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Emerge Capital Corp.
provides business restructuring, turnaround management, and advisory services for emerging
and re-emerging public and private companies
Emerge Capital Corp.
109 North Post Oak Lane, Suite 422
Houston, TX 77024
Timothy J. Connolly
Chief Executive Officer
Interview conducted by:
Lynn Fosse, Senior Editor
June 1, 2006
Actively engaged in the development of companies for over twenty-five years, he has been
the Chairman, President or CEO of numerous private and public companies, and has been
interviewed on many radio and television networks throughout the U.S.A. He is particularly
skilled in the areas of short and long term strategic planning and executive, capital
formation, mergers and acquisitions, marketing, sales strategy and crisis resolution.
Emerge Capital Corp. provides business restructuring, turnaround management, and advisory
services for emerging and re-emerging public and private companies through its wholly
owned operating subsidiary, Corporate Strategies Inc. (CSI). CSI helps micro-cap public
companies accelerate growth and provides working capital, management restructuring and
turnaround expertise, and in select cases, makes direct investments in our client
companies. CSI markets its turnaround services to hedge funds, institutional investors and
banks that have significant exposure in troubled micro-cap public companies. Typically,
these companies are in operational or financial difficulty, may be in default of lending
or equity agreements, and may be facing bankruptcy or liquidation if their operations are
not turned around. CSI is compensated with cash payments on a monthly or quarterly basis,
and the most significant part of our compensation is in outright grants of equity in the
form of common stock, and/or warrants for purchasing common stock. We believe this
compensation plan aligns our interests with the client company and its shareholders
because our ultimate compensation is determined by successfully increasing shareholder
value. This performance-based arrangement clearly demonstrates that our interests are
consistent with the goals of our clients, their shareholders and the shareholders of
Emerge Capital Corp.
CEOCFO: Mr. Connolly, Emerge has recently become a public
company; what changes have occurred and what do you see for the future?
Mr. Connolly: Our Company is primarily focused on
turnaround, strategic planning and business development of public companies. One of the
primary partners in the company is Fred Zeidman, who has been involved in these
turnarounds and public restructuring companies for many years. He has done a turnaround of
Seitel (SELA) a $400 million dollar market cap company and recently finished a major
recovery for the shareholders of AremisSoft Corporation, which was a $288 million dollar
recovery in a stock fraud case; one of the largest recoveries in stock fraud that is in
the history of statistics. Fred and I have been involved for years in building companies
and helping companies restructure. One of the reasons we named our company Emerge Capital
is that we want to bring our skills to emerging and reemerging public companies because so
many times we see the opportunity to rebuild what was fundamentally a good business plan,
but may have been poorly executed. We are generally referred by funds or institutional
investors who have put money into the companies and are concerned about their own
investment. We come in to develop a plan, restructure it, do the turn-around management
and then provide continuing advisory services in those companies as they
CEOCFO: Are you
primarily compensated with stock?
Mr. Connolly: Yes, that is what is unusual about our
company and we see it as a key differentiator. Most of the turnaround management people
out of the market require large retainers, a lot of monthly or quarterly compensation, and
then if the investors, lenders and stakeholders are lucky, they turnaround the company and
off they go. We decided that we wanted to develop a business plan to closely align our
interest as the outside professional with the interest of the stakeholders, the
shareholders and everyone who has a stake in that company. We did not want to be seen as
just another level of overhead and people saying I hope these people succeed. We take a
small retainer from the companies in order to help defray our overhead costs, but the vast
majority of our compensation is in stock of the target company. Whatever that company
does, we are betting that we can make it better. We are betting that our efforts are going
to result in an enhanced perception in the market and hopefully, increase price in the
stock. As the price of that stock increases, all of the stakeholders benefit from our
work, and hopefully we have a substantial benefit from having had a large number of shares
as an incentive to turnaround the company.
CEOCFO: How do you
decide whom to take on as a client and what insights have you developed to know what is
likely to be successful?
Mr. Connolly: It is an interesting question because it
is different for virtually every company. When we assess some companies, we have to go
back and report to that institutional investor or a large stakeholder that this is one you
will have to let die. There are companies that we look at that simply cannot be saved.
Part of our business and our model is the honesty in telling that to the investors. We do
an assessment of all the companies and we look at what market they serve, is it shrinking,
is it growing? Does it have a defensible position in the market, and is it a company that
was strictly a development company that never developed its products? Does it have a
prayer of penetrating the market or is there something unique about the company that would
make it interesting enough for the market and to us, to invest our time and money in this
company. It does not get determined by a specific industry, but a specific opportunity.
For instance, we just took over a company that is a 38-year-old specialty circuit board
prototype manufacturer in the Boston area and Brandon, Vermont. That particular area of
the market has been badly damaged by Chinese suppliers. This particular company has
actually lost half of its revenue in the last 24 months to Chinese suppliers. When we went
in and looked at the company, we saw that they have unique skill sets and a unique
position in the defense industry that they provide circuit boards and other products to
defense contractors. I doubt very seriously if the builders of the Apache helicopter are
going to let the Chinese build their circuit boards. We interviewed customers, interviewed
vendors, looked at the market and decided it was worth taking the risk. We see it as a
unique defensible opportunity worth spending our time on. We believe that the company in
the next quarter may actually be cash flow positive, having hemorrhaged over the last
couple of years.
CEOCFO: How many
companies can you work with at a time?
Mr. Connolly: What limits our ability to do what we do
is having good quality bankers that have been through the process of building and
rebuilding companies. Some of the opportunities that we see are a building process. It may
be a company that has a very good product, has a market, and does not have the systems or
controls in place to properly build a business. That is one group that we serve. When we
get into restructuring and the turnaround side of the business, it is very helpful to have
people that have done that before because typically we are going to be replacing
management when we come into the company. Early on in the process is relatively management
intensive and we have to have the resources to do that. Fortunately, we have bench
strength here of experienced executives and people that have done this in the past. Where
does that limit us on numbers of companies per year? That is difficult to say. It is based
on what is the available talent in that market for the industry, how long the turnaround
will take, and how much of our resources we want to devote to it. If it is something with
a huge upside, naturally, we are willing to put more resources in that, than a smaller
transaction. It is hard to give you a stock answer that we can do ten companies a year; it
depends on the size and the upside.
CEOCFO: Why should
investors be interested in Emerge?
Mr. Connolly: One of the things that we believe makes
us truly unique is that Emerge has the possibility of delivering venture capital like
returns for our equity in these companies. We took on a company last year that needed to
be restructured to not only fight a lawsuit but also prepare to bring their product to
market. Their stock was trading for three and over a period of roughly fifteen months,
that stock has now traded as high as eighteen. We have seen the company not only win its
lawsuit, and have defined itself in the technology in the market, but are now beginning to
manufacture its products. They are into a completely new part of its market
capitalization. We believe this model can be reproduced repeatedly. We also believe we are
going to see more opportunities as we get into 2007 and perhaps the latter part of 2006.
There is roughly one trillion dollars that has been invested in hedge funds and a
tremendous amount of that has been invested in micro cap companies. We believe we will see
more opportunities from hedge funds who need professionals to come in and work on
restructuring and turning around these companies. Because we are willing to do it for
equity and take stock, we believe we can negotiate a very, very good package that can
deliver significant returns for our shareholders for turning around those companies and
that is exactly what we intend on doing.
CEOCFO: So it is a good
way for shareholders to be involved with a variety of companies without having to find the
Mr. Connolly: Exactly! We do all the homework, get out
there and work on the fundamental business model of those companies. We analyze whether
they are viable or not and once we get past the viability issue, whether they are a
candidate that we are willing to invest our human resources in. When we invest our human
resources we believe we can get a return of at least five to ten times on our time and
CEOCFO: How do you know
when your plan is not working and you need to give up?
Mr. Connolly: Fortunately, since Fred and I have been
implementing this plan over the last two years, we have not had a single client that we
took on as a restructuring case fail. We have had one of our business development clients
fail, and in that particular case, it was an issue of the board and management not willing
to take on the hard decisions that we had given them to do. Sometimes you just have to let
go and in that case, we had to walk away from the company because management and the board
just was not executing the way we expected them to do it.
CEOCFO: Are you looking
to reach out to the investment community?
Mr. Connolly: Since we have recently become public and
the name has been changed only in the last two or three weeks, we are just now beginning
to develop what we see as the appropriate communication for the market for what we do. Our
next steps are going to be interviewing the right PR and IR professionals and getting our
message to the market. The nice thing about our message is it is intended to touch
institutional investors because that is whom we serve. By going out and getting in front
of the brokerage community and the financial reporting community, we feel we have two
opportunities every visit that we make. One, we are talking to people about our stock as a
possible investment, and two, those very same people have investments in companies that
are troubled that they may refer to us to do the work.
CEOCFO: What do you draw
on from your background that is most helpful to you in what you are doing now?
Mr. Connolly: Very early in my career, I funded a
restaurant chain that was run by my brother and two very good friends. This chain was
developed from a tiny concept of a Dairy Queen that was converted into a bakery in Austin,
Texas and then into a sixteen-unit restaurant chain, doing many millions of dollars in
sales per year. The restaurant chain over expanded. It had roughly half of its restaurants
that were profitable and half were not. They waited too long to make the hard decisions,
to close down the restaurants that did not make money in order to preserve the jobs,
restaurants and income for the restaurants that did make money. That was the most powerful
lesson of my career and fortunately, it came early. I think of it every time I have to go
through the pain of recommending lay-offs and closures. I am recommending not only based
on my personal experience, but also based on what is best for the people remaining, the
customers and their families and for that company to be leaner and healthier. That is what
I call on many times when it comes to the tough decisions. I have to remember what happens
when we make bad decisions. That restaurant chain went into bankruptcy. The restaurants
were sold, and several of the sixteen restaurants are still opened today, twenty years
CEOCFO: In closing, what
should our readers remember about Emerge?
Mr. Connolly: I think that the first thing they should
remember is that Emerge is an opportunity to participate into buying into companies on a
very inexpensive valuation. When you merge capital types on a client, we are getting
equity on that client at a very, very favorable price. You get the opportunity to invest
in a company that is not only buying stock right but also a reflection in Emerge capital
stock from realizing those gains and passing it through to our shareholders.
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