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Date: Wed, 30 Jan 2002 18:18:56 -0800 (PST)
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To: h..lewis@enron.com
Subject: Reaching The Breaking Point
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[IMAGE] =09
[IMAGE] Dow Jones [IMAGE] 9762.86 + 144.62 6:08 pm EST, Wed., January 30,=
2002 [IMAGE] NASDAQ [IMAGE] 1913.44 + 20.45 For info, visit www.smallcap=
network.net . [IMAGE] S & P 500 [IMAGE] 1113.23 + 12.59 To be removed, p=
lease click here . [IMAGE] Russell 2000 [IMAGE] 479.72 + 5.74 VOLUME 0=
2: ISSUE 9 =09
[IMAGE]=09
Reaching The Breaking Point Is anyone else sick and tired of the financi=
al "scandals" being harked by the media? Companies are blaming auditors wh=
ile auditors are blaming Wall Street and Wall Street is blaming everybody. =
Members of Congress are jumping on the bandwagon denouncing the companies.=
These are the same companies that helped finance their campaigns. This d=
rama is starting to resemble the Jerry Springer show and it is doing harm t=
o investors' faith in the market. Publicly traded companies are expected t=
o conduct themselves in a respectable manner. This means no shredding of d=
ocuments and no actions of management that undermine the integrity of the c=
ompany. Is it too much to ask for? In just the past few weeks we have ha=
d some high profile cases. [IMAGE]ImClone Systems (IMCL ) is being inves=
tigated by the SEC and the Justice Department. The company is accused of m=
isleading investors of a highly touted colon cancer drug called Erbitux. CE=
O Samuel Waksal told investors on a conference call that he was "stunned'' =
at the FDA's decision to refuse the cancer drug application for Erbitux. Ho=
wever a copy of the FDA's rejection letter was obtained by The Cancer Lette=
r. It suggests Waksal and his brother Harlan knew, or should have known, th=
at the FDA had serious concerns about the way the company conducted a key c=
linical trial. To add fuel to the fire, Harlan Waksal filed a Form 144 wit=
h the SEC on Dec. 6 to sell 700,000 shares of ImClone stock. At the time o=
f the filing the stock was at its 52-week high of $75. Call it coincidence=
if you will but investors feel cheated. [IMAGE] Global Cros=
sing (GX ) filed for bankruptcy this Monday. Company Chairman Gary Winnick=
was a former Drexel Burnham Lambert sales executive that joined the junk b=
ond business in 1972 and left in 1985 which was five years prior to the fir=
ms collapse. It is somewhat ironic that Global Crossing's inability to pay=
off its debt caused the company to fall. Unfortunately for GX, Drexel isn=
't around anymore. There is a winner in all this and that is the Winnick. =
He started the company with a little over $20 million investment and over =
the last three years he has managed to sell over $600 million worth of stoc=
k. [IMAGE] Tyco (TYC ) has always had bears scrutinizing over the co=
mpany's accounting. The Enron collapse prompted the company to announce a =
breakup into four units which would "maximize shareholder value". It seeme=
d like a defensive move and the market responded by selling the stock. The=
n some troubles hit when it was revealed the company paid $10 million to ou=
tside director Frank Walsh and an additional $10 million to a charity of wh=
ich he is a trustee. This prompted another sell off. In this environment, =
anything that even hints at impropriety will cause investors to jump ship. =
[IMAGE] Anadarko Petroleum Corp. (APC ) fell as much as 7.=
4 percent on Wednesday after the largest U.S. independent oil and gas produ=
cer said it restated third-quarter earnings to include an additional $1.7 b=
illion in charges to reflect lower values for its U.S. oil and gas assets. =
The problem was that the accountants had used the wrong figures to calcula=
te the worth of some of the company's U.S. energy properties. Brownie poin=
ts go to Anadarko for correcting the error but you have to wonder if manage=
ment would've been so swift if it not for Enron. It may be painful now bu=
t good will come out of all this. Companies will face intense scrutiny when=
they report their earnings. Stocks may be hurt in the near term but overa=
ll there will be a shift to a higher quality of reporting. The companies=
listed above are predominantly large corporations and cover four different=
industries. The problems are in no way relegated to a certain industry. =
The bottom line is huge consulting fees are paid by big companies. This i=
n turn creates a greater incentive for the accounting side to make sure the=
ir clients make their numbers. It is equivalent to an investment bank havi=
ng their "analysts" issue a buy rating on a company that does banking deals=
with them. With all the turmoil right now many investors are pulling the=
ir money out of the markets. A poll by Investors Business Daily showed tha=
t 40 out of 50 executives polled believe there are other companies with acc=
ounting irregularities. This is frightening but it most certainly does not =
mean investors should not buy stocks. On the contrary, there are some very=
exciting things happening in the world being made possible by companies th=
at are publicly traded. The challenge is finding these companies. Whereas=
in the past, investors put their money in the stock market and expected si=
gnificant returns, now we are in a market of stocks where it days some seri=
ous work to find the winners. Innovation is not going to stop. Can peopl=
e afford not to be invested in the future? The SmallCap Digest has always=
advocated diversification. This means a well balanced portfolio consistin=
g of companies in different sectors with varying market caps. All the trou=
bles currently in the market have been mostly isolated to large companies. =
Small cap companies are always in a "prove it" mode because they have no=
institutional coverage and must win over investors with their performance.=
They face more scrutiny, thus making for a less likely chance of "Enroni=
tis". In about one week we will be profiling a biotech company that has p=
assed our due diligence test. This company is already generating very impr=
essive sales and looks to be profitable this year. Coupled with strong ins=
titutional backers, a rarity for a company of it's size, this medical devic=
e maker is poised to make a big splash when it debuts. The company will be =
going public through an RTO, and it will open for trading on the American S=
tock Exchange. (Subscribers are encouraged to read our expose on Enron )=
=09
D I S C L A I M E R :[IMAGE] The SmallCap Digest is an independent electro=
nic publication committed to providing our readers with factual information=
on selected publicly traded companies. SmallCap Digest is not a registere=
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ward maximizing the upside potential for investors while minimizing the do=
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Readers can review all public filings by companies at the SEC's EDGAR page=
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