'Pink Sheets' Can Be Double-Edged Sword for Firms.

CALL it the final resting place for down-on-their-luck companies ineligible for listing on major exchanges. It's the "pink sheets," an over-the-counter quotation service where the stocks of some 125 Los Angeles-based public companies are traded.

They may be there simply because they're too small or new to be listed elsewhere, or may prefer not to meet burdensome listing regulations.

Still, with a reputation for "pump-and-dump" fraud schemes, thin trading that can lead to wild price swings and little if any analyst coverage, the pinks can be a dicey proposition for both companies and investors alike.

"It's still, relatively speaking, the Wild West," said Mark Beauchamp, executive director of the North American Securities Administrators Association. "If you are a pioneer and willing to take the risks, there are probably diamonds to be found, but you really have to do your homework and you have to have a strong stomach for risk."

Among the Los Angeles-area companies quoted on the service, which operates out of New York, are such diverse operations as the Azusa Valley Water Co., an assortment of banks that includes First Citizen Bank of Sherman Oaks, and a variety of Internet and technology issues.

The pink sheets service dates back to early in the last century and was the original source of quotes for OTC stocks. The quotes were distributed to securities firms each week, and the service s name is derived from the color of the paper the quotes were printed on.

With the ascent of the Nasdaq stock market, however, the pink sheets service withered over the past few decades. But it was reinvigorated beginning with a change in ownership in 1997, and installation of a real-time electronic quotation system (available to securities dealers, for a fee) in 1999. Last year, a Web site was launched, where individual investors can get 15-minute-delayed quotes for free.

"It was a huge change. It used to be a phone book," said Cromwell Coulson, CEO and controlling owner of Pink Sheets LLC, the privately held provider of the service. "Going electronic has made more people interested in the pink sheets."

Migration to pinks

The quotation service also got a huge boost when the Nasdaq, in an effort to combat fraud, tightened requirements on its own higher-profile OTC Bulletin Board, where other penny stocks are listed.

In 1999, the Nasdaq began requiring OTC Bulletin Board companies to file quarterly and annual reports with the Securities and Exchange Commission or other relevant regulators in order to stay listed.

That requirement trimmed the Bulletin Board's roster of more than 5,000 companies by about 60 percent, with many of those companies migrating to the pink sheets.

"Some of these companies were owned by a small number of parties or the management of the company, or didn't have that many shares outstanding," said Wesley McGrew, senior vice president for Nasdaq's alternative markets.

There are now 4,139 securities quoted exclusively on pinks sheets, 1,913 quoted exclusively on the OTC Bulletin Board and 1,898 quoted on both.

Coulson claims that the moves to post quotes electronically, as well as the migration of thousands of stocks onto the pinks sheets, has improved trading volume, lowered spreads between buyers and sellers and improved the image of the service.

Still, landing on the pink sheets is often not where a company wants to be.

Take Omni Nutraceuticals Inc., a Los Angeles manufacturer of vitamins and other natural consumer health products that is having financial problems. Its stock was trading at around $5 a share two years ago, but it was delisted from the Nasdaq last year. It is now on the pink sheets, trading last week at around 20 cents a share.

Kristine Barrett, a company spokeswoman, declined to even comment on the company's stock. "It's not something we want to talk about, our stock on the pink sheets," Barrett said.

But other companies seek to be listed on the pink sheets. McGlen Internet Group Inc. is one of them.

Seeking visibility

The Industry-based computer parts seller was delisted from the Nasdaq last month after its share price fell below $1, but it met the requirements of the OTC Bulletin Board.

Still, the company chose to also be listed on the pink sheets to raise its visibility, as it completes a merger that it hopes will land it back on the Nasdaq, said Grant Trexler, the company's chief financial officer.

"There is more visibility (being listed on both services). We have done some press releases that discuss (the merger) in terms of revenue, and we hope when the public has more information, that they will value us based on the combined companies," he said.

But the problem for many companies is that, once they are delisted from a major exchange, it is very difficult to get their stock price high enough to return.