Wellfleet Partners, inc.

There is an amusing anecdote about the renown Inspector Sherlock Holmes and his trusted sidekick Watson. Once, while the sleuth was investigating a case in the desert he left the campsite for the day and by nighttime, to their great chagrin, their tent had been stolen. While standing on their tent site, Holmes asked Watson to look up and tell him what he saw. Thinking this was either a test of his astronomical skills or an attempt to figure out their location based on the heavens above, Watson went into a 20 minute dissertation about the stars, moon and the milky way. After several minutes of silence post Watson’s response and realizing it might not have been the answer sought, Watson asked: "What is it you see? "Without a moments hesitation Sherlock Holmes responded: Someone’s stolen our tent."

The morale of the story is simple: Often the answer to life’s great dilemmas is simple and right in front of our eyes. All we need is the proper perspective!

"No calamity truly public can happen, while these institutions (the Treasury and the Banks) remain sound."

Alexander Hamilton

In a disappointing yet not all together unexpected development, the bible of venture capital, the Industry Standard recently closed down. As many other "new economy" enterprises whose short-term financial prospects were dismal, lead investors and conservative VCs have recently tended to prefer to cut their losses and close down non-performers rather than fund a bridge loan or raise another round of financing. Thus, our industry has created an unfortunate self-fulfilling prophecy for failure: innovative ideas requiring currently risk-adverse capital. As an example, according to the National Venture Capital Association, VC disbursements in the US technology sector in 2000 was $86.2 billion; during the first half of 2001, it was a mere $17 billion. What are all these banks and/or Angel Investors doing? Some are simply out of business; others have dramatically pared down their fund’s and company’s overhead; others are spending most of their time doing triage or merging and downsizing their investments into other companies, and others still are simply staying on the sidelines. Yet there is still another VC-type that is as active as ever. Some of the more aggressive VCs are scouring the ocean floor, looking for bargains and revisiting old relationships and companies looking for newly attractive investment opportunities. They are still investing in start-ups yet much more carefully.

"The artist doesn’t have time to listen to the critics. The ones who want to be writers read the reviews, the ones who want to write don’t have the time to read reviews."

William Faulkner

As previously stated, raising capital these days (non-funds) is practically impossible for private companies. The IPO market is all but shut as well, thus, how are public companies seeking or needing capital to succeed? One current answer is PIPES, or "private investment in public equity." Generally, large, accredited investors and/or institutions arrange to buy large blocks of unregistered public equity at a discount (generally 15 - 20%) with the right to have the aforementioned company file a registration statement to register their shares within 90 days or so. Until recently, PIPES were the realm of opportunistic off-shore hedge funds that exploited troubled companies. Affectionately referred to as "death spirals", the Company would continuously issue registered stock at a pre-determined discount to its market price and the hedge fund would short the stock and eventually cover at lower prices. Today the PIPE marketplace is becoming more legitimate and companies such as Rite Aid, Amazon.com and VerticalNet and investors such as the Wisconsin Investment Board and Forstmann Little have participated in them. We at WPs are proud to have participated this quarter in our first PIPE with our brokerage affiliate KSH Investment Group, Inc. for Synergy Brands, Inc. (NASDAQ Symbol "SYBR"). WPs found, negotiated, structured and participated in the aforementioned PIPE and we, together with KSH who has extensive experience with PIPES, are looking to close several others this coming quarter.

The private equity markets are so in vogue that there are attempts to bring liquidity to venture capital by the formation of the New York Private Placement Exchange (NYPPE). Started by an ex-Bear Stearns Managing Director, a secondary VC firm or Angel Investor purchases a portfolio from another VC or limited partners and then holds, manages and/or resells them again. With the acute need for liquidity for some sellers and an abundance of restrictive securities (NYPPE estimates as much as $2.5 trillion worth), this could be an idea whose time has come (Red Herring – September 15th, 2001). Also, BD Direct Capital and Coast Capital Partners recently announced a joint venture called BD Coastal to advise institutional investors on securitising their portfolios of stock in private companies. Thus, there certainly is a trend to enhance the liquidity and viability of the private marketplace.

"What the public criticizes in you, cultivate: It is you."

As we mentioned over the past year, in early 2000 WPs formed Spider Financial, Inc. ("Spider") a bridge loan and lending arm to distressed emerging growth companies. Although often referred to as "Vulture Capital’, this form of financing can be very lucrative to the lender and extremely valuable if not crucial to the borrower. The capital may be needed to secure an important contract or simply fund working capital during a slow quarter. By using the expertise and contacts of WP’s management and that of its and Spider Financial’s advisory board, we have seen an endless and eclectic array of candidates. We are very pleased with Spider’s developments and indeed did two bridge loans this quarter alone and are working on two others. We hope to shortly increase the fund’s size as well.

"Called the ‘Self Enforcing’ law, the Romans solved their problem of soldiers brawling over their bread rations by having one soldier cut the loaf in two then allowing his companion first choice."

John Steele Gordon
The Business of America
Walker & Company, 2001

Since the investment and merchant banking divisions of our firm have been slow due to the capital markets’ depressed conditions, we have expanded dramatically our in-house consulting services and activities. As companies become more pressed for capital and comparable valuations continue to slide, corporate management has become significantly more amenable to merging, being acquired outright or accepting significantly more modest valuations. In addition, other forms of capital: reverse mergers, strategic investments and/or partnerships, convertible or mezzanine debt…, has become popular again for emerging growth companies. WPs is working on various forms of debt and convertible debt for the first time in our 2 _ year history for 3 different corporate clients. We are extremely pleased to welcome into the Wellfleet family of consulting clientele this past quarter ZA Consulting (Pennsylvania), Cel Sci ("CVM" of Virginia), Answers Systems (Florida), IP2M (Houston), LTV (Spider Financial-NYC), USA Broadband ("USDB" of Seattle), Diabetex (Baltimore), Global Pathways (Virginia), East Tennessee Coal Co. (Tennessee), NAT Communications (Florida), and Nobel Watch Co. (New York City). In addition, we are currently in the early stages of discussions with other mostly M&A related candidates, several located in Israel and London, England.

As we approach the Jewish New Year and the magnificent Fall plumage beckons, we are reminded of our brethren’s struggles worldwide and our miniscule position in the larger scheme of things in the universe. May G-d bless us and our families with continued good health, happiness and hopefully financial prosperity.

Sincerely,

WELLFLEET PARTNERS, Inc.

ATTACK ON AMERICA

This newsletter’s initial date was supposed to be September 11th, 2001, a day that will live in infamy in our illustrious nation’s history. While sitting at my desk, a member of our advisory board, Eric Lipetz ran into my office and told me he just witnessed a low flying plane fly into the World Trade Center ("WTC"). Our firm, on the 46th floor of One Penn Plaza, overlooks the north side of NYC. Somewhat incredulous, I walked across the hall to the large picture window on our south side and watched, together with 10 others, and in utter horror and disbelief, the unfolding of events that by now remains on the lips of all Americans and nations world wide. As the first building collapsed, those watching in silence broke out in loud cries of anguish and shock. I too could not compose myself and watched, through teary eyes, as thousands met an obviously gruesome death. An announcement shortly thereafter requested the orderly, timely yet immediate evacuation of our building and subsequently Penn Station as well.

After hitching a ride to my Long Island home, my family and I spent the balance of the day riveted to our television sets. At times I glanced at the confused faces of my three children, ages 17, 14 and 9. They were horrified, angry, upset and frightened. To date they had only seen scenes of such incredible carnage in the movies where, reassured that it was merely Hollywood magic, they could leave the theatres or shut off their DVD players or VCRs secure in the knowledge that all was again well. No aliens were destroying the world, no Muslim fundamentalist group or terrorists were taking over Manhattan nor was any of our landmarks really being destroyed by meteors. Well, unfortunately, all of our greatest fears have been realized. The Pentagon, long a sign of our bravado, strength and authority in the world was crippled and will require a $1 Billion makeover. Our magnificent country has been infiltrated by insane maniacal terrorists and their attack was very real, highly coordinated and profoundly deadly. At this time the endless daily count of the dead and missing multiplies almost geometrically. Who knows what the final tally will be, or what everlasting effect the violation of our free shores will have. None of us born after WWII have ever seen or been touched by such horror. My mother, a survivor of the infamous concentration death camp Auschwitz, relived bad memories long forgotten of such enormous terror and horror that she was visibly shaken even from the security of my sister’s Teaneck, New Jersey home.

We at Wellfleet Partners do not know yet how many of the presumed dead were friends, acquaintances or contacts. One of our portfolio companies, SupportScape, was situated at the WTC. As of this writing, not all of its employees have yet been accounted for. Many of us are grappling with the question of how this could happen to our country, the most powerful nation ever. Is our security so lax that we could allow terrorists to so easily infiltrate our skies and hijack, simultaneously, 4 jumbo jets? Can our federal government and the world’s financial center be paralyzed by the acts of madmen thousands of miles away whose lives consist of reeking terror on the innocent and then scurrying away like rats in the night? Finally, is this the ultimate price of freedom? May G-d watch over us and comfort all the bereaved amongst us, AMEN.

There is a story about a man who tried to influence a child with talk of heresy and hatred. One night he wrote on the side of the innocent boy’s bed while he was asleep "G-d is nowhere." Hoping that this message would leave an indelible impression, when the child awoke he jumped out of bed and, to the man’s chagrin, exclaimed: "On my bed was left the message – ‘G-d is NOW HERE." The forces of brotherhood, peace and Godliness are very strong and will overcome hatred and terrorism for all times!

Mark I. Lev, Esq.
Managing Director
Wellfleet Partners, Inc.

NOTE: This report was produced by Wellfleet Partners, Inc. ("WPI") from various public research sources, for the sole purpose of general information. WPI makes no warranties to its factual content and is not a brokerage firm, registered Investment Advisor nor securities dealer; therefore, nothing contained in this report shall constitute an offer to sell, solicit or buy any securities or investment advice. Investment in these securities mentioned here involves risk and should not be considered without first reading the target Company’s most recent financial statements, 10Q and 10K, its Private Placement, Offering Memorandum or Business Plan, if applicable, and discussing the investment with your registered representative or professional financial advisor. Venture capital is inherently extremely risky. Mr. Lev is currently a registered representative of Starr Securities, Inc. a NYSE and NASD member broker-dealer.