There are four major national markets in the US. Each market has its own special characteristics. Both NYSE and AMEX have histories of over 100 years. The NASDAQ was established in 1971 as the first electronic stock market in the world. The OTCBB was established in 1991 and has developed rapidly in order to meet raising market demand.

Playing a Less Risky IPO Game
Oct. 20, 2000
By Savina Petrova

Is there a less risky alternative to the IPO game? The reverse merger is one option. Or, at least, it’s the most common one. It offers a good opportunity for a company to walk around the complexities of a traditional IPO, and avoid the whims of market conditions.

The revere merger is a process whereby a privately owned small or midsize company purchases the trading rights of a public shell company and then uses the acquired stock for acquisitions. This go public technique is by no means a new thing: Ted Turner applied it with Rice Communication some 20 years ago. But it has just recently started to get attention in the press. So there is a good chance that some investors have owned shares in a company that went through a reverse merger, but simply didn’t know it.

Gaining Credit

Nearly half of the U. S. companies that went public over the past five years did so through reverse merger, according to s study conducted by consulting firm Halter Financial Group. In 1995, the percentage of reverse merger reached 54.3%. Last year, they made up 36% of all new listings. A few of the many companies that have made use of this method include Alford Refrigerated Warehouse (ALFO), Microwave Transmission System (MWVT) and KMG Chemicals (KMGB).

Advantage

The reverse merger offers a company the benefits of being public, such as liquidity for investors, stock for acquisition, access to a source of capital, and an identifiable market cap. In addition, a public company can fetch a higher sales price than most private companies. “A pubic company will sell for around 25 times its trailing earning,” according Timothy Halter from Halter Financial Group. “But a private company generally sells for between four and six times its cash flow.”

Path to NASDAQ
A reverse merger case study of Pacific Chemical, Inc. P. R. China

Operating Company

Jinan Chemical Fibre Corporation (“JCF”) was a People’s Republic of China ("PRC") corporation, which operated a chemical fiber production complex in the city of Jinan in northern China.

Pacific Chemical Group Limited (“PCG”) was a privately held BVI corporation that was 100% owned by the shareholders of JCF.

Public Vehicle

Until November 1996, Bureau of Electronic Publishing, Inc.’s, a Delaware corporation (the "Company”) the principal business was creating, publishing, and selling interactive multimedia software titles on CD-ROM.

On January 23, 1997 the Agreement and Plan of Merger between the Company, the Company's British Virgin Islands (“BVI”) subsidiary, PCG, and JCF (the “Agreement”) was simultaneously executed and closed.

The Joint Venture

PCG owns 51% and JCF owns 49% of a joint venture, Jinan Dayang Chemical Fibre Corporation (the “Joint Venture”), which operates JCF's former Plant No. 1 production facility for purified terephthalic acid ("PTA"). The Joint Venture was established on February 9, 1996 by PCG and JCF pursuant to a joint venture agreement entered into pursuant to the PRC laws governing Sino-foreign joint ventures.

Merger with PCG

Pursuant to the Agreement, at the closing the Company's BVI subsidiary merged into PCG in a merger carried out pursuant to the laws of the BVI (the "Merger"). In connection with the Merger, the stockholders of PCG transferred 100% ownership of PCG to the Company and the stockholders of PCG received an aggregate of 833,671.66 shares of Series A Preferred Stock of the Company. Each share of Series A Preferred Stock is automatically convertible into 20 shares of the Company's Common Stock.

Prior to the Merger the Company had approximately 4,650,000 shares of Common Stock outstanding. As a result of the Merger, the former stockholders of PCG acquired control of a substantial majority of the voting stock of the Company and PCG became a wholly owned subsidiary of the Company, through which the Company has acquired PCG's rights and obligations in the Joint Venture. The Joint Venture has succeeded to the business of manufacturing and sale of PTA originally conducted by JCF in the No. 1 Plant. The No. 1 Plant is principally engaged in the manufacture of PTA for further processing by other production units of JCF into polyester chip, film, staple and filament.

Changing the Company's Name to Pacific Chemical, Inc.

The Board believed that the old name would not accurately reflect in its name the Company's new business following the Merger and approved an amendment to the Certificate of Incorporation, which changed the name of the Company from Bureau of Electronic Publishing, Inc. to Pacific Chemical, Inc. (“CPTA”)

List on NASDAQ Small-Cap

After giving effect to the Merger that CPTA met all of the requirements for initial inclusion except the requirement of a minimum bid price requirement of $3.00 per share, or $4.00 per share in the event that proposed new Nasdaq listing requirements became effective.

The Nasdaq Stock Market, Inc. ("Nasdaq") has informally notified the Company that it considered the Merger to constitute a transaction which involved a change of control and change of business which requires that the Company meet the requirements for initial inclusion on the Nasdaq Small-Cap Market in order to list the Company's securities.

The Board of Directors and the holders of a majority of CPTA's outstanding Common Stock further approved an amendment to the Certificate of Incorporation of the Company to affect a two-to-one reverse stock split of the Company's currently issued and outstanding Common Stock.

The primary reason for reverse stock split was to meet the minimum bidding price requirements for listing of the Company's securities on the Nasdaq Small-Cap Market.

Another requirement for initial inclusion that the Board took into account in determining the reverse stock split ratio is that CPTA must have outstanding at least 1,100,000 publicly held shares with a market value of at least $5,000,000.

The reverse stock split resulted in a stock price in excess of the $3.00 or $4.00 per share requirement while maintaining the amount of publicly held Common Stock above the required levels of 1,100,000 shares with a market value of above $5,000,000.

Private Placement

CPTA, immediately after its initial inclusion on NASDAQ Small Cap, issued an aggregate of up to 5 shares of Series B Preferred Stock at $100,000 per share and shares of Series C Preferred Stock convertible into 1,000,000 shares of Common Stock in a private placement, which provided the Company a net proceeds of $3,600,000. Within 180 days after the closing of the private placement, CPTA filed at its expense a registration statement (Form S-3) for the public sale of an aggregate of 2.3 million shares, of which 1.3 million shares were issued to the Company’s advisors in the Merger and 1 million issued in the private placement.

Combined Entity

In according to the pro forma financials of the combined entity, CPTA’s had a shareholders' equity of $10,765,000 as of 12/31/1996, revenue of $31,143,000 and a net income of $5,500,000 for the first 6 months of 1997.

The stock of CPTA was traded under symbol ticker “CPTA” on NASDAQ and its price moved up to $21 per share from $1 below in 3 months after the effective of the Merger.

Note: Mr. Zuoxun Pan, Director of Asia Division of Warner Technology & Investment Corp, was a lead participant in this case. Reference will be available upon request.