Reverse Mergers Help Companies Raise Cash Quickly.

THE joke about the last person left turning off the lights rang true for Richard Berger when Chicago-based Classics International Entertainment Inc. ceased operating in the mid-1990s. At its peak in the late 1980s, the company sold millions of dollars worth of pop culture products such as T-shirts, board games and comic books via a network of 22 stores in five states.

"When the bubble burst on Superman, the entire comic book industry went into a tailspin," said Berger. "What was a $1 billion industry tanked at about $200 million in the mid-1990s."

In 1996, he terminated the remaining 144 workers and stayed on to deal with what was left -- mainly pending lawsuits and unhappy creditors.

"I was the last man -- the sole director and officer when there was nothing left," he recalled. "But, I was very concerned about trying to give our 2,700 shareholders something for their investment."

Instead of filing for bankruptcy protection or moving to dissolve the defunct firm, Berger started looking around for an entrepreneurial venture that wanted to go public quickly by merging its operations into the empty public shell of CIEI.

Although securities-industry analysts and mergers-and-acquisitions experts believe hundreds of small companies go public every year using what's called a "reverse merger," surprisingly, no statistics are kept by the Securities and Exchange Commission.

"We don't do a lot of statistical analysis at the commission," said a press spokesman for the SEC in Washington, D.C. "Companies do file a disclosure statement about using a shell company when they complete the merger paperwork, but we don't track the numbers."

In 1998, 1,479 companies filed initial public offerings (IPOs), according to the SEC spokesman. In 1999, the number dropped to 1,085, and the preliminary estimates indicate that figure is expected to remain flat in 2000.

A spokeswoman for the Securities Industries Association, a trade group based in New York City, said her organization doesn't track the number of reverse mergers either.

Going quickly to the public

Despite the lack of statistics, merging a privately held company in the empty shell of another has certain benefits. The main one is speed -- the merger often allows a company to sell shares to the public within weeks or months, rather than years.

It apparently was a smart move for Piranha Inc., a Dallas-based, high-tech firm that develops digital data-compression management products. Piranha merged into CIEI's shell last spring after Berger met Ed Sample through business associates.

Sample, a technology executive at JC Penney Co. Inc., has worked for the $30 billion retailer for 29 years. He was looking for an entrepreneurial venture and was familiar with the problems faced by the printing industry when it came to transmitting large amounts of data online. Data transmission was an issue because JC Penney produced and distributed 65 catalogs a year to 20 million people.

Sample connected with a team, of scientists who were developing new ways to compress huge amounts of data. He was convinced they had a marketable technology.

"We had a theory that better ways to compress data would have a big impact on many industries, including video streaming, online entertainment and printing," said Sample, CEO of Piranha Inc.

He and his colleagues wrote a business plan and, by November 1999, they went looking for capital to launch Piranha.

"We validated the market for our technology. When we found it was there, we wanted it to become public immediately," said Sample.

Sample and Berger decided to merge Piranha Inc. into the shell of CIEI with the help of a securities lawyer and other advisers. The once-prosperous company was dormant, with its stock trading at a half cent per share, but it was still a publicly traded company with stock trading on over-the-counter in the "pink sheets."

Although virtually worthless, CIEI had 20 million shares of stock outstanding, 75 broker dealers and 20 market makers still keeping an eye on it.

When the stock resumed trading, Sample, Berger and their management team raised about $10 million from investors.

"Our ticker symbol on the over-the-counter market is BYTE because we are taking a byte out of data," said Sample.

More positives than lust stock price

At its peak in March 2000, Piranha stock sold for $65 a share. It was recently trading at around $7.50 per share.

"We got crushed like everyone else in the technology area," he said. "But we aren't worried about our stock price. We have so many positives, including great management."

Berger said reverse mergers aren't always successful.

"They don't all work out, but this one is a winner," he said.

If you are interested in a reverse merger, consider these factors:

* Do your homework to make sure the existing public company is not saddled with debts, liens or pending lawsuits.

* Check with the SEC to learn more about the company's trading history and records of any previous infractions.

* Work with a skilled mergers-and-acquisitions team, including a veteran CPA and an experienced securities lawyer.

* Prepare a detailed budget so you know exactly how much the merger process will cost.

* Make sure you are prepared to run a public company. Even companies listed on the "pink sheets" and bulletin boards have to file quarterly reports to the public and the SEC.

Jane Applegate is the author of "201 Great Ideas for Your Small Business," and is founder of ApplegateWay.com a multimedia Web site for busy entrepreneurs.