential costs to operate the carved-out ‡ &DSLWDO H[SHQGLWXUH ÂłFDSH[´ business on a stand-alone basis. The cost analysis requirements– Evaluate capex requirements should consider personnel, infrastructure, information LQ OLJKW RI H[SHFWHG FDVK Ă€RZV LQFOXGLQJ technology, and other operational requirements. Only maintenance expenditures, whether they DIWHU FRPSOHWLQJ VXFK DQ DQDO\VLV FDQ SURÂżWDELOLW\ are capitalized or not for accounting TXDOLW\ RI HDUQLQJV DQG ÂżQDQFLDO IRUHFDVWV EH HYDOXpurposes. ated. A similar analysis should be done on the balance

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2ND QUARTER 2009

‡ %ULGJLQJ WKH VWDQG DORQH ¿QDQFLDO VWDWHPHQWV to forecasts – Verify that the seller’s projections are grounded in reality. If the seller has not properly presented the KLVWRULFDO ¿QDQFLDOV WKHLU SURMHFWLRQV PD\ EH meaningless.

‡ &RQFHQWUDWLRQ RI FXVWRPHUV DQG YHQGRUV ¹ 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 carveout. 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 advisors can help reduce the risk and uncertainty often associated with a divestiture. The advisory group should LQFOXGH ÂżQDQFLDO DQG DFFRXQWLQJ VXSSRUW WKDW FDQ EULQJ the critical depth of knowledge to complete complex carve-outs. It is imperative that buyers have a thorough underVWDQGLQJ RI WKH LVVXHV EHIRUH HQWHULQJ LQWR D GHÂżQLWLYH purchase agreement. Evaluating accounting information 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 negotiating points. Further, if the carve-out analysis reveals a negative result, buyers can avoid wasting time on unattractive investment opportunities.

/DXUXV 7UDQVDFWLRQ $GYLVRUV SURYLGHV H[SHUW ÂżQDQFLDO DQG accounting due diligence services to buyers and sellers in 0 $ WUDQVDFWLRQV 7KH ÂżUP DOVR SURYLGHV SRUWIROLR PDQDJHment services for private equity investors and advisory serYLFHV WR XQGHUSHUIRUPLQJ DQG RYHUOHYHUDJHG EXVLQHVVHV

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2ND QUARTER 2009

Never Seen a Stock Market Like This Before Sheldon Kraft multiplying the current market share price by the number of outstanding shares.) The cut-off for deciding that a stock belongs in one category or the other is arbitrary. However, the market capitalization thresholds currently being suggested for micro-caps range from $50 million to $250 million. Micro-caps are not only the smallest of the publicly traded corporations, but they are also among the most volatile. That’s partly because they often lack the cash reserves that may allow a larger company to weather rough periods. From the Securities and Exchange Commission (SEC) Web site: :KDW ,V D 0LFUR FDS 6WRFN"

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KDYH VSRNHQ ZLWK QXPHURXV H[ WUDGHUV FKDUWHUHG ÂżQDQcial 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.â€? 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 VWDYH RII GHSUHVVLRQ E\ VKRULQJ XS WURXEOHG ÂżQDQFLDO LQVWLWXtions, 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 ÂżQG LQ WKLV PDUNHW IRU VXUH )RFXVLQJ RQ PLFUR FDS VWRFNV seems timely, because they are the new opportunity haven. /HWÂśV VWDUW E\ GHÂżQLQJ PLFUR FDS VWRFNV By Free Dictionary on Google: Micro-cap stock. A micro-cap stock is one with a smaller market capitalization - sometimes much smaller - than stocks GHVFULEHG DV VPDOO FDSV 0DUNHW FDSLWDOL]DWLRQ LV ÂżJXUHG E\

2ND QUARTER 2009

The term “micro-cap stockâ€? applies to companies with a low or “microâ€? 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 suspended 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. :LNLSHGLD GHÂżQHV PLFUR FDS VWRFNV DV VWRFNV RI SXEOLFO\ 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 total stock market value. Most are traded on over-the-counter (OTC) exchanges. Their prices are quoted on the OTC Bulletin Board (OTCBB) or the Pink Sheets. Larger, more established 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 Investment 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 disproportionately increased the accounting and legal costs of U.S. stock listings for small companies.

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Micro-cap stocks are notorious for their volatility. A high percentage of these companies fail to execute on their business plans and go out of business. Fraud and market manipulation 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 FRPH ZLWK VXFFHVV 3ULFLQJ LV OLNHO\ WR EH LQHI¿FLHQW )HZHU institutional investors and analysts operate in this space, due to the relatively small dollar amounts involved and the lack of liquidity. The micro-cap and small-cap sectors have outperformed larger stocks since 2000. New indexes have been created to track the performance of micro-caps as an asset class. These include the Russell Micro-cap Index, the Dow Jones Select Micro-cap Indexes, and the Dow Jones Wilshire U.S. Microcap Index. $QDO\]LQJ 0LFUR FDSV Micro-cap companies rarely enjoy regular research coverage 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 SULFH LQHI¿FLHQF\ FUHDWHV RSSRUWXQLWLHV IRU VDYY\ LQYHVWRUV When it comes to analyzing a micro-cap company, the approach is the same as that for a larger company; the difference is a matter of emphasis. Like any other potential investment, 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 multiple or price/book multiple, to see whether the stock looks underpriced or overpriced. You’ll probably review the comSDQ\œV ¿QDQFLDO VWDWHPHQWV WR OHDUQ KRZ PXFK QHW SUR¿W LV earned on revenues, how high debt exists compared to the company’s capital base, and whether the company is generating cash or burning it. Questions to think about include:

‡ +DV WKLV FRPSDQ\ LQYHQWHG D FRPSHOOLQJ product or service that taps a unique niche in the market place? ‡ ,V WKH FRPSDQ\ÂśV VHFWRU ÂłKRW´" ‡ $UH WKHUH FRPSDULVRQ FRPSDQLHV WR measure against? ‡ ,V PDQDJHPHQW RXWVWDQGLQJ"

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2ND QUARTER 2009

‡ 'RHV WKH FRPSDQ\ KDYH D EHWWHU way of doing things? ‡ :LOO WKH FRPSDQ\œV RIIHULQJ EH LQ GHPDQG in the future, no matter what the economic cycle? ‡ ,V WKH FRPSDQ\œV KLVWRU\ H[FLWLQJ"

The promise of wild returns in micro-cap equities, however, 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 affects both buy-side and sell-side activities. Lack of liquidity may cause a higher buy price and a lower sell price. Also, it PD\ EH GLIÂżFXOW IRU LQGLYLGXDO LQYHVWRUV WR FRQGXFW LQ GHSWK 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 techniques. *DLQLQJ 0LFUR FDS ([SRVXUH 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 inGHSHQGHQW IHH EDVHG UHVHDUFK ÂżUPV 7KHVH ÂżUPV LVVXH VWRFN 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 counterâ€? through quotation services, such as the OTC Bulletin Board or the Pink Sheets. Although a penny stock is said to be “thinly traded,â€? daily trading volume can be in the hundreds of millions of shares for a sub-penny stock. Legitimate inIRUPDWLRQ RQ SHQQ\ VWRFN FRPSDQLHV FDQ EH GLIÂżFXOW WR ÂżQG and a stock can be easily manipulated. ,Q WKH 8 6 ÂżQDQFLDO PDUNHWV WKH WHUP SHQQ\ VWRFN FRPmonly refers to any stock trading outside one of the major exchanges (NYSE, NASDAQ, or AMEX), and is often FRQVLGHUHG SHMRUDWLYH +RZHYHU WKH RIÂżFLDO 6(& GHÂżQLWLRQ of a penny stock is a low-priced, speculative security of a very small company, regardless of market capitalization or whether it trades on a securitized exchange (like NYSE or

NASDAQ) or an over-the-counter listing service, such as the OTCBB or Pink Sheets. The terms, penny stock, micro-cap stock, small-caps, and nano-caps, are sometimes used interchangeably; 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'$4 DUH ÀRRGHG ZLWK PLFUR FDS VWRFNV DQG HYHQ VRPH SHQQ\ 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. :KHWKHU ODEHOHG DV D SHQQ\ VWRFN RU D PLFUR FDS VWRFN VWRFNV RI VRPH YHU\ IDPLOLDU FRPSDQLHV DUH WUDGLQJ DW OHYHOV QRW VHHQ LQ GHFDGHV )RU H[DPSOH IURP -DQXDU\ WR )HEUXDU\ WKH IROORZLQJ EOXH FKLS VWRFNV H[SHULHQFHG D VKDUS SULFH GURS &RPSDQ\

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Okay, now what? How should investors deal with this plethora of opportunity? &DQ ODFN RI OLTXLGLW\ EH Âż[HG"

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 acquisition companies (SPAC). The shrinking market capitalization 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 PRUH GLIÂżFXOW WRGD\ WKDQ HYHU EHIRUH 1RZ ZH KDYH WR NQRZ the complete history of a stock, like we do the “lemon lawsâ€? for automobiles. Micro-cap stocks need their own lemon laws. Caveat emptor (buyer beware) has never been more applicable than it is today. :H PD\ KDYH VHHQ WKH ZRUVW RI WKH PDUNHW GRZQIDOO WKH DLU LV RXW RI WKH EDOORRQ 7KH JRYHUQPHQW EDLORXWV KDYH SURSSHG XS VHYHUDO SURPLQHQW KRXVHKROG FRPSDQ\ QDPHV 1HYHUWKHOHVV WKH PDUNHW LV VWLOO D YHU\ VFDU\ SODFH , UHFRPPHQG EX\LQJ LQWR OLTXLGLW\ /RRN IRU VWRFNV WKDW KDYH WUDGLQJ YROXPH QR PDWWHU KRZ ´JRRGÂľ WKH VWRU\ LV ,W LV DOZD\V HDVLHU WR EX\ WKDQ WR VHOO DQG \RX PXVW DOZD\V EX\ ZLWK WKH LGHD RI VHOOLQJ :LWKRXW OLTXLGLW\ WUDGLQJ YROXPH WKHUH LV QR H[LW VWUDWHJ\

6KHOGRQ .UDIW LV IRXQGHU &(2 RI 611 ,QFRUSRUDWHG +H FDQ EH UHDFKHG DW VNUDIW#VQQZLUH FRP References Loiacono, S. (2009, March 23). +RZ 7R (YDOXDWH $ 0LFUR &DS &RPSDQ\ Retrieved March 22, 2009, from Investopedia: http:// www.investopedia.com/articles/stocks/07/micro_cap.asp Securities and Exchange Commission. (2009, March 23). MiFURFDS VWRFN $ *XLGH IRU ,QYHVWRUV Retrieved March 22, 2009, from Securities and Exchange Commission: http://www.sec. gov/investor/pubs/microcapstock.htm 7KH )UHH 'LFWLRQDU\ (2009, March 23). Retrieved March 22, 2009, from 7KH)UHH'LFWLRQDU\ KWWS ÂżQDQFLDO GLFWLRQDU\ WKHfreedictionary.com/microcap

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- :LNLSHGLD (2009, March 23). Retrieved March 22, 2009, from ate revenues and EBITDA, unless investing in the biotech or Wikipedia: http://en.wikipedia.org/wiki/Microcap_stocks alternative energy industries. Management experience is a big plus. Read the company’s business plan and visit the Web site. 5HDOO\ JR WKURXJK WKH :HE VLWH WR ¿QG DV PXFK LQIRUPDWLRQ DV possible – the more information you have, the better you will understand the business model.

2ND QUARTER 2009

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2ND QUARTER 2009

Opportunity Knocks During Recession Mark H. Fowler, CPA, CMC

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he 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 prepare for the future. Many businesses go through a crisis more than once during 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 longterm and short-term.

business. Issues that seemed invisible in a thriving economy can become serious threats in a market downturn. The structural phase is about creating a disciplined approach to strengthen the following areas. R %XVLQHVV SODQQLQJ ERWK VKRUW WHUP DQG ORQJ WHUP ‡ :KHUH GR ZH QHHG WR EH DW WKH HQG RI WKH PRQWK" ‡ :KHUH GR ZH ZDQW WR EH DW WKH HQG RI WKH \HDU" ,Q WKUHH \HDUV" ,Q ÀYH \HDUV" ‡ $UH DOO VHQLRU PDQDJHUV DQG RZQHUV RQ WKH VDPH SDJH DERXW WKH SODQ" ‡ :KDW DUH WKH WKUHH VWUDWHJLF LPSHUDWLYHV WKDW ZLOO EH GULYLQJ WKH FRPSDQ\" R 2UJDQL]DWLRQDO GHYHORSPHQW ‡ 'R ZH KDYH WKH ULJKW SHRSOH LQ WKH ULJKW SODFH GRLQJ WKH ULJKW MRE" ‡ 'R RXU OHDGHUV KDYH WKH VNLOOV WKH\ QHHG IRU WRGD\ DQG WRPRUURZ" ‡ 'R ZH KDYH D V\VWHP WR JHW WLPHO\ IHHGEDFN WR VROYH LVVXHV" ‡ +RZ FDQ ZH LGHQWLI\ SUREOHPV VRRQHU UDWKHU WKDQ ODWHU" ‡ :KR ZLOO EH UHVSRQVLEOH IRU FUHDWLQJ VROXWLRQV" ‡ :KR ZLOO EH UHVSRQVLEOH IRU LPSOHPHQWDWLRQ"

The word “crisisâ€? in Chinese also means “opportunity.â€? 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 opportunities when the economy rebounds. R 'HYHORSLQJ D WHDP RI DGYLVRUV WR OHDG WKH FRPSDQ\ WKURXJK WKH SURFHVV THREE KEY AREAS FOR REVIEW ‡ :KDW H[SHUWLVH GR ZH QHHG RXWVLGH WKH RUJDQL]DWLRQ" &RPSDQLHV FDQ RYHUFRPH GLIÂżFXOWLHV E\ IRFXVLQJ RQ ‡ +RZ ZLOO WKH WHDP ZRUN WRJHWKHU WR DFFRPSOLVK three key areas: structural elements, strategic protocols, WKH JRDOV" and tactical actions/services. ‡ :KR DUH WKH VWDNHKROGHUV DQG KRZ VKRXOG WKH\ EH FRPPXQLFDWHG" 6WUXFWXUDO (OHPHQWV A solid foundation is essential to the success of any 2ND QUARTER 2009

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6WUDWHJLF 3URWRFROV

BUILDING THE RIGHT TEAM

8QGHUVWDQGLQJ IDFWRUV WKDW FDQ FDXVH D FULVLV LV WKH NH\ WR JURZ RU SURWHFW D EXVLQHVV %\ FUHDWLQJ RU UHYLVLQJ VWUDWHJLF SURWRFROV FRPSDQ\ OHDGHUV FDQ EHWWHU GHWHFW SRWHQWLDO SUREOHPV DQG ÀQG ZD\V WR PLWLJDWH D FULVLV 7KHVH SURWRFROV FDQ LQFOXGH

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 professionDOV WR PDNH LW ZRUN 6WDUW ZLWK \RXU FHUWLÂżHG SXEOLF DFcountant (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 experiHQFH &3$ LQYROYHPHQW FDQ VLJQLÂżFDQWO\ UHGXFH FRVWV DQG improve effectiveness. We have helped many companies manage through a crisis. These companies faced downsizing, 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.

R )LQDQFLDO VWDWHPHQW UHYLHZV ZLWK EDQNHUV R 3HULRGLF PDQDJHPHQW UHYLHZV o Operational audits R (QKDQFHG SURGXFW TXDOLW\ FRQWURO R 9LJRURXV GLDORJXH ZLWK FXVWRPHUV R ,PSURYHG LQIRUPDWLRQ V\VWHPV R &UHDWLQJ DQ HDUO\ ZDUQLQJ V\VWHP WR KHOS anticipate changes

%\ LPSOHPHQWLQJ WKHVH VWUDWHJLF SURWRFROV WKH FRPSDQ\ FDQ DYRLG VHULRXV LVVXHV WR IRFXV RQ FXUUHQW DQG IXWXUH 0DUN + )RZOHU &0& &3$ LV 3UHVLGHQW RI 6WRZH 0DQDJHPHQW &RUSRUDWLRQ D FRUSRUDWH UHHQJLQHHULQJ ÂżUP EDVHG LQ 6DQWD JRDOV 7DFWLFDO $FWLRQV DQG 6HUYLFHV +DYLQJ DFFHVV WR JRRG LQIRUPDWLRQ LV HVVHQWLDO GXULQJ GLIĂ€FXOW WLPHV ,QIRUPDWLRQ V\VWHPV VKRXOG EH LQ SODFH WR WUDFN PHDVXUH DQG DQDO\]H WKH PRVW LPSRUWDQW SDUWV RI WKH EXVLQHVV KDYLQJ JRRG LQIRUPDWLRQ ZLOO KHOS PDQDJHUV PDNH ULJKW GHFLVLRQV ,QIRUPDWLRQ WKDW LV XVHIXO LQFOXGHV WKRVH WKDW DGGUHVV WKH IROORZLQJ DUHDV

0RQLFD &DOLIRUQLD +H KDV ZRUNHG ZLWK &3$V DQG WKHLU FOLHQWV IRU RYHU \HDUV LQYROYLQJ SURMHFW WXUQDURXQGV VXFFHVVLRQ SODQQLQJ PHUJHUV DFTXLVLWLRQV DQG FRUSRUDWH JURZWK +H LV also the author of the forthcoming book, Always Adding Value, ZKLFK LV H[SHFWHG WR EH RXW LQ 'HFHPEHU Stowe Management Corporation P.O. Box 2028 Santa Monica, CA 90406 Phone: 310-458-1321 Web: www.estowemanagement.com Email: estowemanagement@aol.com

‡ ,GHQWLI\LQJ VRXUFHV RI UHYHQXHV ‡ ,GHQWLI\LQJ WRS SURGXFW OLQHV DQG FXVWRPHUV DQG CopyrightŠ 2006—2009 Stowe Management Corporation. All WKHLU VWDJH RI GHYHORSPHQWDO SURFHVV rights reserved. ‡ 8QGHUVWDQGLQJ LQYHQWRU\ WXUQV ‡ ,PSOHPHQWLQJ NH\ LQGLFDWRUV DQG RWKHU PHWULFV ‡ 3UHSDULQJ FRVWLQJ DQDO\VLV ‡ &UHDWLQJ D GHFLVLRQ PDNLQJ SURFHVV WR KHOS PDLQWDLQ FRQVLVWHQF\ DQG IRFXV ‡ 0DQDJLQJ FDVK DQG RWKHU UHVRXUFHV $ ODFN RI JRRG LQIRUPDWLRQ FDQ KDPVWULQJ GHFLVLRQ PDNLQJ 4XDOLW\ RI LQIRUPDWLRQ LV HTXDOO\ LPSRUWDQW DV TXDQWLW\ RI LQIRUPDWLRQ 7KH PRUH FRPSDQLHV NQRZ DQG XQGHUVWDQG WKH GHWDLOV RI WKH EXVLQHVV WKH EHWWHU WKH\ FDQ PDQDJH GXULQJ DQ HFRQRPLF GRZQWXUQ DQG SUHSDUH IRU IXWXUH JURZWK

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2ND QUARTER 2009

SGS-COC-004752

TIGRcub™ Security Gives Investors Access to Top-Line Revenues TIGRcub™ Security is an investment product pioneered by (QWUH[ ,QF WKDW RIIHUV XQLTXH DGYDQWDJHV WR PLFUR FDS DQG PLGGOH FDS LQYHVWRUV DQG FRPSDQLHV ,QYHVWRUV EHQH¿W IURP having liquidity and stability of returns that are based on a SHUFHQWDJH RI WKH LVVXHUœV UHYHQXHV IRU D GH¿QLWH SHULRG ,VVXLQJ FRPSDQLHV EHQH¿W E\ REWDLQLQJ FDSLWDO ZLWKRXW FUHDWLQJ HTXLW\ GLOXWLRQ

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n 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 innovative 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 ,QFRPH *HQHUDWLRQ 5LJKWV &HUWL¿FDWH (QWUH[ ODXQFKHG 7,GRcub™ last summer after several years of vetting by top legal, tax, and accounting experts. TIGRcub™ is set for rapid adoption by institutional investors, fund managers, and middle-market companies (with annual revenues from $5 million to $250 million).

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 investment option. TIGRcub™ investors can participate in market segments that were once unavailable or unattractive and that VDWLV¿HV WKHLU QHHG IRU ULVN DGMXVWHG UHWXUQV FXUUHQW LQFRPH and liquidity. During a recent interview with Micro-Cap Review, Stephen H. Watkins, founder of Entrex, explained that the TIGRcub™ security was created as a solution for middle-market JURZWK FRPSDQLHV DQG LQYHVWRUV ZKR ¿QG HTXLW\ DQG GHEW FDSLWDO PDUNHWV WR EH OLPLWHG DQG LQHI¿FLHQW 6SHFL¿FDOO\ WKH (QWUH[ WHDP GHYHORSHG WKH VHFXULW\ DIWHU ¿QGLQJ WKDW WKH HTXLW\ DQG PH]]DQLQH GHEW PDUNHWV KDG VHULous limitations:

‡ )DFWRUV XQUHODWHG WR FRPSDQ\ ¿QDQFLDO performance adversely affect stock price. 7ZR PDMRU LQÀXHQFHV DUH LQYHVWRU VHQWLPHQW and the complex algorithmic trading models routinely exercised. Both of these factors are completely outside a company’s direct control.

7R GDWH LQYHVWPHQW EDQNHUV KDYH LGHQWLÂżHG PRUH WKDQ public and private companies that will consider TIGRcub™ VWUXFWXUHV IRU YDULRXV ÂżQDQFLQJ SURMHFWV :LWK D GHSUHVVHG HTXLW\ PDUNHW FRPSDQLHV ÂżQG WKLV QRQ dilutive security to be far more compelling than issuing QHZ VWRFN $OVR PRUH LQYHVWRUV DUH ÂżQGLQJ WKDW 7,*5FXEÂŒ solves their concerns about micro-cap companies, including LOOLTXLGLW\ LQĂ€DWLRQ DQG ULVNV DVVRFLDWHG ZLWK PDUNHW IDFWRUV 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 WKH ÂżQDQFLQJ QHHGV RI PLGGOH PDUNHW FRPSDQLHV (QWUH[ KDV EHHQ D OHDGHU LQ EXLOGLQJ WKH LQIUDVWUXFWXUH 7KH ÂżUP KDV

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‡ 3XEOLF FRPSDQ\ UHYHQXH DQG VWRFN SULFH 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. ‡ 5HYHQXH YRODWLOLW\ LV VXEVWDQWLDOO\ ORZHU than stock price volatility. This is seen at both company and portfolio levels, representing lower investor risk. ‡ 5HYHQXHV ERWK SXEOLF DQG SULYDWH companies) tend to grow more steadily than do equity prices. In fact, quarterover-quarter indexed revenue growth of private company revenues outperformed Entrex’s two public sample groupseven during recessionary periods.

The dichotomy between revenue growth and stock price is highlighted by the recent 30 percent decline in the stock market. Even in a strong market, revenue continues to be less volatile and oriented toward growth, when compared to equity values. Blue chip companies in the Dow Jones Industrial Average (DJIA) also experience this disconnect between revenue growth and equity value. Based on a study of DJIA companies covering a 10-year period, revenues of companies in aggregate tended to be stable and increasing, even when stock prices declined. The DJIA study compares the revenue performance of companies to the aggregate stock price performance over the last decade. The DJIA graph shows how revenues increased by

of many factors that impact equity value. Many investors cannot see this. The disparity between revenue and stock price is further illustrated 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 Revenue Index (EMRI). The EMRI data (see graph) show that stock prices exhibit high volatility, whereas company revenue shows far lower volatility and stable overall growth. Entrex found that the revenue/stock price dilemma also applied 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 ZHOO HYHQ ZKHQ VWRFN SULFHV Ă€XFWXDWHG DQG GHFOLQHG This research shows that the TIGRcub™ security is a winwin solution for both investors and issuers. TIGRcubs™ offer companies a way to raise capital that meets investors’ need for current income, while minimizing ownership dilution and governance issues that are often associated with equity transactions. Modern Corporate Finance Solutions & Investment Options Are a Natural Evolution of the Capital Marketplace “Just as markets for other critical resources are changing and adapting to economic conditions today, so too should capital markets,â€? said Watkins. “TIGRcubs™ are leading the change. The security allows investors to take advantage of the good revenue positions that many companies are in today, even though their stock prices might look bad.â€?

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

2ND QUARTER 2009

“TIGRcubs™ have unique advantages that appeal to companies that previously thought that an equity raise or mez]DQLQH GHEW ÂżQDQFLQJ ZLWK VWRFN ZDUUDQWV ZDV WKHLU RQO\ 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 traditional debt, as there are different ways to account for the TIGRcub™ security, depending on how it is structured,â€? 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 returns that are distributed monthly. Investors do not have to

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wait on a liquidity event to recover their investment. In toGD\ÂśV SRWHQWLDOO\ LQĂ€DWLRQDU\ HQYLURQPHQW WKH 7,*5FXEÂŒ What Fund Managers Say About TIGRcubs™ VHFXULW\ DOVR RIIHUV LQYHVWRUV D ZD\ WR KHGJH LQĂ€DWLRQ EHFDXVH UHYHQXHV IRU PRVW FRPSDQLHV FOLPE GXULQJ LQĂ€DWLRQ- Several funds are organizing capital to invest in TIGRcub™ securities. One group is Arctaris Capital Partners ary periods. TIGRcubs™ Are a Solution for Micro-cap Finance Micro-cap companies avoid raising equity capital when their share price is falling. Doing so in today’s depressed stock market can be extremely dilutive, and transactions will be based on lower valuations than those made just 18 months ago. Âł%XW WKHVH ÂżQDQFLQJ FLUFXPVWDQFHV DUH QRW D WUXH UHĂ€HFWLRQ of what’s going on,â€? 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 recently.â€? 7KH 7,*5FXEÂŒ VHFXULW\ FDQ DFFRPPRGDWH WKH FDSLWDO VWUXFWXUHV RI QHDUO\ DQ\ FRPSDQ\ DQG VWLOO PHHW LQYHVWRU UHWXUQ UHTXLUHPHQWV 7,*5FXEÂŒ Ă€QDQFLQJ FDQ EH DFFRPSOLVKHG XVLQJ YDULRXV PRGHOV ‡ 7KH +LJK <LHOG 9DULDEOH $QQXLW\ PRGHO RIIHUV LQYHVWRUV D KLJKHU ULVN KLJKHU UHZDUG PRGHO ZKHUH WKH LQWHUQDO UDWH RI UHWXUQ ,55 LPSURYHV DV WKH LVVXLQJ FRPSDQ\¡V UHYHQXHV JURZ ‡ 7KH )L[HG $QQXLW\ PRGHO KDV PRUH ERQG OLNH FKDUDFWHULVWLFV ZKHUH LQ H[FKDQJH IRU D SUH GHWHUPLQHG ,55 DQ LVVXLQJ FRPSDQ\ FDQ DFWXDOO\ GHFUHDVH LWV FRVW RI FDSLWDO RYHU WLPH E\ VKRZLQJ H[WUDRUGLQDULO\ KLJK UHYHQXH JURZWK ‡ 7KH ([FKDQJH 2IIHU PRGHO DOORZV FRPSDQLHV D ZD\ WR EX\ EDFN VWRFN IURP VKDUHKROGHUV WKURXJK D 7,*5FXEÂŒ RU FUHDWH D WHQGHU RIIHU WR EX\ EDFN WKH RXWVWDQGLQJ VKDUHV RI WKH FRPSDQ\ ZLWK WKH SURFHHGV RI D 7,*5FXEÂŒ Ă€QDQFLQJ 7R WKH H[WHQW WKDW D FRPSDQ\ ZLVKHV WR SULYDWL]H 6DUEDQHV 2[OH\ FRPSOLDQFH FRVWV DQG REOLJDWLRQV FRXOG EH HOLPLQDWHG DQG RZQHUVKLS UHJDLQHG 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,â€? said Watkins.

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2ND QUARTER 2009

LQ :DOWKDP 0DVVDFKXVHWWV Âł7KH ÂżQDQFLDO PDUNHWV DUH DW a juncture where the need for innovation of practical and WUDQVSDUHQW ÂżQDQFLDO VWUXFWXUHV LV FUXFLDO ´ VDLG $QGUHZ ' &ODSS PDQDJLQJ SDUWQHU Âł7KH WLPH LV QRZ IRU ÂżQDQFH WR render new solutions that satisfy both investors and companies.â€? Arctaris has adopted TIGRcubs™ as an important solution and presents the security as an opportunity to limited partners of their fund and to portfolio companies.

The TIGRcub™ Stimulus Package Watkins concludes by saying that revenue-based investing is the stimulus that U.S. companies and global capital markets need today. “A movement away from the customary asset allocations of stocks, bonds, and cash is possible with the availability of revenue-based securities. A move toward asset allocations with revenue-based securities offers a new investment opportunity that can have a substantial economic impact in the 8QLWHG 6WDWHV ,W FDQ UHVWRUH DQG HYHQ LQFUHDVH FDSLWDO Ă€RZV into some of the most important sectors of the U.S. economy,â€? said Watkins.

“In light of the adverse conditions of the credit markets and the challenges associated with raising capital in the public HTXLW\ PDUNHW 7,*5FXEVÂŒ RIIHU WUHPHQGRXV EHQHÂżWV WR ERWK investors and company issuers.â€? “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.â€? For more information, contact Entrex at 877-4-ENTREX or visit www.entrex.net. Stephen Watkins can be reached at swatkins@entrex.net

6WHSKHQ + :DWNLQV LV &(2 DQG IRXQGHU RI (QWUH[ $Q HQWUHSUHQHXU KH IRXQGHG DQG H[LWHG QXPHURXV FRPSDQLHV +H LV WKH DXWKRU of Capital Can’t Fund What it Can’t Find. (QWUH[ LV D FDSLWDO PDUNHW V\VWHP WKDW EULQJV investors and issuers together through the 7,*5FXEVŒ VHFXULW\

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ANNOUNCED TRANSACTIONS

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

ASK THE TAX GUYS Q: What is an employee stock option plan owner who is retiring after many years has no better (ESOP)? way to sell his/her shares than through an ESOP. By selling shares to the ESOP, the owner is transferring +DUW $Q (623 LV D W\SH RI HPSOR\HH EHQHÂżW SODQ ownership to people who will have a vested inter,WÂśV VLPLODU LQ VRPH ZD\V WR D SURÂżW VKDULQJ SODQ est in the long-term welfare of the company – the An ESOP is formed by setting up a trust fund to ac- employees. The ESOP can help perpetuate the comquire shares of a company’s stock for employees. pany’s existence long after the owner/founder leaves The shares acquired by the ESOP are allocated to the company. individual employee accounts. An ESOP can also be used by companies to raise The ESOP can acquire shares in several ways. One capital to fund growth. Under this arrangement, the way is to have the company issue new shares of its ESOP borrows money from an external source and stock directly to the ESOP. The second way is to uses the proceeds to buy newly issued shares of a have the company contribute cash to the ESOP to FRPSDQ\ÂśV VWRFN %HFDXVH RI WKH WD[ EHQHÂżWV DVVRFLbuy existing shares (e.g., from a departing owner of DWHG ZLWK ÂżQDQFLQJ DQ (623 (623 ÂżQDQFLQJ FDQ EH a closely held company). The third way is to have a less expensive way for companies to raise capital. the ESOP raise money by borrowing from an external source, such as a bank or the company, and then 4 :KDW DUH VRPH RI WKH WD[ EHQHÂżWV DVVRFLDWHG buy the shares. Frequently, a bank will lend to the ZLWK ÂżQDQFLQJ WKH (623" company, and the company will then lend the proceeds of the loan to the ESOP. .HVVHO ,Q JHQHUDO FRPSDQLHV FDQ GHGXFW GLYLGHQGV SDLG WR DQ (623 ZLWK FHUWDLQ OLPLWDWLRQV ,I WKH (623 Q: What are some compelling reasons to have an KDV D ORDQ VXFK GLYLGHQG SD\PHQWV FDQ EH XVHG E\ WKH ESOP as a business owner? (623 WR SD\ WKH LQWHUHVW DQG SULQFLSDO RQ WKH ORDQ 7KXV WKH HIIHFW LV WKDW WKH FRPSDQ\ JHWV WR GHGXFW WKH IXOO FRVW +DUW $Q (623 VXUSDVVHV RWKHU W\SHV RI EHQHÂżW SULQFLSDO DQG LQWHUHVW RI XVLQJ WKH SURFHHGV IURP WKH plans, because it provides tangible and intangible (623 ORDQ EHQHÂżWV WR D FURVV VHFWLRQ RI FRQVWLWXHQWV HPSOR\ees, owners, and the company. 4 :KDW WD[ EHQHÂżWV DUH DYDLODEOH WR FORVHO\ KHOG C corporations? At the most basic level, an ESOP can serve as an employee incentive plan that fosters a sense of own- +DUW :LWK VRPH UHVWULFWLRQV VKDUHKROGHUV RI D FORVHO\ ership among employees. When employees have an KHOG & FRUSRUDWLRQ ZKR VHOO VKDUHV WR DQ (623 ZLOO SD\ ownership stake in a company, they tend to be moti- QR WD[ RQ WKH JDLQ IURP WKH VDOH 7R WDNH DGYDQWDJH RI vated to work harder, stay with the company longer, WKH WD[ SURYLVLRQ XQGHU , 5 & † WKH (623 PXVW and help it succeed. Morale improves and staff turn- RZQ DW OHDVW SHUFHQW RI WKH FRPSDQ\¡V VWRFN )XUWKHU over is minimized. WKH VHOOLQJ VKDUHKROGHUV PXVW UHLQYHVW WKH SURFHHGV LQ ´TXDOLI\LQJ VHFXULWLHVÂľ RI RWKHU 8 6 GRPHVWLF FRUSRUD)RU RZQHUV DQ (623 FDQ EH D WD[ HIÂżFLHQW ZD\ WR WLRQV SXEOLF RU SULYDWH ZLWKLQ PRQWKV DIWHU WKH VDOH liquidate their ownership interest in a company. An WR WKH (623

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4 :KDW WD[ EHQH¿WV DUH DYDLODEOH WR 6 FRUSRUDtions? Kessel: Unfortunately, shareholders of an S corporation cannot take advantage of the tax-free reinvestment provision available to shareholders of a C corporation. However, the S corporation’s income that is allocated to the ESOP is exempt from federal income tax; the ESOP is responsible for the income tax. If the ESOP owned all of the S corporation’s shares, the ESOP would not have to pay any federal income tax attributable to the S corporation.

tive and compliance considerations associated with PDLQWDLQLQJ D TXDOLÂżHG SURÂżW VKDULQJ SODQ )RU example, the ESOP must satisfy discrimination requirements under the Internal Revenue Code and ÂżOH DQ DQQXDO UHSRUW )RUP ZLWK WKH ,56 ,I 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 PXVW EH DSSUDLVHG HDFK \HDU E\ D TXDOLÂżHG LQGHSHQdent appraiser.

Alexander Hart , CPA, MBA, is the managing partner RI &3$ 7D[ 6WUDWHJLHV ,QF D VXEVLGLDU\ RI 3URÂżW 3ODQQHUV ,QF 7KH ÂżUPV SURYLGH WD[ DQG EXVLQHVV DGYLVRU\ .HVVHO 7KH WHUPV RI WKH (623 GRFXPHQW GHWHUPLQH VHUYLFHV $OH[ VSHFLDOL]HV LQ WD[ SODQQLQJ DQG WD[ SUHSZKR FRQWUROV WKH (623 DQG KRZ WKH VKDUHV LQ WKH (623 DUH WR EH YRWHG )UHTXHQWO\ WKH WUXVWHH RI WKH (623 DUDWLRQ IRU EXVLQHVV RZQHUV DQG FRUSRUDWH H[HFXWLYHV KDV WKH ULJKW WR YRWH WKH VKDUHV LQ WKH (623 ,Q FORVHO\ KHOG FRPSDQLHV HPSOR\HH VKDUHKROGHUV JHQHUDOO\ KDYH Michael Kessel LV D SDUWQHU ZLWK WKH ODZ ÂżUP RI +HUWKH ULJKW WR YRWH IRU VLJQLĂ€FDQW HYHQWV VXFK DV D PHUJHU ULFN )HLQVWHLQ //3 +H FRQFHQWUDWHV KLV SUDFWLFH LQ LQRI WKH FRPSDQ\ ,W LV IDLUO\ FRPPRQ IRU WKH PDQDJH- FRPH WD[ ODZ ZLWK D IRFXV RQ FRUSRUDWH DQG SDUWQHUVKLS PHQW RI D FRPSDQ\ WR UHPDLQ LQ SODFH DIWHU DQ (623 LV WUDQVDFWLRQV DQG UHDO HVWDWH 0LFKDHO DGYLVHV FOLHQWV RQ HVWDEOLVKHG DOO DVSHFWV RI LQFRPH WD[ ZLWK SDUWLFXODU HPSKDVLV RQ joint ventures, limited liability companies, hedge funds, 4 :KDW W\SHV RI FRPSDQLHV ZRXOG EHQHÂżW PRVW HTXLW\ IXQGV DQG LQWHUQDWLRQDO WD[ SODQQLQJ by establishing an ESOP? Q: Who controls the ESOP?

+DUW &RPSDQLHV WKDW EHQHÀW PRVW DUH WKRVH WKDW FDQ XVH WKH WD[ EHQHÀWV RIIHUHG E\ WKH (623 7KHVH DUH W\SLFDOO\ FRPSDQLHV WKDW DUH YHU\ SURÀWDEOH ZLWK H[FHOOHQW FDVK à RZV WKDW FDQ WDNH DGYDQWDJH RI WKH WD[ EHQHÀWV RI WKH (623 7KH FDVK à RZ LV QHFHVVDU\ WR EH DEOH WR VHUYLFH WKH EDQN ÀQDQFHG GHEW SUHYLRXVO\ GLVFXVVHG 7KHVH FRPSDQLHV W\SLFDOO\ KDYH D VWURQJ PDQDJHPHQW WHDP WKDW RIIHUV WKH VHOOLQJ VKDUHKROGHU DQ DOWHUQDWLYH WR VHOOLQJ WR DQ RXWVLGH SDUW\ RU SDVVLQJ WKH EXVLQHVV RQ WR WKHLU KHLUV

7KLV DUWLFOH LV SXEOLVKHG IRU LQIRUPDWLRQ SXUSRVHV RQO\ Nothing contained herein is intended to serve as leJDO RU WD[ DGYLFH RU FRXQVHO RU DV DQ RSLQLRQ RI &3$ 7D[ 6WUDWHJLHV ,QF 3URÂżW 3ODQQHUV ,QF RU +HUULFN )HLQVWHLQ //3

Q: How does a company go about setting up an ESOP? .HVVHO &RPSDUHG ZLWK RWKHU UHWLUHPHQW SODQV VXFK DV D N SODQ DQ (623 WHQGV WR EH D OLWWOH PRUH GLIĂ€FXOW WR VHW XS DQG PDLQWDLQ $Q RZQHU VKRXOG VHHN SURIHVVLRQDO OHJDO DQG WD[ DGYLFH ZKHQ VHWWLQJ RQH XS Q: What are some of the administrative and compliance considerations in maintaining an ESOP? +DUW $V QRWHG DERYH DQ (623 LV VLPLODU WR D SURÂżW sharing plan and has many of the same administra-

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The Compliance Corner Chet Hebert

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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 unscrupulous market participants. The current situation is not any different, except that the damages are far more severe and recovery 7U\LQJ WR ÂżQG RQH LVVXH WKDW WUXPSV DOO RWKHUV LQ WRGD\ÂśV PDUNHW LV is expected to take longer. That does not mean that we cannot and OLNH WU\LQJ WR ÂżQG WKH SURYHUELDO QHHGOH LQ D KD\VWDFN 'HSHQGLQJ should not continue our business. Sure, it may be harder. Capital on your market niche, various issues may or may not be important may be more expensive or may not be available in many cases. But to you. We will try to cover issues that are most pertinent to market we must move on. 5HJXODWLRQ LQ LWV VLPSOHVW IRUP LV D EDUULHU WR SDUWLFLSDQWV ZKLOH ÂżQGLQJ WLPH WR FRYHU VSHFLDO WRSLFV <RXU LQSXW HQWU\ DQG LQ LWV ZRUVW IRUP D UHVWUDLQW RI IUHH WUDGH (LWKHU ZD\ and comments are important to us, so drop us an e-mail and let us ZH Ă€QG D ZD\ WR GHDO ZLWK LW $QG WKDW LV ZK\ FRPSOLDQFH VKRXOG EH DQ LPSRUWDQW SDUW RI \RXU EXVLQHVV know what’s on your mind. ith this inaugural “Compliance Cornerâ€? column, we provide you with a quick update on important compliance issues facing the securities industry.

Electronic Blue Sheets The Options Clearing Corporation and participating exchanges have begun the Option Symbology Initiative, which will affect ),15$ PHPEHU ÂżUPVÂś (OHFWURQLF %OXH 6KHHW VXEPLVVLRQV %HJLQQLQJ )HEUXDU\ ),15$ ÂżUPV PXVW GHVFULEH DOO H[FKDQJH 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 voluntary 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.

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7DNH 1$6' 5XOH DQG LWV VLEOLQJ 1$6' 5XOH QRZ NQRZQ DV ),15$ 5XOH 0DQ\ Ă€UPV ORRN DW LW DQG VD\ WKLV LV D ZDVWH RI WLPH DQG PRQH\ 6PDUW Ă€UPV KDYH ORRNHG DW WKH UXOH DQG VDLG ´+RZ FDQ ZH PDNH WKLV ZRUN IRU XV"Âľ 4XLWH VLPSO\ 1$6' 5XOH LV D JUHDW RSSRUWXQLW\ IRU DQ\ Ă€UP WR WDNH DQ LQ GHSWK ORRN DW LWVHOI LWV EXVLQHVV LWV SURFHVVHV DQG LWV SHRSOH 'RQH FRUUHFWO\ 1$6' 5XOH ZLOO PDNH D Ă€UP MXVWLI\ ZKDW LW LV GRLQJ Personal Securities Transactions by or for Associated Persons As part of rule book consolidation, FINRA wants to combine NASD HDFK \HDU $QG WKDW LV QRW QHFHVVDULO\ D EDG WKLQJ ,GHQWLI\LQJ KLJK Rule 3050 and NYSE Rule 407. Under the proposed rule, an asso- ULVN ORZ SURĂ€W DUHDV FDQQRW EH DOO EDG ,GHQWLI\LQJ LQHIIHFWLYH VXFLDWHG SHUVRQ PXVW UHFHLYH KLV KHU ÂżUPÂśV DSSURYDO EHIRUH RSHQLQJ SHUYLVRUV ZKR LQFUHDVH ULVN FDQQRW EH DOO EDG $V D UHVXOW RI UHJXODDQ DFFRXQW WKH H[HFXWLQJ ÂżUP PXVW KDYH ZULWWHQ DSSURYDO RI WKH WLRQ \RX PD\ DFWXDOO\ LPSURYH \RXU EXVLQHVV DQG ORZHU \RXU ULVN DFFRXQW IURP WKH DVVRFLDWHG SHUVRQÂśV ÂżUP EHIRUH H[HFXWLQJ WUDGHV For complete information, refer to FINRA Regulatory Notice 09- &KHW +HEHUW LV IRXQGHU DQG 3UHVLGHQW RI 7KH &RPSOLDQFH 'HSDUW22. This rule is up for comments. As a responsible member, you PHQW ,QF D FRPSOLDQFH FRQVXOWLQJ ÂżUP LQ &HQWHQQLDO &RORUDGR should review the proposed rule and send FINRA your comments. 7KH &RPSOLDQFH 'HSDUWPHQW KHOSV EURNHU GHDOHUV DQG LQYHVWPHQW DGYLVRUV LQ WKH DUHDV RI ÂżUP IRUPDWLRQ FRPSOLDQFH &5' VHUYLFH EXUHDX RXWVRXUFHG EDFN RIÂżFH SURFHVVLQJ DQG EUDQFK RIÂżFH DXGLW So the Rules Are Changing &RPSOLDQFH LV JHWWLQJ WRXJKHU DQG EXVLQHVVHV PXVW ÂżQG ZD\V WR VHUYLFHV LQFOXGLQJ $0/ DQG 5HJ 6 3 FRPSOLDQFH 0RUH LQIRUPDFRPSO\ (YHU\RQH LQ WKH ÂżQDQFLDO VHUYLFHV LQGXVWU\ QHHGV WR XQ- WLRQ DERXW WKH ÂżUP FDQ EH IRXQG E\ YLVLWLQJ ZZZ WKHFRPSOLDQFHGHderstand why we need to follow regulations. It is not rocket sci- SDUWPHQW FRP RU E\ FDOOLQJ &KHW DW 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-

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Dealing with the Surprise Government Interview David M. RosenďŹ eld 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 prodXFW

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After all, someone needs to be held accountable.

Federal Food, Drug, and Cosmetic Act, 21 U.S.C. §§ 331, 333). When conducting criminal investigations about possible corporate wrongdoing, in both alleged defective products matters and other cases, government agents often seek to interview company executives and other HPSOR\HHV ³E\ DPEXVK´ RXWVLGH WKH RI¿FH SODFH WR minimize the likelihood that a supervisor or a company lawyer might intervene to thwart the interview. There is nothing improper in using this investigative technique. Nevertheless, employees should know their legal rights and understand the risks they take when they submit to such surprise negotiations.

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

(Stanley A. Twardy, Jr., et al., The Criminalization of the CEO, National Legal Center for the Public Interest, March 2001; see also 3UHVV 5HOHDVH RI QDWLRQDO SURÂżW consumer advocacy organization Public Citizen, “Public Citizen Calls for Criminal Investigation of Breast Implant Manufacturer for Withholding Safety Data from FDA,â€? ZZZ FLWL]HQ RUJ, October 12, 2006; Con- A company and its employees ignore the threat of an sumer Product Safety Act, 15 U.S.C. §§ 2068, 2070; PAGE ( 40 )

2ND QUARTER 2009

ambush or surprise interview, particularly at a time for school. Beaver, who was being groomed when the company may have committed wrongdoing by his father to lead the company, later said or is under investigation, at their own peril. In numerhe had hoped authorities would leave without ous cases, law enforcement or regulatory agencies have hauling him away in handcuffs as his children used ambush interviews to collect evidence to prosecute watched from atop the staircase. a company and its employees. For example, as noted in a 1999 article in the )RRG DQG 'UXJ /DZ -RXUQDO 0DQ\ RI WKH H[HFXWLYHV LQWHUYLHZHG E\ WKH )%, ODWHU SOHG JXLOW\ WR SULFH À[LQJ FKDUJHV RU OLNH &KULV %HDYHU The government followed this pattern [the use ZHUH FRQYLFWHG DIWHU D MXU\ WULDO DQG ÀQHV WRWDOLQJ of ambush interviews] ... when it began the PLOOLRQ ZHUH OHYLHG E\ WKH -XVWLFH 'HSDUWPHQW DJDLQVW public stage of an investigation of suspected WKH FRQFUHWH FRPSDQLHV fraudulent commodity trading practices in Chicago. For months, the government FIVE KEY RULES TO FOLLOW DURING A SURsecretly gathered information through an FBI PRISE INTERVIEW DJHQW ZKR ZRUNHG RQ WKH WUDGLQJ ÀRRU When that phase of the investigation was 1) Be respectful, but do not be intimidated. Act courcomplete, the government unleashed teams of teously and as calmly as possible under the circumprosecutors and agents who visited numerous stances, although you may understandably be nervous traders at home during the evening in and concerned. Do not yell, curse, or attack the agents’ coordinated and simultaneous interviews. integrity or motives. Few traders sought to consult with a lawyer, and many provided information that &RQVLGHU ZKHWKHU \RX ZRXOG SUHIHU WR SRVWSRQH WKH supported subsequent prosecutions. LQWHUYLHZ XQWLO \RX KDYH KDG DQ RSSRUWXQLW\ WR FRQVXOW ZLWK DQ DWWRUQH\ DQG SUHSDUH IRU WKH LQWHUYLHZ ,I \RX (Steven M. Kowal, :KHQ 8QH[SHFWHG *RYHUQPHQW FKRRVH WKLV FRXUVH DGYLVH WKH DJHQWV WKDW \RX ZLOO EH $JHQWV 'URS ,Q 5HVSRQGLQJ WR 5HTXHVWV IRU ,PPHGLDWH KDSS\ WR FRQVLGHU VSHDNLQJ WR WKHP EXW FDQQRW GR VR ,QWHUYLHZV )RRG 'UXJ / -

QRZ ZLWKRXW ÀUVW VSHDNLQJ WR DQ DWWRUQH\ 5HSHDW WKLV VWDWHPHQW ZLWKRXW HPEHOOLVKPHQW LI WKH DJHQWV WU\ WR Additionally, as reported in a May 6, 2007 article in HQJDJH \RX LQ D GLDORJXH DERXW ZK\ \RX QHHG WKH DGThe Indianapolis Star, in May 2004, the FBI effectively YLFH RI D ODZ\HU 2I FRXUVH LI \RX KDYH DOUHDG\ UHutilized a series of 20 early morning surprise interviews WDLQHG D SHUVRQDO DWWRUQH\ RU FRQVXOWHG ZLWK FRUSRUDWH at the homes of various corporate executives in an In- FRXQVHO \RX VKRXOG QRW VXEPLW WR WKH VXUSULVH LQWHUGLDQD SULFH ¿[LQJ FDVH LQYROYLQJ FRQFUHWH FRPSDQLHV view, but rather, should advise the agents to contact that (Kevin Corcoran, 7KH %LJ )L[, The Indianapolis Star, DWWRUQH\

May 6, 2007) Some of the executives lied to the FBI during these surprise interviews, and one executive, af- 'RQ¡W WDON OLVWHQ /LVWHQ FDUHIXOO\ WR ZKDW WKH DJHQWV ter learning that the FBI wanted to talk to him, even WHOO \RX DERXW WKH QDWXUH RI WKH LQYHVWLJDWLRQ DQG WKH VWRSSHG DW KLV RIÂżFH DQG KLV KRPH DQG GHVWUR\HG LQ- UHDVRQ IRU WKH LQWHUYLHZ ,W PD\ EH XVHIXO WR SUHSDUH criminating documents. The Indianapolis Star article QRWHV VXPPDUL]LQJ ZKDW WKH DJHQWV WROG \RX ZLWKRXW described some of the ambush interviews in detail, in- FRPPHQW LPPHGLDWHO\ DIWHU WKH\ OHDYH ,I \RX FKRRVH cluding the following interview: WR SRVWSRQH WKH LQWHUYLHZ XQWLO \RX FDQ FRQVXOW ZLWK DQ DWWRUQH\ DYRLG DQVZHULQJ HYHQ ´EDFNJURXQGÂľ TXHVWLRQV In Noblesville [Indiana], Chris Beaver, XQWLO D IRUPDO LQWHUYLHZ FDQ EH DUUDQJHG DV RQFH \RX operations manager at Beaver Materials, VWDUW WDONLQJ LW PD\ EH GLIĂ€FXOW WR VWRS invited investigators in and offered them refreshments. He was calm and talkative, 2EWDLQ WKH EXVLQHVV FDUGV RI WKH DJHQWV EHIRUH WKH\ but he repeatedly denied any involvement. OHDYH His wife was getting their children ready 2ND QUARTER 2009

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(DFK HPSOR\HH VKRXOG XQGHUVWDQG WKDW GXULQJ DQ DWThis danger can be avoided by declining WHPSWHG VXUSULVH LQWHUYLHZ KH RU VKH KDV D FKRLFH DV to participate in the surprise interrogation. WR ZKHWKHU RU QRW WR DQVZHU TXHVWLRQV 7HVWLPRQ\ FDQ RQO\ EH FRPSHOOHG E\ D VXESRHQD IRU DQ DSSHDUDQFH EHIRUH D JUDQG MXU\ RU D UHJXODWRU\ DJHQF\ DW D ODWHU GDWH CONCLUSION ADVANTAGES TO CONDUCTING THE INTERVIEW 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 recollection, 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 exercise his or her Fifth Amendment right not to testify. Second, any later interview will likely be held at a govHUQPHQW RI¿FH QRW DW KRPH ZLWK WKH HPSOR\HHœV VSRXVH 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 interrogation. Fourth, by insisting upon the right to seek WKH FRXQVHO RI RWKHUV WKH HPSOR\HH LV QRW VDFUL¿FLQJ OHQLHQF\ RU WKH EHQH¿WV RI FRRSHUDWLRQ IRU WKH IROORZLQJ reasons:

What a company executive or other employee does when confronted with a surprise or “ambush� interview during a criminal investigation into an allegedly defective product is critical for both the employee and company. 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 company.

‡ ,W LV XQOLNHO\ WKDW OHQLHQF\ ZLOO EH ZLWKKHOG LI cooperation takes place at a later time; ‡ $JHQWV GR QRW KDYH WKH DXWKRULW\ WR JUDQW leniency; ‡ 6XEPLWWLQJ WR D VXUSULVH LQWHUYLHZ UDUHO\ terminates an investigation; ‡ ,I WKH HPSOR\HH PLVWDNHQO\ JLYHV LQFRUUHFW answers to the agent’s questions, any prospect for leniency may be compromised; and ‡ )LQDOO\ LW LV KLJKO\ XQOLNHO\ WKDW DQ\ VOLJKW advantage gained from immediate cooperation will ever outweigh the advantages of waiting. The real danger is that the information provided by the employee during the surprise interview will be incomplete, incorrect, or presented in a way that is subject to misinterpretation by the agents. 2ND QUARTER 2009

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Company ProďŹ le: Allied Energy America’s Return to Value How one company is making it happen! Investors today want an answer to a pressing question, “Where is my money safe?â€? With uncertainty in ÂżQDQFLDO PDUNHWV LQYHVWRUV DUH ORRNLQJ IRU VWDELOLW\ DQG 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 LQ WKH WZHQW\ ÂżUVW FHQWXU\ QHZ HPSOR\PHQW RSSRUWXQLties 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 FRQWULEXWHG WR D ERRP LQ UHDO HVWDWH DQG ÂżQDQFLDO PDUkets. But investors want to know where to put their money QRZ :KHUH FDQ WKH\ ÂżQG YDOXH WRGD\ WKDW RIIHUV ERWK 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 energy. With the world facing an economic crisis, energy is a sound investment option. Investing in America’s energy independence is good for both investors and the country alike.

HDUQLQJV GXULQJ WKLV WXPXOWXRXV HFRQRP\ KDV LPSURYHG VLJQLĂ€FDQWO\ $QG ZH H[SHFW HDUQLQJV WR LPSURYH LQ WKH IXWXUH Âľ 7KH FUHDWLRQ RI $OOLHG *DV 7UDQVPLVVLRQ LQ -DQXDU\ LV D JUHDW H[DPSOH RI $(,¡V JURZWK LQLWLDWLYHV 7KH PDMRULW\ RZQHG VXEVLGLDU\ ZDV FUHDWHG WR GHYHORS D QDWXUDO JDV GLVWULEXWLRQ V\VWHP IRU $(,¡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orward Thinking

In 2008, AEI extended its forward thinking with the creation of Allied Operating, LLC. This wholly-owned subsidiary manages and operates all of AEI’s properties in Rogers County, Oklahoma. As the number of oil The Future of Energy wells in Rogers County grew to over 50, it made sense to stop paying other companies to operate them. Now One company dedicated to America’s energy indepen- $OOLHG 2SHUDWLQJ LV D YHU\ SURÂżWDEOH FRPSDQ\ dence is Allied Energy, Inc. (PINK: AGGI). Allied Energy, Inc. (AEI) is a company committed to developing $FFRUGLQJ WR 6WHYH 6WHQJHOO WKH VXFFHVV RI $(, GHdomestic oil and gas resources and alternative energy. SHQGV RQ IROORZLQJ WKURXJK RQ VHYHUDO NH\ DUHDV AEI has acquired numerous properties to assure longterm growth. The company uses leading-edge geosci- /HYHUDJH DVVHWV WR EXLOG D VWURQJ ÂżUVW FODVV RLO ences and other technology to identify and develop and gas company; quality oil and gas properties. ,GHQWLI\ DQG GHYHORS VLJQLÂżFDQW UHVHUYHV through exploration efforts; ´5HJDUGOHVV RI WKH VWDWH RI WKH JOREDO HFRQRP\ $OOLHG %XLOG SURGXFWLRQ UHVHUYHV DQG RWKHU (QHUJ\ FRQWLQXHV WR JURZ DQG SODQ IRU WKH IXWXUH Âľ VDLG assets through diversity; 6WHYH 6WHQJHOO SUHVLGHQW RI $(, LQ D UHFHQW HDUQLQJV ,QYHVW LQ UHVHDUFK DQG GHYHORSPHQW RI UHOHDVH ´7KH FRPSDQ\ LV SURĂ€WDEOH DQG LWV TXDOLW\ RI alternative energy products. PAGE ( 44 )

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 engiQHHUV ÂżQDQFLDO DQDO\VWV DQG LQGXVWU\ H[SHUWV ZKRVH FRPELQHG LQGXVWU\ H[SHULHQFH LV HVVHQWLDO WR WKH VXFcess of each project. The company’s focus is to develop oil and natural gas reserves. To meet the demand for FOHDQ EXUQLQJ IXHO WKH FRPSDQ\ KDV PDGH VLJQLÂżFDQW investments in natural gas reserves and gas transmisVLRQ V\VWHPV WR JHQHUDWH VLJQLÂżFDQW UHYHQXHV IRU \HDUV to come.â€? AEI currently has about 6,000 acres of leased properties and more than 70 wells under development or approaching production in Rogers County, Oklahoma. Allied Operating LLC manages all of AEI’s properties LQ 2NODKRPD ,Q WKH FRPSDQ\ H[SDQGHG LWV GULOOing operations to Pawnee County, Oklahoma; southeast 2KLR )LVKHU DQG /HRQ FRXQWLHV LQ 7H[DV DQG 0RUJDQ County, Colorado. Growth In Adverse Conditions AEI has achieved impressive growth over the last few years when many companies downsized or went out of business. In 2006, the company reported over $5 million in revenue. Revenue increased to $9.1 million in $FFRUGLQJ WR UHFHQW DXGLWHG ÂżQDQFLDO VWDWHPHQWV the company reported revenue of $13.3 million for 2008. This is an increase of $3.2 million or 31.2 percent compared to 2007. The growth occurred during a period when oil and natural gas prices were falling. The FRPSDQ\ÂśV QHW LQFRPH EHIRUH WD[HV IRU ZDV PLOOLRQ 6HOOLQJ JHQHUDO DQG DGPLQLVWUDWLYH H[SHQVHV decreased from $5.5 million in 2007 to $3.2 million in 2008. The company attributes the lower costs to imSURYHG HIÂżFLHQFLHV DQG LQYHVWPHQWV PDGH LQ

Find Out More 7R ÂżQG RXW PRUH DERXW $(, SOHDVH YLVLW WKH FRPSDQ\ÂśV Web site at www.alliedenergy.com or send an e-mail to info@alliedenergy.com. 7KLV &RUSRUDWH 3URÂż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ÂżFXOWLHV GHPDQG IRU $OOLHG (QHUJ\ ,QF FRPPRQ VWRFN DQG WKH FRPSDQ\ÂśV DELOLW\ WR REWDLQ IXWXUH ÂżQDQFLQJ 0LFUR &DS 5HYLHZ 0DJD]LQH PD\ KDYH UHFHLYHG FDVK DQG RU VWRFN WR SXEOLVK DQG SULQW WKLV FRUSRUDWH SURÂżOH 0LFUR FDS 5HYLHZ 0DJD]LQH GLVFODLPHUV DSSO\ DQG PD\ EH UHYLHZHG DW KWWS ZZZ PLFURFDSUHYLHZ FRP GLVFODLPHU SKS %HIRUH LQYHVWLQJ LQ DQ\ VHFXULW\ \RX DUH VWURQJO\ DGYLVHG WR UHYLHZ DOO SXEOLF ÂżOLQJV RI WKH LVVXHU RI VXFK VHFXULW\ ZKLFK FDQ EH IRXQG DW ZZZ VHF JRY DV ZHOO DV WKH ZDUQLQJV SXEOLVKHG E\ WKH 6(& DW ZZZ VHF JRY LQYHVWRUV

)XWXUH ([SDQVLRQ DQG 'LYHUVLÂżFDWLRQ AEI embarked on another major expansion in 2009 when the company established Allied Alternative Energy, LLC (AAE). AAE has been working hard to develop alternative energy resources, such as wind, solar, and fuel cell technologies. The company recently entered into a partnership with a waste management company to develop renewable energy resources.

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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

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EDUUHO RI OLJKW RLO RQ WKH SODQHW +HDY\ RLO KDV WKH YLVwo mega deals* completed – but not visible in the FRVLW\ RI PRODVVHV RU WDU DQG LV H[WUHPHO\ GLIĂ€FXOW WR stock, in my opinion. XSJUDGH DQG WUDQVSRUW LQ IDFW VRPH RI WKH KHDY\ RLO LV PDURRQHG DQG FDQ¡W EH DFFHVVHG DW DOO 7KH UHĂ€QHPHQW , EHFDPH HQDPRUHG ZLWK ,YDQKRH (QHUJ\ 1$6'$4 DQG WUDQVSRUWDWLRQ SUREOHPV KLVWRULFDOO\ KDYH PDGH ,9$1 LQ ZKHQ , VDZ Ă€UVWKDQG WKH DVWRQLVKLQJ KHDY\ RLO QRW YLDEOH SURFHVV WKDW FRQYHUWV KHDY\ FUXGH RLO WR OLJKW FUXGH RLO , ZDV ZLWK D JURXS RI PRQH\ PDQDJHUV DQDO\VWV DQG 1RZ ZLWK ,YDQKRH¡V SDWHQWHG +7/ÂŒ SURFHVV D VROXKLJK QHW ZRUWK LQYHVWRUV IURP DOO RYHU WKH ZRUOG ZKR WLRQ LV DW KDQG :LWK WKLV SURSULHWDU\ WHFKQRORJ\ WKH KDG DWWHQGHG DQ LQYHVWRU URDG VKRZ LQ %DNHUVĂ€HOG &DO- FRPSDQ\ FDQ FRQYHUW KHDY\ FUXGH RLO WR OLJKWHU PRUH LIRUQLD 7KHUH ZH YLVLWHG WKH QHZ $HUD 3HWUROHXP SODQW YDOXDEOH FUXGH RLO 7KH FRPSDQ\ FDQ GR VR LQ KLJK YROD MRLQW YHQWXUH SURMHFW EHWZHHQ ([[RQ DQG 6KHOO 7KH XPH HIIHFWLYHO\ HIĂ€FLHQWO\ DQG LQH[SHQVLYHO\ RQH WKRXVDQG EDUUHOV D GD\ GHPRQVWUDWLRQ IDFLOLW\ KDG WKH ORRN RI D VPDOO RLO UHĂ€QHU\ ,Q ZKDW DPRXQWHG WR D 7KH +7/ÂŒ FRQYHUVLRQ SURFHVV LV H[WUHPHO\ HIĂ€FLHQW WZR GD\ RQ VLWH VHPLQDU ,YDQKRH PDQDJHPHQW JDYH XV $ERXW SHUFHQW RI WKH KHDY\ RLO LV FRQYHUWHG WR OLJKW D GHPRQVWUDWLRQ RI LWV DVWRQLVKLQJ +7/ÂŒ SURFHVVLQJ RLO (TXDOO\ VLJQLĂ€FDQW LV WKDW WKH UHPDLQLQJ SHUFHQW WHFKQRORJ\ LV SURGXFHG DV ´UHVLGÂľ IXHOV ZLWK VRPH HQHUJ\ OHIW RYHU 7KH SURFHVVLQJ RI WKH UHVLG FUHDWHV VWHDP D SRZHU E\ 6LQFH ,YDQKRH (QHUJ\ KDV PDGH PXFK SURJUHVV LQ SURGXFW LW WDNHV WKUHH EDUUHOV RI VWHDP WR H[WUDFW RQH GHYHORSLQJ LWV EXVLQHVV LQFOXGLQJ HQWHULQJ LQWR H[FLW- EDUUHO RI KHDY\ FUXGH RLO ,YDQKRH¡V +7/ÂŒ WHFKQRORLQJ DQG KLJKO\ VLJQLĂ€FDQW GHDOV %XW EHIRUH GLVFXVVLQJ J\ KDV DOUHDG\ EHHQ VXFFHVVIXOO\ DSSOLHG WR FRQWLQXRXV WKHVH GHDOV Ă€UVW OHW PH WHOO \RX DERXW WKH JOREDO KHDY\ ZRRG DQG ELRPDVV SURFHVVLQJ IRU RYHU \HDUV ZLWK RLO PDUNHW WKH LQJHQLRXV +7/ÂŒ KHDY\ WR OLJKW RLO VL[ FRPPHUFLDO SODQWV LQ RSHUDWLRQ SURFHVV DQG WKH FRPSDQ\ LWVHOI Bitumen (heavy crude oil) producers will be compelled 7KH ZRUOG¡V VXSSO\ RI FUXGH RLO LV JHWWLQJ VPDOOHU DQG to adopt Ivanhoe’s new breakthrough technology for VPDOOHU 0RVW RI WKH ÂśHDV\¡ VWXII WKH OLJKW DQG PHGLXP the following reasons: JUDGH FUXGH RLO ZLWK ORZHU SURGXFWLRQ FRVWV DUH TXLFNO\ GLVDSSHDULQJ ,Q IDFW WKH H[WUDFWLRQ RI WKH OLJKW DQG PH- 1. Expensive light oil or light oil synthetic substitutes GLXP FUXGH RLO WKDW FRPSULVH PRUH WKDQ SHUFHQW RI are not needed to dilute the oil for transport. The diJOREDO RLO SURGXFWLRQ KDV H[FHHGHG RQH WULOOLRQ EDUUHOV WR luents cost more than the lightest crude oil. GDWH 7KH UHPDLQLQJ UHVHUYHV RI OLJKW DQG PHGLXP FUXGH RLO DUH ORFDWHG LQ PDWXUH RLO Ă€HOGV RU LQ UHPRWH HQYLURQ- 2. Outside energy (i.e., natural gas) is not needed to PHQWV VXFK DV GHHS ZDWHU DQG XOWUD GHHS IRUPDWLRQV power the conversion. The upgrading process is selfDQG LQ FRXQWULHV WKDW DUH SDUWLDOO\ RU FRPSOHWHO\ FORVHG sustaining and fuels itself. WR LQYHVWPHQW E\ LQWHUQDWLRQDO RLO FRPSDQLHV 3. The process produces light crude oil with vastly im:KLOH OLJKW DQG PHGLXP FUXGH RLO LV TXLFNO\ GLVDSSHDU- SURYHG YLVFRVLW\ SHUPLWWLQJ HIÂżFLHQW SXPSLQJ WKURXJK LQJ WKHUH LV DQ DEXQGDQW VXSSO\ RI KHDY\ FUXGH RLO )RU SLSHOLQH QHWZRUNV 7KLV VLJQLÂżFDQWO\ UHGXFHV WUDQVSRUH[DPSOH WKUHH EDUUHOV RI KHDY\ RLO H[LVW IRU HYHU\ RQH tation costs by allowing the oil to be transported to more 2ND QUARTER 2009

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convenient processing and marketing points. $OVR KLJKO\ VLJQLÂżFDQW WR QRWH LV WKDW WKHVH VPDOOHU ‘satellite’ conversion facilities are inexpensive to set up. They use off-the-shelf components and can be deployed to remote sites with relatively small installations. This is in stark contrast to existing technologies that do not adjust well to the scaling requirements RI VPDOOHU SURMHFWV ,PSRUWDQWO\ WKH SURMHFW ÂżQDQFLQJV 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 percent. Price variances between winter and summer are W\SLFDO DQG FDQ EH VLJQLÂżFDQW 7KH KXJH SULFH VZLQJV FDQ KDYH DQ H[WUHPHO\ QHJDWLYH LPSDFW RQ WKH FDVK Ă€RZ 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 total 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. With a world-wide shortage of light crude oil, the marThis one deal can potentially generate about $1 billion ket for a conversion solution to address this predicaof revenues a year for 20 years. ment is indeed mind-boggling. During a recent conference call, Mr. Robert Friedland, Executive Chairman and CEO, spoke of “enormous opportunitiesâ€? and said that he had had “intensive dialogues with resource owners in 17 countries, most of whom are national oil companies.â€? Friedland later mused that the possibilities for Ivanhoe Energy are ÂłQHDU LQÂżQLWH ´

$FFRUGLQJ WR ¿QDQFLDO VHUYLFHV ¿UP 5D\PRQG -DPHV the superiority of Ivanhoe’s HTL™ process over the SAG-D type process (used by the competitor) is roughly 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 Canada alone has two trillion barrels of heavy oil re- 3XQJDUD\DFX KHDY\ RLO ÂżHOG ,YDQKRH (QHUJ\ /DWLQ serves. For perspective, Saudi Arabia’s oil reserves $PHULFD ,QF ZLOO XQGHUWDNH WKH ÂżUVW SURMHFW E\ GHYHOare said to be 300 billion barrels. The picture is clear; RSLQJ WKH PDVVLYH 3XQJDUD\DFX KHDY\ RLO ÂżHOG ORFDWHG there’s plenty of heavy oil out there, and Ivanhoe En- approximately 125 miles southeast of Quito, Ecuador. ergy has a next generation process to convert it to light oil. The numbers quoted are spectacular. “Ivanhoe Energy PAGE ( 48 )

2ND QUARTER 2009

plans to invest about $4.5 billion in the project and Ec- them they have found more crude oil on planet earth uador will pay $37 per barrel to extract the oil. Ivanhoe than anybody.â€? might produce 108,000 barrels of heavy oil a day at the 3XQJDUD\DFX ÂżHOG ´ Ivanhoe Energy now employs many former Occidental executives, 3-D seismic geologists, and geophysicists. At 108,000 barrels a day times 365 days a year times Further, with the acquisition of Ensyn, Ivanhoe Energy SHU EDUUHO \RX JHW D JURVV FDVK Ă€RZ QXPEHU RI acquired some exceptional mid-management talent. $1.5 billion per year at a fully operational facility. What you get with Ivanhoe Energy is a reformulated Occidental Petroleum in a new small-cap bottle. On July 8, 2008, Ivanhoe Energy completed a private placement of warrants to raise Can$88 million ($86 Ivanhoe Energy is now on the doorstep of numerous million). After the transaction, 52 institutions held 18 agreements that are expected to be signed within the percent of Ivanhoe’s common shares. next several months. As part of the new proposed deals, the company is asking for a percentage participaIt’s important to point out that Ivanhoe’s management tion (i.e., joint venture) in the oil producing property. team is a brain trust of entrepreneurial talent. Executives have legendary management experience on a glob- 7KHUH LV VLJQLÂżFDQW XSVLGH WR WKH FRPSDQ\ÂśV VKDUH SULFH al scale. They have a long and super successful history as deals are signed. In fact, I own shares in Ivanhoe of doing important international deals. Plus, they know Energy. where all the heavy oil is out there‌ and they know the SOD\HUV ZKR FRQWURO LW PDQ\ RQ D ÂżUVW QDPH EDVLV For analytical summaries of how these advantages are TXDQWLÂżHG VHQG PH DQ H PDLO UHTXHVW DQG ,ÂśOO IRUZDUG Robert Friedland, Deputy Chairman, is the largest you the Raymond James and Tristone Capital research VKDUHKROGHU 5REHUW LV DQ LQWHUQDWLRQDO ÂżQDQFLHU SKH- reports. nom who sold his nickel deposit company to Inco for $4.2 billion in 1996. He is also Chairman of Ivanhoe More information about Ivanhoe Energy can be found Mines Ltd. (NYSE: IVN), which is known for its Oyu at www.ivanhoe-energy.com. Tolgoi mine in Mongolia. The Oyu Tolgoi mine is recognized as one of the world’s largest copper-gold porphyry deposits. Robert is an entrepreneur and investor par excellence. He has raised billions in capital over 'U -RKQ )DHVVHO is a seasoned Wall Street the course of an incredible career. analyst who is widely recognized for his LQVLJKWV LQWR SXEOLF FRPSDQLHV DQG ÂżQDQDavid Martin is CEO and Chairman of Ivanhoe Energy FLDO PDUNHWV 'U )DHVVHO DGYLVHV ÂżUPV Latin America. A geologist, he was formerly CEO and EURNHUV DQG WUDGHUV +LV PDUNHW HYDOXPresident of Occidental Petroleum (NYSE: OXY) for ations cover global currencies, credit 26 years. markets, sector strength analysis, technical analysis, sentiment overviews, and both long-side and short-side Leon Daniel is Chairman and CEO of Ivanhoe Energy UHFRPPHQGDWLRQV )RU RYHU \HDUV 'U )DHVVHOÂśV Middle East and North Africa. He was formally Execu- On the Market reports have been widely distributed tive Vice President of Worldwide Business Develop- WKURXJKRXW WKH ZRUOG WR DQ H[WHQVLYH OLVW RI ÂżQDQFLDO LQment for Occidental Petroleum. He has over 40 years stitutions, investment banks, mutual funds, hedge funds, experience in the oil and gas industry that includes suc- EURNHUV IRXQGDWLRQV DQG KLJK QHW ZRUWK LQYHVWRUV FHVVIXO RLOÂżHOG SURMHFWV LQ 9HQH]XHOD 4DWDU /LE\D WKH 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 Daniel were at the helm at Occidental Petroleum during its great boom and growth years, and they say, “between 2ND QUARTER 2009

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The Next Course with Heidi ! 4!,% /& !24)3429 -!$% 3)-0,%x Heidi W. Picone

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he Upper West Side is making its imprint as a serious, upscale dining destination with restaurants like Dovetail. (YHQ LQ WKHVH GLIÂżFXOW WLPHV WKLV VPDOO streamlined restaurant was packed at 8:30 P.M. When we arrived, the friendly staff welcomed us at the door. They were all wearing ties. Once inside, you see a simple interior with grey carpeting, naked walls, and brick columns lit with candles. Struck by the somewhat stark surroundings, you wonder how the food will relate. The restaurant speaks of nature. 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 cornbread with parmesan cheese prepared by pastry chef, Vera Tong. We glanced at the menu. It was not your run of the mill menu, to say the least. It left you wanting to know more about chef John Fraser.

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 adventurous 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 ¿VKLQJ YHVVHO WR KHDU ELUGV SHFNLQJ RYHU 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.

buco, my husband’s favorite. The mix of lentils, carrots, and piquillo vinaigrette made the osso buco jealous. My husband felt he was dining in Tuscany, Italy. Such ambition made no surprise of the wine selection either. I was happy to see one page with wines priced under $75. We went with a 2006 Burgundy from Chassagne-Montrachet,Margeot-Clos Pitoris, 1st Cru. It was an absolute stunner and complemented our food to perfection. Pastry chef, Vera Tong, did not disappoint us with dessert. Her signature bread pudding was deceptively simple. The pudding blended perfectly with bananas, bacon brittle, and a tender scoop of rum ice cream. Simple food indeed had gone sophisticated! 'RYHWDLO ZDV GH¿QLWHO\ ZRUWK WDNLQJ 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)RU WKH ¿UVW FRXUVH ZH WULHG WKH VLJQDWXUH vate room with windows to view where crab ravioli with salty chorizo, chunks of all the action takes place – the kitchen. Chef John Fraser had an interesting back- sweet potato, all bound with a layer of ground. He was studying in California brown butter. Without saying a word, we Dovetail to become a doctor when his career took both gobbled it down. For the second 103 West 77th Street a sharp turn after he met none other than FRXUVH , KDG WKH KDOLEXW FRQ¿W 7KH IUHVK New York, NY Thomas Keller at The French Laundry in peas, spring onions, and morels took Tel: 212 362 3800 Napa Valley. Fraser’s exposure to fresh me from the ocean waves straight to the FDXJKW ¿VK ZDV JDLQHG E\ ZRUNLQJ QHDU ¿HOGV RI D FRXQWU\ IDUP 7KH GLVK ZDV 0RQWDXN /RQJ ,VODQG +H UH¿QHG KLV simple, yet highly delicate. My partner in artistry after spending time at Tailievert gastronomic crime had the striped bass. and L’Arpege in Paris, France. Return- 7KH GLVK KDG DQ XQXVXDO ÀDYRU RI RVVR

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