Geeks On Call grows in reverse

NORFOLK

This week's itinerary includes stops in Richmond and New York. Next week, Richard Cole will head back to New York. Later in the month, he'll be in Chicago and Los Angeles.

Cole's job as chief executive officer of Geeks on Call Holdings Inc. became more complicated in February when shares of the computer-

repair company began trading publicly. In addition to managing Geeks, Cole has to deliver the company's message about continued expansion to the investment community.

In its search for capital to expand, Norfolk-based Geeks weighed whether to try the conventional route, tapping the stock market with an initial public offering. Instead, Cole said, it decided to use an alternative: merging into a company that had publicly traded shares. Geeks folded into an inactive shell company - a process called a reverse merger.

Before merging, Geeks separately raised $2.44 million of capital from the private sale of new shares through a brokerage firm, in part to allow early investors to recoup some of their investment. Once they are registered with the U.S. Securities and Exchange Commission and reviewed, these shares also can be traded publicly.

The company, established in 2001 by Cole, delivers on-site computer-repair services through franchisees and company-owned facilities to individuals and small businesses. It's known for having its technicians operate out of blue Chrysler PT Cruisers.

One reason why Geeks sought capital was its lack of earnings. The company has yet to report a profitable year. For the fiscal year ended Aug. 31, it lost $1.15 million on revenues of $7.11 million, Geeks reported in a Feb. 8 filing with the SEC.

For the quarter ended Nov. 30, it lost $424,818, which was wider than its $187,782 net loss in the year-earlier period. The company also reported a 3 percent drop in revenues for the September-through-November quarter, citing a decline in the number of active franchises and a resulting falloff in royalty revenues.

Geeks' losses were expected, Cole said, because its strategy has been to build a nationwide presence rather than become profitable as quickly as possible. The company, which has sold more than 300 franchises, expects this strategy to pay off with a profit this year, he said.

For years, reverse mergers were viewed with suspicion. Stock manipulators sometimes used the mergers as a way to gain access to the stock market, where they drove up the price of a public company's stock and then profited by dumping it.

Despite concerns about "pump-and-dump" schemes, small companies in need of capital have turned increasingly to reverse mergers. Last year, the number using this technique to become public climbed to 226 from 50 in 2003, according to Belmont Partners, a Washington, Va., firm that provides reverse-merger advice.

"A year and a half ago, we had people coming in asking about using a reverse merger, and I'd say, 'Don't do it,' " said John Paris Jr., a Virginia Beach attorney who specializes in corporate finance and securities at the firm Williams Mullen. Paris said he has yet to advise a client on a reverse merger. However, some of his concerns about the transactions have been addressed by the SEC's changes in securities rules, he said.

For Geeks, the cost of merging into a shell company was less than $1 million, Cole said. The company compensated the brokerage firm that conducted the private placement, First Montauk Securities Corp., with some of its new shares. Geeks also compensated stockholders of the shell company with 20 percent of the stock that Geeks on Call Holdings issued, Cole said. After the transactions, the company has slightly more than 13 million shares outstanding.

Geeks' stock trades in a part of the over-the-counter market known as the "bulletin board," which lacks the regulatory demands of the Nasdaq market and the major stock exchanges. Cole said he expects Geeks' shares to meet the criteria to qualify for the Nasdaq market in 24 months. When that happens, the company will apply to move its shares, he said.

On Wednesday, Geeks' shares closed at $1.70, off 5 cents from March 13, when they last traded, and down 90 cents from their opening price of $2.65 on Feb. 14.

In its SEC filing, Geeks said it will use $1 million from the recently raised $2.44 million of capital to hire more sales representatives and technicians. Its expansion efforts include opening

company-owned service operations in parts of the country where demand for its franchises has been weak. Earlier this month, it opened such sites in Phoenix, Tucson and Scottsdale, Ariz.

As part of its expansion, Geeks also will open company-owned operations in Boston, Manhattan, Queens, the Bronx and on Long Island, said Cole, who spent more than 20 years building and selling billboard companies before launching Geeks seven years ago. He spent a part of his career in outdoor advertising at Landmark Communications Inc., the Norfolk-based media company that owns The Virginia-Pilot.

This year, Cole will receive an annual salary of $275,000, a bonus to be determined by himself and the company's board and options to buy 1 million Geeks shares for $1 each, according to a Feb. 8 employment agreement with the company.

Cole said he expects sales from the company-owned operations to surpass sales from the franchise side in about two years. Geeks, he said, will retain franchise businesses and won't compete with its franchisees.

Tom Shean, (757) 446-2379, tom.shean@pilotonline.com