IN THE NEWS

In the news...

"

The board of Eatontown, N.J.-based Millennium Cell (Nasdaq: MCEL), a fuel cell developer, announced that it plans to file for bankruptcy protection and expects to liquidate the company's assets.

The move comes after the company received a going concern qualification from its independent accounting firm earlier this year.

Millennium Cell closed its operations in May, but said at the time that it was in discussions with a corporation that had expressed interest in entering into a reverse merger with it.

"As discussions for that transaction did not proceed as expected and were terminated by the company, the company's board of directors determined that it had no further options other than to pursue the liquidation plan/bankruptcy," said the company in a statement.

Last August, Millennium Cell made a deal with Singapore's Horizon Fuel Cell Technologies, with Horizon acquiring a license to Millennium's hydrogen storage technology (see Licensed to win). Horizon planned to use the technology to build and distribute a 50 watt emergency power unit designed to support disaster relief professionals.

The companies announced an equity exchange two months later as part of an agreement to jointly develop and sell hydrogen fuel cells (see Millennium, Horizon Fuel Cell in stock swap).

Horizon launched the sale of the emergency power units, called the HydroPak, in February in Japan, but the two companies had planned to start selling additional products for consumer and military use this year and next year.

Millennium said the proceeds of its liquidation will be distributed to its creditors. The company said there is no expectation that the holders of the company's common stock will receive any cash from the asset sale.

The company plans to file for bankruptcy within the next 30 to 45 days"

REVERSE MERGERS IN THE NEWS

In the news..

"

The Mint Leasing goes public through reverse merger

Houston Business Journal

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The Mint Leasing Inc. has completed its merger with Legacy Communications Corp. and emerged as a public company.

The new company will be called The Mint Leasing Inc. and as a result of a reverse stock split, will trade on the over-the-counter bulletin board under the symbol “MLES.”

With 25 employees, Houston-based The Mint Leasing leases automobiles and fleet vehicles throughout the U.S. Most of its customers are located in Texas and six other states in the southeastern U.S.

St. George, Utah-based Legacy Communications (OTC: LGCC) is a holding company that has historically acquired radio station licenses and permits for development, operation and sale.

The Mint Leasing's customers are mainly made up of automobile dealers that seek to provide leasing options to their customers. The Mint Leasing is responsible for underwriting criteria and procedures, administration of the leases, and collection of payments from lessees."

REVERSE MERGERS IN THE NEWS

In the news..


"Saturday marked the commencement of a trial in Southern China for the former president of Guangfa Securities, China’s sixth largest stock brokerage firm, over allegations of insider trading that began in 2006. At that time, Chinese authorities accused Dong Zhengqing of tipping off a reverse merger between Guangfa Securities and Yan Bian Road Ltd., a company listed on the Shenzhen Stock Exchange, so that Guangfa could obtain a stock market listing without meeting government requirements - an all too common practice in China, according to an Associated Press story on the trial.

Dong allegedly tipped off his younger brother, Dong Dewei, and a former classmate, Zhao Shuya, about the acquisition, and both allegedly profited from the deal. According to Xinhua News Agency, they raked in 50 million yuan ($7.3 million) and 1 million yuan ($146,000) respectively, after buying Yan Bian Road stock before the deal was finalized and publicized. Although the three defendants have reportedly already confessed to the crimes, they denied their confessions in court, claiming they were extracted through intimidation and inducement by Chinese police."

IPOs, DPOs VS. REVERSE MERGERS

A direct public offering is when a company raises capital by selling its shares directly to what is refer to as affinity groups, unlike an IPO which are sold by a broker dealer to its customers and the general public through other broker dealers who have customers interested in buying shares in the company.

In IPO’s you have a firm commitment underwriting, where the underwriters promise to purchase the securities for their own account if they can not sell them to customers.

Best-effort underwriting: The underwriters do not guarantee any specific number of shares to be sold, they merely act as brokers.

In an IPO the lead underwriter is refer to as the syndicate manager, he keeps the book and invites other broker dealers to join the syndicate. In an firm commitment underwriting, an eastern underwriters agreement makes members liable for any unsold securities, regardless of how much of their allotment they sold. The eastern underwriting agreements have joint and several liability.

A western underwriting a agreement: In a firm commitment underwriting, it makes underwriters liable severally but not jointly. If one syndicate member can not sell its entire allotment, only he must buy the unsold securities.

In a direct public offering the company sells the shares to affinity groups, who fall in this category? Customers, suppliers, distributors, friends, employees and other members the community.

In a direct public offering the company place its shares in the hand of those people who are familiar with the company and know the company’s product and management, and are most likely to hold the shares longer because they feel comfortable with the company’s prospects for the future.

Direct public offerings are considerably less expensive than IPO’s and most effective for smaller offerings, for large offerings the sales staff and customer base of a broker dealer are usually necessary.

Since the affinity group is already familiar with the company and its practices it doesn’t put pressure on the company to change the way it does business, and will remain loyal to the company because of it’s presence in the community.

DPO’s are preferable to venture capital financing because it allows the present management to execute its business plan without outside interference. When a small company turns to a single large investor they tend to surrender the freedom to make all the decisions.

In a DPO like other method of going public today audited financial statements are required, unlike a reverse merger you choose your shareholders and you don’t have to deal with shady, unscrupulous shell owners.

Shell owners usually keep between 5-15% of the shares outstanding and are quick to liquidate, and besides they do not have an interest in the well being of the company’s share price. Even if you insert a stipulation in the contract that they can not sell for a year they will find a way of shorting the stock and destroying the share price.

This make DPO a preferable option even for companies that don’t need financing but would like to go public. If you are in the kind of business that keep records of your customer in order to bill them or for follow ups you already have a head start.

You must be able to contact those affinity group in order to market the shares to them, a popular business that has a lot of client but does not have the contact information is at disadvantage because it’s unable to contact its customer.

There are other ways to market the company’s stock for example a medical supply company might try contacting doctor in the area or by purchasing a mailing list.

But the best way is when you have an established relationship with your affinity group and are in constant contact with them, by mail, newsletter, or email.

Sometime a supplier or distributor may want to purchase an interest in the company in order retain the business and keep competitors from stealing the client.

A DPO does not always require audited financials but if you plan on going public you will need them. So you must hire an auditing firm. A foreign company must use a Certified International Accounting Firm.

A good Attorney that has experience with Direct Public Offerings, one that is familiar with the process and does not have to waste time researching and learning.

You must prepare sales material that provides a good deal of information about the company, you want investors feel that your company has a future.

You should always have a business plan, it will show investor that you have strategy for making the company succeed and doing it one step at a time.

By setting dates for the implementation of each step in your plan it shows investors that you have things well under control, but allow some time in case you must make adjustments.

If you wish to take your company public then you must file a form SB with the Securities and Exchange Commission and a form 15c211 must be filed with the NASD.

A DPO is an alternative to an IPO or Reverse Merger for a company wishing to go public or obtain financing, it allows the company owner(s) to call the shots instead of an underwriter or a shell owner.

REVERSE MERGERS AND SHORT SELLERS

An interesting article from Bloomberg:

Sept. 20 (Bloomberg) -- Who likes wars, recessions, hurricanes, terrorist threats and corporate scandals?

Short sellers do, if you listen to their detractors.

Short sellers are investors who profit when a stock declines. Some folks view these renegade investors as antisocial. I have a more positive view.

Each year I run a contest in which the goal is to pick a stock that will go down. I call it ``Short Sellers Don't Have Horns.''

Christian Olesen, an analyst and trader at Xaraf Management LLC, a hedge fund in Greenwich, Connecticut, won this year's contest. He recommended a short sale of UAL Corp. (UAUA), correctly predicting that stockholders of the airline, based in Elk Grove Township, Illinois, would be wiped out in a bankruptcy.

For the coming 12 months, Olesen says his entry will probably be Delta Air Lines Inc. (DALRQ), which is currently in bankruptcy proceedings.

``The stock is up a lot in the last few days on unsubstantiated speculation,'' he said. ``I guess people are thinking the stockholders will get some recovery down the road, but I don't think so.''

Jonathan Kniss, a stock trader from Fullerton, California, came in second, after a first-place finish in 2004-2005. His pick, Net2Auction Inc. (NAUC), dropped 95 percent from Sept. 30, 2005, through Sept. 15, 2006.

Kniss won the contest the previous year when his choice, LFG International Inc. (LFGC), declined 99.9 percent.

Empty Shells

Kniss says he often finds short sales among companies that have done a reverse merger, in which a private company takes over a public one that has few, if any, assets or operations. ``It's a backdoor way of going public,'' he says. One stock that interests him as a short today is Conversion Solutions Holding Corp. (CSHD) of Kennesaw, Georgia.

A short seller borrows shares of a stock and immediately sells them, pocketing the proceeds.

At some point, he must buy shares to return those he borrowed. If the stock price falls, he makes money, because the replacement shares cost less than his original proceeds. If the stock price rises, he loses.

It's true that short sellers often benefit from adverse events such as military conflict or slumping profits. And critics are right in saying that the shorts have an incentive to spread nasty, sometimes untrue rumors about companies they have sold short. Then again, conventional investors have an incentive to hype the stocks they own.

Useful Purpose

In my opinion, the short brigade serves a useful purpose. By pointing out unpleasant truths, and by counteracting hype, the short sellers help keep all investors, especially the proverbial ``widows and orphans,'' from overpaying for certain stocks.

Short selling is considered a risky form of investment because the potential loss when you sell short is unlimited. (There is no ceiling on how high a stock might rise.) The maximum gain on a short sale is 100 percent, because a stock can't decline past zero.

With conventional investing, the maximum loss is 100 percent (same reason), while the maximum gain is unlimited.

For winning the eighth annual contest, Olesen will get some shortcake delivered to his home. Second- and third-place finishers receive no prize except prestige.

Other than UAL, airline stocks did well, confounding several contestants who picked AMR Corp. (AMR) or Delta as shorts. Fort Worth, Texas-based AMR rose 112 percent and Delta, based in Atlanta, advanced 47 percent.

Calpine, Delta

Third place goes to Jeff Lenamon, a portfolio manager at Diversified Credit Investments in San Francisco. His pick, Calpine Corp. (CPNLQ), an electric utility owner and power seller in San Jose, California, dropped 87 percent. Remarkably, Lenamon also finished third last year. He picked Delta as a short at the right time: It dropped 77 percent from Sept. 30, 2004, through Sept. 15, 2005.

Twenty-six people entered the contest, down from 39 the year before. Exactly half of them managed to pick a losing stock.

On average, their picks declined 4 percent, which is a good showing considering the Standard & Poor's 500 Index rose 9.4 percent in the contest period.

If you would like to participate in the ninth annual Short Sellers Don't Have Horns contest, e-mail me at jdorfman@bloomberg.net.

Please list your name, occupation, address and phone number. Then tell me your pick, its stock symbol, and (briefly) why you think it will decline.

Contest Rules

If you don't have e-mail, or don't like to use it, you can write me at John Dorfman, President, Thunderstorm Capital, One Federal Street, 18th floor, Boston MA 02110.

All entries must be postmarked or time-stamped by midnight Sept. 29. The next contest runs from Sept. 29, 2006, through Sept. 14, 2007.

I don't require that people put real money into their short picks.

Indeed, it isn't a requirement that the stock can be borrowed in practice. When a stock appears to be a possible fraud, seems deeply troubled, or is thinly traded, it is sometimes hard to borrow. A trader doesn't know whether it's easy or hard until he or she goes to do it.

To be eligible for inclusion, a stock must have a market value of $100 million or more at the time the contestant chooses it.

In discussing the merits of short selling, I may not be totally objective. I sell selected stocks short for certain clients who can tolerate high risk. When I look in the mirror, I haven't seen any horns yet.

REVERSE MERGERS - STEP BY STEP

A walk-through on a reverse merger:

( a) A public company acquires a proportion of the assets of a privately held
company, giving in exchange the majority (above 51%) of the shares of the
public company.

( b) A public company may merge with a private company and, through a stock
swap, the private company keeps control over the public company.

(c) A public company acquires a proportion of the shares (i.e. acquires rights
over assets, liabilities and financial flows) of the private company, giving in
exchange the majority (above 51%) of the shares of the public company.
Then the private company becomes a subsidiary of the public company and
therefore also public.

In all these cases, the privately held company obtains more than 51% of the shares of the public company, becoming a public company. Usually, the private company changes the name of the public company and removes its managers and board of directors. Legally, the activities of the public company (if any) continue until the new shareholders decide to cancel them.

REVERSE MERGERS EXPLAINED

A reverse merger is an alternative method to go public6. According to the NYSE, a
company to be listed is expected to meet certain qualifications and to be willing to
keep the investing public informed on the progress of its affairs. The company must
be an on going concern, or be the successor to a going concern7. The essence of the
reverse merger is to make a privately held company (privco) the successor of a
previously going concern public company (pubco). This goal is achieved through a
stock swap in which privco is acquired by pubco, but privco’s shareholders obtain
control over pubco. In addition, privco’s shareholders can change the name of pubco
and remove its board of directors. In the next section we explain with a real example
the typical reverse merger operation.

Public companies that get involved in a reverse merger can be of two types: defunct
or shell companies. A defunct company is a company that went public via IPO but
for some reason is already out of its market and therefore is an inactive company.
Some of them are in fact in bankruptcy. These companies are not involved in real
activities any more, although they used to have operations. They just preserve their
corporate structure, are still listed and some times are trading companies. A shell
company is a company registered at the Securities and Exchange Commission under
the 1934 Exchange Act. The main characteristic that differentiates this kind of
company from a defunct company is that a shell company has been founded with the
main objective to serve as a going public vehicle, through a merger with a privately
held corporation. These companies are commonly called SPAC, or Special Purpose Acquisition Corporation and usually are non-trading companies. In addition,
because of its special purpose, this kind of company lacks a history of real
operations, employees or assets. Therefore, in general, it is safer to do a reverse
merger with a shell company than with a defunct company because of the potential
liabilities that a company with previous operations may have.

FAQ ON GOING PUBLIC

Many entrepreneurs have preconceived notions about taking their company public, most of which are not accurate. Nine little known facts:

1. You do not need a brokerage firm or investment banking firm to take your company public.

Many companies opt to go public through a direct public offering. In these registered public offerings, a private company follows the same rules and regulations that are followed by companies who go public with an investment banking firm.

2. You do not need to go public through a reverse merger.

Many companies falsely believe that they are too small or are not interesting enough to go public so they decide to go public through a reverse merger transaction. The truth is that virtually any company can go public through a direct public offering.

3. You do not need to give up control of your company.

Senior executives of small to medium size companies believe that they will lose control of their company during the process to become public. While there are additional constraints due to government regulations and investor demands, it is rare for a company to give up control. When companies do give up control during the initial public offering process, they always do so voluntarily as they have a choice not to proceed with the transaction.

4. You can significantly increase your personal wealth by going public.

Going public is a great way to generate immense wealth. Private companies are often valued at far less than their publicly traded counterparts. The mere process of becoming public adds enormous value to the shares of any private business.

5. You can provide yourself and your investors with an exit strategy and liquidity.

Companies go public for many reasons. One of the benefits of being public includes the fact that insiders and their investors can liquidate their holdings over time.

6. You can use newly issued stock to acquire other companies and grow your business.

Many companies want to go public because they understand that issuing stock to acquire other companies is a tremendous advantage. What private company would not be interested in hearing an offer from a publicly traded company?

7. You can generally raise capital easier, faster and at a lower cost after going public.

Investors have a natural preference to invest in publicly traded companies. As a result, they are more willing to invest in publicly traded companies.

8. You can issue stock options to attract and retain high quality employees and consultants.

Smart and talented people are always hard to get. Public companies can effectively use stock options as a nice incentive that their private companies can not offer.

9. You do not need any minimum level of sales, profits or assets to become public.

Many private companies think they need to achieve certain milestones to become publicly traded. The fact is: there are absolutely no sales, profit or asset requirements for a private company to go public.

ADVANTAGES OF A REVERSE MERGER

Advantages of Going Public through a Reverse Merger

Increased Valuation: Typically publicly traded companies enjoy substantially higher valuations than private companies.

Capital Formation: Raising capital is usually easier because of the added liquidity for the investors, and it often takes less time and expense to complete an offering.

Acquisitions: Making acquisitions with public stock is often easier and less expensive.

Incentives: Stock options or stock incentives can be useful in attracting management and retaining valuable employees.

Financial Planning: Public company stock is often easier to use in estate planning for the principals. Public stock can provide a long term exit strategy for the founders.

Reduced Costs: The costs are significantly less than the costs required for an initial public offering.

Reduced Time: The time frame requisite to securing public listing is considerably less than that for an IPO.

Reduced Risk: Additional risk is involved in an IPO in that the IPO may be withdrawn due to an unstable market condition even after most of the upfront costs have been expended.

Reduced Management Time: Traditional IPOs generally require greater attention from senior management.

Reduced Business Requirements: While an IPO requires a relatively long and stable earnings history, the lack of an earnings history does not normally keep a privately held company from completing a reverse merger.

Reduced Dilution: There is less dilution of ownership control, compared to a traditional IPO.

Reduced Underwriter Requirements: No underwriter is needed: (a significant factor to consider given the difficulty companies face in attracting an investment banking firm to commit to an offering.)

RULE 15C-211

5c211 Was designed to allow fully reporting public companies to have their securities quoted on the Over-The-Counter Bulletin Board (“OTCBB”) by filing some simple disclosure.

Rule 15C211 Under SEC Rule 15C211, a U.S. securities broker or dealer may not publish a quotation for any security unless certain information concerning the issuer is available and the broker or dealer has a reasonable basis for believing that the information is accurate. The information requirement is satisfied, in simple terms, if:

1) a Securities Act registration statement (F-6, F-1) has been filed within the last 90 days,

2) the issuer is complying with filing requirements and has in its records the issuer's most recent annual report,

3) the issuer is complying with Rule 12g3-2(b),

4) the broker or dealer has on record information relating to the issuer, its securities, its business, products and facilities. Management information, financial statements of the issuer and certain other data must also be on record.

Form 15C211, also known as Form 211, refers to the specific filing form a broker/dealer must provide containing the information necessary to publish a quotation on the company.Your attorney should prepare the form. For more information visit www.tracyfirm.com

Reverse merger: A reverse merger is a method by many of our small and mid-cap companies to initially go public, is the purchase of, and reverse merger into, an existing public shell company. This is inexpensive compared with conventional Initial public offerings (IPO). this is also a simplified fast track method by which a private company can become a public company.

In a reverse merger, an operating Private company merges with a public company that has little or no assets, nor known liabilities (the "shell"). In some rare instances, the shell may have some amount of cash remaining for investment into the new enterprise. The public corporation is called a "shell" since all that exists of the original company is its corporate shell structure and shareholders. The private company owners obtain the majority of the shell corporation's stock (usually 90-95%) through a new issue of stock for the private enterprise or asset.

The public corporation will normally change its name to the private company's name and elect a new Board of Directors which will appoint the officers. The public corporation will usually have a base of shareholders sufficient to meet the 300 shareholder requirement for eventual admission to quotation on the NASDAQ Small Cap Market or American Stock Exchange (if the private company's financial condition substantiates other NASDAQ or AMEX requirements), although some shells have as few as 35-50 shareholders, and are currently listed (or can apply for listing) on the OTC Bulletin Board or the NQB Pink Sheets.

ALTERNATIVE TO THE IPO

A few years ago, it seemed that nearly every company was going public with an IPO to gain capital investment, but now, with this route effectively blocked to smaller companies, entrepreneurs, angel investors and employees are increasingly looking at the opportunity of a reverse merger with a trading shell on the OTC Bulletin Board, the Pink Sheets or Form 10.

Through the reverse merger, your private company merges into a publicly listed company called a "shell" and gains control. This gives you listed stock that can be leveraged to raise capital.

Investor Peter Klamka of Ann Arbor, Michigan a stake holder in fast growing solar energy company Girasolar Inc (OTC: GRSR) stated that he thinks "the best way to go public in the current climate for most private companies, is with a Form 10 shell. It can be the least expensive method with the opportunity to avoid problems associated with most trading shells."

At a purchase cost of approximately $50-100K, a Form 10 blank check shell company is an attractive vehicle for private companies searching for a route onto the public markets. But, under the purview of the Worm/Wulff Letters, blank check shares are prevented from instantaneously trading after Form 10-SB shells complete a reverse merger with a private firm, regardless of how long the shells have been reporting public companies.

The alternative is an already trading shell listed on the Pink Sheets or OTCBB, which, with acquisition costs ranging from $150K up to $1 Million is a much more expensive option.

The greatest benefit of using a Form 10 shell company as your route to public ownership is that the purchasing company will retain most if not all of the stock in the shell. Overall the process takes longer, but is ultimately a much better deal for shareholders and the company alike.