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We specialize in the management of equities, concentrating in the area of Small and Micro Capitalization companies. "Small Cap" generally means a security with a market capitalization of less than $1 billion. "Micro Cap" are generally considered to be all stocks with market capitalization as high as $500 million. Occasionally, we may take positions in larger companies when valuations are compelling and sentiment is negative. Most financial professionals agree that modern investment planning requires diversification between the various types of asset classes available. This is achieved through asset allocation and typically calls for some portion to be invested in "Small Cap" stocks. The risk is higher and so is the potential reward. We are dedicated to maximizing client returns, but do so with the preservation of capital foremost in mind. Small Cap investing requires full time professional management. We have over twenty years of experience with superior performance in this specialized area. Small Cap stocks have outperformed other major asset categories since 1926, according to Ibbotson Associates. Investing in micro/small cap stocks offers several desirable characteristics which tend to produce higher relative returns, including:Higher Growth/Nimble Operations Small companies grow from a smaller arithmetic base. It is easier to double sales of a $10 million company than sales of a $10 billion company. Small companies are usually in growing industries and find it easier to change their focus in response to market conditions. Smaller companies tend to be run by their founders or small group of managers who are more motivated to increase shareholder value. Small companies are usually in growing industries and find it easier to change their focus in response to market conditions. Greater Universe of Opportunities There is a larger universe of companies to choose from in the small and micro cap asset classes. A recent study by First Wilshire showed 86% of all U.S. public companies were small or micro cap (small capitalization is generally considered less than $1 billion). Most Wall Street firms spend all their research resources competing with each other for coverage of the other 14% of companies. Inefficient Market A larger number of companies increases the odds of discovering a hidden value. This is compounded by the fact that there is little, if any, research coverage of small companies by brokerage firms, creating a greater possibility of market inefficiencies. Also, because most small companies have relatively less shares freely trading, a liquidity problem exists, and this, to a large degree, prevents large institutions from investing in them. In-Depth Research Can Make the Difference Because large investment firms cannot invest in smaller companies, we are often the first analyst to visit in many years. Management of small companies are far more accessible and analysts typically have good rapport with top management. Due to the Investment Manager's experience in small cap stocks, we are able to help companies in ways to enhance shareholder value. We believe that most investors need some exposure to Small and Micro Cap stocks. The amount to invest will vary depending upon each client's particular financial circumstances. PAGE: Investment Process and Research FWSM believes that the investment process is best broken down into three components; research, trading and portfolio management. Success comes only when all three of these elements are coordinated and efficiently executed with patience and discipline. In the OTC market, there is often a wide spread between what an investor can purchase shares for versus what an investor can sell shares for. This makes good execution of trades' imperative. Results can be impacted negatively by the cost of transactions. This problem of limited liquidity in most Small Cap stocks makes it difficult to buy or sell and often creates higher spreads. We try to offset this issue by using two different but complementary approaches. We keep turnover low, usually less than 50% annually, and by working closely with various market makers in these stocks we can usually reduce the impact of these spreads. We patiently accumulate or distribute a large position in a stock in order to avoid unduly disturbing the price. This illustrates one of the ways we manage portfolios to serve our clients best. Our performance record demonstrates that superior returns can be realized by searching out long-term evolving values. This requires looking beyond the obvious. There are many guidelines we use in the measurement of value, but each security selected would most likely have some the following characteristics:Strong, credible management Relatively small debt and relatively large cash position Expanding cash flow Earnings growth superior to its industry and the economy in general Low P/E ratio relative to market average and growth rate Return on equity above Industry Average Sustainable competitive advantage Because of these selection requirements, our stock holdings sometimes are atypical of what you will find elsewhere. This is because we try to be initiators rather than followers. From pursuing this value approach, our portfolios will tend to include the following types of issues:Growth at a Discount The majority of First Wilshire stocks have fallen in this category. The Investment Manager seeks to buy companies growing earnings at 15% or more per year and above that are trading at price/earnings ratios below the market. First Wilshire often invests in emerging industries that are poorly understood by the investment community. Portfolios have often contained more than one company in these industries. It also might buy a single company servicing a growing niche market that is not addressed by other products or services. Finally it might buy shares of an out of favor company that is perceived by the investment community as slow growing, but it really is a growth company in disguise because of a new distribution channel, new product introduction, a new emerging business, or a new strategic focus. Deep Value/Pricing Inefficiencies First Wilshire seeks companies that are trading at very low valuations, such as P/E's less than 5, price to tangible book value less than 1, and market values less than cash. Generally these companies operate in mature industries and have been overlooked by investors for long periods of time. Often, these companies are consistently buying in shares and may make a bid to take the company private. Stocks with P/E's of three or four can double in price even without recognition by the investment community. Similarly, profitable companies selling for less than cash value usually return to normalized valuation fairly rapidly. Finally, a trading situation may occur where a large holder must exit a stock quickly, driving down the price to a temporary low valuation. To take advantage of such opportunities requires a fast and efficient analytical process. Turn Around Situations Good values often occur after the plight of a company, industry or market segment has been well discounted. The price pattern has usually traced out a long base formation and there is lessened current demand for the shares. Our initial interest would probably begin during this negative psychological environment. If our research proves fruitful, we would take an initial position and add to it as our confidence in the story increases. In these situations, a catalyst that would help investors recognize the value of the issue is a big plus. Such a catalyst might be a management change, debt reorganization, litigation settlement, regulatory change, new business line, or a renewed investor relations effort by the company. Our research is extensive and thorough. We continually search the Small Cap universe looking at companies for prospective investments. Once a candidate is identified, we undertake an investigation that typically includes not only an analysis of all financial figures, but also a visit to talk with management and personally interview the Officers. A tour of company facilities, and even interviews of its vendors, customers and lenders, helps us get an insight into the company that one cannot get by just reviewing financial statements. Only a small number of Companies we investigate eventually pass this screening. The final step is to present the candidate to our Investment Committee for consideration. Every security considered for purchase must pass the scrutiny of the Investment Committee, which is composed of our Portfolio Managers and Analysts. Since large retail brokerage firms generate most research, the net result has been a concentration in the most widely held stocks and a void in the coverage of many regional companies with modest capitalization. This creates opportunities to ferret out undervalued issues before they become generally well known. Early discovery gives us time to accumulate stock free from competitive pressures and before the company's value becomes more widely understood.