To OTC Journal Members:

I decided to publish the quarterly review early. This edition is important, and I thought I'd get it done before the long 4th of July weekend so all members had an opportunity to review it before escaping for the holiday.

I believe these eight companies comprise an outstanding microcap portfolio. All have reasonable valuations, significant upside, money in the bank, and strong industry groups. There are at least two or three on this list which could easily double, triple, or quadruple over the next year.
 

A Look Back at the Last 16 Months

Currently I am covering eight microcap companies. In today's edition you will find a quarterly review with an overview of each. In the last review I dropped coverage of several companies, mostly for failure to perform. This time, I'm not dropping any of them. They are all doing well, and unless the fundamentals change, they all have significant upside.

Prior to a brief overview on each, I think it would be instructive to look back at the last 16 months, which will give us some insight as to where we stand today and where we could be headed. 

In March of 2003 stocks came roaring back after a three year bear market. Once demand finally resurfaced, many microcap stocks moved up with little or no resistance. They were completely blown out, and anyone who wanted to sell had done so. The three year bear market left small companies starved for expansion capital. It was a very "Darwinian": The strong survived and mutated into a stronger species. The weak died.

Small stocks moved up as the economy picked up steam. By the 4th quarter of 2003, many had appreciated to reasonable valuations, and the availability of equity capital resurfaced. Every one of the eight companies I am reporting on today has done some sort of equity financing in the last year. These companies all needed money to feed growth.

Typically, equity financings come in the form of "PIPES" (private investments in public equities). The company issues new shares to fund managers, generally at a discount to the prevailing market. There is more risk, because the shares are not free trading. The money goes directly into the company's treasury and can be used for expansion.

Subsequent to the financings, the companies then file a registration statement with the SEC in order to allow the newly issued shares to become free trading. In past years, this has been a lengthy process.

For some reason, 2004 has been different. Registration statements are moving more rapidly through the process than in times past.  Registration statements which I would have expected to take 6 months are clearing in 6 days. This has created an unexpected excess supply of stock in many companies before they have had time to invest the capital and demonstrate growth.

In conjunction with the excess supply, we have had a fairly severe correction. Fund managers who might have patiently liquidated stock slowly over time have been quick to pull the trigger. Many are suffering nasty hangovers from the three year bear market. Professionals are much more afraid of short term losses than those who manage their own money. They are managing other people's money, and money losses equate to job losses in their world. As long as you don't lose money, you stay alive.

Financings, an accommodating SEC, and the correction have brought us to where we are today. Like a cruise missile, stocks have zeroed in on support levels. For the most part, stocks have dropped almost exactly to the point where financings were down earlier. This is not a coincidence. Once these fund managers hit the break even, they are unwilling to sell. The companies are performing too well, and there is no need to lose money. 

This is not 2000/2001 all over again. Circumstances are different. The big three body blows to the market (the bubble bursting, 911, Enronitis) are behind us. We survived, and its full steam ahead in the economy. Corporate growth and earnings are outstanding. Higher interest rates, geopolitical risks (higher oil prices), and the uncertainty of a Presidential election have slowed the market, but the tide appears to be turning.

Here are eight ideas. Each one can be accumulated at or near levels fund managers were willing to put in millions. Once supplies dry up, look for much higher levels. Accumulate any or all. The choice is yours. They are presented in the order I began covering them, starting with the earliest.
 

Family Room Entertainment (OTC BB: FMLY)

• Shares I&O: About 72 million
• Market Capitalization: $5.76 million
• Recent Financing: Done at $.07 

I continue to love this as a long term speculation with significant upside. When you look at the company 2 years ago vs today, there is no comparison. They made a bunch of "C" movies which went straight to cable. 

Now, their movie production schedule is a whole different story. They produced "Edison" earlier this year, featuring Justin Timberlake, Kevin Spacey, Morgan Freeman, and LL Cool J. The film will be in movie theaters next year. It is sure to get a lot of buzz, as it will be Timberlake's movie debut.

In September they will begin filming a movie with Al Pacino. This is important because it is the highest profile star they have ever produced for, and they will get a percentage of the box office for the first time in their history.

The company has announced it will be cash flow positive for the first time in fiscal 2005, which starts July 1. They have four revenue sources over the next several months: 2 Steven Seagal pictures, the Al Pacino picture, and a property fee from the Amityville Horror movie. 

One hit, and this stock will run. Two big movies will hit theaters next year, and they will be producing more for the following year. The stock is not too exciting, but also not too risky. For long term investors who are willing to wait for a huge home run. From the current market cap there is a lot of upside potential.
 

VirTra Systems (OTC BB: VTSI)

• Shares I&O: 52 million
• Market Capitalization: $20 million
• Recent Financing: Equity Line

All the gains were achieved in the fall, when the company started to get traction on its virtual reality judgemental-use-of-force simulator. This is a fantastic product and should sell very well. This company will grow from both domestic police sales and international government sales. 

The stock has held up very well because they haven't done a major financing. The company has been raising capital in very small amounts through an equity credit line. A few pre registered shares are sold into the market when the stock is trading well, and the capital goes directly to the company. There has been no major excess supply with the exception of one block from a former employee.

The company has sold a number of individual units to a police department, the Air Force , the Department of Defense. International sales include Mexico and India. 

I expect the company to continue to deliver lots of "singles" in the immediate future. The big home run will come with multi unit follow up orders. If they gain multi unit traction, the company could deliver $10 to $25 million in 2005. Long term price target: $1.
 

NetWork Installation (OTC BB: NWIS)

• Shares I&O: 13.8 million
• Market Capitalization: $41.5 million
• Recent Financing: $3

The company has expanded rapidly in 2004, opening new sales offices in Phoenix, Las Vegas, Sacramento, and Seattle. They acquired Del Mar Systems in San Diego, which added another $1 million in annual revenues and some new product lines.

The company should deliver about $1 million in revenues in the June quarter. Considering they achieved $1 million in all of 2003, the growth rate is 300%. I expect growth to continue to accelerate as the new sales offices begin to deliver contracts.

The stock did extremely well through the first quarter of 2004, but fell on harder times in the April/May sell off. When you consider we started at $.80 last August, the stock has been a win. However, it is currently trading at $3, down from a $5.50 high.

$3 is the exact price at which the company recently completed a $2.2 financing. It's a great level to accumulate. Look for growth, growth, and more growth from this company. The financing was small, so it shouldn't take too long to absorb the excess supply.
 

HyperDynamics (OTC BB: HYPD)

• Shares I&O: 41 million
• Market Capitalization: $102 million
• Recent Financing: $.80 with no registration rights

The political turmoil in West Africa has slowed offshore oil development, but it seems to be getting on track. The Fall auction of several sections near he tiny island nation of Sao Tome brought hundreds of millions, and drilling is getting started.

HyperDynamics has been completing seismic studies on its concession. The early returns suggest there are sizable hydrocarbons which can be exploited. 2d seismic studies have been completed.

In the initial studies the company identified a number of "gas plumes". Apparently, hydrocarbons are just seeping out of the ocean floor. They have retained a study vessel to measure the gas plumes. Studies are expected to conclude by the end of the summer.

Originally, the company had planned to drill a few test wells before entering into a partnership with a major to develop the field. Management now feels the next studies will give them all the data they need to find the right partner.

Recently, the former Chairman of Ford Motor Company and board member at Kellog's and Shell Oil joined the board of directors, giving the company a lot of credibility.

The right deal with the right major company and this one is off to the races. In the meantime, there are no revenues, the project is not proven, and there is some political risk. 

The stock has not given much ground despite the low priced financing. This is because there were no registration rights with the deal. The shareholders all have to hold for a year.

Risky, but huge upside.
 

NuTech Digital (OTC BB: NTDL)

• Shares I&O: 22 million
• Market Capitalization: $11 million
• Recent Financing: $.40

We got a double after three days with this one, but it's been all down hill ever since. The financing they did in February was priced too low for the market at the time, and they did it with the worst kind of investors. As soon as the shares were registered, the stock headed straight for $.40 like a homing pigeon.

NuTech delivers about $4 million in annual sales as a DVD distributor. The company is consistently cash flow positive, which mitigates a lot of the risk associated with owning the stock.

NuTech did nothing to help its cause with its March quarterly performance. The company demonstrated no growth over 2003 results. However, due to large order delivery to new customers, the June quarter will be the best in corporate history.

The company also is working on a couple of wild cards, which could change the multiple the stock will get considerably. They are in the concert DVD production business, and have completed a couple of small deals. This makes them a content creator, as opposed to just a content reseller. These kinds of companies garner a much higher multiple in the market.

In addition, they have developed some very exciting technology for viewing movies over the internet. It is better than anything I have ever seen, and if the right deal is struck, look out above.

The company is closing in a several very high profile deals in the concert DVD series. The stock has been completely blown out, and is finally headed back up.

This stock has the most upside of any I cover during July. There will be minimal supply between $.50 and $.75. Above $.75, the market will have to deal with 13 million $.75 warrants in the hands of investors with itchy trigger fingers. 

Look for NuTech to rebound nicely in July.
 

NeWave Corp (OTC BB: NWAV)

• Shares I&O: 10.8 Million
• Market Capitalization: $37.8 million
• Recent Financing: N/A

Individuals can get the service for a mere $29.95 per month. The company started operations last August. From a dead stand still, the announced revenues of $600k in May, equating to an annualized revenue run rate of $7.2 million. Since getting started, over 50,000 people have signed up and paid for the service at one time or another.

The company has about 60 full time telemarketers who do nothing but handle incoming calls. The phones ring 4,000 times a day, for fifteen hours straight.

During June, they moved into a new facility. They outgrew their existing space, and have had to add personnel to handle the call volume. The move has not gone smoothly. They have had technical problems with their new phone switch. Consequently, I am anticipating June will not be as robust as May. 4th of July weekend will also slow call volume considerably.

This is the hottest growth company I currently cover. Their margins are outstanding- gross margins run 90%. Their growth rate is accelerating. I am looking for $10 on this one longer term. No one knows about it yet, but when the market figures it out, the stock will take off.
 

American Water Star (AMEX: AMW)

• Shares I&O: 75 million
• Market Capitalization: $85.5 million
• Recent Financing: $.90

They bottle and sell tropical flavored non carbonated beverages under the Hawaiian Tropic level. They are sugar free, carb free, and caffeine free. Wal-Mart ordered the beverage for delivery to 1208 superstores around the country, and the beverage sold through before the company could get free demonstrations going. They are bottling for reorders with Wal-Mart right now.

Before year's end, I expect the company to expand both vertically and horizontally. A number of grocery store chains should start carrying the beverages, and new product lines in the "low carb" theme will be introduced. I particularly like their coming line of low carb drink mixers.

American Water is implementing a strategy to acquire bottling facilities. They are buying up smaller bottlers who have suffered from the oversupply of bottled water. When completed, they will have a self owned bottling facility within 500 miles of any location in the continental US and Hawaii. That's one hell of an infrastructure for reducing costs.

I look for American Water to turn the corner into 2005 annualizing at $100 million in sales. I like about $2.50 as a minimum target price if those sales levels can be achieved.
 

Aegis Assessments (OTC BB: AGSI)

• Shares I&O: 18 million
• Market Capitalization: $57.6 million
• Recent Financing: $1.50 with no registration rights

I have received several responses from members looking at other technologies. I thoroughly researched them all, and nothing compares.

Their "Radio Bridge" product solves the problem of varying response agencies communicating with each other at a disaster site. They are all on differing frequencies, and consequently are out of touch.

For $20,000, response teams can acquire a device about the size of a brief case. As emergency teams show up at a disaster site, they simply plug one of their radios into the radio bridge, and every one is talking to each other. I can easily visualize thousands of these in the trunks of police car and fire chiefs all over the US.

Their first order for 200 units came last month from a New York based distributor. Manufacturing is beginning in July, and the order will start being filled in August. 

They have also developed a mobile command center which integrates voice, data, and video over a mobile wireless network, and a Safety Net System for protecting buildings.

Look for accelerating sales later in the year. The stock hasn't traded too well yet, but I believe this one has huge upside potential. 

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