What is a Reverse Merger?

If you are reading this message in plaintext or if you have an AOL address =
you must click on this link: http://www.smallcapnetwork.net/archive/listser=
v/20020116-1.html and wait for a web page to automatically open up to prop=
erly read this newsletter.=20
[IMAGE] =09
[IMAGE] Dow Jones [IMAGE] 9712.27 -211.88 9:08 pm EST, Sat., January 16, =
2002 [IMAGE] NASDAQ [IMAGE] 1944.44 -56.47 For info, visit www.smallcap=
network.net . [IMAGE] S & P 500 [IMAGE] 1127.56 -18.63 To be removed, =
please click here . [IMAGE] Russell 2000 [IMAGE] 476.42 -8.58 VOLUME=
02: ISSUE 5 =09
[IMAGE]=09
What is a Reverse Merger? Investors are familiar with the traditional IP=
O (initial public offering) as a method for going public. However, the curr=
ent market environment makes going public just about impossible. This does=
n't' mean that no new companies are coming to market. Many people don't re=
alize there are numerous other ways for private company to become publicly =
traded outside of the IPO. One widely used method is the "Reverse Merger"=
, a simplified, fast track method by which a private company can become a P=
ublic Company. This method for going public is more prevalent than most i=
nvestors realize. One study estimates that 53% of all companies obtaining p=
ublic listings in 1996 did so through the "Reverse Merger". The same study =
concluded about 30% of newly publicly listed companies got there through Re=
verse Mergers in 1999. Percentages have recently dropped because Wall Stree=
t Investment Banking firms have had a huge appetite for IPOs in the late 90=
s. This led to many marginal companies receiving enormous financial windfal=
ls. In today's climate we expect reverse mergers to become more prevalent w=
ith very few IPOs finding their way to completion. Simply defined, a reve=
rse merger occurs when a public company which has no business and usually l=
imited assets acquires a private company with a viable business. The Privat=
e company "Reverse Merges" into the already public company, which now becom=
es an entirely new operating entity and generally changes name to reflect t=
he new merged company's business. The original public company, commonly k=
nown as a Shell company, has value because of its publicly traded status. T=
he shell company is generally recapitalized and issues shares to acquire th=
e private company, giving shareholders and management of the private compan=
y majority control of the newly formed public company. Reverse Mergers ar=
e also commonly referred to as Reverse Takeovers, or RTO's. Benefits of G=
oing Public Through the RTO (Reverse Take Over) The RTO (reverse take ove=
r) method for going public has numerous benefits for the private company: =
Initial costs are much lower and excessive investment banking fees are avo=
ided. The time frame for becoming public is considerably shorter. There i=
s no significant regulatory review or regulatory approval for the transacti=
on. The company can now use its stock as currency to finance acquisitions =
and attract quality management. Capital is easier to raise as investors no=
w have a clearly defined exit strategy. Insiders can create significant we=
alth if they perform. Negatives of Going Public Through the RTO There i=
s no capital raised in conjunction with going public. There is limited spo=
nsorship for the stock. There is no high powered Wall Street Investment Ba=
nking relationship. The stock generally trades on a low exposure exchange.=
Things You Should Know About RTOs- Investors Beware Many highly succes=
sful companies have become public through the RTO process. However, there s=
ome important negatives investors should be aware of. There is a much hig=
her failure rate amongst RTO companies versus the traditional IPO. Much sma=
ller and less successful companies are able to become public through the RT=
O, and many are badly undercapitalized. Often these stocks trade very ineff=
iciently in the absence of any sponsorship or following. There is a cotta=
ge industry of merchant bankers and entrepreneurs who specialize in orchest=
rating reverse mergers. Unfortunately, there are no barriers to entry in th=
is field. Therefore, scams are common place. Through various methods, sca=
m artists manage to accumulate large positions in the free trading shares o=
f the shell company. An RTO is consummated with a marginal private company,=
and the scam artists put together a massive publicity campaign designed to=
create activity in the stock. Unrealistic promises and absurd claims of co=
rporate performance find their way to the public. The enhanced trading volu=
me allows the scam artist to dump his shares on the unsuspecting public, mo=
st of whom eventually lose their money once the newly formed public company=
fails. This scam is commonly known as a "Pump and Dump". Alternatively t=
here a hundreds of examples of highly successful companies which have yield=
ed millions in profits for investors that have gone public through the RTO.=
Many of these companies deserve exposure to investors. Initial valuations =
can be reasonable, providing excellent opportunities for individual investo=
rs to accumulate positions ahead of Wall Street institutional money. Some=
High Profile and Successful RTOs Armand Hammer, world renowned oil magna=
te and industrialist, is generally credited with having invented the "Rever=
se Merger". In the 1950s, Hammer invested in a shell company into which he =
merged multi decade winner Occidental Petroleum. In 1970 Ted Turner comple=
ted a reverse merger with Rice Broadcasting, which went on to become Turner=
Broadcasting. In 1996, Muriel Siebert, renown as the first woman member o=
f the New York Stock Exchange, took her brokerage firm public by reverse me=
rging with J. Michaels, a defunct Brooklyn Furniture company. One of the D=
ot Com fallen Angels, Rare Medium (RRRR ), merged with a lackluster refrige=
ration company and changed the entire business. This was a $2 stock in 1998=
which found its way over $90 in 2000. Acclaim Entertainment (AKLM ) merge=
d into non operating Tele-Communications Inc in 1994. Cross Media Marketin=
g XMM ), a stock that SmallCap Digest readers are familiar with, merged in=
to non operating Brack Industries in 1998. Cross Media is on track to gener=
ate $150 million in revenues and over $15 million in profits in 2002. Alth=
ough we can't confirm this from old records, Viacom is rumored to have been=
an RTO. There are hundreds of other examples of highly successful RTOs a=
nd thousands of failures. Individual investors can profit from knowing abou=
t these situations before Wall Street gets involved and places its own infl=
ated value on the company. Investors that got into Cross Media early Novemb=
er are getting a taste of the benefit of getting in ahead of Wall Street mo=
ney managers. The SmallCap Digest issued a short term trading alert on this=
company November 6th. At the time the stock was trading at 6x next year's =
earnings with a 50% growth rate. If Wall Street had done the IPO you would =
have never seen such a compelling value in the open market. Institutional=
izing the RTO - Verus International Wall Street Brokerage Firms have look=
ed down their nose at RTOs for years. There are no massive investment banki=
ng fees generated in an RTO, and companies hitting the public market throug=
h this route are generally high risk. However, there is a New York based =
Merchant Banking firm in a position to change this perception. Verus Intern=
ational, located in Midtown Manhattan, has the credentials and credibility =
to force Wall Street to stand up and take notice. Their Advisory Board re=
ads like a Who's Who of Wall Street power players. As disclosed on their we=
b site http://www.verusinternational.com/ ), here is a list of people on th=
e Verus International advisory board: Jack Rivkin- Executive Vice Preside=
nt in charge of investments at CitiGroup. Rivkin also serves as the Chairma=
n of the Board of Verus International. Sir Richard Branson- International =
businessman, investor, and financier. Founder of Virgin Airlines and Virgin=
Records. Strauss Zelnick- Formerly President and CEO of BMG Entertainment=
and 20th Century Fox. Jonathan Cohen- Well known and highly regarded Wall=
Street analyst. He was the subject of our last edition on Merrill Lynch's=
track record during the internet craze. Robert Lessin- Current Chairman a=
nd former CEO of Wit SoundView Group. Peter Norris- International financie=
r and investment banker. Currently with ING. Formally with Goldman Sachs. =
CitiGroup has a minority ownership stake in Verus International, and provi=
des the expertise of Wall Street legend Jack Rivkin to their management tea=
m. While this does not insure their projects won't fail like any others, in=
vestors can assume Verus has the opportunity to structure highly sought aft=
er projects due to their financial community relationships. In the near f=
uture a Verus International client company will open for trading on the Ame=
rican Stock Exchange after completing an RTO. We believe this stock will tr=
ade like a highly sought after IPO, and individual investors will have a ch=
ance to participate on a level playing field with the institutions. =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=
d investment advisor or broker-dealer. All companies are chosen on the basi=
s of certain financial analysis and other pertinent criteria with a view to=
ward maximizing the upside potential for investors while minimizing the do=
wnside risk, whenever possible. Moreover, as detailed below, this publicat=
ion accepts compensation from third party consultants and/or companies whic=
h it features for the publication and circulation of the SmallCap Digest or=
representation on SmallCapNetwork.net. Likewise, this newsletter is owned=
by TGR, LLC. To the degrees enumerated herein, this newsletter should no=
t be regarded as an independent publication. Click Here to view our comp=
ensation on every company we have ever covered, or visit the following web =
address: http://www.smallcapdigest.net/compensation_disclosure.html for o=
ur full compensation disclosure and http://www.smallcapdigest.net/short_ter=
m_alerts.html for Trading Alerts compensation and disclosure. All statem=
ents and expressions are the sole opinions of the editors and are subject =
to change without notice. A profile, description, or other mention of a com=
pany in the newsletter is neither an offer nor solicitation to buy or sell =
any securities mentioned. While we believe all sources of information to b=
e factual and reliable, in no way do we represent or guarantee the accuracy=
thereof, nor the statements made herein. The editor, members of the edit=
or's family, and/or entities with which the editor is affiliated, are forb=
idden by company policy to own, buy, sell or otherwise trade stock for thei=
r own benefit in the companies who appear in the publication. The profiles,=
critiques, and other editorial content of the SmallCap Digest and SmallCap=
Network.net may contain forward-looking statements relating to the expected=
capabilities of the companies mentioned herein. THE READER SHOULD VERIFY=
ALL CLAIMS AND DO THEIR OWN DUE DILIGENCE BEFORE INVESTING IN ANY SECURITI=
ES MENTIONED. INVESTING IN SECURITIES IS SPECULATIVE AND CARRIES A HIGH DE=
GREE OF RISK. THE INFORMATION FOUND IN THIS PROFILE IS PROTECTED BY THE COP=
YRIGHT LAWS OF THE UNITED STATES AND MAY NOT BE COPIED, OR REPRODUCED IN AN=
Y WAY WITHOUT THE EXPRESSED, WRITTEN CONSENT OF THE EDITORS OF SMALLCAPNET=
WORK.NET. We encourage our readers to invest carefully and read the inves=
tor information available at the web sites of the Securities and Exchange =
Commission ("SEC") at http://www.sec.gov and/or the National Association o=
f Securities Dealers ("NASD") at http://www.nasd.com . We also strongly re=
commend that you read the SEC advisory to investors concerning Internet Sto=
ck Fraud, which can be found at http://www.sec.gov/consumer/cyberfr.htm .=
Readers can review all public filings by companies at the SEC's EDGAR page=
. The NASD has published information on how to invest carefully at its web =
site. =09

---
You are currently subscribed to smallcapdigest as: andrew.h.lewis@enron.com
To unsubscribe send a blank email to leave-smallcapdigest-871164Q@lyris.sma=
llcapnetwork.net